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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, 1998 TO MARCH 31, 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 April 30, 1998.
Class Outstanding at April 30, 1998
- ------------------------------- -----------------------------
Common Stock, $1 par value 30,375,329
Preferred Stock Purchase Rights 30,375,329
1 of 18
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HOUGHTON MIFFLIN COMPANY
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
March 31, 1998 and 1997 and December 31, 1997 3 - 4
Consolidated Condensed Statements of Operations,
Comprehensive Income, and Retained Earnings -- Three
Months Ended March 31, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 6
Notes to Unaudited Consolidated Condensed
Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 16
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE> 3
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, March 31, December 31,
1998 1997 1997
-------- -------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,813 $ 5,144 $ 5,621
Marketable securities and time deposits
available-for-sale, at fair value 614 614 614
Accounts receivable 98,227 113,012 180,241
Less: allowance for book returns 11,978 15,487 20,734
-------- ---------- --------
86,249 97,525 159,507
Inventories
Finished goods 163,798 143,293 130,825
Work in process 8,029 9,707 9,010
Raw materials 7,167 7,019 5,208
-------- ---------- --------
178,994 160,019 145,043
Income taxes 37,494 39,522 12,049
Prepaid expenses 9,730 10,275 1,882
-------- ---------- --------
Total current assets 317,894 313,099 324,716
Property, plant, and equipment and book
plates (net of accumulated depreciation and
amortization of $170,331 in 1998, $134,801 in
1997 and $176,040 at December 31, 1997) 127,263 123,600 120,388
Intangible assets, net 457,111 479,165 462,884
Other assets 77,978 86,182 73,112
-------- ---------- --------
$980,246 $1,002,046 $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>
MARCH 31, March 31, December 31,
1998 1997 1997
-------- -------- -----------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 78,979 $ 78,889 $ 47,612
Commercial paper 110,564 96,190 61,346
Royalties 16,764 15,392 41,463
Salaries, wages, and commissions 3,336 2,452 21,625
Other accrued expenses 24,533 24,845 26,680
Current portion of long-term debt 40,000 40,000 40,000
-------- ---------- --------
Total current liabilities 274,176 257,768 238,726
Long-term debt 371,102 451,019 371,081
Accrued royalties 1,346 1,763 1,430
Other liabilities 25,286 20,379 24,017
Accrued post retirement medical benefits 28,239 27,805 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;
30,310,879 shares issued 30,311 29,922 30,219
Capital in excess of par value 69,269 51,937 75,307
Retained earnings 239,209 213,467 279,513
-------- ---------- --------
338,789 295,326 385,039
Less:
Notes receivable from purchase agreement (4,460) (5,980) (4,628)
Unearned compensation related to
restricted stock (6,940) (8,737) (7,178)
Common shares held in treasury, at cost
(286,025 shares in 1998, 94,852
shares in 1997 and 282,329 shares
at December 31, 1997) (5,660) (2,037) (5,553)
Benefits Trust assets, at market (41,632) (35,260) (49,923)
-------- ---------- --------
Total stockholders' equity 280,097 243,312 317,757
-------- ---------- --------
$980,246 $1,002,046 $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 MARCH 31, 1998 AND 1997
(UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net sales by industry segment:
Educational publishing $ 54,645 $ 51,367
General publishing 16,987 17,380
-------- --------
71,632 68,747
Costs and expenses:
Cost of sales 53,223 52,223
Selling and administrative 71,798 67,958
-------- --------
125,021 120,181
Operating loss (53,389) (51,434)
Other income (expense):
Net interest expense (8,300) (9,378)
Gain on equity transactions of INSO Corporation -- 14,904
Equity in earnings of INSO Corporation 497 1,612
-------- --------
(7,803) 7,138
-------- --------
Loss before taxes (61,192) (44,296)
Income tax benefit (24,477) (17,420)
-------- --------
Net loss (36,715) (26,876)
Other comprehensive income:
Valuation allowance on noncurrent marketable equity securities (1) (71)
-------- --------
Comprehensive loss $(36,716) $(26,947)
======== ========
Retained earnings at beginning of period $279,513 $243,998
Net loss (36,715) (26,876)
Two-for-one stock split effected in the form of a stock dividend -- (180)
Valuation allowance on noncurrent marketable equity securities (1) (71)
Dividends paid (3,588) (3,404)
-------- --------
Retained earnings at end of period $239,209 $213,467
======== ========
Earnings per share:
Net loss per share - Basic $ (1.29) $ (0.96)
Net loss per share - Diluted (except when anti-dilutive) $ (1.29) $ (0.96)
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 CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $(36,715) $(26,876)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in earnings of INSO Corporation (497) (1,612)
Depreciation and amortization 14,825 13,562
Gain on equity transactions of INSO Corporation -- (14,904)
Changes in operating assets and liabilities:
Accounts receivable 73,258 67,287
Inventories (33,951) (21,472)
Accounts payable 31,367 21,304
Royalties (25,383) (22,872)
Deferred and income taxes payable (25,442) (18,971)
Salaries, wages, and commissions (18,289) (16,956)
Other, net (9,944) (12,820)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (30,771) (34,330)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Book plate expenditures (10,281) (11,722)
Acquisition of publishing assets (1,290) (2,336)
Property, plant, and equipment expenditures (4,309) (1,955)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (15,880) (16,013)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Dividends paid on common stock (3,588) (3,404)
Issuance of commercial paper 49,218 96,190
Repayment of long-term financing -- (50,000)
Exercise of stock options 457 1,205
Other (244) (38)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 45,843 43,953
Decrease in cash and cash equivalents (808) (6,390)
Cash and cash equivalents at beginning of period 5,621 11,534
-------- --------
Cash and cash equivalents at end of period $ 4,813 $ 5,144
======== ========
Supplementary disclosure of cash flow information:
Income taxes paid $ 946 $ 1,589
Interest paid $ 8,149 $ 7,892
</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 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 periods presented by adjusting the par value for the additional shares
due to the stock split from retained earnings. All 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 the assets 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.
These acquisitions did not materially impact consolidated results;
therefore, no pro forma information is provided.
7
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HOUGHTON MIFFLIN COMPANY NOTES TO UNAUDITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(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
March 31, 1998, the Company's equity ownership has been reduced to approximately
26%.
(5) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997 1997
-------- -------- -----------
(in thousands)
<S> <C> <C> <C>
Goodwill $515,717 $510,835 $515,532
Publishing rights 17,724 16,623 16,623
Other 4,000 4,000 4,000
Less: accumulated amortization (80,330) (52,293) (73,271)
-------- -------- --------
Total $457,111 $479,165 $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.
8
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(6) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earning
per share:
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
(in thousands, except per share amounts)
<S> <C> <C>
Numerator:
Net loss $(36,715) $(26,876)
Denominator:
Denominator for basic earnings per share:
weighted-average shares outstanding 28,443 28,046
Effect of dilutive securities: -- --
Dilutive potential common shares:
Denominator for diluted earnings per share:
adjusted weighted-average shares outstanding
and assumed conversions 28,443 28,046
======== ========
Basic loss per share $ (1.29) $ (0.96)
======== ========
Diluted loss per share (except when anti-dilutive) $ (1.29) $ (0.96)
======== ========
</TABLE>
In the first quarter of 1998 and the first quarter of 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 antidilutive.
(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 unrealized gains or losses
on the Company's valuation allowance on non-current marketable equity
securities, which prior to adoption were reported separately in shareholders'
equity, be included in other comprehensive income.
Total comprehensive loss amounted to $36.7 million for the first quarter
of 1998, and $26.9 million for the first quarter of 1997.
(8) SUBSEQUENT EVENTS
At its April 29, 1998 meeting, the Board of Directors declared a quarterly
dividend of $0.125 per share, payable on May 27, 1998, to shareholders of record
on May 13, 1998.
9
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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 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
10
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adoptions are scheduled in 1998, these disciplines do not generate as large 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
of the Statement No. 128, see Note 6 on page 9.
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. All per share amounts have been retroactively restated in this
report to reflect the effect of the stock split.
11
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RESULTS OF OPERATIONS:
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
For the quarter ended March 31, 1998, the consolidated net loss was $36.7
million, or $1.29 per share, compared to a net loss of $26.9 million, or $0.96
per share, for the same period in 1997. The Company recognized a one-time charge
of $0.2 million ($0.1 million after-tax) in the first quarter of 1998 related to
INSO's acquisition of Henderson Software, Incorporated ("Henderson Software").
In the first quarter of 1997, the Company recognized a gain of approximately
$14.9 million ($8.6 million after-tax), or $0.30 per share, as the result of
INSO's offering of common stock in the fourth quarter of 1996.
Excluding these non-recurring items, the net loss for the first quarter of 1998
would have been $36.6 million, or $1.29 per share, compared to a net loss of
$35.5 million, or $1.26 per share, in the first quarter of 1997. The primary
reasons for the higher seasonal loss were 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 quarter ended March 31, 1998 were $71.6 million, an increase
of 4% from the $68.7 million reported in the first quarter of 1997. Educational
publishing net sales increased $3.2 million, or 6%, to $54.6 million in the
first quarter of 1998, from last year's first-quarter net sales of $51.4
million. The School Division's math program, Math Central, had strong sales in
open territories, and its spelling and social studies programs had increased
sales from adoption states as schools that previously adopted these programs
purchased additional product components. Riverside Publishing's revenue
increased over the same period last year as a result of state contract sales and
sales of group assessment materials, guidance products, and clinical tests.
Sales also increased for Great Source as a result of increased sales of Math
Zones, Every Day Counts, and the Write Source product line. College Division
sales were in line with the prior year.
12
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Net sales of $17.0 million for the general publishing segment in the first
quarter of 1998 were down $0.4 million, or 2%, from last year's first-quarter
net sales of $17.4 million. The decrease was primarily due to lower guide book
sales, offset somewhat by increased sales of juvenile products.
Cost of sales:
Cost of sales in the first quarter of 1998 increased $1.0 million, or 2%, to
$53.2 million from $52.2 million in the first quarter of 1997, primarily as a
result of higher editorial and plate costs related to product revisions and new
product development. Despite this increase, cost of sales as a percent of sales
decreased to 74.3% in 1998 from 76.0% in 1997. The primary reason for this
improvement in margin was lower royalty and manufacturing expense as a percent
of sales. Arrangements entered into with the Company's printing vendors
continued to help reduce manufacturing costs.
Selling and administrative:
Selling and administrative expenses in the first quarter of 1998 were $71.8
million, an increase of $3.8 million, or 6%, from $68.0 million in the first
quarter of 1997. As a percent of sales, selling and administrative expenses
increased to 100.2% from 98.9%. The primary reason for this increase was higher
costs related to Year 2000 compliance and new systems development.
Other income and expense:
The Company recognized a special charge of $0.2 million ($0.1 million after-tax)
in the first quarter of 1998 related to INSO's acquisition of Henderson
Software. Excluding the special charge, equity income from the Company's
investment in INSO declined to $0.7 million in the first quarter of 1998 from
$1.6 million in the first quarter of 1997. In the first quarter of 1997, the
Company recognized 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
13
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INSO's net equity as a result of the completion of a public offering by INSO of
1.2 million shares of common stock at a net offering price of approximately $47
per share.
Net interest expense of $8.3 million for the first quarter of 1998 was $1.1
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.
Income taxes:
The income tax benefit increased $7.1 million, or 41%, over the same period last
year, due to the higher operating loss in 1998 and an increase in the tax rate
to 40.0% in 1998 from 39.3% 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
draw-down of cash and marketable securities, supplemented by short-term
borrowings, principally commercial paper.
During the first quarter of 1998, the Company used $0.8 million of cash on hand
at year-end 1997, as well as $49.2 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 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.
14
<PAGE> 15
Net cash used in operating activities was $30.8 million in the first quarter of
1998, a $3.5 million improvement from the $34.3 million in cash used in
operations during the first quarter of 1997. Excluding the non-cash effect of
depreciation and amortization, equity earnings and losses of INSO, and the gain
on equity transactions of INSO, the pre-tax loss decreased by $0.4 million.
Changes in operating assets and liabilities provided $3.1 million more cash
during the first quarter of 1998 than in the same period in 1997, primarily due
to improved working capital management.
Cash required for investing activities was $15.9 million in the first quarter of
1998, a decrease of $0.1 million from the $16.0 million required in the same
period in 1997. This decrease was principally due to a $1.4 million decrease in
book plate expenditures and a $1.0 million decrease in acquisition of publishing
assets, offset by a $2.3 million increase in property, plant, and equipment
expenditures in first quarter of 1998 compared to the same period in 1997.
Net proceeds from financing increased by $1.9 million in the first quarter of
1998 from the same period in 1997. In the first quarter of 1997, the Company
issued $50 million in commercial paper and used the proceeds to pay down a
portion of its the five-year credit facility.
The Company expects that cash flows from operations for the full year 1998 will
be sufficient to provide adequate financing resources to support operational
needs to fund capital expenditures and dividend payments, and to pay down by
year end a portion of the debt outstanding at the beginning of 1998.
15
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"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 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; and (ix) other factors detailed
from time to time in the Company's filings with the Securities and Exchange
Commission.
16
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Stockholders' Meeting on April 29, 1998, at which a quorum
was present, the stockholders approved the following proposals by the number of
shares of common stock voted as noted:
Proposal #1 - Election of Class III Directors for a three-year term:
Number of Shares
Voted For Against
----------------------------
Mary H. Lindsay 23,598,956 170,103
John F. Magee 23,599,452 169,607
Claudine B. Malone 23,601,875 167,184
Ralph Z. Sorenson 23,602,238 166,821
Robert J. Tarr, Jr. 23,605,211 163,848
The following directors continued their term in office: James O. Freedman,
Charles R. Longsworth, Alfred L. McDougal, Joseph A. Baute, Nader F.
Darehshori, and George Putnam.
Proposal #2 - Approval of the Houghton Mifflin Company 1998 Stock
Compensation Plan.
For 19,205,993
Against 2,659,671
Abstained 195,958
Broker non-votes 1,707,437
Proposal #3 - Ratification of Ernst & Young LLP as independent auditors for
the fiscal year ended December 31, 1998.
For 23,706,657
Against 32,081
Abstained 30,321
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. (10) (iii) (A) 1998 Senior Executive Incentive
Compensation Plan
Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE> 18
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, 1998 /s/ Gail Deegan
--------------------------------------
Gail Deegan
Executive Vice President,
Chief Financial Officer, and Treasurer
Dated: May 12, 1998 /s/ David R. Caron
--------------------------------------
David R. Caron
Vice President, Corporate Controller
18
<PAGE> 19
Houghton Mifflin Company
Index To Exhibits
Item 6(a)
Exhibit No Description of Document Page Number in This Report
- ---------- ----------------------- --------------------------
(10)(iii)(A) 1998 Senior Executive
Incentive Compensation Plan
(27) Financial Data Schedule
19
<PAGE> 1
Exhibit (10)(iii)(A)
HOUGHTON MIFFLIN COMPANY
1998 SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
A. PURPOSE: The purpose of the Plan is to motivate and reward performance
that contributes to the achievement of divisional and corporate strategy.
B. PAYMENT THRESHOLDS:
1. FINANCIAL OBJECTIVES. Payment of incentive compensation for
achievement of individual financial factors may occur if
a. 80% or more of the budget for that financial factor is
achieved; and
b. Corporate net income exceeds $(omitted for reasons of Company
confidentiality) million;
2. Operating Objectives: Payment of incentive compensation for
achievement of operating objectives only may occur if the weighted
average achievement of all financial factors exceeds 50% and
corporate net income exceeds 50% of budget, or $(omitted for reasons
of Company confidentiality).
C. PAYMENTS.
1. FINANCIAL OBJECTIVES: Payment of incentive compensation for
achievement of financial objectives is based on the degree to which
those financial objectives are achieved.
a. Payment of incentive compensation is determined by the extent
to which targeted corporate and operating unit financial
performance is achieved.
b. Achievement at targeted corporate and operating unit financial
performance for all financial objectives provides payment in
cash of up to 30% of the participant's December 31, 1998
salary as incentive compensation.
c. Additional incentive compensation may be earned if one or more
financial targets are exceeded.
2. OPERATING OBJECTIVES: Payment of incentive compensation for
achievement of operating objectives is based on the Chief Executive
Officer's assessment of each participant's degree of success in
achieving operating objectives. Maximum payment for achievement of
operating objectives is 10% of the participant's December 31, 1998
salary.
<PAGE> 2
3. PAYMENTS IN EXCESS OF 40% OF DECEMBER 31, 1998 SALARY: If the total
incentive compensation earned exceeds 40% of a participant's
December 31, 1998 salary, the excess amount is paid in shares of
Houghton Mifflin Company restricted common stock.
a. The number of shares awarded will be determined on the basis
of the average closing price of Houghton Mifflin Company
common stock on the New York Stock Exchange during the last
calendar quarter.
b. Full ownership of the restricted stock will occur after three
years, provided that the recipient is still employed by
Houghton Mifflin Company on that date. If the recipient ceases
to be employed by the Company prior to the expiration of the
restrictions, all shares are forfeited to the Company without
payment to the recipient.
c. During the period of restriction, the recipient is entitled to
vote any restricted shares awarded and to receive any
dividends paid on the shares. Any additional shares issued
with respect to the restricted shares (e.g., as a result of a
stock split, dividend, or other distribution) shall be subject
to the same restrictions as the underlying shares.
d. The recipient may not sell, assign, transfer, exchange,
pledge, hypothecate, or otherwise encumber any of the shares
until the restrictions lapse.
e. The shares shall be held by the Registrar and Transfer Agent
until the restrictions lapse.
f. In the event of retirement after age 55 with at least five
years of service, death, or permanent disability during the
period of restriction, the recipient, or his or her heirs,
shall be entitled to receive, free of restrictions, a pro rata
number of shares based on a fraction, the numerator of which
is the number of whole months from January 1 of the year the
shares were awarded, and the denominator of which is 36.
g. All restrictions shall lapse in the event of a "Change of
Control" as defined in this Plan.
h. The Compensation and Nominating Committee of the Board of
Directors, or the Board of Directors, acting by a majority of
its directors who are not employees of the Company, may at any
time accelerate the time at which the restrictions lapse.
4. MAXIMUM PAYMENT: The maximum amount of incentive compensation,
including any restricted stock portion, which may be awarded to any
participant is 100% of the participant's December 31, 1998 salary.
2
<PAGE> 3
D. ELIGIBILITY:
1. Participants in this plan include executive vice presidents,
division heads, and corporate staff senior executives as designated
by the Chief Executive Officer. Individuals who become participants
after the beginning of the year participate on a prorated basis.
2. In the event of retirement, death, or permanent disability, a pro
rata share of the award (based on the number of months of eligible
employment during that year) will be paid to the participant, or his
or her heirs, based upon the extent of partial achievement of
applicable objectives. In the event of a leave of absence during the
year, a pro rata share of the award may be paid.
3. A participant whose employment terminates, voluntarily or
involuntarily, for reasons other than retirement after age 55 with
at least five years of service, death, or permanent disability, is
not eligible for an incentive award.
4. The eligibility of a participant whose participation ceases during
the year will be determined by the Chief Executive Officer.
5. If the participant during the year transfers to another position and
continues to participate in the Plan, the employee's performance
will be measured against the objectives in each position and then
prorated on the number of months each position was held.
6. Nothing contained in the Plan shall be construed to limit in any way
the right of the Company to terminate a participant's employment or
to adjust an employee's position or salary at any time, or be
evidence of any agreement or understanding, expressed or implied,
that any person will be employed in a particular position or at a
particular rate of compensation.
7. The Compensation and Nominating Committee of the Board of Directors
reserves the right to amend the terms of this Plan whenever in its
best judgment it is in the best interest of the Company to do so.
E. INTERPRETATION: The Compensation and Nominating Committee of the Board of
Directors ("Committee") shall administer this plan and approve any
payments pursuant to the Plan. Any interpretations of the Plan, including
adjustments to the financial objectives under the Plan, shall be made by
the Committee. Determinations of the Committee shall be final and binding
on all participants.
F. CHANGE IN CONTROL:
1. For purposes of the Plan, a "Change in Control" of the Company shall
be deemed to have occurred if any of the following occurs:
3
<PAGE> 4
i. any "Person" (as defined in this Section F) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the
Company's then outstanding securities;
ii. during any period of no more than two consecutive years
beginning after the date of this Amendment and Restatement
individuals who at the beginning of such period constitute the
Board, and any new director (other than a director whose
initial assumption of office is in connection with an actual
or threatened election contest relating to the election of the
directors of the Company) whose election by the Board or
nomination for election by the Company's stockholders was
approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were
directors at the beginning of the period or whose election or
whose nomination for election was previously so approved or
recommended, cease for any reason to constitute at least a
majority thereof;
iii. there occurs a merger or consolidation of the Company or a
subsidiary thereof with or into any other entity, other than
(x) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity or any parent thereof), more than 75% of
the combined voting power of the voting securities of the
Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation or
(y) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no Person acquires 25% or more of the combined voting
power of the Company's then outstanding securities; or
iv. The stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the company of all or substantially all of the
Company's assets.
2. For purposes of the Plan, "Person" has the meaning given such term
in Section 3(a) (9) of the Exchange Act, as modified and used in
Sections 13(d) and 14(d) of the Exchange Act, but excludes (a) the
Company or any of its subsidiaries, (b) any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company (or of any subsidiary of the Company), (c) any corporation
owned, directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company and (d) an underwriter temporarily holding securities
pursuant to an offering of such securities.
4
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,813
<SECURITIES> 614
<RECEIVABLES> 98,227
<ALLOWANCES> 11,978
<INVENTORY> 178,994
<CURRENT-ASSETS> 317,894
<PP&E> 297,594
<DEPRECIATION> 170,331
<TOTAL-ASSETS> 980,246
<CURRENT-LIABILITIES> 274,176
<BONDS> 0
0
0
<COMMON> 30,311
<OTHER-SE> 249,786
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<INCOME-TAX> (24,477)
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