<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 8 - K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 31, 1995
HOUGHTON MIFFLIN COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Massachusetts 1-5406 04-1456030
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
222 Berkeley Street, Boston, Massachusetts 02116
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 351-5000
---------------
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report).
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
-------------------------------------------------------------------
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. Financial statements
of the business acquired are filed as Exhibit 99.1 hereto.
(b) PRO FORMA FINANCIAL INFORMATION. Pro forma financial information
is filed as Exhibit 99.2 hereto.
(c) EXHIBITS.
2. Stock and Asset Purchase Agreement dated as of September
25, 1995 by and between Raytheon Company and Houghton
Mifflin Company (previously filed).
23.1 Consent of Ernst & Young LLP (filed herewith).
99.1 Financial Statements of Business Acquired (filed herewith).
99.2 Pro Forma Financial Information (filed herewith).
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized this 16th day of January, 1996.
HOUGHTON MIFFLIN COMPANY
By: /s/James F. Stack
------------------------------------
James F. Stack
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Accounting and Financial
Officer)
<PAGE> 3
<TABLE>
Exhibit Index
-------------
<CAPTION>
Exhibit No. Exhibit Description Page No.
----------- ------------------- --------
<S> <C>
2 Stock and Asset Purchase Agreement dated as of
September 25, 1995 by and between Raytheon
Company and Houghton Mifflin Company
(previously filed).
23.1 Consent of Ernst & Young LLP (filed herewith).
99.1 Financial Statements of Business Acquired (filed herewith).
99.2 Pro Forma Financial Information (filed herewith).
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-64903) and in the related Prospectus of Houghton Mifflin
Company for the registration of $300 million of debt securities, of our report
dated December 22, 1995, with respect to the combined financial statements of
D.C. Heath and Company (A Business Unit of Raytheon Company), included in the
current report on Form 8-K/A of Houghton Mifflin Company dated October 31, 1995,
filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Boston, Massachusetts
January 16, 1996
<PAGE> 1
EXHIBIT 99.1
COMBINED FINANCIAL STATEMENTS
D. C. HEATH AND COMPANY
(A BUSINESS UNIT OF RAYTHEON COMPANY)
Ten months ended October 31, 1995 and
years ended December 31, 1994 and 1993
<PAGE> 2
D. C. Heath and Company
(A Business Unit of Raytheon Company)
Combined Financial Statements
<TABLE>
Ten months ended October 31, 1995 and
years ended December 31, 1994 and 1993
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . 1
Audited Combined Financial Statements
Combined Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 2
Combined Statements of Income and Net Worth . . . . . . . . . . . . . 3
Combined Statements of Cash Flows . . . . . . . . . . . . . . . . . . 4
Notes to Combined Financial Statements . . . . . . . . . . . . . . . 5
</TABLE>
<PAGE> 3
Report of Independent Auditors
The Board of Directors
- ----------------------
Houghton Mifflin Company
We have audited the accompanying combined balance sheets of D. C. Heath and
Company (a business unit of Raytheon Company) as of October 31, 1995 and
December 31, 1994, and the related combined statements of income and net worth,
and cash flows for the ten months ended October 31, 1995 and the years ended
December 31, 1994 and 1993. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of D.C. Heath
and Company at October 31, 1995 and December 31, 1994, and the combined results
of its operations and its cash flows for the ten months ended October 31, 1995
and the years ended December 31, 1994 and 1993, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1995 the Company changed
its method of accounting for teachers' editions.
ERNST & YOUNG LLP
Boston, Massachusetts
December 22, 1995
1
<PAGE> 4
D. C. Heath and Company
(A Business Unit of Raytheon Company)
<TABLE>
Combined Balance Sheets
<CAPTION>
OCTOBER 31, DECEMBER 31,
1995 1994
--------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowances for book returns of
$7,646 in 1995 and $5,639 in 1994 $ 49,193 $ 28,598
Inventories:
Finished goods 46,952 38,402
Products in process 2,899 1,541
Raw materials and supplies 5,997 2,002
--------------------------
55,848 41,945
Prepaid expenses 557 983
--------------------------
Total current assets 105,598 71,526
Property, plant and equipment:
Land and land improvements 264 264
Buildings and building equipment 12,038 11,887
Machinery and equipment 12,239 11,611
Leasehold improvements 705 705
Construction in process 3,723 2,050
--------------------------
28,969 26,517
Less accumulated depreciation and amortization (15,447) (14,815)
Book plates, less accumulated depreciation of $94,803 in
1995 and $93,369 in 1994 64,496 67,717
--------------------------
Net property, plant and equipment 78,018 79,419
Intangible and other assets, less accumulated amortization
of $2,985 in 1995 and $2,100 in 1994 19,651 16,778
--------------------------
Total assets $203,267 $167,723
==========================
LIABILITIES AND NET WORTH
Current liabilities:
Notes payable $ 4,000 $ 4,000
Accounts payable 22,294 13,336
Royalties 8,464 10,492
Commissions 5,650 5,120
Accrued expenses 2,467 2,056
Line of credit 59
--------------------------
Total current liabilities 42,875 35,063
Commitments and contingencies
Net worth
Common stock of D.C. Heath Canada, LTD., 1,000 shares
authorized, issued and outstanding 1 1
Retained earnings 3,044 2,674
Divisional net worth 157,347 129,985
--------------------------
Total net worth 160,392 132,660
--------------------------
Total liabilities and net worth $203,267 $167,723
==========================
</TABLE>
See accompanying notes.
2
<PAGE> 5
D. C. Heath and Company
(A Business Unit of Raytheon Company)
<TABLE>
Combined Statements of Income and Net Worth
<CAPTION>
TEN MONTHS
ENDED
OCTOBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net sales $176,454 $180,098 $176,644
Costs and expenses:
Cost of sales 87,635 89,950 91,272
Selling and administrative 59,217 64,895 62,828
--------------------------------------
146,852 154,845 154,100
--------------------------------------
Operating income 29,602 25,253 22,544
Other income (expense):
Interest expense 4,641 2,966 2,648
Other income (693) (651) (397)
Other expenses 61 321 61
--------------------------------------
4,009 2,636 2,312
--------------------------------------
Income before provision for income taxes and
cumulative effect of accounting change 25,593 22,617 20,232
Provision for income taxes 10,460 9,255 7,602
--------------------------------------
Income before cumulative effect of accounting
change 15,133
Cumulative effect of accounting change, net of
taxes of $1,588 2,383
--------------------------------------
Net income 17,516 13,362 12,630
Net worth at beginning of period 132,660 110,550 109,376
Net cash activity with Raytheon 10,216 8,748 (11,456)
--------------------------------------
Net worth at end of period $160,392 $132,660 $110,550
======================================
</TABLE>
See accompanying notes.
3
<PAGE> 6
D. C. Heath and Company
(A Business Unit of Raytheon Company)
<TABLE>
Combined Statements of Cash Flows
<CAPTION>
TEN MONTHS
ENDED OCTOBER
31, YEAR ENDED DECEMBER 31,
1995 1994 1993
--------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 17,516 $ 13,362 $ 12,630
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense 24,790 29,331 27,137
Cumulative effect of accounting change 3,971
Changes in operating assets and liabilities:
Accounts receivable, net (20,595) (1,739) (6,558)
Inventories (17,874) (11,045) (663)
Other assets 395 (1,551) 540
Accounts payable 8,958 3,342 3445
Royalties, commissions and accrued expenses (1,087) (319) 2049
Prepaid expenses 426 (481) (53)
--------------------------------------
Net cash provided by operating activities 16,500 30,900 38,527
INVESTING ACTIVITIES
Acquisition of publishing assets (6,000)
Book plate expenditures (19,566) (32,461) (24,676)
Property, plant and equipment expenditures (3,091) (1,246) (2,286)
--------------------------------------
Net cash used in investing activities (22,657) (39,707) (26,962)
FINANCING ACTIVITIES
Payment of Notes (4,000)
Proceeds (payment) of line of credit (59) 59 (109)
Net cash activity with Raytheon 10,216 8,748 (11,456)
--------------------------------------
Net cash provided by (used in) financing activities 6,157 8,807 (11,565)
--------------------------------------
Net cash $ 0 $ 0 $ 0
======================================
SUPPLEMENTARY INFORMATION
Write Source assets acquired for notes payable $ 4,000 $ 4,000
</TABLE>
See accompanying notes.
4
<PAGE> 7
D. C. Heath and Company
(A Business Unit of Raytheon Company)
Notes to Combined Financial Statements
1. BASIS OF PRESENTATION
The combined financial statements include the accounts of D. C. Heath and
Company and D.C. Heath Canada, LTD., (collectively the "Company"). D. C. Heath
and Company is a division of Raytheon Company (Raytheon) and D.C. Heath Canada,
LTD. is a subsidiary of Raytheon. Amounts included for D.C. Heath Canada, LTD.
are not material to the combined amounts. All material intercompany
transactions have been eliminated. These statements include the historical
assets, liabilities, revenues and expenses that are directly related to the
Company's business, including expenses charged to the Company by Raytheon. See
Note 3.
2. SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at cost (principally on a weighted average basis), but
not in excess of net realizable value.
As of January 1, 1995, the Company changed its method of accounting for
teachers' editions from expensing when purchased to capitalizing into inventory
and expensing upon delivery. The Company believes including the cost of
teachers' editions in inventory provides better matching of costs with product
sales and is consistent with industry practice. The effect of this change for
the ten months ended October 31, 1995 was to increase inventory by $4,908,000
and net income by $553,000, after provision for income taxes of $384,000. The
pro forma effect of this change on prior years has been omitted as the Company
has concluded that it is not practicable to determine the effect.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Betterments and major
renewals are capitalized and included in property, plant and equipment
accounts, while expenditures for maintenance and repairs and minor renewals are
charged to expense. When assets are retired or otherwise disposed of, the
assets and related allowances for depreciation and amortization are eliminated
from the accounts and any resulting gain or loss is reflected in income.
Provisions for depreciation are computed generally on the
sum-of-the-years-digits method, except for certain assets which use the
straight-line or declining-balance method. Depreciation provisions are based
on the estimated useful lives: buildings--20 to 45 years; machinery and
equipment including production tooling--3 to 10 years; equipment
5
<PAGE> 8
D. C. Heath and Company
(A Business Unit of Raytheon Company)
Notes to Combined Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
leased to others--5 to 10 years. Leasehold improvements are amortized over the
lesser of the remaining life of the lease or the estimated useful life of the
improvement.
Included in property, plant and equipment is the Company's investment in book
plates, which includes the costs of all pre-press work through printing plates.
These external development costs are paid to vendors and suppliers and include
artwork, photo acquisition, typesetting, illustration, stripping and film
assembly, and composition. Such costs are capitalized as incurred and amortized
over five years, with amortization beginning in the month immediately following
capitalization.
INTANGIBLES AND OTHER ASSETS
Purchased publishing rights are amortized on a straight-line basis over the
estimated economic life of the titles or contracts, not to exceed 10 years.
The excess of cost over net assets acquired, or goodwill, is amortized on a
straight-line basis over periods that do not exceed 15 years. The Company
continually evaluates the existence of goodwill impairment on the basis of
whether the goodwill is fully recoverable from projected, undiscounted net cash
flows of the related business unit. Amortization expense was approximately
$886,000 for the ten months ended October 31, 1995, and $568,000 and $240,000
for the years ended December 31, 1994 and 1993, respectively.
REVENUE RECOGNITION
Revenue is recognized upon shipment of goods to customers. Revenue is reported
in the financial statements as net sales, which is net of estimated returns and
selling commissions paid to book depositories and outside sales
representatives. The Company also pays commissions to internal sales
representatives under various compensation arrangements in return for services
rendered in connection with obtaining orders. Such commissions are charged to
expense.
BOOK RETURNS
A provision for future estimated book returns, consisting of the sales value
less related inventory value and royalty costs, is made at time of sale.
6
<PAGE> 9
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Throughout the periods presented herein, the Company's U.S. operations were
included in Raytheon's consolidated income tax returns. The Company provides
deferred taxes for temporary differences in the recognition of income and
expense for financial reporting and tax accounting purposes. Differences
relate principally to publishing expenses, depreciation, post retirement
benefits and allowance for book returns.
CONCENTRATIONS OF CREDIT RISK
The Company sells its products primarily to school districts, private and
parochial schools, colleges and universities, and bookstores. The Company
performs ongoing credit evaluations of its customers and maintains reserves for
potential credit losses, which have not been material to the Company's
financial position or results of operations.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated into US
dollars at year end exchange rates. Sales and expenses are translated into US
dollars using weighted average exchange rates for the period. Gains and losses
on translation of financial statements of foreign entities, not significant in
amount, are included in net worth.
3. SALE OF BUSINESS BY RAYTHEON
On October 31, 1995, Houghton Mifflin Company (Houghton) acquired certain
assets and assumed certain liabilities of the Company's business from Raytheon
for $455 million. Raytheon has provided various administrative services to the
Company, including, but not limited to, payroll, employee benefits
administration, insurance administration, data processing, tax and legal
services, and treasury services. In addition, the Company's employees
participated in various benefit plans sponsored by Raytheon. The Company was
charged for these benefits on the same basis Raytheon charged its other
operating units, which varies depending on the type of services provided.
7
<PAGE> 10
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. SALE OF BUSINESS BY RAYTHEON (CONTINUED)
<TABLE>
The following table lists the amounts charged by Raytheon:
<CAPTION>
TEN MONTHS
ENDED
OCTOBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993
----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Insurance and benefits $ 7,510 $ 8,832 $ 10,538
General and administrative services 795 1,012 1,069
----------------------------------------
$ 8,305 $ 9,844 $ 11,607
========================================
</TABLE>
Advances and cash disbursements by Raytheon on the Company's behalf, payments
of amounts relating to the above services and cash receipts received by
Raytheon on the Company's behalf are included in net worth in the accompanying
combined financial statements. Raytheon charged the Company interest on
certain amounts included for presentation purposes in the accompanying
financial statements as net worth. Interest charged to operations and paid to
Raytheon for the ten months ended October 31, 1995 and years ended December 31,
1994 and 1993 was $4,628,000, $2,946,000, and $2,632,000, respectively.
Interest was charged by Raytheon at rates ranging from 4.5% to 6.5%.
4. TAXES ON INCOME
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's net deferred tax assets are shown in the following
table:
8
<PAGE> 11
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. TAXES ON INCOME (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
--------------------------------------
1995 1994 1993
--------------------------------------
(In Thousands)
<S> <C> <C> <C>
Deferred tax assets:
Allowances for bad debts $ 72 $ 51 $ 106
Allowances for book returns 2,977 2,200 2,120
Reserve for inventory obsolescence 5,404 2,509 2,591
Accelerated book depreciation 1,100
Inventory capitalization 15,143 15,199 15,209
--------------------------------------
24,696 19,959 20,026
--------------------------------------
Deferred tax liabilities:
Prepaid royalty expenses (2,521) (2,698) (2,075)
Paperbacks and record returns (731) (835)
Accelerated tax depreciation (440) (2,376)
--------------------------------------
(2,521) (3,869) (5,286)
--------------------------------------
Net deferred tax assets included
in net worth $ 22,175 $ 16,090 $ 14,740
======================================
<FN>
The net deferred tax assets above are a component of divisional net worth in the
accompanying combined financial statements since the Company was a division of
Raytheon and all current and deferred taxes and related tax attributes are
attributable to Raytheon.
</TABLE>
9
<PAGE> 12
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. TAXES ON INCOME (CONTINUED)
<TABLE>
Significant components of the provision for income taxes are as follows:
<CAPTION>
TEN MONTHS
ENDED YEARS ENDED
OCTOBER 31, DECEMBER 31,
-----------------------------------
1995 1994 1993
-----------------------------------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 13,248 $ 8,495 $ 2,451
State 3,297 2,110 609
-----------------------------------
16,545 10,605 3,060
-----------------------------------
Deferred:
Federal (5,599) (1,242) 4,178
State (486) (108) 364
-----------------------------------
(6,085) (1,350) 4,542
-----------------------------------
Total $ 10,460 $ 9,255 $ 7,602
===================================
</TABLE>
Income taxes paid to Raytheon for the ten months ended October 31, 1995 and
years ended December 31, 1994 and 1993 was $12,564,000, $7,772,000, and
$6,771,000, respectively.
<TABLE>
The reconciliation of the income tax rate computed at the U.S. federal
statutory tax rate to the effective income tax rate is as follows:
<CAPTION>
TEN MONTHS
ENDED YEARS ENDED
OCTOBER 31, DECEMBER 31,
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.00% 35.00% 35.00%
State income taxes, net of federal benefit 5.28 5.29 4.86
Charitable contribution (0.06) (2.62)
Permanent differences 0.59 0.69 0.33
----------------------------------
Effective income tax rate 40.87% 40.92% 37.57%
==================================
</TABLE>
10
<PAGE> 13
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. WRITE SOURCE ACQUISITION
On July 1, 1994, the Company acquired certain assets and liabilities of the
Write Source business line. The fixed portion of the purchase price was
approximately $10 million. The Company is also required to make additional
contingent payments of $4 million and $2 million on January 1, 1996 and 1997,
respectively, based on the achievement of specified milestones for 1995 and
1996. In the ten months ended October 31, 1995, the Company achieved the
required milestone and accrued the $4 million payment, resulting in an increase
to goodwill.
The acquisition has been accounted for as a purchase and accordingly, the
results of operations of Write Source are included with those of the Company
from July 1, 1994, the date of the acquisition. The purchase price, including
payment for copyrights valued at approximately $1 million, resulted in an excess
of cost over net assets acquired of approximately $8.5 million. The copyrights
are being amortized over 10 years and the goodwill is being amortized over its
expected remaining life of 15 years. Pro forma results have not been presented
as they are not material to the Company's results of operations.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE OBLIGATIONS
The Company has leases for various real property, including warehouse and
office facilities, and equipment which expire at various dates through 1999.
Certain leases contain renewal and escalation clauses for the Company's
proportionate share of operating expenses.
<TABLE>
The future minimum rental commitments under all noncancelable leases for real
estate and equipment are as follows:
<CAPTION>
YEARS (In Thousands)
-----
<S> <C>
1996 $ 2,057
1997 1,001
1998 448
1999 151
-------
Total minimum lease payments $ 3,657
=======
</TABLE>
11
<PAGE> 14
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense was approximately $1,484,000 for the ten months ended October 31,
1995, and $1,728,000 and $1,537,000 for the year ended December 31, 1994 and
1993, respectively.
The Company is involved in ordinary and routine litigation incidental to its
business. There are no pending legal proceedings, in the opinion of the
management of the Company, that would materially affect the financial position
or results of operations of the Company.
LINE OF CREDIT
The Company maintains a line of credit with a bank totaling $2,000,000, which
expires in 1996. As of October 31, 1995, the full amount of the line was
available to the Company.
7. PENSION AND OTHER EMPLOYEE BENEFITS
The Company participated, through Raytheon, in several pension and retirement
plans covering the majority of its employees. The principal plans covering
salaried and management employees provide pension benefits that are based on
the five highest consecutive years of the employee's compensation in the 10
years before retirement. Plans covering hourly employees generally provide
benefits of stated amounts for each year of service. The Company's funding
policy for the salaried plans is to contribute annually at a rate that is
intended to remain at a level percentage of compensation for the covered
employees. The Company's funding policy on the hourly plan is to contribute
annually at a rate that is intended to remain level for the covered employees.
Unfunded prior service costs under the funding policy are generally amortized
over periods from 10 to 30 years.
12
<PAGE> 15
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
<TABLE>
Net periodic pension expense for the Company included the following components:
<CAPTION>
TEN MONTHS
ENDED
OCTOBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 1,084 $ 1,338 $ 1,357
Interest cost on projected benefit obligation 1,017 1,105 1,216
Actual (gain) loss on assets (2,442) 211 (1,871)
Net amortization and deferral 1,181 (1,679) 539
--------------------------------------
Total pension expense $ 840 $ 975 $ 1,241
======================================
Assumptions used in the accounting were:
Discount rate 8.25% 7.75% 8.00%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
Rate of increase in compensation levels 5.00% 5.00% 6.00%
</TABLE>
Pension expense declined in 1994 as a result of investment gains in prior years
and changes in assumptions.
13
<PAGE> 16
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the funded status of the plans at:
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1995 1994
-----------------------------
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation $ (12,087) $ (9,466)
Accumulated benefit obligation (12,387) (9,860)
Projected benefit obligation (17,482) (14,790)
Plan assets at fair value 18,716 16,274
Projected benefit obligation less than ---------------------------
plan assets 1,234 1,484
Unrecognized net (gain) or loss (835) (205)
Unrecognized net (assets) at transition (233) (273)
---------------------------
Prepaid pension cost included in net worth $ 166 $ 1,006
===========================
</TABLE>
Plan assets primarily include equity and fixed income securities.
The Company's salaried pension plan provides that in the event of a termination
of the plan within three years after involuntary change of control of the
Company, the assets of the plan will be applied to satisfy all liabilities to
participants and beneficiaries in accordance with Section 4044 of the Employee
Retirement Income Security Act of 1974. Any remaining assets, if any, will be
applied on a pro rata basis to increase the benefits to the participants and
beneficiaries.
In addition to providing pension benefits, the Company, through Raytheon,
provides certain health care and life insurance benefits for retired employees.
Substantially all of the Company's employees may become eligible for these
benefits, if they reach normal retirement age while working for the Company.
Retiree health plans are paid for in part by employee contributions, which are
adjusted annually. Benefits are provided through various insurance companies
whose charges are based either on the benefits paid during the year or annual
premiums. Health benefits are provided to retirees, their covered dependents,
and beneficiaries. Retiree life insurance plans are non-contributory and
cover the retiree only.
14
<PAGE> 17
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
<TABLE>
Prior to 1993, the Company, through Raytheon, recognized annual costs for
retiree medical coverage and the accrued costs for retiree life insurance on a
cash basis. In 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Post Retirement Benefits Other
than Pensions, which requires recognition of an accumulated post retirement
benefit obligation for retiree costs existing at the time of implementation, as
well as incremental expense recognition for changes in the obligation
attributable to each successive fiscal year. The Company has elected to
amortize the past service amount over the allowable 20 year period. The
Company is funding the liability for a portion of its salaried and hourly
employees and plans to continue to do so. The net post retirement benefit
expense for the Company included the following components:
<CAPTION>
TEN MONTHS
ENDED YEARS ENDED
OCTOBER 31, DECEMBER 31,
1995 1994 1993
-------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost--benefits earned during
the period $ 36 $ 48 $ 43
Interest cost on accumulated post
retirement benefit obligation 57 67 59
Net amortization and deferral 29 41 41
------ ----- ------
Net post retirement benefit expense $ 122 $ 156 $ 143
====== ===== ======
Assumptions used in the accounting were:
Discount rate 7.75% 8.25% 7.50%
Expected long-term rate of return on assets 9.00% 8.50% 8.50%
Rate of increase in compensation levels 5.00% 5.00% 5.00%
Health care trend rate in the first year 10.00% 8.00% 10.00%
Heath care trend rate - Ultimate 5.00% 5.00% 5.00%
</TABLE>
15
<PAGE> 18
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
<TABLE>
The following table presents the accrued post retirement benefit cost:
<CAPTION>
OCTOBER DECEMBER
31,1995 31, 1994
--------------------
(In Thousands)
<S> <C> <C>
Retirees $ (110) $ (90)
Active employees eligible for benefits (335) (286)
Active employees not yet eligible for benefits
(596) (464)
--------------------
Total obligation (1,041) (840)
Plan assets at fair value 0 0
--------------------
Total obligation (in excess of) plan assets (1,041) (840)
Unrecognized net:
Transition obligation 704 738
Prior service cost - -
Net (gain) loss (61) (182)
Accrued post retirement benefit cost included --------------------
in net worth $ (398) $ (284)
====================
The effect of a one percentage point increase in the
assumed healthcare trend rate for each future year on:
Aggregate of service and interest cost $ 8 $ 10
====================
Accumulated post-retirement benefit obligation $ 83 $ 67
====================
</TABLE>
Under the terms of the Raytheon Savings and Investment Plan, a defined
contribution plan, covered employees are allowed to contribute up to 17% of
their pay limited to $9,240. Raytheon contributes amounts equal to 50% of the
employee's contributions, up to a maximum of 3% of the employee's pay. Total
Company expense, allocated by Raytheon, for the plan was $513,000, $591,000 and
$ 575,000 for the ten months ended October 31, 1995 and the years ended
December 31, 1994 and 1993, respectively.
The Company's annual contribution to the Raytheon Employee Stock Ownership Plan
is approximately one half of one percent of salaries and wages, limited to
$150,000 per person of substantially all United States salaried and a majority
of hourly employees.
16
<PAGE> 19
D. C. HEATH AND COMPANY
(A Business Unit of Raytheon Company)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The expense was $105,000, $125,000 and $ 121,000 for the ten months ended
October 31, 1995 and the years ended December 31, 1994 and 1993, respectively.
17
<PAGE> 1
EXHIBIT 99.2
Houghton Mifflin Company
Pro Forma Combined Balance Sheet and Income Statements
(Unaudited)
Background Information
- ----------------------
On October 31, 1995, Houghton Mifflin Company ("Company") acquired certain
assets and assumed certain liabilities of D.C. Heath and Company ("Heath") from
Raytheon Company ("Raytheon") in a cash transaction. The total cost of the
acquisition is estimated at $459 million, of which $455 million represents the
contractual purchase amount and $4 million represents estimated professional
and other fees directly related to the acquisition.
The Company financed $345 million of the acquisition with short-term bank debt.
The Company intends to refinance this debt with long-term debt securities to be
issued under a shelf registration. Accordingly, the Pro Forma Combined Balance
Sheet classifies the bank borrowings as long-term obligations.
Operating cash of $114 million was also applied to the acquisition. The
September 30, 1995 historical balance sheet shows cash and marketable securities
of $110 million. As a result, the remaining $4 million is shown on the
Pro-Forma Combined Balance Sheet as short-term borrowings.
Basis of Accompanying Unaudited Pro Forma Financial Statements
- --------------------------------------------------------------
The acquisition will be accounted for as a purchase. Accordingly, the results of
Heath will be included in the Company's operating results as of October 31,
1995, the date of acquisition. The Pro Forma Balance Sheet combines the audited
combined balance sheet of Heath at October 31, 1995 with the Company's
consolidated balance sheet as of September 30, 1995. The Pro Forma Combined
Income Statements assume that the acquisition occurred on January 1, 1994 and
January 1, 1995. Cost savings that may be recognized from the combination of the
Company and Heath are not included.
The intangible assets shown in the accompanying balance sheet as a result of
the acquisition amount to approximately $346 million and are being amortized
over the expected life estimated at twenty years. The actual allocation of the
purchase price, including the allocation of intangibles to assets acquired,
may be different from that reflected in the pro forma financial data.
This unaudited pro forma combined financial information does not purport to be
indicative of the results which actually would have been obtained if the
acquisition had been effected on the date indicated or of those results which
may be obtained in the future. The pro forma combined financial information
should be read in conjunction with the consolidated financial statements of
Houghton Mifflin Company included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
<PAGE> 2
The unaudited pro forma combined income statements do not include certain
non-recurring charges which may result from the transaction and the integration
of Heath into the Company. The Company expects such items to be charged to
operations during the period ended December 31, 1995. Such charges include
integration expenses related to personnel, facilities, and assets. The
unaudited pro forma combined balance sheet does contain these adjustments.
Pro Forma Adjustments
- ---------------------
<TABLE>
A summary of the Pro Forma Adjustments is set forth as follows:
a) To record the operating cash, marketable securities and borrowings
associated with consummation of the transaction.
<S> <C> <C>
Intangible assets 459,000
Cash 95,480
Marketable securities 14,420
Long-term debt 345,000
Short-term borrowings 4,100
</TABLE>
<TABLE>
b) To adjust for certain Heath assets and liabilities that were not acquired.
<S> <C> <C>
Divisional net worth 30,000
Accrued expenses 1,700
Receivables 31,000
Property, plant and equipment, net 700
</TABLE>
<TABLE>
c) To record an estimate of the non-recurring charges and the related tax
effects resulting from the transaction and the integration of Heath. These
charges relate to excess inventory and duplicate titles, as well as provisions
for transaction and transition costs.
<S> <C> <C>
Retained earnings 30,000
Taxes payable 19,200
Book plates, net 17,500
Inventory 10,500
Author advances 1,900
Accrued expenses 19,300
</TABLE>
<TABLE>
d) To adjust certain Heath assets acquired to estimated fair market value.
<S> <C> <C>
Intangible assets 15,750
Book plates, net 12,500
Inventory 2,100
Accrued post retirement liabilities 1,150
</TABLE>
<TABLE>
e) To eliminate Heath stockholders' equity and net worth.
<S> <C> <C>
Common stock 1
Retained earnings 3,044
Divisional net worth 127,347
Intangible assets 130,392
</TABLE>
f) To record estimated net interest expense (in 1995 for nine months) at 7%
associated with the acquisition financing. This rate is an estimate of the
interest rate of the debt securities to be issued under the Company's shelf
registration.
g) To record intangible asset amortization expense (in 1995 for nine months)
using an amortization period of approximately 20 years.
<PAGE> 3
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(Amounts in thousands)
<TABLE>
<CAPTION>
Company D.C. Heath
September 30, October 31, Pro Forma Pro Forma
1995 1995 Adjustments Combined
---- ---- ----------- --------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 95,480 $ 0 ($ 95,480) a 0
Marketable securities 14,420 (14,420) a 0
Accounts receivable, net 239,247 49,193 (31,000) b 257,440
Inventories 92,512 55,848 (12,600) c, d 135,760
Other 6,859 557 0 7,416
------------------------------------------------------------
Total current assets 448,518 105,598 (153,500) 400,616
Property, plant and equipment,
at cost, net of accumulated depreciation
and amortization 25,959 13,522 (700) b 38,781
Book plates, net of accumulated amortization 44,484 64,496 (30,000) c, d 78,980
------------------------------------------------------------
70,443 78,018 (30,700) 117,761
Other assets
Intangible assets, net 118,748 19,651 344,358 a, d, e 482,757
Other 74,225 (1,900) c 72,325
------------------------------------------------------------
Total other assets 192,973 19,651 342,458 555,082
------------------------------------------------------------
$711,934 $203,267 $158,258 $1,073,459
============================================================
Current liabilities
Accounts payable $65,591 $22,294 $ 0 $ 87,885
Short-term borrowings 4,100 a 4,100
Accrued royalties 30,116 8,464 38,580
Other accrued expenses 34,098 12,117 17,600 b, c 63,815
Income taxes 25,708 0 (19,200) c 6,508
------------------------------------------------------------
Total current liabilities 155,513 42,875 2,500 200,888
Long-term debt 226,133 0 345,000 a 571,133
Other liabilities 17,094 0 0 17,094
Accrued postretirement liabilities 25,673 1,150 d 26,823
Stockholders' equity and net worth
Common stock 14,759 1 (1) e 14,759
Capital in excess of par value 31,655 0 0 31,655
Retained earnings 283,634 3,044 (33,044) c, e 253,634
Divisional net worth -- 157,347 (157,347) b, e --
Notes receivable from purchase agreements (5,744) 0 0 (5,744)
------------------------------------------------------------
324,304 160,392 (190,392) 294,304
Less:
Common stock held in treasury, at cost (6,115) 0 0 (6,115)
Benefits trust assets, at market (30,668) 0 0 (30,668)
------------------------------------------------------------
Total stockholders' equity 287,521 160,392 (190,392) 257,521
------------------------------------------------------------
$711,934 $203,267 $158,258 $1,073,459
============================================================
</TABLE>
<PAGE> 4
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Company D.C. Heath
for the nine for the ten
months ended months ended Pro Forma
Sept. 30, 1995 Oct. 31, 1995 Adjustments Pro Forma
-------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $423,053 $176,454 $599,507
Costs and expenses
Cost of sales 197,625 87,635 285,260
Selling and administrative 153,939 59,217 12,913 g 226,069
Special charges 7,033 7,033
-------- -------- -------- --------
358,597 146,852 12,913 518,362
-------- -------- -------- --------
Operating income 64,456 29,602 (12,913) 81,145
Other income (expense)
Gain on equity transactions of INSO Corporation 15,001 15,001
Equity in earnings of INSO Corporation 273 273
Interest expense, net (6,396) (4,009) (23,882) f (34,287)
-------- -------- -------- --------
8,878 (4,009) (23,882) (19,013)
-------- -------- -------- --------
Income before taxes and cumulative effect
of accounting change 73,334 25,593 (36,795) 62,132
Taxes on income before cumulative effect of
accounting change (28,900) (10,460) 14,501 (24,859)
-------- -------- -------- --------
Income before cumulative effect of
accounting change $ 44,434 $ 15,133 ($22,294) $ 37,273
======== ======== ======== ========
Income per share before cumulative effect
of accounting change $ 3.22 $ 2.70
======== ========
Shares utilized in calculation of income
per share before cumulative effect
of accounting change 13,805 13,805
======== ========
</TABLE>
<PAGE> 5
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
For the twelve months ended December 31, 1994
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Company D.C. Heath Adjustments Pro Forma
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $483,076 $180,098 $663,174
Costs and expenses
Cost of sales 230,674 89,950 320,624
Selling and administrative 192,425 64,895 17,218 g 274,538
Special charges 6,513 6,513
-------- -------- -------- --------
429,612 154,845 17,218 601,675
-------- -------- -------- --------
Operating income 53,464 25,253 (17,218) 61,499
Other income (expense)
Gain on sale of interest in Software Division 36,212 36,212
Equity in earnings of INSO Corporation 1,973 1,973
Interest expense, net (6,509) (2,636) (31,843) f (40,988)
-------- -------- -------- --------
31,676 (2,636) (31,843) (2,803)
-------- -------- -------- --------
Income before taxes and extraordinary item 85,140 22,617 (49,061) 58,696
-------- -------- -------- --------
Taxes on income before extraordinary item (32,710) (9,255) 18,849 (23,116)
-------- -------- -------- --------
Income before extraordinary item $ 52,430 $ 13,362 ($30,212) $ 35,580
======== ======== ======== ========
Income per share before extraordinary item $ 3.79 $ 2.57
======== ========
Shares utilized in calculation of income
per share before extraordinary item 13,822 13,822
======== ========
</TABLE>
