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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 APRIL 1, 1998 TO JUNE 30, 1998
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 July 31, 1998.
Class Outstanding at July 31, 1998
- ------------------------------- ------------------------------
Common Stock, $1 par value 30,452,224
Preferred Stock Purchase Rights 30,452,224
1 of 22
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HOUGHTON MIFFLIN COMPANY
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
June 30, 1998 and 1997 and December 31, 1997 3 - 4
Consolidated Condensed Statements of Operations,
Comprehensive Income, and Retained Earnings --
Three Months Ended June 30, 1998 and 1997 5
Consolidated Condensed Statements of Operations,
Comprehensive Income, and Retained Earnings --
Six Months Ended June 30, 1998 and 1997 6
Consolidated Condensed Statements of Cash Flows --
Six Months Ended June 30, 1998 and 1997 7
Notes to Unaudited Consolidated Condensed
Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 20
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, June 30, December 31,
1998 1997 1997
---------- ---------- --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,567 $ 4,441 $ 5,621
Marketable securities and time deposits
available-for-sale, at fair value 614 614 614
Accounts receivable 196,229 208,159 180,241
Less: allowance for book returns 11,026 10,819 20,734
---------- ---------- --------
185,203 197,340 159,507
Inventories
Finished goods 177,237 165,707 130,825
Work in process 5,773 9,177 9,010
Raw materials 7,112 5,329 5,208
---------- ---------- --------
190,122 180,213 145,043
Income taxes 34,061 33,581 12,049
Prepaid expenses 6,463 6,950 1,882
---------- ---------- --------
Total current assets 423,030 423,139 324,716
Property, plant, and equipment
and book plates (net of accumulated
depreciation and amortization of
$186,709 in 1998, $150,418 in 1997
and $176,040 at December 31, 1997) 130,210 125,598 120,388
Intangible assets, net 449,497 473,341 462,884
Other assets 77,422 87,336 73,112
========== ========== ========
$1,080,159 $1,109,414 $981,100
========== ========== ========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, June 30, December 31,
1998 1997 1997
----------- ----------- ---------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 51,568 $ 70,096 $ 47,612
Commercial paper 218,427 140,187 61,346
Royalties 23,234 21,745 41,463
Salaries, wages, and commissions 7,635 7,170 21,625
Other accrued expenses 27,573 25,238 26,680
Current portion of long-term debt 40,000 40,000 40,000
----------- ----------- ---------
Total current liabilities 368,437 304,436 238,726
Long-term debt 371,123 501,040 371,081
Accrued royalties 1,239 1,810 1,430
Other liabilities 26,350 21,523 24,017
Accrued post retirement medical benefits 28,389 27,955 28,089
Stockholders' equity
Preferred stock, $1 par value;
500,000 shares authorized, none issued - - -
Common stock, $1 par value;
70,000,000 shares authorized;
30,423,079 shares issued 30,423 29,992 30,219
Capital in excess of par value 71,509 61,793 75,307
Retained earnings 242,770 220,894 279,513
----------- ----------- ---------
344,702 312,679 385,039
Less:
Notes receivable from purchase agreement (4,513) (6,065) (4,628)
Unearned compensation related to
restricted stock (6,385) (7,773) (7,178)
Common shares held in treasury, at cost
(346,997 shares in 1998, 204,852
shares in 1997 and 282,329 shares
at December 31, 1997) (7,555) (2,491) (5,553)
Benefits Trust assets, at market (41,628) (43,700) (49,923)
----------- ----------- ---------
Total stockholders' equity 284,621 252,650 317,757
=========== =========== =========
$ 1,080,159 $ 1,109,414 $ 981,100
=========== =========== =========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS,
COMPREHENSIVE INCOME, AND RETAINED EARNINGS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net sales by industry segment:
Educational publishing $ 182,562 $ 179,796
General publishing 20,178 22,525
--------- ---------
202,740 202,321
Costs and expenses:
Cost of sales 95,291 93,652
Selling and administrative 84,596 80,885
--------- ---------
179,887 174,537
Operating income 22,853 27,784
Other income (expense):
Net interest expense (9,806) (10,421)
Equity in earnings (losses) of INSO Corporation (522) 678
Other expense (1,050) -
--------- ---------
(11,378) (9,743)
--------- ---------
Income before taxes 11,475 18,041
Income tax provision 4,590 7,216
--------- ---------
Net income 6,885 10,825
Other comprehensive income:
Valuation allowance on noncurrent marketable equity securities 271 52
========= =========
Comprehensive income $ 7,156 $ 10,877
========= =========
Retained earnings at beginning of period $ 239,209 $ 213,467
Net income 6,885 10,825
Two-for-one stock split effected in the form of a stock dividend - (35)
Valuation allowance on noncurrent marketable equity securities 271 52
Dividends paid (3,595) (3,415)
========= =========
Retained earnings at end of period $ 242,770 $ 220,894
========= =========
Earnings per share:
Net income per share - basic $ 0.24 $ 0.38
Net income per share - diluted $ 0.24 $ 0.38
Cash dividends paid per common share $ 0.125 $ 0.120
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
5
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS,
COMPREHENSIVE INCOME, AND RETAINED EARNINGS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net sales by industry segment:
Educational publishing $ 237,208 $ 231,164
General publishing 37,165 39,905
--------- ---------
274,373 271,069
Costs and expenses:
Cost of sales 148,515 145,874
Selling and administrative 156,393 148,845
--------- ---------
304,908 294,719
Operating loss (30,535) (23,650)
Other income (expense):
Net interest expense (18,106) (19,799)
Gain on equity transactions of INSO Corporation - 14,904
Equity in earnings (losses) of INSO Corporation (25) 2,290
Other expense (1,050) -
--------- ---------
(19,181) (2,605)
--------- ---------
Loss before taxes (49,716) (26,255)
Income tax benefit (19,886) (10,204)
--------- ---------
Net loss (29,830) (16,051)
Other comprehensive income:
Valuation allowance on noncurrent marketable equity securities 270 (20)
========= =========
Comprehensive loss $ (29,560) $ (16,071)
========= =========
Retained earnings at beginning of period $ 279,513 $ 243,998
Net loss (29,830) (16,051)
Two-for-one stock split effected in the form of a stock dividend - (215)
Valuation allowance on noncurrent marketable equity securities 270 (20)
Dividends paid (7,183) (6,818)
========= =========
Retained earnings at end of period $ 242,770 $ 220,894
========= =========
Earnings per share:
Net loss per share - basic $ (1.05) $ (0.57)
Net loss per share - diluted (except when anti-dilutive) $ (1.05) $ (0.57)
Cash dividends paid per common share $ 0.250 $ 0.240
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
6
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows provided by (used in) operating activities
Net loss $ (29,830) $ (16,051)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in earnings (losses) of INSO Corporation 25 (2,290)
Depreciation and amortization 38,231 36,225
Gain on equity transactions of INSO Corporation - (14,904)
Changes in operating assets and liabilities:
Accounts receivable (25,696) (32,269)
Inventories (45,079) (41,146)
Accounts payable 3,956 12,511
Royalties (18,290) (16,314)
Deferred and income taxes payable (22,009) (13,030)
Salaries, wages, and commissions (13,990) (12,238)
Other, net (2,468) (7,431)
--------- ---------
Net cash used in operating activities (115,150) (106,937)
Cash flows provided by (used in) investing activities
Book plate expenditures (23,814) (25,582)
Acquisition of publishing assets (1,302) (4,437)
Property, plant, and equipment expenditures (9,500) (5,485)
--------- ---------
Net cash used in investing activities (34,616) (35,504)
Cash flows provided by (used in) financing activities
Dividends paid on common stock (7,183) (6,818)
Issuance of commercial paper 157,081 140,187
Exercise of stock options 1,078 2,157
Other (264) (178)
--------- ---------
Net cash provided by financing activities 150,712 135,348
Increase (decrease) in cash and cash equivalents 946 (7,093)
Cash and cash equivalents at beginning of period 5,621 11,534
--------- ---------
Cash and cash equivalents at end of period $ 6,567 $ 4,441
========= =========
Supplementary disclosure of cash flow information:
Income taxes paid $ 1,583 $ 4,771
Interest paid $ 19,050 $ 19,711
</TABLE>
See accompanying notes to unaudited consolidated condensed 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 1998 interim
financial statements.
(2) Common Stock Split
On June 25, 1997, the Board of Directors declared a two-for-one split of
the Company's common stock effected in the form of a 100% stock dividend to
shareholders of record on July 11, 1997, which was distributed on July 25, 1997.
The effect of the split is reflected retroactively within stockholders' equity
for all 1997 periods presented by adjusting the par value for the additional
shares due to the stock split from retained earnings. All 1997 share and per
share amounts in this report have been restated to reflect the effect of this
stock split.
(3) Acquisitions
On May 12, 1997, the Company acquired the assets of Chapters Publishing
Ltd., predominantly a publisher of cookbooks. The acquisition was 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 the acquisition.
Net cash consideration for the acquisition amounted to approximately $3.3
million. The cost of the acquisition was 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 ten years.
On September 10, 1997, the Company, through its subsidiary The Riverside
Publishing Company, acquired all outstanding shares of Wintergreen/Orchard
House, Inc., a publisher of guidance products for the elementary and secondary
school markets. The acquisition was 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 the acquisition. Net cash consideration
for the acquisition amounted to approximately $3.6 million. The cost of the
acquisition was 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 fifteen years.
8
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(3) Acquisitions - continued
These acquisitions did not materially affect consolidated results;
therefore, no pro forma information is provided. See Note 8 for the disclosure
of a subsequent event acquisition.
(4) 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, if any, on a
quarterly basis one quarter 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 $47.04 for a total
consideration of $56.4 million. As a result, in March 1997, the Company recorded
a gain of $14.9 million, $8.6 million after tax, or $0.30 per share,
representing the Company's portion of the increase in INSO's net assets. As of
June 30, 1998, the Company's equity ownership has been reduced to approximately
26%. See Note 8 for the disclosure of a subsequent event transaction.
(5) Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Goodwill $ 515,129 $ 511,963 $ 515,532
Publishing rights 17,724 16,624 16,623
Other 4,000 4,000 4,000
Less: accumulated amortization (87,356) (59,246) (73,271)
--------- --------- ---------
Total $ 449,497 $ 473,341 $ 462,884
========= ========= =========
</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.
(6) Earnings Per Share
The tables on the following page set forth the computation of basic and
diluted earning per share for the three months ended June 30, 1998 and June 30,
1997 and for the six months ended June 30, 1998 and June 30, 1997:
9
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(6) Earnings Per Share - continued
<TABLE>
<CAPTION>
Three months ended June 30,
1998 1997
--------------- ---------------
(in thousands, except per share amounts)
Numerator:
<S> <C> <C>
Net income $ 6,885 $ 10,825
Denominator:
Denominator for basic earnings per share:
weighted-average shares outstanding 28,524 28,165
Effect of dilutive securities:
Employee stock options 355 340
Restricted stock 37 110
Performance shares -- 10
--------------- ---------------
392 460
Dilutive potential common shares:
Denominator for diluted earnings per share:
Adjusted weighted-average shares
outstanding and assumed conversions 28,916 28,625
=============== ===============
Basic earnings per share $ 0.24 $ 0.38
=============== ===============
Diluted earnings per share $ 0.24 $ 0.38
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
--------------- ---------------
(in thousands, except per share amounts)
Numerator:
<S> <C> <C>
Net loss $ (29,830) $ (16,051)
Denominator:
Denominator for basic earnings per share:
weighted-average shares outstanding 28,494 28,124
Effect of dilutive securities -- --
Dilutive potential common shares:
Denominator for diluted earnings per share:
Adjusted weighted-average shares
outstanding and assumed conversions 28,494 28,124
=============== ===============
Basic loss per share $ (1.05) $ (0.57)
=============== ===============
Diluted loss per share (except when anti-dilutive) $ (1.05) $ (0.57)
=============== ===============
</TABLE>
Options to purchase 247,534 shares of common stock at June 30, 1998 were not
included in the computation of diluted earnings per share for the three months
ended June 30, 1998 because the options' exercise prices were greater than the
average market price of the common shares and, therefore, the effect would be
anti-dilutive. There were no options for which the exercise price exceeded the
average market price of the common shares for the three months ended June 30,
1997.
10
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(6) Earnings Per Share - continued
For the six months ended June 30, 1998 and June 30, 1997, no dilutive
securities were included in the computation of diluted earnings per share
because the Company had a net loss, and the effect would have been
anti-dilutive.
(7) Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") which is required to be
adopted for fiscal years beginning after December 15, 1997. This statement
establishes new rules for the reporting and display of comprehensive income and
its components. The adoption of this Statement had no impact on the Company's
net income or shareholders' equity. SFAS 130 requires that unrealized gains or
losses on the Company's valuation allowance on non-current marketable equity
securities be included in other comprehensive income. Prior to adoption these
gains and losses were reported separately in shareholders' equity.
Total comprehensive income for the three months ended June 30, 1998
amounted to $7.2 million and $10.9 million for the same period in 1997. For the
six months ended June 30, 1998, total comprehensive loss amounted to $29.6
million and $16.1 million for the same period in 1997.
(8) Subsequent Events
On July 21, 1998, the Company, through its subsidiary, The Riverside
Publishing Company, acquired all of the outstanding stock of Computer Adaptive
Technologies, Inc. ("CAT"), which specializes in developing and delivering
computer-based testing solutions to organizations worldwide. The acquisition
will be accounted for as a purchase, and the assets acquired, liabilities
assumed, and results of operations will be included in the Company's
consolidated financial statements from the date of the acquisition. Net cash
consideration for the acquisition amounted to approximately $10.3 million, of
which $8.0 million was paid to the former shareholders of CAT, and $2.3 million
to paydown debt and buyout certain warrants. In addition, there is $6 million of
contingent consideration which is based on the achievement of certain future
operational and financial targets. The cost of the acquisition will be allocated
on the basis of the estimated fair market value of the assets acquired and the
liabilities assumed.
On August 1, 1998, the Company redeemed 50%, or $65,280,000 in aggregate
principal, of its outstanding 6% Exchangeable Notes due 1999 - Stock
Appreciation Income Linked Securities ("SAILS"). The SAILS were redeemed at an
exchange rate equal to (i) two shares of the common stock of INSO, par value
$0.01 per share, for each SAILS and (ii) cash in an amount equal to all accrued
and unpaid interest thereon to the redemption date. Redemption of the SAILS is
being made at the option of the Company pursuant to Section 1301 (b) of the
Indenture dated as of March 15, 1994 between the Company and State Street Bank
and Trust Company (as successor to the First National Bank of Boston), as
Trustee, as supplemented by a First Supplemental Indenture dated as of July 27,
1995. After this transaction, the Company's ownership of INSO will drop below
20%; therefore the Company will no longer report equity income from its
investment in INSO or special charges related to that investment.
At its July 29, 1998 meeting, the Board of Directors declared a quarterly
dividend of $0.125 per share, payable on August 26, 1998, to shareholders of
record on August 12, 1998.
11
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's principal business is publishing, and its operations are
classified in two industry segments: (1) textbooks and other educational
materials ("instructional materials") and services for the school and college
markets; and (2) general publishing, including fiction, nonfiction, children's
books, and dictionary and reference materials in a variety of formats and media.
In the school market, which consists of kindergarten through twelfth grade
("K-12"), the process by which elementary and secondary schools select and
purchase new instructional materials is referred to as the "adoption" process.
Twenty-one states, representing approximately one-half of the United States
elementary and secondary school-age population, select new instructional
materials on a statewide basis for a particular subject once approximately every
five to eight years. These twenty-one states are referred to as "adoption
states." Generally, a school or school district within an adoption state may use
state monies to purchase instructional materials only from the list of
publishers' programs which have been approved, or "adopted," by the particular
state's governing body. In the other states, referred to as "open territories,"
individual schools or school districts make the purchasing decisions from the
unrestricted offerings of all publishers. The industry terms "adopted" or
"adoption" are used: (1) to describe a state governing body's approval process,
or (2) to describe a school or school district's selection and purchase of
instructional materials. After adopting, or selecting, instructional materials,
schools later decide how much to purchase and when to purchase in order to
implement the adoption.
Sales of instructional materials are cyclical, with some years offering more
sales opportunities than others. Although the loss of a single customer or a few
customers would not have a materially adverse effect on the business of the
Company, schedules of school adoptions and market acceptance of the Company's
products can affect year-to-year revenue performance. The Company expects that
there will be fewer statewide adoption opportunities for its products in 1998
than in 1997, when a significant number of states and districts adopted reading
and literature products. Although a number of statewide mathematics and social
studies adoptions are scheduled in 1998, these disciplines do not generate as
large
12
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a per-pupil expenditure as reading and literature adoptions. However, due to
growth opportunities in other divisions, the Company expects a modest increase
in 1998 revenues.
Almost ninety percent of the Company's revenues are derived from educational
publishing, a markedly seasonal business. Schools and colleges make most of
their purchases in the second and third quarters of the calendar year, in
preparation for the beginning of the school year in September. Thus, the Company
realizes more than forty percent of net sales and a substantial portion of net
income during the third quarter, making third-quarter results material to
full-year performance. The Company also characteristically posts a net loss in
the first and fourth quarters of the year, when fewer educational institutions
are making purchases.
The Company has implemented Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," which requires the presentation of both basic and diluted
earnings per share on the Consolidated Statement of Operations. The per share
amounts presented in this document are based on the diluted weighted average
shares outstanding. For further discussion of earnings per share and the impact
Statement No. 128, see Note 6 on page 9.
RESULTS OF OPERATIONS:
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
For the quarter ended June 30, 1998, consolidated net income was $6.9 million,
or $0.24 per share, compared to net income of $10.8 million, or $0.38 per share,
for the same period in 1997. In 1998, the Company recognized a one-time charge
of $0.6 million ($0.3 million after tax), or $0.01 per share, related to INSO's
acquisition of ViewPort Development AB. The second quarter of 1997 included a
one-time charge of $0.5 million ($0.3 million after tax), or $0.01 per share,
related to INSO's acquisition of the Mastersoft product line from Adobe Systems
Incorporated.
Excluding these non-recurring items, net income for the second quarter of 1998
would have been $7.2 million, or $0.25 per share, compared to net income of
$11.1 million, or $0.39 per share, in the second quarter of 1997. The primary
reasons for the decrease in net income in 1998 were increases in editorial
13
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costs related to product revisions and new product development, and increased
investments to improve operating and support systems and to comply with Year
2000 computer requirements.
Net sales:
Net sales for the quarter ended June 30, 1998 were $202.7 million, an increase
of $0.4 million from the $202.3 million reported in the second quarter of 1997.
Educational publishing net sales increased $2.8 million, or 1.5%, to $182.6
million in the second quarter of 1998 from last year's second-quarter net sales
of $179.8 million. Significantly higher sales of secondary school, supplemental,
and testing products, and modestly higher college sales offset the expected
decrease in elementary school sales. The School Division, the Company's
elementary school unit, reported lower net sales due to fewer reading and social
studies opportunities in 1998 than in 1997, partially offset by strong sales of
Houghton Mifflin Spelling & Vocabulary (C) 1998. McDougal Littell, the Company's
secondary school division, had strong sales from its math and social studies
programs. Riverside Publishing's revenue increased over the same period last
year primarily as a result of state contract sales, custom products, guidance
products, and group assessment sales. Sales also increased for Great Source as a
result of increased sales of its math and Write Source product lines.
General publishing's net sales of $20.2 million for the second quarter of 1998
were down $2.3 million, or 10.4%, from last year's second-quarter net sales of
$22.5 million. The decrease was primarily due to lower guidebook sales,
reflecting the expiration of the Insight Travel Guide distribution arrangement,
lower adult and juvenile sales as a result of a smaller number of new
publications in the spring and lower sales of publishing rights. These decreases
were partially offset by increased sales of dictionary products. Second-quarter
net sales for Houghton Mifflin Interactive were also lower in the same period
than last year due to increased competition in the retail channel.
14
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Cost of sales:
Cost of sales in the second quarter of 1998 increased $1.6 million, or 1.8%, to
$95.3 million from $93.7 million in the second quarter of 1997. As a percent of
sales, cost of sales increased to 47.0% in 1998 from 46.3% in 1997. This
increase was primarily due to higher editorial expenses related to product
revisions and new product development.
Selling and administrative:
Selling and administrative expenses in the second quarter of 1998 were $84.6
million, an increase of $3.7 million, or 4.6%, from $80.9 million in the second
quarter of 1997. As a percent of sales, selling and administrative expenses
increased to 41.7% from 40.0%. The primary reason for this increase was higher
costs related to new systems development and Year 2000 compliance.
Other income and expense:
The Company recognized a $1.1 million charge ($0.6 million after tax), or $0.02
per share, in the second quarter of 1998 related to its unsuccessful bid for a
portion of Simon & Schuster's publishing assets.
The Company also recognized a one-time charge of $0.6 million ($0.3 million
after tax), or $0.01 per share, related to INSO's acquisition of ViewPort
Development AB. In the second quarter of 1997, the Company recognized a one-time
charge of $0.5 million ($0.3 million after tax), or $0.01 per share, related to
INSO's acquisition of the Mastersoft product line from Adobe System
Incorporated. Excluding the one-time charges, equity income from the Company's
investment in INSO declined to less than $0.1 million in the second quarter of
1998 from $1.2 million in the second quarter of 1997.
Net interest expense of $9.8 million for the second quarter of 1998 was $0.6
million lower than in the same period in 1997. The reduction was primarily due
to paydown of $68.7 million of debt in the fourth quarter of 1997, partially
offset by higher working capital borrowings in the second quarter of 1998
compared to the second quarter of 1997.
15
<PAGE> 16
Income taxes:
The tax provision decreased $2.6 million, or 36%, over the same period last
year. This decrease is the result of the lower operating income in 1998.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The consolidated net loss for the six months ended June 30, 1998 was $29.8
million, or $1.05 per share, compared to a net loss of $16.1 million, or $0.57
per share, for the same period in 1997. During the six months ended June 30,
1998, the Company recorded one-time charges of $0.8 million ($0.5 million after
tax), or $0.02 per share, related to the equity investment in INSO. During the
six months ended June 30, 1997, the Company recorded a gain of $14.9 million
($8.6 million after tax), or $0.30 per share, as the result of INSO's offering
of common stock and a one-time charge of $0.5 million ($0.3 million after tax),
or $0.01 per share, related to the equity investment in INSO.
Excluding these non-recurring items, the seasonal net loss for the six months
ended June 30, 1998 would have been $29.4 million, or $1.03 per share, compared
to a net loss of $24.4 million, or $0.86 per share, for the first six months of
1997. The increase in the net loss was primarily due to increases in editorial
and plate costs related to product revisions and new product development and
increased investments in Year 2000 compliance and new systems.
Net sales:
Net sales for the six months ended June 30, 1998 were $274.4 million, an
increase of 1.2% from the $271.1 million reported in the same period in 1997.
Educational publishing net sales increased $6.0 million, or 2.6%, to $237.2
million in the six months ended June 30, 1998, from net sales of $231.2 million
in the same period in 1997. All educational publishing divisions reported sales
increases except the School Division. McDougal Littell, Great Source Education
Group, and The Riverside Publishing Company all had double-digit sales gains, as
these divisions benefited from additional sales opportunities.
16
<PAGE> 17
The School Division reported lower sales due to the decrease in the number of
reading and social studies sales opportunities in 1998 versus 1997.
The general publishing segment's net sales of $37.2 million in the six months
ended June 30, 1998 decreased $2.7 million, or 6.9%, from net sales of $39.9
million during the same period in 1997. This decrease was primarily due to the
decline in guidebook sales and sales of publishing rights, partially offset by
increased sales of dictionary products.
Cost of sales:
During the six months ended June 30, 1998, cost of sales increased $2.6 million,
or 1.8%, to $148.5 million from $145.9 million during the same period in 1997.
As a percent of sales, cost of sales was 54.1% for the six months ended June 30,
1998 and 53.8% for the same period in 1997. This increase was primarily due to
the increase in editorial and plate costs due to product revisions and new
product development.
Selling and administrative:
Selling and administrative expenses during the six months ended June 30, 1998
were $156.4 million, an increase of $7.6 million, or 5.1%, from $148.8 million
recorded in the same period in 1997. The primary reason for this increase was
higher costs related to Year 2000 compliance and new systems development.
Other income and expense:
During the six-month period ended June 30, 1998, the Company recognized a $1.1
million charge ($0.6 million after tax), or $0.02 per share, related to its
unsuccessful bid for a portion of Simon & Schuster's publishing assets.
The Company also recorded one-time charges of $0.8 million ($0.5 million after
tax), or $0.02 per share, related to INSO's acquisition of Henderson Software
and ViewPort Development AB. During the six months ended June 30, 1997, the
Company recorded a gain of $14.9 million ($8.6 million after tax), or $0.30 per
share, as a result of INSO's offering of common stock and a one-time charge of
17
<PAGE> 18
$0.5 million ($0.3 million after tax), or $0.01 per share, related to INSO's
acquisition of Mastersoft products from Adobe Systems Incorporated. Excluding
the one-time charges, equity income from the Company's investment in INSO for
the six months ended June 30, 1998 declined to $0.7 million compared to $2.8
million in the first six months of 1997.
Net interest expense of $18.1 million for the six months ended June 30, 1998
decreased $1.7 million from the same period in 1997. The reduction was primarily
due to paydown of $68.7 million of debt in the fourth quarter of 1997, partially
offset by higher working capital borrowing during the six months ended June 30,
1998 compared to the same period in 1997.
Income taxes:
The tax benefit increased $9.7 million, or 94.9%, during the six months ended
June 30, 1998 over the same period last year. This increase was the result of
the higher operating loss in 1998 and an increase in the tax rate to 40.0% in
1998 from 38.9% in 1997.
Liquidity and Capital Resources
The Company's principal businesses are seasonal, with almost ninety percent of
the Company's revenues derived from educational publishing, a markedly seasonal
business. The Company realizes more than forty percent of net sales and a
substantial portion of net income during the third quarter and
characteristically posts a net loss in the first and fourth quarters of the
year.
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 of the year. The deficit is funded through the use
of cash and sale of marketable securities, supplemented by short-term
borrowings, principally commercial paper.
During the six months ended June 30, 1998, the Company used $157.1 million of
net borrowings to cover its seasonal operating loss and working capital needs
and to fund publishing and capital investments.
18
<PAGE> 19
During the six months ended June 30, 1997, the Company used $7.1 million of cash
on hand at year-end 1996, as well as $140.2 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 $115.2 million during the six months
ended June 30, 1998, an $8.2 million increase from the $106.9 million in cash
used in operations during the same period in 1997. Excluding the non-cash effect
of equity earnings and losses of INSO, depreciation and amortization, and the
gain on equity transactions of INSO, the pre-tax loss increased by $4.2 million.
Changes in operating assets and liabilities used $4.0 million more cash during
the six months ended June 30, 1998 than in the same period in 1997.
Cash required for investing activities was $34.6 million during the six months
ended June 30, 1998, a decrease of $0.9 million from the $35.5 million required
in the same period in 1997. This decrease was principally due to a $3.1 million
decrease in acquisition of publishing assets and a $1.8 million decrease in book
plate expenditures, offset by a $4.0 million increase in property, plant, and
equipment expenditures in the first six months of 1998 compared to the same
period in 1997.
Net proceeds from financing increased by $15.4 million during the six months
ended June 30, 1998 from the same period in 1997, primarily due to higher
working capital requirements.
The Company believes its existing cash, positive cash flow from operations and
its existing lines of credit will be sufficient to finance the CAT acquisition,
fund capital expenditures and dividend payments, and cover working capital
requirements for the full year.
Outlook
The Company anticipates that the CAT acquisition will be dilutive to earnings in
1998. It is expected that CAT's business development costs will exceed its
revenues and the Company anticipates earnings dilution of approximately $0.08
per share.
19
<PAGE> 20
"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. Investors should not rely 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) cost of development and market acceptance
of the Company's educational and testing publications; (ii) the seasonal and
cyclical nature of the Company's educational sales; (iii) 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;
(iv) changes in purchasing patterns in elementary and secondary school and
college markets; (v) changes in the competitive environment, including those
which would adversely affect selling expenses; (vi) regulatory changes which
would affect the purchase of educational materials and services; (vii) strength
of the retail market for general-interest publications and market acceptance of
newly published titles and new electronic products; (viii) unanticipated
expenses or delays in resolving Year 2000 computer issues by either the Company
or those with whom the Company does business; and (ix) other factors referred to
from time to time in the Company's filings with the Securities and Exchange
Commission.
20
<PAGE> 21
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. (10) (iii) (A):
Form of Amendment Agreement dated June 30, 1998 to the Option
Grant and Exercise Agreement dated as of August 24, 1996
Form of Replacement Promissory Note under the Amended 1994
Executive Stock Purchase Plan
Houghton Mifflin Company Amended and Restated 1994 Executive
Stock Purchase Plan
Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
None
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUGHTON MIFFLIN COMPANY
Registrant
Dated: August 12, 1998 /s/ Gail Deegan
Gail Deegan
Executive Vice President,
Chief Financial Officer, and Treasurer
Dated: August 12, 1998 /s/ David R. Caron
David R. Caron
Vice President, Corporate Controller
22
<PAGE> 23
Houghton Mifflin Company
Index To Exhibits
Item 6(a)
Exhibit No Description of Document Page Number in This Report
- ---------- ----------------------- --------------------------
(10) (iii) (A) Form of Amendment Agreement
dated June 30, 1998 to the Option
Grant and Exercise Agreement
dated as of August 24, 1996
Form of Replacement Promissory
Note under the Amended 1994
Executive Stock Purchase Plan
Houghton Mifflin Company Amended
and Restated 1994 Executive Stock
Purchase Plan
(27) Financial Data Schedule
23
<PAGE> 1
Exhibit (10)(iii)(A)
Amended and Restated as of June 30, 1998
HOUGHTON MIFFLIN COMPANY
AMENDED AND RESTATED
1994 EXECUTIVE STOCK PURCHASE PLAN
1. Purpose. The Houghton Mifflin Company 1994 Executive Stock Purchase Plan
("Plan"), adopted pursuant to the Houghton Mifflin Company 1992 Stock
Compensation Plan (the "1992 Plan"), is designed to facilitate the
immediate purchase, by the Senior Corporate Officers of Houghton Mifflin
Company and its subsidiaries (collectively, the "Company"), of the
Company's common stock, par value $1.00 per share ("Common Stock"). The
purchases facilitated by the Plan are intended to achieve the following
specific purposes:
a. more closely align Senior Corporate Officers' financial rewards
with the financial rewards realized by other Company
stockholders;
b. increase Senior Corporate Officers' motivation to manage the
Company as owners; and
c. increase the ownership of Common Stock among Senior Corporate
Officers of the Company.
2. Eligibility and Participation. Individuals eligible to participate are
those granted options to purchase shares of Common Stock by vote of the
Compensation and Nominating Committee of the Company's Board of Directors
(the "Committee") on August 24, 1994. To become a Plan participant
("Participant"), an eligible individual must:
a. submit a completed and executed Option Grant and Exercise
Agreement; and
b. promptly complete and execute all necessary agreements and other
documents relating to the Plan and the loans contemplated by
Section 3 hereof.
<PAGE> 2
The agreements and other documents specified in this Section 2 must be in
such form and must be submitted at such times and to such Company officers
as are specified by the Company. No eligible individual is required to
participate in the Plan.
3. Payment of Exercise Price. Each Participant must deliver consideration
equivalent to 100% of the price for the shares of the Common Stock
purchased pursuant to this Plan ("Purchased Shares") at the time, place and
manner specified by the Company. The Purchased Shares will not be issued in
the Participant's name until the Company has received such consideration.
The Company may arrange for each Participant to obtain a loan from a third
party ("Third Party Loan") or directly provide a loan (collectively,
"Permanent Loan") as consideration to fund the purchase of the Purchased
Shares; however, the initial interim funding of the purchase price will be
provided by a loan ("Interim Loan") from the Company to the Participant
with an interest rate equal to 50 basis points above the average 90-day
posted commercial paper rates, as provided by the Company's two commercial
paper agents, Merrill Lynch Pierce Fenner & Smith Inc. and CS First Boston
Corporation. If the third party financing is arranged, each Participant
shall sign a letter of direction which directs all of his or her Third
Party Loan proceeds to be paid directly to the Company in payment of the
Interim Loan or the Permanent Loan. The Participant is responsible for
satisfying all of the lending requirements to qualify for the Third Party
Loan. The Participant is fully obligated to repay all principal, interest
and any prepayment fees on the Participant's loan when due and payable.
While the Interim Loan is outstanding, wherever the context requires in
this Plan, references to the third party as lender shall be deemed to be
references to the Company as lender.
4. Loan Guarantee. With respect to a Third Party Loan, if any, the Company may
be required to guarantee repayment to the lender of 100% of all principal,
interest, prepayment fees and other obligations of each Participant under
the Participant's loan described in Section 3 hereof. The Company's loan
guarantee may be a condition to the loan arrangement the Participant makes
with the third party The terms and conditions of the guarantee shall be as
agreed by the Company and the lender. As stated in Section 3 hereof, each
2
<PAGE> 3
Participant is fully obligated to repay to the lender all principal,
interest and any prepayment fees on the Participant's loan when due and
payable. The Company may take all action relating to the Participant and
his or her assets which the Committee deems reasonable and necessary to
provide security for the Interim Loan or Permanent Loan provided by the
Company or for the Company's guarantee of the Participant's Third Party
Loan (including, without limitation, a pledge of the Purchased Shares) and
to obtain full reimbursement for any payments the Company becomes obligated
to make to a third party under its guarantee of the Participant's loan.
5. Registration of Shares. The Purchased Shares will be registered in the name
of the Participant. Each certificate may bear a legend referring to the
Plan and the agreements between the Participant and the Company relating to
the Purchased Shares. The certificates for the Purchased Shares, together
with all non-cash and other extraordinary dividends on the Purchased
Shares, will be held by the Company until all restrictions on the Purchased
Shares have lapsed and any loan to the Participant referred to in Section 3
hereof is no longer outstanding. Each Participant shall deliver to the
Company a stock power endorsed in blank with respect to the Purchased
Shares.
6. Stockholder Rights. During the period in which the Purchased Shares are
subject to pledge or restrictions on transfer, each Participant will have
all other rights of a stockholder with respect to the Purchased Shares,
including the right to vote the Purchased Shares and the right to receive
all regular cash dividends paid with respect to the Purchased Shares. To
the extent required by the Plan, the loan agreements and other documents
relating to the Plan, the Company's Transfer Agent will be irrevocably
directed to deliver all such dividends directly to the Company for payment
of loan interest on the Permanent Loan. Any regular cash dividends with
respect to the Purchased Shares in excess of required interest payments
will, at the Participant's option, either be paid directly to the
Participant or deposited in a bank account designated by the Participant.
3
<PAGE> 4
7. Restrictions on Sale of Purchased Shares. Each Participant is permitted to
sell all or any portion of the Purchased Shares, subject to the following
restrictions:
a. except in the event of death, disability (as determined by the
Company, in its sole discretion), or certain terminations of
employment, as described in Section 11, 12 or 13 hereof, or a
Change in Control as defined in Section 14 hereof, no Participant
may sell any portion of the Purchased Shares before the first
anniversary of the Participant's payment of the exercise price
(hereinafter, each such sequential anniversary may be called an
"Anniversary");
b. no Participant may sell any portion of the Purchased Shares
unless all principal, interest and any prepayment fees due on the
loan contemplated by Section 3 hereof have previously been paid
or all proceeds of the sale are simultaneously applied first to
the payment of all such principal, interest and prepayment fees;
and
c. the Company has the right to impose additional restrictions on
the timing, amount and form of the sale of the Purchased Shares
with respect to any Participant to the extent it determines that
such restrictions are necessary or advisable in order to comply
with any applicable law. Each Participant must notify the Company
of his or her intention to sell the Purchased Shares before such
a sale may be implemented. The Company may elect, by notice
directed to the Participant on the business day immediately
following receipt of such notification, to allow the Participant
to sell the Purchased Shares in the open market or to repurchase
the Purchased Shares itself. If the Company repurchases the
Purchased Shares, the purchase price will be the average closing
sale price of a share of Common Stock as reported in the New York
Stock Exchange Composite Index over the six-day period consisting
of the three trading days before and the three trading days after
the notification to the Company of the intent to sell.
4
<PAGE> 5
8. 1992 Plan and Amendment of This Plan. The Plan is governed by the
provisions of the 1992 Plan, except as otherwise expressly stated herein.
Subject to the provisions of the 1992 Plan, the Committee may amend the
Plan at any time it determines an amendment to be in the best interests of
the Company. In accordance with the 1992 Plan, no such amendment may
adversely affect the rights of a Participant without the consent of the
Participant.
5
<PAGE> 6
Exhibit(10)(iii)(A)
Amendment Agreement
-------------------
Agreement dated June 30, 1998 between participant (the "Executive") and
Houghton Mifflin Company ("the "Company") to amend the 1994 Executive Stock
Purchase Plan.
Whereas, in 1994, the Company adopted the 1994 Executive Stock Purchase
Plan (the "Plan") with the purpose of increasing the ownership of the Company's
common stock by senior corporate officers; and
WHEREAS, in connection with the purchase of shares of the Company's common
stock under the Plan, the Company and the Executive entered into an Option Grant
and Exercise Agreement dated as of August 24, 1994 (the "Agreement"), and the
Executive signed a promissory note dated September 30, 1994 (the "Note"); and
WHEREAS, the Plan permits amendment by the Company with the consent of the
participants; and
WHEREAS, the Company now wishes to amend the Plan in certain respects and
the Executive is willing to consent to such amendments, as provided herein;
NOW, THEREFORE, the parties agree as follows:
1. All defined terms used in this Consent without definition shall have the
meanings ascribed to them in the Plan.
2. The Plan as originally adopted provided in Section 3 that the term of
any Permanent Loan will end no later than 90 days after the fifth Anniversary of
payment as required under the Plan, and in Sections 8 through 14, for the
Company and Participants to share in any gain or loss on sale of Purchased
Shares, under the conditions provided in such Sections. The Company has amended
the Plan to (i) delete the sentence in Section 3 requiring repayment of any
Permanent Loan within a five-year period, and (ii) delete Sections 8 through 14,
renumbering former Section 15 as Section 8.
<PAGE> 7
3. The Company has offered to extend the repayment date of the Note, as
provided in a new promissory note of even date herewith.
4. In consideration of the extension of the term of the Note, the Executive
hereby consents to the amendments to the Plan described in the preceding
paragraph 2.
5. The terms of the Agreement are hereby modified as necessary to reflect
the deletion of Sections 8 through 14 of the Plan.
IN WITNESS WHEREOF, the parties have executed this Consent Agreement dated
as of the date first written above.
HOUGHTON MIFFLIN COMPANY
By:
_______________________________
Susan E. Hardy
Assistant Treasurer
___________________________________
Name: participant
<PAGE> 8
Exhibit (10)(iii)(A)
FORM OF
REPLACEMENT PROMISSORY NOTE UNDER
THE AMENDED 1994 EXECUTIVE STOCK PURCHASE PLAN
<<dollar_amount>> Boston, Massachusetts
June 30, 1998
FOR VALUE RECEIVED, the undersigned, participant (the "Borrower"), HEREBY
PROMISES TO PAY to or to the order of Houghton Mifflin Company (the "Company"),
the principal sum of dollar_amount, in accordance herewith, but in no event
later than the Maturity Date. Capitalized terms used and not otherwise defined
herein shall have the meanings ascribed to them in the Company's 1994 Executive
Stock Purchase Plan (the "Purchase Plan"). The purpose of the loan represented
by this Note is to refinance the purchase of the shares (the "Purchased Shares")
of common stock of the Company, par value $1.00 per share, purchased by the
Borrower pursuant to the Purchase Plan.
1. Interest. (a) The Borrower promises to pay interest to the Company on
the outstanding principal amount hereof from the date hereof until such
principal amount is paid in full at an effective interest rate of six and
one-quarter percent (6.25%) if compounded per annum (the "Interest Rate").
Accrued interest and principal is due on October 1, 2003 (the "Maturity Date").
The Interest Rate for the Maturity Period remains at six and one-half percent
(6.5%) and is applied to the principal and accrued interest due on the Maturity
Date.
(b) Interest shall be calculated for actual days elapsed on the basis of a
365-day year, and shall compound on a daily basis at .016611% per day.
(c) The Borrower shall direct the Company to apply all quarterly dividends
with respect to the Purchased Shares to interest payable hereunder. In the event
that, at any time prior to the Maturity Date, the Company does not declare a
quarterly dividend on its common stock, the Borrower shall pay to the Company
the per-share amount of $.125 as a substitute for the quarterly dividend.
<PAGE> 9
2. Repayment. The aggregate principal amount of and all accrued interest
and other amounts owing under this Note shall be repayable in full on the
Maturity Date.
3. Prepayment. The outstanding principal amount of and accrued interest
under this Note may be prepaid in whole or in part, at any time prior to the
Maturity Date, without penalty.
4. Method of Payment. All payments of principal, interest (other than the
amount of any quarterly dividend payment applied directly by the Company to
interest pursuant to Paragraph 1(c) above) and other amounts owing hereunder
shall be made, without setoff, deduction or counterclaim, in funds which are
available on the Maturity Date to the Company at the Company's principal address
at 222 Berkeley Street, Boston, Massachusetts 02116, or to such other person and
at such other place specified in writing by the Company to the Borrower, by
12:00 noon (New York time) on the date when due. Whenever any payment to be made
hereunder shall be stated to be due on a day other than a business day, such
payment shall be made on the next succeeding business day, and such extension of
time shall in such case be included in the computation of payment of interest.
5. Prior Note. Upon execution of this Note, the Promissory Note of the
Borrower dated September 30, 1994, shall be canceled.
6. Pledge of the Purchased Shares. The Borrower hereby grants to the
Company, as security for the obligations of the Borrower hereunder, a security
interest in the Purchased Shares. Upon default by Borrower in any obligation of
Borrower hereunder, the Company shall have the rights and remedies of a secured
party under the Uniform Commercial Code as in effect in the Commonwealth of
Massachusetts and may take such action as it deems necessary or appropriate,
including, without limitation, sale of the Purchased Shares, to satisfy the
Borrower's obligations hereunder. The Borrower will execute such documents and
take such action as the Company may require to evidence and perfect such
security interest.
7. Waiver of Presentment, etc. The Borrower hereby expressly waives any
presentment, demand, protest or notice of any kind by the Company upon the
occurrence and during the continuance of a matured event of default in the
payment of the principal amount and interest and other amounts outstanding under
this Note owing by Borrower, by notice to the Borrower.
<PAGE> 10
8. Agreements; Representations and Warranties. The Borrower hereby (i)
represents that such Borrower's name, address, home phone number and social
security number or similar number is correct as listed below, (ii) agrees that
any notice permitted or required to be given by the Company to the Borrower
pursuant hereto shall be deemed given upon the earlier of actual receipt by the
Borrower and three business days after posting in the U.S. first class mail
addressed to the Borrower at the address set forth below or at such other
address as specified in writing by the Borrower to the Company and (iii) the
Borrower acknowledges that he or she is accepting the loan herein contemplated
and acquiring the Purchased Shares for the purpose of investment or profit.
9. Amendments. This Note may not be amended orally but only in writing
signed by the Borrower and the Company.
10. Preservation of Rights; Survival. No delay or omission of the Company
to exercise any right with respect to this Note shall impair such right or be
construed to be a waiver of any default or an acquiescence therein. Any single
or partial exercise of any such right shall not preclude other or further
exercise thereof or the exercise of any other right. All remedies which the
Company may have shall be cumulative and all shall be available to the Company
until this Note has been paid in full. All representations and warranties of the
Borrower contained in this Note shall survive delivery of this Note and the
making of the loan herein contemplated.
11. Headings; Entire Agreement. Section headings in this Note are for
convenience of reference only, and shall not govern the interpretation of any of
the provisions of this Note.
12. Benefits of this Agreement. This Note shall be binding upon the
Borrower and the Borrower's personal representatives, heirs and assigns and
shall not be construed so as to confer any right or benefit upon any Person
other than the Borrower and his or her personal representatives, heirs and
assigns.
13. Expenses; Indemnification. The Borrower agrees to reimburse the Company
for any costs, internal charges and out of pocket expenses (including reasonable
attorneys' fees and time charges of attorneys for the Company, which attorneys
may be employees of the Company) paid or incurred by the Company in connection
with the collection and enforcement of this Note. The Borrower further agrees to
indemnify the Company, its directors, officers and employees (other than
<PAGE> 11
the Borrower) against all losses, claims, damages, penalties, judgments,
liabilities and expenses (including, without limitation, all expenses of
litigation or preparation therefor whether or not the Company is a party
thereto) which any of them may pay or incur arising out of or relating to this
Note, the transactions contemplated hereby or the direct or indirect application
or proposed application of the proceeds of the loan evidenced hereby except to
the extent that they arise out of the gross negligence or willful misconduct of
the party seeking indemnification. The obligations of the Borrower under this
Section shall survive the repayment of this Note.
14. Severability of Provisions. Any provision in this Note that is held to
be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that
jurisdiction, be inoperative, unenforceable, or invalid without affecting the
remaining provisions in that jurisdiction or the operation, enforceability, or
validity of that provision in any other jurisdiction, and to this end the
provisions of this Note are declared to be severable. If any interest payment or
other charge or fee payable by the Borrower under this Note exceeds the maximum
amount then permitted by applicable law, the Borrower shall be obligated to pay,
and the Company shall be entitled to receive, only the maximum amount permitted
by applicable law. If the Company has collected interest in excess of such
maximum rate, the Borrower's only remedy will be that the Company will apply
such excess interest as a full or partial prepayment of the unpaid balance of
the principal amount to the extent of the unpaid principal balance and refund
any additional excess amount to the Borrower.
15. Choice of Law. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS, OF THE
COMMONWEALTH OF MASSACHUSETTS.
16. CONSENT TO JURISDICTION. THE COMPANY AND THE BORROWER HEREBY
IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL OR
MASSACHUSETTS STATE COURT SITTING IN BOSTON IN ANY ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS NOTE AND THE PARTIES HEREBY IRREVOCABLY AGREE THAT
ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED
IN ANY SUCH COURT AND IRREVOCABLY WAIVE ANY OBJECTION THEY MAY NOW OR HEREAFTER
HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING
<PAGE> 12
BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING
HEREIN SHALL LIMIT THE RIGHT OF THE COMPANY TO BRING PROCEEDINGS AGAINST THE
BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE
BORROWER AGAINST THE COMPANY OR ANY AFFILIATE OF THE COMPANY INVOLVING, DIRECTLY
OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED
WITH THIS NOTE SHALL BE BROUGHT ONLY IN A COURT IN BOSTON, MASSACHUSETTS.
17. WAIVER OF JURY TRIAL. THE BORROWER AND, BY ACCEPTANCE HEREOF, THE
COMPANY HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR
OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS NOTE.
IN WITNESS WHEREOF, the undersigned Borrower has executed this Note as of
the day and year first above written.
____________________________________
Borrower: <<participant>>
____________________________________
(Home Address)
____________________________________
____________________________________
(Home Phone Number)
____________________________________
(Social Security Number or other
taxpayer identification number,
if any, as applicable)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,567
<SECURITIES> 614
<RECEIVABLES> 196,229
<ALLOWANCES> 11,026
<INVENTORY> 190,122
<CURRENT-ASSETS> 423,030
<PP&E> 316,919
<DEPRECIATION> 186,709
<TOTAL-ASSETS> 1,080,159
<CURRENT-LIABILITIES> 368,437
<BONDS> 0
0
0
<COMMON> 30,423
<OTHER-SE> 254,198
<TOTAL-LIABILITY-AND-EQUITY> 1,080,159
<SALES> 202,740
<TOTAL-REVENUES> 202,740
<CGS> 95,291
<TOTAL-COSTS> 179,887
<OTHER-EXPENSES> (1,572)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,806
<INCOME-PRETAX> 11,475
<INCOME-TAX> 4,590
<INCOME-CONTINUING> 6,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,885
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
