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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 JANUARY 1, 1997 TO MARCH 31, 1997
COMMISSION FILE NUMBER 1-5406
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
-------------------------
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 ST., BOSTON 02116-3764
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 351-5000
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 April 30, 1997.
Class Outstanding at April 30, 1997
- ----------------------------- -----------------------------
Common Stock, $1 par value 14,969,268
Preferred Stock Purchase 14,969,268
Rights
1 of 15
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HOUGHTON MIFFLIN COMPANY
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
March 31, 1997 and 1996 and December 31, 1996 3 - 4
Consolidated Condensed Statements of Operations
and Retained Earnings -- Three Months Ended
March 31, 1997 and 1996 5
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996 6
Notes to Unaudited Consolidated Condensed
Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 13
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE> 3
<TABLE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS EXCEPT SHARE AMOUNTS)
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1997 1996 1996
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 5,144 $ 2,790 $ 11,534
Marketable securities available
for sale, at fair value 614 604 612
Accounts receivable 113,012 120,010 189,978
Less: allowance for book returns 15,487 13,052 25,166
---------- ---------- ----------
97,525 106,958 164,812
Inventories
Finished goods 143,293 137,919 124,263
Work in process 9,707 18,819 9,162
Raw materials 7,019 10,597 5,122
---------- ---------- ----------
160,019 167,335 138,547
Income taxes 39,522 44,715 20,551
Prepaid expenses 10,275 11,155 1,913
---------- ---------- ----------
Total current assets 313,099 333,557 337,969
Property, plant, and equipment and book
plates (net of accumulated depreciation
and amortization of $134,801 in 1997,
$129,343 in 1996 and $144,648
at December 31, 1996) 123,600 131,902 116,447
Intangible assets, net 479,165 466,707 485,766
Other assets 86,182 77,512 66,260
---------- ---------- ----------
$1,002,046 $1,009,678 $1,006,442
========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
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<TABLE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS EXCEPT SHARE AMOUNTS)
<CAPTION>
MARCH 31, MARCH 31, DECEMBER 31,
1997 1996 1996
---------- ---------- ----------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 78,889 $ 72,171 $ 57,585
Commercial paper 96,190 79,090 -
Royalties 15,392 27,062 38,154
Salaries, wages, and commissions 2,452 947 19,408
Other accrued expenses 24,845 26,562 30,783
Current portion of long-term debt 40,000 - 40,000
---------- ---------- ----------
Total current liabilities 257,768 205,832 185,930
Long-term debt 451,019 550,936 500,999
Accrued royalties 1,763 2,427 1,899
Other liabilities 20,379 15,705 19,666
Accrued post retirement medical benefits 27,805 27,146 27,655
Stockholders' equity
Preferred stock, $1 par value;
500,000 shares authorized, none issued - - -
Common stock, $1 par value;
70,000,000 shares authorized;
14,961,044 shares issued 14,961 14,759 14,781
Capital in excess of par value 51,937 30,102 43,476
Retained earnings 228,428 203,071 258,779
---------- ---------- ----------
295,326 247,932 317,036
Less:
Notes receivable from purchase agreement (5,980) (6,254) (5,916)
Unearned compensation related to outstanding
restricted stock (8,737) (565) (1,563)
Common shares held in treasury, at cost
(94,852 shares in 1997, 218,963
shares in 1996 and 115,390 shares
at December 31, 1996) (2,037) (4,644) (2,448)
Benefits trust assets, at market (35,260) (28,837) (36,816)
---------- ---------- ----------
Total stockholders' equity 243,312 207,632 270,293
---------- ---------- ----------
$1,002,046 $1,009,678 $1,006,442
========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
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<TABLE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net sales by industry segment:
Educational publishing $ 51,367 $ 43,285
General publishing 17,380 19,550
-------- --------
68,747 62,835
Costs and expenses:
Cost of sales 52,223 50,095
Selling and administrative 67,953 56,829
-------- --------
120,176 106,924
Operating loss (51,429) (44,089)
Other income (expense):
Gain on equity transactions of INSO Corporation 14,904 -
Gain on sale of INSO Corporation common stock - 14,243
Net interest expense (9,376) (9,608)
Equity in earnings of INSO Corporation 1,612 1,299
Other expense (7) -
-------- --------
7,133 5,934
-------- --------
Loss before taxes (44,296) (38,155)
Income tax (benefit) provision (17,420) (16,025)
-------- --------
Net loss (26,876) (22,130)
Retained earnings at beginning of period 258,779 228,528
Valuation allowance on noncurrent marketable
equity securities (71) -
Dividends declared (3,404) (3,327)
-------- --------
Retained earnings at end of period $228,428 $203,071
======== ========
Net loss per common share $ (1.89) $ (1.60)
Average number of common shares 14,187 13,866
Cash dividends paid per common share $ 0.24 $ 0.24
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
5
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<TABLE>
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED; IN THOUSANDS)
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $(26,876) $ (22,130)
Adjustments to reconcile net loss to
net cash used in operating activities
Equity in (earnings) losses of INSO Corporation (1,612) (1,299)
Depreciation and amortization 13,562 13,168
Gain on equity transactions of INSO Corporation and
sale of INSO Corporation stock (14,904) (14,243)
Changes in operating assets and liabilities:
Accounts receivable 67,287 75,886
Inventories (21,472) (27,408)
Accounts payable 21,304 (11,612)
Royalties (22,872) (22,385)
Deferred and income taxes payable (18,971) (16,243)
Salaries, wages, and commissions (16,956) (17,804)
Other, net (12,794) (19,239)
-------- ---------
NET CASH USED IN OPERATING ACTIVITIES (34,304) (63,309)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from the sales of INSO Corporation stock - 16,136
Book plate expenditures (11,722) (14,433)
Acquisition of publishing assets (2,336) (7,500)
Property, plant, and equipment expenditures (1,955) (1,176)
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES (16,013) (6,973)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Dividends paid on common stock (3,404) (3,327)
Issuance (repayment) of commercial paper 96,190 (65,522)
Issuance of long-term financing 40,000 224,788
Repayment of long-term financing (90,000) (100,000)
Exercise of stock options 1,205 432
Other (64) -
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 43,927 56,371
Decrease in cash and cash equivalents (6,390) (13,911)
Cash and cash equivalents at beginning of period 11,534 16,701
-------- ---------
Cash and cash equivalents at end of period $ 5,144 $ 2,790
======== =========
Supplementary disclosure of cash flow information:
Income taxes paid $ 1,512 $ 233
Interest paid $ 7,892 $ 9,005
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
6
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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 1997 interim
financial statements.
(2) 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. Accordingly, the Company records its pro-rata share of
income and losses and the impact of INSO's equity activities on a quarterly
basis in arrears.
In November 1996, INSO completed an additional public offering of 1.2
million shares of common stock at a net offering price of $47.27 for a total
consideration of $56.7 million. A gain of $14.9 million ($8.6 million
after-tax), or $0.61 per share, was recorded representing the Company's portion
of the increase in INSO's net equity. As of March 31, 1997, the Company's equity
ownership has been reduced to approximately 27%.
(3) Intangible Assets
-----------------
<TABLE>
Intangible assets consist of the following (in thousands):
<CAPTION>
March 31, December 31,
1997 1996 1996
-------- -------- --------
<S> <C> <C> <C>
Goodwill $510,835 $472,290 $510,500
Publishing rights 16,623 18,523 16,787
Other 4,000 4,000 4,000
Less: accumulated amortization (52,293) (28,106) (45,521)
-------- -------- --------
Total $479,165 $466,707 $485,766
======== ======== ========
</TABLE>
7
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(3) Intangible Assets (continued)
-----------------
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.
(4) Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," ("SFAS 128") which is required to be adopted for
fiscal years ending after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under SFAS 128, the dilutive effect of stock
options will be excluded in calculating earnings per share. There is no
material impact on net loss per share for the quarter ended March 31, 1997 and
1996 calculated under SFAS 128.
(5) Subsequent Events
-----------------
The Board of Directors, at its April 30, 1997 meeting, declared a quarterly
dividend of $0.24 per share, payable on May 28, 1997, to shareholders of record
on May 14, 1997.
8
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First-Quarter 1997 compared to First-Quarter 1996
- -------------------------------------------------
The consolidated net loss was $26.9 million, or $1.89 per share, for the quarter
ended March 31, 1997, compared to a net loss of $22.1 million, or $1.60 per
share, for the same period in 1996. The Company recorded a gain of approximately
$14.9 million ($8.6 million after-tax), or $0.61 per share, in the first-quarter
of 1997 as the result of INSO's offering of common stock in the fourth quarter
of 1996. The first-quarter of 1996 included a gain of approximately $14.2
million ($8.3 million after-tax), or $0.60 per share, on the sale of 343,000
shares of INSO common stock.
Excluding these non-recurring items, net loss for the first-quarter of 1997
would have been $35.5 million, or $2.50 per share, compared to a net loss of
$30.4 million, or $2.20 per share, in the first-quarter of 1996. Higher selling
costs related to 1997 adoption opportunities were the primary reason for the
increased seasonal loss.
Net sales:
Net sales for the quarter ended March 31, 1997 were $68.7 million, an increase
of 9% from the $62.8 million reported in the first-quarter of 1996. Educational
publishing net sales increased $8.1 million, or 19%, to $51.4 million in the
first-quarter of 1997, from last year's first-quarter net sales of $43.3
million, reflecting higher sales across all divisions. The School Division
reading program, Houghton Mifflin Reading: Invitations to Literacy(C) 1996,
earned strong sales in open territories as schools which adopted last year
purchased additional product components. The language arts programs of McDougal
Littell, the secondary school division, The Language of Literature(C) 1997 and
The Writer's Craft(C) 1995, won large market shares last year, and many of the
schools that adopted these programs in 1996 ordered additional
9
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materials during the first-quarter of 1997. Riverside Publishing's sales
increased over the same period last year as a result of increases in custom
contract sales, group assessment materials, and clinical sales. Great Source's
sales increased over the first-quarter of 1996 as a result of increased Write
Source product sales.
Net sales of $17.4 million from the general publishing segment in the
first-quarter of 1997, decreased $2.2 million, or 11%, from last year's
first-quarter net sales of $19.6 million. The decrease was due to lower sales
of publishing rights and distribution income, offset somewhat by increased
sales of adult books, which is in line with the change in strategy implemented
in 1996. Houghton Mifflin Interactive's sales increased significantly,
reflecting additional products available in the marketplace.
Cost of sales:
Cost of sales in the first-quarter of 1997 was $52.2 million, an increase of
$2.1 million, or 4%, from $50.1 million in 1996, primarily as the result of
higher sales. Despite this increase, cost of sales as a percent of sales
decreased to 76% in 1997 from 80% in 1996. One of the reasons for this
improvement in margin was lower editorial expenses. By combining the
acquisitions of D.C. Heath and Company and McDougal Littell & Company with
in-house development of new products, the Company has built a wide spectrum of
products which are positioned to compete in a wealth of adoption opportunities
in 1997, 1998 and 1999. Although management does not expect editorial expenses
in 1997 to decline in absolute dollars, these costs are expected to be lower as
a percent of sales as the Company supports the existing product base. The
improvement in the margin was also due to plate amortization expense, which
remained flat at $5.3 million.
10
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Selling and administrative:
Selling and administrative expenses in the first-quarter of 1997 was $68.0
million, an increase of $11.2 million, or 20%, from $56.8 million in the
first-quarter of 1996. This increase is primarily due to higher selling and
distribution costs. Selling expense rose due to higher sampling and advertising
costs and the addition of sales people to increase coverage in states where
there are large number of adoption opportunities in 1997. Distribution cost
increased due to the higher sales and sampling in the first-quarter of 1997
compared to the same period in 1996.
Other income and expense:
The Company recognized a gain of $14.9 million ($8.6 million after-tax), or
$0.61 per share, in the first-quarter of 1997, representing the Company's
portion of the increase in INSO's net equity as a result of INSO completing a
public offering of 1.2 million shares of common stock at a net offering price of
approximately $47 per share in the fourth quarter of 1996. In the first-quarter
of 1996, the Company recorded a gain of $14.2 million ($8.2 million after-tax),
or $0.60 per share, representing the gain realized on the sale of 343,000 shares
of INSO common stock.
Net interest expense for the first-quarter of 1997 decreased $0.2 million to
$9.4 million from the same period in 1996. The reduction is primarily a result
of the paydown of $30.0 million of debt in the fourth quarter of 1996.
Income Taxes:
The tax benefit increased $1.4 million, or 9%, over the same period last year.
This increase is the result of the higher operating loss in 1997, offset
somewhat by a decrease in the tax rate to 39% in 1997 from 42% in 1996.
11
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Liquidity and Capital Resources
- -------------------------------
The Company's principal businesses are seasonal, with approximately 70% of net
sales normally reported in the second and third quarters. The first and fourth
quarters historically have contributed approximately 10% and 20%, respectively,
of the Company's annual net sales.
This sales seasonality affects the Company's operating cash flow. A net cash
deficit from all the Company's activities is normally incurred through the
middle of the third quarter. This deficit is funded through the draw-down of
cash and marketable securities, supplemented by short-term borrowings,
principally commercial paper. During the first-quarter of 1997, the Company
used $6.4 million of cash on hand at year-end 1996, as well as $46.2 million of
net borrowings to cover its seasonal operating loss and working capital needs
and to fund publishing and capital investments. During the first-quarter of
1996, the Company used $13.9 million of cash on hand at year-end 1995 and
proceeds from the sale of INSO stock, as well as $59.3 million of net
borrowings to cover its seasonal operating loss and working capital needs, and
to fund publishing and capital investments.
Net cash used in operating activities was $34.3 million in the first-quarter of
1997, a $29.0 million decrease from $63.3 million in cash used in operations
during the first-quarter of 1996. Net loss, excluding the gain on equity
transaction of INSO and sale of INSO stock, increased $5.4 million. Changes in
operating assets and liabilities provided $34.3 million more cash during the
first-quarter of 1997 over the same period in 1996, primarily due to improved
working capital management.
Cash required for investing activities was $16.0 million in the first-quarter
of 1997, an increase of $9.0 million from $7.0 million required in the same
period in 1996. Excluding the $16.1 million in proceeds the Company received
from the sale of 343,000 shares of INSO common stock in the first-quarter of
1996, the cash required for investing activities decreased by $7.1 million,
which was principally due to
12
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a $2.7 million decrease in bookplate expenditures and a $5.2 million decrease
in acquisition of publishing assets from first-quarter of 1997 compared to the
same period in 1996.
Net proceeds from financing decreased by $12.4 million in the first-quarter of
1997 from the same period in 1996, primarily due to lower working capital
requirements. In March 1996, the Company completed the refinancing of the debt
incurred in conjunction with the Heath acquisition by replacing short-term bank
financing with $125 million of long-term debt and $100 million of medium-term
notes. Proceeds from these issuances 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. In the first-quarter of 1997, the
Company issued $50 million in commercial paper and used the proceeds to pay down
a portion of the five-year credit facility.
The Company expects that cash flows from operations for the full-year 1997 will
be sufficient to provide adequate financing resources to support operational
needs, and fund capital expenditures, dividend payments, and pay down by year
end a portion of the debt outstanding at the beginning of 1997.
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
This report includes forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. The
words "believe," "expect," "anticipate," and similar expressions identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they are subject to a variety of risks, uncertainties, and
other 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.
13
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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 No.(27) Financial Data Schedule
(b) Reports on Form 8-K
None
14
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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: May 12, 1997 /s/ Gail Deegan
----------------------------------
Gail Deegan
Executive Vice President,
Chief Financial Officer, and
Treasurer
Dated: May 12, 1997 /s/ David R. Caron
----------------------------------
David R. Caron
Vice President, Controller
15
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Houghton Mifflin Company
Index To Exhibits
Item 6(a)
Exhibit No Description of Document Page Number in This Report
- ---------- ----------------------- --------------------------
(27) Financial Data Schedule 17
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 5,144
<SECURITIES> 614
<RECEIVABLES> 113,012
<ALLOWANCES> 15,487
<INVENTORY> 160,019
<CURRENT-ASSETS> 313,099
<PP&E> 258,401
<DEPRECIATION> 134,801
<TOTAL-ASSETS> 1,002,046
<CURRENT-LIABILITIES> 257,768
<BONDS> 0
0
0
<COMMON> 14,961
<OTHER-SE> 228,351
<TOTAL-LIABILITY-AND-EQUITY> 1,002,046
<SALES> 68,747
<TOTAL-REVENUES> 68,747
<CGS> 52,223
<TOTAL-COSTS> 120,176
<OTHER-EXPENSES> (16,509)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,376
<INCOME-PRETAX> (44,296)
<INCOME-TAX> (17,420)
<INCOME-CONTINUING> (26,876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,876)
<EPS-PRIMARY> (1.89)
<EPS-DILUTED> (1.89)
</TABLE>
