<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 1-5406
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------------------
HOUGHTON MIFFLIN COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS
(State or other jurisdiction of
incorporation or organization)
222 BERKELEY ST., BOSTON
(Address of principal executive offices)
04-1456030
(I.R.S. Employer
Identification No.)
02116-3764
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 351-5000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $1 par value New York Stock Exchange
Preferred Stock Purchase Rights
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
(Title of Class)
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 of
1934 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant was approximately $790,562,237 as of February
28, 1998.
The registrant had outstanding 28,425,872 shares of common stock (exclusive
of Treasury shares) and 28,425,872 Preferred Stock Purchase Rights as of
February 28, 1998.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative to
the Company's 1998 Annual Meeting of Stockholders are incorporated into Part
III.
================================================================================
<PAGE> 2
HOUGHTON MIFFLIN COMPANY
TABLE OF CONTENTS
FORM 10-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 4
Item 3. Legal Proceedings........................................... 5
Item 4. Submission of Matters to a Vote of Securities Holders....... 5
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 8. Consolidated Financial Statements and Supplementary Data.... 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 46
PART III
Item 10. Directors and Executive Officers of the Company............. 46
Item 11. Executive Compensation...................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 46
Item 13. Certain Relationships and Related Transactions.............. 46
PART IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on
Form 8-K.................................................... 46
Index to Consolidated Financial Statements and Financial
Schedules................................................... 46
Financial Statement Schedule................................ 46
Signatures.................................................. 48
Index to Exhibits........................................... 49
</TABLE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "'Safe Harbor'
Statement under Private Securities Litigation Reform Act of 1995" on page 16 of
this Form 10-K.
<PAGE> 3
PART I
ITEM 1. BUSINESS
(a) DESCRIPTION OF BUSINESS
Houghton Mifflin Company (the "Company") was incorporated in 1908 in
Massachusetts as the successor to a partnership formed in 1880. Antecedents of
the partnership date back to 1832. The Company has three significant
subsidiaries: McDougal Littell Inc., Evanston, Illinois, publishes educational
materials for the secondary school market; The Riverside Publishing Company,
Itasca, Illinois, publishes assessment materials for the educational and
clinical testing markets; and Great Source Education Group, Inc., Wilmington,
Massachusetts, publishes supplementary instructional material for the elementary
and secondary school markets. The Company's principal business is publishing,
and its operations are classified into two industry segments: (1) textbooks and
other educational 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 this
description of the Company's business, all subsidiaries are treated as part of
the Company.
In October 1995, Houghton Mifflin acquired the D.C. Heath and Company
("Heath") division of Raytheon Company in a purchase transaction for net cash
consideration of $460.6 million. Heath was a publisher of textbooks and
supplemental materials for the elementary and secondary school and college
markets. The Company's consolidated financial statements include Heath's
operating results from the date of acquisition in the educational publishing
segment.
In March 1994, the Company's former Software Division successfully
completed an initial public offering. The Company retained an equity interest in
the successor company, INSO Corporation ("INSO"), of approximately 40%. In
August 1995, INSO completed a new public offering of 1.2 million shares of
common stock which reduced the Company's ownership interest to approximately
36%. INSO declared a stock split in the form of a 100% stock dividend to be paid
in September 1995. All INSO share references have been restated to reflect the
effects of the stock split. In 1996, the Company sold 770,000 shares of INSO
common stock, reducing the Company's ownership interest to approximately 30%. In
November 1996, INSO completed an additional public offering of 1.2 million
shares of common stock which reduced the Company's ownership interest to
approximately 27%.
(b) FINANCIAL INFORMATION ABOUT THE INDUSTRY SEGMENTS
Financial information about the Company's industry segments is in Part II,
Item 8, Notes to Consolidated Financial Statements, ("Note") Note 14 under the
heading "Segment Information" on page 42, and in the schedule "Five-Year
Financial Summary" on page 8.
(c) NARRATIVE DESCRIPTION OF BUSINESS
As a publisher, Houghton Mifflin shapes ideas, information, and
instructional methods into various media that satisfy the lifelong need of
people to learn, gain proficiency, and be entertained. The Company seeks out,
selects, and generates worthwhile concepts and then enhances their value and
accessibility through creative development, design, production (performed by
outside suppliers), marketing, sales, and distribution. While the Company's
works have been published principally in printed form, many programs or works
are published in other formats including computer software, laser discs, CD-ROM,
and other electronic media.
TEXTBOOKS AND OTHER EDUCATIONAL MATERIALS AND SERVICES
This industry segment includes textbooks and instructional materials, tests
for measuring achievement and aptitude, clinical/special needs testing products,
computer-assisted as well as computer-managed instructional programs on all
educational levels, computer tools and operating systems for the college market,
and a computer-based career and college guidance information system in versions
for both junior and senior high school students. The principal markets for these
products are elementary and secondary schools and two-
1
<PAGE> 4
and four-year colleges. The Company's major regional sales offices are located
in Illinois, Texas, Georgia, Massachusetts, and New Jersey.
The Company's School Division develops and sells textbooks and materials
for the elementary school market. McDougal Littell Inc. ("McDougal")
concentrates on the secondary school market. Supplemental instructional
materials for the elementary and secondary school markets are published and sold
by Great Source Education Group, Inc. ("Great Source"). The Riverside Publishing
Company ("Riverside") serves the educational and clinical testing markets; and
the two- and four-year higher education markets are serviced by the College
Division. All operating divisions have their own dedicated sales forces.
Products of the School Division, McDougal, Great Source, and the College
Division are distributed from two facilities located in Indianapolis, Indiana
and Geneva, Illinois. The Company is required by certain states to use state
textbook depositories for the distribution of educational materials. In
September 1997, the Company, through Riverside, acquired the assets of
Wintergreen/Orchard House, Inc., a publisher of guidance products for the
elementary and secondary school markets to strengthen its guidance system
product line.
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, or approximately one-half of the United States school
population, select new instructional materials on a statewide basis for a
particular subject 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," may be used in either of two ways: (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.
In general, the Company presents products to schools and teachers by
sending samples to teachers within a school market which is considering a
purchase. Sending sample copies is an essential part of marketing instructional
materials. Since any educational program may have many individual components,
and samples are widely distributed, the cost of sampling a new program can be
substantial. In addition, once a program is purchased, the Company provides a
variety of support, or ancillary, materials (such as teachers' editions, charts,
classroom displays, classroom handouts, and tests) to purchasers at no cost. The
Company also conducts training sessions within a school district that has
purchased its materials to help the teachers learn how to use its products
effectively. These free materials, usually called "implementation," and "in
service" training sessions are an additional cost of doing business.
The elementary school market, which consists of kindergarten through eighth
grade, is composed of four major disciplines: Reading and Language Arts,
Mathematics, Science and Health, and Social Studies. The School Division
develops and markets its products for three of these disciplines: Reading and
Language Arts, Mathematics, and Social Studies. The secondary school market,
which consists of sixth grade through twelfth grade, is composed of six major
disciplines: Science and Health, English and Language Arts, Social Studies,
Mathematics, Vocational, and Foreign Languages. McDougal develops and markets
its products for four of these disciplines: English and Language Arts, Social
Studies, Mathematics, and Foreign Language.
GENERAL PUBLISHING
Houghton Mifflin's general publishing segment consists of the Trade &
Reference Division ("Trade Division") and Houghton Mifflin Interactive
Corporation ("HMI"). The Trade Division publishes fiction and nonfiction for
adults and children, dictionaries, and other reference works. Its principal
markets are retail stores. The sales volume for trade books and reference works
may vary significantly from year to year based on the success of one or more
titles. The division also gains revenue from sales of book reprint rights to
paperback publishers, book clubs, and other publishers in the U.S. and abroad.
Reference materials are also sold to schools, colleges, office supply
distributors, and businesses. The Trade Division's publications are sold by its
2
<PAGE> 5
own sales force, as well as the Company's other divisional sales forces,
commission agents, and wholesalers. Major corporate sales and support offices
are maintained in Massachusetts and New York. In May 1997, the Company acquired
the assets of Chapters Publishing Ltd., predominantly a publisher of cookbooks,
to supplement the Trade Division's reference product line.
HMI develops and sells multimedia consumer products, chiefly CD-ROM titles,
in the children's, reference, and adult-hobby markets. Its principal markets are
retail stores.
COMPANY BUSINESS AS A WHOLE
Book printing and binding capacity and the availability of raw materials
remained at satisfactory levels throughout the year. The Company is not
dependent upon any one supplier. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 9.
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.
Sales of instructional materials are also cyclical, with some years
offering more sales opportunities than others. There were more sales
opportunities for the Company's instructional materials in 1997 than in 1996,
due to an increase in the number of states adopting elementary and secondary
school products in subjects in which the Company publishes, particularly in the
Reading and Language Arts disciplines. 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 can affect year-to-year revenue
performance. See "Summary of Quarterly Results of Operations (unaudited)" for
the two-year period ended December 31, 1997, on page 45.
The Company expects that there will be fewer 1998 statewide adoption
opportunities than in 1997, when a significant number of states and districts
adopted reading and literature products. Although a number of mathematics and
social studies statewide adoptions are scheduled in 1998, these disciplines do
not generate as large a per-pupil expenditure as reading and literature
adoptions. Due to growth opportunities in other divisions, the Company expects a
modest increase in 1998 revenues, despite an anticipated decrease in revenue
opportunities in the K-12 market in 1998 as compared to 1997. During 1998, the
Company plans to increase its investment in new products and services to take
advantage of opportunities in both publishing segments and to respond to changes
in the timing of statewide adoption opportunities. The Company will also invest
to improve operating and support systems and to comply with Year 2000 computer
requirements. These investments will help maintain a market-leading product
line, as well as improve efficiency, profitability, and service to customers. As
a result of these investments, the Company expects 1998 income from operations
to be below 1997 results.
The Company sells its products in highly competitive markets and believes
the major competitive factors are quality of product and customer service. The
elementary and secondary school markets are served by approximately ten
significant publishers; the college book market is served by approximately ten
significant publishers. In the diverse trade and juvenile book markets,
approximately 70% of total industry sales is shared by eight major publishers,
including Houghton Mifflin.
At December 31, 1997, the Company employed approximately 2,550 people.
The Company anticipates no substantial expenditures for compliance with
environmental laws or regulations.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND EXPORT SALES
Export sales are not significant to either of the Company's two business
segments.
3
<PAGE> 6
ITEM 2. PROPERTIES
The Company's principal executive office is located at 222 Berkeley Street,
Boston, Massachusetts.
The following table describes the approximate building areas and principal
uses of the significant operating properties of the Company and its subsidiaries
at December 31, 1997. The Company believes that its owned and leased properties
are suitable and adequate for its present and anticipated business needs,
satisfactory for the uses to which each is put, and, in general, fully utilized.
<TABLE>
<CAPTION>
APPROXIMATE PRINCIPAL
AREA USE
LOCATION IN SQUARE FEET OF SPACE SEGMENT USED BY
- - ---------------------------------- -------------- ---------------- ------------------------------------
OWNED PREMISES
<S> <C> <C> <C>
Geneva, Illinois.................. 486,000 Offices & Textbooks and other educational
warehouse materials; sales office
Indianapolis, Indiana............. 503,000 Offices & Textbooks and other educational
warehouse materials
LEASED PREMISES
Boston, Massachusetts............. 301,000 Executive & (1) Textbooks and other educational
222 Berkeley Street/ business offices materials and services,
500 Boylston Street (2) General publishing, and
(3) Corporate headquarters
Batavia, Illinois................. 120,000 Offices & Textbooks and other educational
warehouse materials and services
Itasca, Illinois.................. 75,000 Offices Textbooks and other educational
materials and services, sales office
Dallas, Texas..................... 70,000 Offices & Textbooks and other educational
warehouse materials and services; sales office
Evanston, Illinois................ 71,000 Offices Textbooks and other educational
materials; sales office
Wilmington, Massachusetts......... 41,000 Offices Educational materials and services;
corporate support; sales office
Atlanta, Georgia.................. 31,000 Offices & Textbooks and other educational
warehouse materials; sales office
New York, New York................ 30,000 Offices General publishing; sales office
St. Charles, Illinois............. 14,000 Offices Textbooks and other educational
materials; sales office
Somerville, Massachusetts......... 12,000 Offices General publishing; sales office
Princeton, New Jersey............. 5,700 Offices Textbooks and other educational
materials; sales office
</TABLE>
The years of expiration on leased premises are as follows:
<TABLE>
<S> <C>
Boston, Massachusetts....................................... 2007
Itasca, Illinois............................................ 2006
Dallas, Texas............................................... 2005
Evanston, Illinois.......................................... 2004
Wilmington, Massachusetts................................... 2005
Atlanta, Georgia............................................ 1999
New York, New York.......................................... 2004
St. Charles, Illinois....................................... 2006
Somerville, Massachusetts................................... 1999
Princeton, New Jersey....................................... 1999
Batavia, Illinois........................................... 1998
</TABLE>
4
<PAGE> 7
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 1997.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
OTHER
OFFICE POSITIONS
AGE AT HELD WITH THE
NAME 2/28/98 OFFICE SINCE COMPANY
- - ------------------------------- ------- ------------------------------------------- ------ ---------
<S> <C> <C> <C> <C>
Nader F. Darehshori............ 61 Chairman, President, and Chief Executive 1991 Director
Officer
Albert Bursma, Jr.............. 60 Executive Vice President; President, 1995 --
Great Source Education Group, Inc.
David R. Caron................. 37 Vice President, Controller 1997 --
Gail Deegan.................... 51 Executive Vice President, Chief Financial 1996 --
Officer, and Treasurer
Margaret M. Doherty............ 59 Senior Vice President, Human Resources 1994 --
Elizabeth L. Hacking........... 56 Senior Vice President, Strategic 1993 --
Development
George A. Logue................ 47 Senior Vice President, School Division 1997 --
Julie A. McGee................. 55 Executive Vice President; President, 1995 --
McDougal Littell Inc.
Mark Mooney.................... 45 Senior Vice President, Chief Technology 1997 --
Officer
John H. Oswald................. 48 Executive Vice President; President, 1992 --
The Riverside Publishing Company
Conall E. Ryan................. 40 Senior Vice President; President, 1997 --
Houghton Mifflin Interactive Corporation
Gary L. Smith.................. 53 Senior Vice President, Administration 1991 --
June Smith..................... 54 Executive Vice President, College Division 1994 --
Wendy Strothman................ 47 Executive Vice President, Trade & Reference 1996 --
Division
Paul D. Weaver................. 55 Senior Vice President, Clerk, Secretary and 1989 --
General Counsel
</TABLE>
Below is a brief account of the business experience of each executive
officer during the past five years. Each executive officer has been employed by
the Company for more than five years with the exception of Mr. Bursma, Mr.
Caron, Ms. Deegan, Ms. McGee, Mr. Mooney, Mr. Ryan, and Ms. Strothman.
Nader F. Darehshori
1991-- Chairman, President, and Chief Executive Officer
Albert Bursma, Jr.
1995-- Executive Vice President; President, Great Source Education Group, Inc.*
1993-- Executive Vice President, D.C. Heath and Company; President, School
Division (D.C. Heath and Company was a publisher not affiliated with the
Company prior to its acquisition on October 31, 1995.)
David R. Caron
1997-- Vice President, Controller
1996-- Assistant Controller
1995-- Director-Corporate Accounting, NYNEX
1993-- Staff Director, NYNEX
5
<PAGE> 8
Gail Deegan
1996-- Executive Vice President, Chief Financial Officer, and Treasurer
1995-- Senior Vice President, Regulatory and Government Affairs, NYNEX
1991-- Vice President and Chief Financial Officer, New England Telephone, a
wholly-owned subsidiary of NYNEX
George A. Logue
1997-- Senior Vice President, School Division
1994-- Vice President, Sales and Marketing, School Division
1993-- Vice President, National Sales Manager, School Division
Margaret M. Doherty
1994-- Senior Vice President, Human Resources
1990-- Vice President, Personnel
Elizabeth L. Hacking
1993-- Senior Vice President, Strategic Development
1993-- Vice President, Strategic Development
Julie A. McGee
1995-- Executive Vice President; President, McDougal Littell Inc.*
1994-- Senior Vice President
1994-- President, McDougal Littell/Houghton Mifflin Inc.*
1991-- President, McDougal, Littell & Company (McDougal, Littell & Company was a
publisher not affiliated with the Company prior to its acquisition on
March 1, 1994.)
Mark Mooney
1997-- Senior Vice President, Chief Technology Officer
1996-- Vice President, Director of Information Technology, The Bureau of
National Affairs
1991-- Director of Information Services, The Bureau of National Affairs
John H. Oswald
1993-- Executive Vice President; President, The Riverside Publishing Company*
Conall E. Ryan
1997-- Senior Vice President; President, Houghton Mifflin Interactive
Corporation
1996-- President, Houghton Mifflin Interactive Corporation
1995-- Corporate Vice President, Houghton Mifflin Interactive
1994-- Director, New Media, Trade and Reference Division, and Chairman, On
Technology Corporation; Vice President, Publishing for Knowledge Adventure
(a publisher not affiliated with the Company)
1993-- Chairman, On Technology Corporation
Gary L. Smith
1991-- Senior Vice President, Administration
June Smith
1994-- Executive Vice President, College Division
1992-- Vice President, Editorial Director, College Division
Wendy Strothman
1996-- Executive Vice President, Trade & Reference Division
1995-- Vice President, Publisher, Adult Trade and Reference
1993-- Director, Beacon Press (a publisher not affiliated with the Company)
Paul D. Weaver
1989-- Senior Vice President, Clerk, Secretary, and General Counsel
* A subsidiary of the Company
6
<PAGE> 9
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange. As of
February 28, 1998, the approximate number of shareholders on record of common
stock of the Company was 5,640.
Information about stock prices and dividends paid per share is set forth
below:
HOUGHTON MIFFLIN COMPANY
STOCK PRICES AND DIVIDENDS PAID PER SHARE (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
DIVIDEND DIVIDEND
HIGH LOW PAID HIGH LOW PAID
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter............................... $28.31 $26.75 $0.120 $22.69 $20.25 $0.120
Second Quarter.............................. 33.38 26.31 0.120 24.88 21.19 0.120
Third Quarter............................... 39.19 33.00 0.125 25.25 23.07 0.120
Fourth Quarter.............................. 40.25 34.44 0.125 28.32 22.69 0.120
------ ------
Year........................................ $0.490 $0.480
====== ======
</TABLE>
7
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
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 below and in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, are based on the
basic weighted average shares outstanding, unless specifically identified as
diluted. For further discussion of earnings per share and the impact of the
Statement No. 128, see Note 15 on page 44.
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.
The response to this item is set forth below:
HOUGHTON MIFFLIN COMPANY
FIVE-YEAR FINANCIAL SUMMARY
(UNAUDITED, IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales...................................... $797,320 $ 717,863 $ 529,022 $483,076 $462,969
Operating income (loss)........................ 106,558 87,382 (13,095) 53,464 51,370
Net interest expense........................... 38,926 40,875 13,008 6,509 2,347
Gain on sale of INSO Corporation common
stock........................................ -- 34,261 -- -- --
Acquisition charges, INSO Corporation.......... (2,455) (11,698) (2,200) -- --
Gain on equity transactions of INSO Corporation
and sale of interest in Software Division.... 14,904 -- 13,102 36,212 --
Income (loss) before taxes and extraordinary
item......................................... 83,533 73,953 (11,444) 85,140 49,023
Net income (loss).............................. 49,822 43,622 (7,243) 51,191 30,371
PER COMMON SHARE
Basic net income (loss) per share.............. $ 1.76 $ 1.57 $ (0.26) $ 1.85 $ 1.12
Diluted net income (loss) per share (except
when anti-dilutive).......................... $ 1.73 $ 1.56 $ (0.26) $ 1.84 $ 1.11
Dividends declared per share................... $ 0.490 $ 0.480 $ 0.465 $ 0.435 $ 0.415
Book value..................................... $ 11.25 $ 9.72 $ 8.45 $ 8.83 $ 8.10
Stock price -- High............................ $ 40.25 $ 28.32 $ 27.38 $ 26.50 $ 25.19
Low.............................. $ 26.31 $ 20.25 $ 19.82 $ 18.07 $ 18.19
Close............................ $ 38.38 $ 28.32 $ 21.50 $ 22.69 $ 24.32
FINANCIAL DATA
Total assets................................... $981,100 $1,006,442 $1,046,449 $497,266 $398,086
Long-term debt less current portion............ 371,081 500,999 426,148 99,445 26,438
Additions to book plates and property, plant,
and equipment................................ 67,903 74,943 54,278 33,720 36,524
Dividends paid................................. 13,959 13,371 12,845 12,026 11,475
Weighted average shares outstanding:
Basic..................................... 28,237 27,801 27,609 27,674 27,221
Diluted................................... 28,826 27,919 27,609 27,771 27,438
NET SALES -- CLASSES OF SIMILAR PRODUCTS
Textbooks and other educational materials and
services
School publishing......................... $560,259 $ 497,709 $ 359,523 $303,370 $267,106
College publishing........................ 148,969 138,346 82,277 84,057 90,092
-------- ---------- ---------- -------- --------
709,228 636,055 441,800 387,427 357,198
General publishing........................ 88,092 81,808 87,222 95,649 105,771
-------- ---------- ---------- -------- --------
$797,320 $ 717,863 $ 529,022 $483,076 $462,969
======== ========== ========== ======== ========
</TABLE>
8
<PAGE> 11
In 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 INSO's net equity as a result of INSO's completion of a public
offering of 1.2 million shares of common stock at a net offering price of
approximately $47 per share in the fourth quarter of 1996 (see Note 1 and Note
11 for the Company's recognition policy). The 1997 results include special
charges of $2.5 million ($1.5 million after-tax), or $0.05 per share, related to
INSO's acquisition of Mastersoft products from Adobe Systems Incorporated, the
acquisition of Level Five Research, Inc. and a restructuring charge affecting
INSO's Information Products and certain of its Information Management Tools
products.
In 1996, the Company recorded a gain of $34.3 million ($19.9 million
after-tax), or $0.71 per share, on the sale of 770,000 shares of INSO common
stock. The Company also recorded acquisition charges in 1996 of $11.7 million
($7.1 million after-tax), or $0.25 per share, relating to its investment in
INSO, resulting from INSO's acquisition of ImageMark Software Labs, Inc. and
Electronic Book Technologies, Inc.
In October 1995, the Company completed the acquisition of Heath from
Raytheon Company in a purchase transaction (see Note 2). As a result, the
Company recorded in 1995 certain charges of $49.3 million ($30.0 million
after-tax), or $1.09 per share, associated with the integration of the Heath
business. In 1995, there was a $2.2 million charge, or $0.08 per share, relating
to the Company's investment in INSO resulting from INSO's acquisition of Systems
Compatibility Corporation. The Company also recorded a gain in 1995 of $13.1
million ($7.8 million after-tax), or $0.28 per share, in 1995 in connection with
an additional public offering of 1.2 million shares made by INSO.
In 1994, the Company recognized a gain of $36.2 million ($22.8 million
after-tax), or $0.82 per share, in connection with the initial public offering
of INSO, the successor company to the former Software Division.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997
The consolidated net income in 1997 was $49.8 million, or $1.76 per share,
compared to net income of $43.6 million, or $1.57 per share in 1996, and a
consolidated net loss of $7.2 million, or $0.26 per share in 1995.
The Company recognized a gain of $14.9 million ($8.6 million after-tax), or
$0.30 per share, in 1997 representing the Company's portion of the increase in
INSO's net equity as a result of INSO's completion of a public offering in 1996,
and a special charge of $2.5 million ($1.5 million after-tax), or $0.05 per
share, related to the equity investment in INSO.
In 1996, the Company recorded a gain of approximately $34.3 million ($19.9
million after-tax), or $0.71 per share, from the sale of 770,000 shares of INSO
common stock. The 1996 results also include acquisition charges of $11.7 million
($7.1 million after-tax), or $0.25 per share, related to the equity investment
in INSO.
The 1995 results include special charges of $49.3 million ($30.0 million
after-tax), or $1.09 per share, related to the integration of Heath; $7.0
million ($4.3 million after-tax), or $0.15 per share, related to the outsourcing
of distribution operations; and $2.2 million, or $0.08 per share, related to the
equity investment in INSO. The 1995 results also include a gain of $13.1 million
($7.8 million after-tax), or $0.28 per share, for the sale of additional common
shares by INSO, and a gain of $3.8 million ($2.3 million after-tax), or $0.08
per share, on the sale of a distribution facility.
Excluding these non-recurring items, net income for 1997 would have been
$42.7 million, or $1.51 per share, compared to net income of $30.8 million, or
$1.11 per share, in 1996 and $19.2 million, or $0.70 per share, in 1995.
9
<PAGE> 12
Net sales:
The Company's net sales in 1997 increased $79.4 million, or 11%, to $797.3
million from $717.9 million in 1996. The educational publishing segment's net
sales of $709.2 million in 1997 were $73.1 million, or 11.5%, above 1996 net
sales of $636.1 million. All divisions reported increased revenues over the
previous year, with the School Division and McDougal reporting the largest
dollar increases. Both divisions benefited from greater sales opportunities in
1997 in both adoption states and open territories. The general publishing
segment's net sales in 1997 increased by $6.3 million, or 7.7%, to $88.1 million
from $81.8 million in 1996. This gain was due to strong market response to
Mariner Books, the Trade & Reference Division's new paperback imprint; higher
net sales of adult, children's and reference titles; and increased sales from
Houghton Mifflin Interactive.
Net sales in 1996 increased $188.8 million, or 36%, to $717.9 million from
$529.0 million in 1995. The educational publishing segment's net sales of $636.1
million in 1996 were $194.3 million, or 44.0%, above net sales of $441.8 million
in 1995. The most significant factor in the net sales increase was the addition
of Heath publications. The general publishing segment's net sales decreased by
$5.4 million, or 6.2%, to $81.8 million from 1995 net sales of $87.2 million.
The decrease in net sales was primarily due to lower frontlist sales.
Cost of sales:
Primarily as a result of higher sales, cost of sales in 1997 rose $32.8
million, or 10%, to $362.5 million from $329.7 million in 1996. Despite this
increase, cost of sales as a percent of sales decreased to 45.5% in 1997 from
45.9% in 1996. This improvement was primarily due to lower editorial and plate
expenses as a percent of sales.
Cost of sales also increased in 1996 primarily due to higher sales, growing
by $58.7 million, or 22%, to $329.7 million in 1996 from $271.0 million in 1995.
Despite this increase, cost of sales as a percent of sales decreased to 45.9% in
1996 from 51.2% in 1995. The improvement was primarily due to the increase in
net sales and operating efficiencies achieved through the integration of Heath.
All components of cost of sales decreased as a percent of sales in 1996 compared
to 1995, except for plate expense, with the largest savings in editorial
expense. Plate expense increased, as expected, due to the development of
elementary and secondary school programs to meet adoption opportunities over the
next several years.
Selling and administrative:
Selling and administrative expenses in 1997 were $328.3 million, an
increase of $27.5 million, or 9%, over the $300.8 million recorded in 1996.
Excluding goodwill amortization of $27.9 million in 1997 and $26.7 million in
1996, selling and administrative expense declined as a percent of sales to 37.7%
in 1997 from 38.2% in 1996. The primary reason for this improvement was a
decrease in distribution costs as a result of a new warehouse management system
and other operating improvements. Partially offsetting this decrease was an
increase in selling costs as a percent of sales, reflecting, in part, the
addition of freelance personnel to expand the sales force and increased sample
and implementation expense. These increases were made to take advantage of
increased sales opportunities in both adoption states and open territories in
1997. Administrative costs also increased marginally, as the Company began
efforts to improve its customer support system and to address the Year 2000
computer issue.
Selling and administrative expenses in 1996 were $300.8 million, an
increase of $86.0 million, or 40%, from $214.8 million recorded in 1995.
Excluding goodwill amortization of $26.7 million in 1996 and $10.5 million in
1995, selling and administrative expense declined as a percent of sales to 38.2%
in 1996 from 38.6% in 1995. The primary reason for the improvement was the
increase in net sales and operating efficiencies achieved through the
integration of Heath. The increase in goodwill amortization expense was due to
the acquisition of Heath. Selling costs increased in 1996 as the Company
expanded the sales force to ensure adequate market exposure of the expanded
product lines from the acquisition of Heath. In preparation for the greater
number of statewide adoption opportunities in 1997, sampling expense increased
year over year. Distribution expenses also declined as a percent of sales with
economies of scale offsetting some of the additional costs incurred to improve
customer service.
10
<PAGE> 13
Special charges:
The 1995 special charges included $49.3 million related to the integration
of Heath and $7.0 million resulting from the decision to outsource the Company's
distribution function. The charges related to Heath included $32.9 million for
inventory and plate adjustments based on strategic decisions made and actions
taken subsequent to the acquisition, $9.3 million for integration of
administrative and sales functions, and $7.1 million for indirect costs of the
acquisition. The distribution-related charges included $3.0 million for closing
costs and the disposal of assets, $2.9 million for severance, and $1.1 million
for consulting and inventory relocation.
Other income and expense:
During 1997, the Company recognized a gain of $14.9 million ($8.6 million
after-tax), or $0.30 per share, representing its portion of the increase in
INSO's net equity as a result of their fourth-quarter 1996 public offering of
1.2 million shares of common stock at a net offering price of approximately $47
per share. The Company also recorded charges of $2.5 million ($1.5 million
after-tax), or $0.05 per share, related to INSO's acquisition of Mastersoft
products from Adobe Systems Incorporated, the acquisition of Level Five
Research, Inc. and a restructuring charge affecting INSO's Information Products
and certain of its Information Management Tools products. In 1996, the Company
recorded a gain of approximately $34.3 million ($19.9 million after-tax), or
$0.71 per share, from the sale of 770,000 shares of INSO common stock and
charges of $11.7 million ($7.2 million after-tax), or $0.25 per share, related
to INSO's acquisition of ImageMark Software Labs, Inc. and Electronic Book
Technologies, Inc. In 1995, there was a $2.2 million charge, or $0.08 per share,
related to INSO's acquisition of Systems Compatibility Corporation, and a gain
of $13.1 million ($7.8 million after-tax), or $0.28 per share, for the sale of
additional common shares by INSO.
Net interest expense of $38.9 million in 1997 decreased $2.0 million from
$40.9 million in 1996. The reduction was primarily a result of the paydown of
$30.3 million of debt in the fourth quarter of 1996 and lower working capital
borrowings in 1997, which were partially offset by higher interest rates in
1997.
Net interest expense of $40.9 million in 1996 increased $27.9 million, or
214%, from $13.0 million in 1995. The increase was mainly due to the financing
of the Heath acquisition; a full year of interest on $126.6 million of Stock
Appreciation Income-Linked Securities ("SAILS"); and higher working capital
requirements in 1996.
Income taxes:
The provision for taxes in 1997 increased $3.4 million, or 11%, over 1996.
This increase was the result of the higher operating income in 1997, partially
offset by a decrease in the effective tax rate to 40.4% in 1997 from 41.0% in
1996.
The provision for taxes in 1996 increased $34.5 million over 1995,
primarily due to higher operating income and a higher effective tax rate. The
effective tax rate increased to 41.0% in 1996 from 36.7% in 1995, reflecting the
spread of certain fixed non-deductible tax costs over significantly higher 1996
taxable income.
TEXTBOOK AND OTHER EDUCATIONAL MATERIALS AND SERVICES
The educational publishing segment's net sales of $709.2 million in 1997
represented a $73.1 million, or 11.5%, increase over 1996 net sales of $636.1
million. In elementary and secondary school publishing, the School Division and
McDougal contributed an increase of $49.1 million, benefiting from the increased
sales opportunities in adoption states and open territories. The School
Division's reading program, Houghton Mifflin Reading: Invitations to Literacy
(C) 1996, 1997, had higher sales in state adoptions and open territories, as did
its social studies program, We The People (C) 1997. McDougal gained significant
market share in adoption states and open territories with its language arts
program, The Language of Literature (C) 1997, and Spanish language program,
Dime! (C) 1997. Great Source reported a 12% increase in net sales primarily due
to the Write Source product line. Riverside sales increased 17%, primarily as a
result of increased sales of custom contracts, group and clinical assessment
materials. The College Division reported net sales of $149.0 million, a
11
<PAGE> 14
7.7% increase over 1996. Its newly published titles performed extremely well,
the backlist was strong, and book returns declined.
The educational publishing segment's net sales of $636.1 million in 1996
rose by $194.3 million, or 44.0%, from net sales of $441.8 million in 1995. The
School Division and McDougal contributed an increase of $118.9 million,
reflecting the addition of Heath publications and new programs. McDougal's
language arts programs, The Language of Literature (C)1997 and The Writer's
Craft (C) 1995, led the market in new business, as did the School Division's
reading program, Houghton Mifflin Reading: Invitations to Literacy (C) 1996.
Great Source reported substantially increased net sales primarily driven by the
Write Source product line. Riverside's sales increased 4.8% over 1995, as it won
a number of large state-wide testing contracts. The College Division reported
net sales of $138.3 million, a 47.3% increase over 1995. The acquisition of
Heath and a strong list of new publications contributed to the revenue growth.
Operating income for the educational publishing segment increased $17.5
million, or 15.4%, to $130.9 million in 1997 from $113.4 million in 1996. The
resulting operating margin for 1997 was 18.5% versus 17.8% in 1996. The
operating margin improvement was primarily due to the increase in net sales and
operating efficiencies achieved in 1997. Distribution, editorial, and plate
expenses decreased as a percent of sales in 1997 compared to 1996. Distribution
costs benefited from investments made in a warehouse management system and other
operating improvements. Although editorial and plate expense were higher in
absolute dollars, as a percentage of sales they were lower in 1997 primarily due
to higher net sales. Increased selling and administrative costs partially offset
these decreases. The increase in selling costs was the result of the large
number of sales opportunities in adoption states and open territories in 1997.
The Company expanded its sales force in preparation for these opportunities, and
sampling and implementation expenses were higher. Administrative costs increased
due to the investments in new systems and the Year 2000 computer issue.
Operating income for the educational publishing segment increased $49.6
million, or 77.7%, to $113.4 million in 1996 from $63.8 million in 1995. The
resulting operating margin for 1996 was 17.8% versus 14.4% in 1995. The
operating margin improvement was primarily due to the increase in net sales and
operating efficiencies achieved through the integration of Heath. As a percent
of sales, every category of operating expense except for plate and goodwill
amortization and selling costs decreased from 1995, with the largest savings
from editorial expense. Plate amortization increased, as expected, due to the
development of elementary and secondary school programs to meet the adoption
opportunities over the next several years. The increase in goodwill amortization
was due to the acquisition of Heath. In 1996, the sales force was increased to
ensure adequate market exposure of the expanded product lines due to the
acquisition of Heath. In preparation for the greater number of statewide
adoption opportunities in 1997, the Company's sampling expense increased year
over year. Distribution expenses also declined as a percent of sales with
economies of scale offsetting some additional costs incurred to improve customer
service.
GENERAL PUBLISHING
The general publishing segment's net sales increased by $6.3 million, or
7.7%, to $88.1 million in 1997 from $81.8 million in 1996. Higher sales in 1997
were due to increased sales of adult and juvenile books, dictionary products,
and the acquisition of Chapters, the cookbook imprint purchased in the second
quarter of 1997. Lower distribution income partially offset these increases. The
gain in adult and juvenile books was due to increased sales of new titles and
promotion of the backlist, led by Mariner Books. Houghton Mifflin Interactive's
net sales in 1997 increased 39% due to an increase in the number of product
offerings and the number of retail outlets through which its titles are sold.
The general publishing segment's operating loss was $3.1 million in 1997
compared to $5.1 million in 1996. The improvement was primarily due to increased
net sales and operating efficiencies in the Trade Division. As a percent of
sales, every category of operating expense except royalty and administrative
costs decreased from 1996.
The general publishing segment reported 1996 revenue of $81.8 million, down
6.2% from the $87.2 million reported in 1995. The Trade Division's lower sales
of new publications were the principal cause of the decline. In 1995, the
Company reduced the number of titles published, which resulted in a smaller list
of new titles in 1996. The division changed its strategy in 1996, curtailing
some revenue streams while developing
12
<PAGE> 15
others. Houghton Mifflin Interactive reported net sales of approximately $4
million. The general publishing segment's operating loss was $5.1 million in
1996 compared to $8.5 million in 1995. The 1995 results included a $7.5 million
non-cash charge to increase reserves. In 1996, lower revenues as well as an
increase in bad debt expense contributed to the greater operating loss before
one-time charges.
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.
Net cash provided by operating activities was $141.8 million in 1997, an
increase of $39.8 million from $102.0 million in 1996. Excluding depreciation
and amortization, equity earnings and losses of INSO, and gains on equity
transactions of INSO, sale of property and plant, and sales of INSO stock,
earnings increased $20.1 million. Changes in operating assets and liabilities
provided $19.7 million more of cash in 1997 than 1996, due to improved working
capital management and lower income tax payments.
In 1996, net cash provided by operating activities was $102.0 million, an
increase of $89.4 million from the $12.6 million reported in 1995. Excluding
equity in earnings and losses of INSO, gains on equity transactions of INSO,
sale of property and plant, and sales of INSO stock, earnings increased $42.0
million. Depreciation and amortization increased $31.9 million, primarily due to
increases in goodwill and plate amortization, as discussed above. Changes in
operating assets and liabilities provided $15.5 million more of cash in 1996
than 1995, primarily due to improved working capital management.
The Company anticipates that cash provided by operating activities in 1998
will be lower than in 1997, primarily as a result of higher income tax payments
and lower earnings.
The Company used $71.8 million in cash for investing activities in 1997, an
increase of $5.5 million over the $66.3 million used during 1996. Excluding the
$24.2 million the Company received from the sale of shares of INSO common stock
in 1996, cash required for investing activities decreased by $18.7 million,
principally due to the $5.2 million in proceeds from the sales of property and
plant, a $7.9 million decrease in book plate expenditures, and a $6.5 million
decrease in acquisition of publishing assets in 1997 compared to 1996.
The Company required $66.3 million in cash for investing activities in
1996, a decrease of $420.0 million from $486.3 million required during 1995.
Book plate expenditures increased by $15.3 million in 1996 for new products to
meet the significant adoption opportunities over the next several years. During
1996, the Company also spent $15.5 million for publishing assets, a decrease of
$437.4 million from 1995. Included in 1996 was the final settlement for Heath
and other products purchased, while 1995 included the Heath acquisition. In
1996, the Company received $24.2 million in proceeds, net of tax, from the sale
of 770,000 shares of INSO common stock.
The Company required $76.0 million in cash for financing activities in
1997, primarily to pay dividends and repay debt in the fourth quarter of 1997.
Total debt decreased approximately $68.6 million to $472.4 million as of
December 31, 1997 from $541.0 million at the end of 1996. The Company's
percentage of debt to total capitalization (debt plus stockholders' equity)
decreased to 59.8% at the end of 1997 from 66.7% at the end of 1996 primarily as
a result of paying down $90 million outstanding under the five-year credit
facility and $40 million outstanding of medium-term notes, offset by short-term
borrowings of $61.3 million.
The Company required $40.9 million in cash for financing activities in
1996, primarily to pay dividends and repay debt in the fourth quarter. Total
debt decreased approximately $30 million to $541.0 million as of December 31,
1996 from $570.8 million at the end of 1995. The Company's percentage of debt to
total
13
<PAGE> 16
capitalization (debt plus stockholders' equity) decreased to 66.7% at the end of
1996 from 71.0% at the end of 1995, primarily as a result of paying down $30
million outstanding under the five-year credit facility by using cash available
at year-end.
Net cash provided from financing was $460.1 million in 1995, as a result of
the incremental borrowings of $345 million used to finance the Heath acquisition
and the $126.6 million SAILS issuance.
In 1997, the Company's average short-term borrowing was $66.9 million, a
decrease of $10.7 million from 1996. The decrease was primarily due to higher
earnings, improved operating efficiencies, and a decrease in book plate
expenditures from 1996.
In 1996, the Company's average short-term borrowing was $77.6 million, an
increase of $57.4 million from 1995. Seasonal borrowing needs increased as a
result of the incremental impact of funding Heath operations for a full year,
and increased funds required for book plate expenditures to meet the significant
adoption opportunities over the next several years. The Company repaid all
short-term borrowings by the end of 1996.
In August 1995, the Company completed a public offering of 6% Exchangeable
Notes due in 1999 at a principal amount of $34 per SAILS. At maturity, the
principal amount of each SAILS will be mandatorily exchanged for a number of
shares of INSO common stock, or at the Company's option, cash with an equal
value. The number of shares which could be issued in exchange will depend on
INSO's share price at the time of the redemption. The Company will record as
additional non-cash interest expense, over the life of the SAILS, the excess of
the current INSO stock price over the maximum redemption price at maturity.
There would be no additional non-cash interest expense recorded through August
1999 based upon INSO's stock price at December 31, 1997. If the Company chooses
to redeem the SAILS with shares of INSO common stock, it would record a gain
representing the excess of the redemption amount over the book value of the
Company's investment in INSO. The Company's ownership percentage of INSO after
this redemption would be substantially less than 20%. The INSO shares may be
sold by the Company, subject to certain restrictions, as market conditions and
events warrant.
The Company currently expects that cash flow from operations for the full
year 1998 will be sufficient to cover investment activities and dividend
payments as well as to repay by year end a portion of the debt outstanding at
the beginning of 1998. The Company intends to continue using the short-term debt
market, primarily commercial paper, for seasonal liquidity needs.
IMPACT OF INFLATION AND CHANGING PRICES
Although inflation is currently well below levels in prior years, which has
benefited recent Company results, particularly in the area of manufacturing
costs, there are offsetting costs. The Company's ability to adjust selling
prices always has been limited by competitive factors and long-term contractual
arrangements which either prohibit price increases or limit the amount by which
prices may be increased. A weak domestic economy at a time of low inflation
could cause lower tax receipts at the state and local level, and the funding and
buying patterns for textbooks and other educational materials could be adversely
affected.
Prices for paper goods rose in 1994 and 1995. However, this trend did not
continue in 1996 or 1997, as prices for paper products moderated. The Company
expects a modest increase in paper prices in 1998.
The most significant Company investments affected by inflation include book
plates; other property, plant, and equipment; and inventories. The Company uses
the last-in, first-out (LIFO) method to value substantially all inventory and,
therefore, the cost of inventory charged against income approximates replacement
value. The incremental replacement cost expense amounted to $12.9 million in
1997 as compared with $13.5 million in 1996.
The Company's publishing business does not require a high level of
investment in property, plant, and equipment. Such net assets represented 4.0%
of consolidated assets at December 31, 1997. The Company's net investment at the
end of 1997 in capitalized book plates for educational and reference works
represented
14
<PAGE> 17
approximately 8.3% of total assets. The Company continues to commit funds to new
publishing areas through both acquisitions and internal growth.
The Company believes that by valuing its inventory using the LIFO method,
continuing to emphasize technological improvements, and quality control, it can
continue to moderate the impact of inflation on its operating results and
financial position.
OUTLOOK
The Company's revenue opportunities in the K-12 market in 1998 are expected
to be below 1997 levels due to a decrease in statewide adoption opportunities in
1998. There are a number of mathematics and social studies statewide adoptions
this year, but these disciplines do not generate as large a per-pupil
expenditure as reading and literature adoptions. For this reason, the Company
expects the School Division's sales to be below 1997 levels. All other divisions
are expected to have growth opportunities, however, and provided that the
Company's share of the mathematics and social studies markets is similar to the
share it has achieved historically, and that there are no significant changes to
announced sizable adoptions, the Company expects a modest increase in 1998
revenues.
The modest sales growth should generate increased gross margin, but this
will be offset by increased investment in products and support systems in 1998.
The Company expects editorial and plate spending to increase by approximately
12-15%. These increases are related to investment in product revisions and new
products and services to take advantage of opportunities in both publishing
segments, as well as to respond to changes in the timing of statewide adoption
opportunities.
The Company will also make investments to improve operating and support
systems, and to comply with Year 2000 computer requirements, which will increase
selling and administrative costs in 1998. The Company expects that the cost of
investments in new systems and Year 2000 compliance in 1998 will be more than $5
million higher than in 1997.
IMPACT OF YEAR 2000 COMPUTER ISSUE
The Year 2000 computer issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on an assessment of the Company's existing systems, the Company
determined that it would have to modify significant portions of its software to
function properly in the year 2000 and thereafter. This assessment also showed
that for some older systems, such as customer order management and accounts
receivable, replacement makes more sense in order to expand the Company's
current system capabilities and support the Company as it continues to grow. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 computer issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed in time, the
Year 2000 computer issue could have a material impact on the operations of the
Company.
The Company is communicating with all of its significant suppliers and
large customers to determine whether interface systems are vulnerable to this
problem. The Company's total Year 2000 project cost estimates include the
estimated costs and time associated with third party Year 2000 issues based on
presently available information. However, the Company cannot be sure that the
systems of other companies on which the Company's systems rely will be timely
converted. If they were not, it would have an adverse effect on the Company's
systems. The Company is in the process of identifying potential exposure to
contingencies related to the Year 2000 computer issue for the products it has
sold.
The Company will use both internal and external resources to reprogram, or
replace, and test software for Year 2000 modifications. The Company anticipates
completing the Year 2000 computer project by mid-1999,
15
<PAGE> 18
prior to any anticipated impact on its operating systems. The total cost of the
Year 2000 computer project, including costs to enhance the functionality of
certain systems as well as to address the Year 2000 computer issue, is currently
estimated at approximately $30-35 million and is being funded through operating
cash flows. Of this total, approximately $10-14 million is for the purchase of
new software and hardware which will be capitalized. The remaining $17-21
million will be expensed as incurred. To date, the Company has spent
approximately $5 million ($3 million expensed and $2 million capitalized for new
systems), related to the assessment of, and preliminary efforts on, its Year
2000 computer project and the development of new systems and systems
modifications.
The forecast costs and the date on which the Company believes it will
complete the Year 2000 computer modifications are based on its best estimates,
which in turn were based on numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans, and
other factors. However, the Company cannot be sure that these estimates will be
achieved and actual results could differ materially from those anticipated.
There are many factors that could affect the accuracy of these estimates,
including the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer code the ability of third
parties to resolve their own Year 2000 computer issue, and similar
uncertainties.
"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) 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, secondary, and college markets; (v)
regulatory changes which would affect the purchase of educational materials and
services; (vi) strength of the retail market for general-interest publications
and market acceptance of newly published titles and new electronic products;
(vii) unanticipated expenses or delays in resolving Year 2000 computer issues;
and (viii) other factors detailed from time to time in the Company's filings
with the Securities and Exchange Commission.
16
<PAGE> 19
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Responsibility for Financial Statements........ 18
Report of Independent Auditors.............................. 19
Consolidated Balance Sheets at December 31, 1997 and 1996... 20
Consolidated Statements of Operations for the three years
ended December 31, 1997................................... 22
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997................................... 23
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1997....................... 24
Notes to Consolidated Financial Statements.................. 26
</TABLE>
SUPPLEMENTARY DATA
Summary of Quarterly Results of Operations (unaudited) is presented on page 45.
17
<PAGE> 20
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Houghton Mifflin Company is responsible for all
information and representations contained in the financial statements and other
sections of this annual report. Management is also responsible for the internal
consistency of such information and representations. In preparing the financial
statements it is necessary for management to make informed judgments and
estimates and to select accounting principles which it believes are in
accordance with generally accepted accounting principles appropriate in the
circumstances.
In meeting its responsibility for the reliability of the financial
statements, management relies on the Company's internal control systems and
procedures. In designing such control procedures, management recognizes that
errors or irregularities may nevertheless occur and that estimates and judgments
are needed to assess and balance the relative costs and expected benefits of
controls. However, management believes that the Company's accounting controls do
provide reasonable assurance that assets are safeguarded and that transactions
are properly recorded and executed in accordance with corporate policy and
management's authorization. As a further safeguard, the Company has a program of
internal audits and appropriate follow-up by management.
The financial statements have been audited by the Company's independent
auditors, Ernst & Young LLP, in accordance with generally accepted auditing
standards. In connection with its audit, Ernst & Young LLP develops and
maintains an understanding of the Company's accounting and financial controls,
and conducts such tests and related procedures as it deems necessary to render
its opinion on the financial statements. The adequacy of the Company's internal
financial controls and the accounting principles employed in financial reporting
are under the general surveillance of the Audit Committee of the Board of
Directors, consisting of five outside directors. The independent auditors and
internal auditors have free and direct access to the Audit Committee and meet
with the committee periodically to discuss accounting, auditing, and financial
reporting matters.
The Company has distributed to its employees a statement regarding, among
other things, potentially conflicting outside business interests of employees,
and proper conduct of domestic and international business activities. It has
developed and instituted additional internal controls and audit procedures
designed to prevent or detect violations of these policies. Management believes
this provides reasonable assurance that its operations meet a high standard of
business conduct.
Nader F. Darehshori Gail Deegan
Chairman, President, Executive Vice President, Chief
and Chief Executive Officer Financial Officer, and Treasurer
18
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Houghton Mifflin Company
We have audited the accompanying consolidated balance sheets of Houghton
Mifflin Company as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a) 2. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Houghton Mifflin Company at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 26, 1998
19
<PAGE> 22
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- ----------
(IN THOUSANDS OF
DOLLARS EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 5,621 $ 11,534
Marketable securities and time deposits
available-for-sale, at fair value..................... 614 612
Accounts receivable.................................... 180,241 189,978
Less: allowance for book returns.................. 20,734 25,166
-------- ----------
159,507 164,812
Inventories............................................ 145,043 138,547
Deferred income taxes.................................. 12,049 20,551
Prepaid expenses....................................... 1,882 1,913
-------- ----------
Total current assets.............................. 324,716 337,969
Property, plant, and equipment, net......................... 39,108 35,430
Book plates, less accumulated amortization of $117,213 in
1997 and $91,628 in 1996.................................. 81,280 81,017
OTHER ASSETS
Royalty advances to authors, less allowance of
$24,290 in 1997 and $20,975 in 1996................... 23,961 24,761
Intangible assets, net................................. 462,884 485,766
Deferred income taxes.................................. 3,807 12,514
Other investments and long-term receivables............ 45,344 28,985
-------- ----------
Total other assets................................ 535,996 552,026
-------- ----------
$981,100 $1,006,442
======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE> 23
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- ----------
(IN THOUSANDS OF
DOLLARS EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................................... $ 47,612 $ 57,585
Commercial paper....................................... 61,346 --
Royalties.............................................. 41,463 38,154
Salaries, wages, and commissions....................... 21,625 19,408
Other.................................................. 26,680 30,783
Current portion of long-term debt...................... 40,000 40,000
-------- ----------
Total current liabilities......................... 238,726 185,930
Long-term debt.............................................. 371,081 500,999
Accrued royalties payable................................... 1,430 1,899
Other liabilities........................................... 24,017 19,666
Accrued post retirement benefits............................ 28,089 27,655
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; 500,000 shares
authorized, none issued............................... -- --
Common stock, $1 par value; 70,000,000 shares
authorized; 30,219,411 shares issued in 1997 and
29,561,852 shares issued in 1996...................... 30,219 29,562
Capital in excess of par value......................... 75,307 43,476
Retained earnings...................................... 279,513 243,998
-------- ----------
385,039 317,036
Less:
Notes receivable from stock purchase agreements........ (4,628) (5,916)
Unearned compensation related to restricted stock...... (7,178) (1,563)
Common shares held in treasury, at cost, 282,329
shares in 1997 and 230,780 shares in 1996............. (5,553) (2,448)
Benefits trust assets, at market....................... (49,923) (36,816)
-------- ----------
Total stockholders' equity........................ 317,757 270,293
-------- ----------
$981,100 $1,006,442
======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE> 24
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
NET SALES............................................ $797,320 $717,863 $529,022
COSTS AND EXPENSES
Cost of sales................................... 362,501 329,686 271,036
Selling and administrative...................... 328,261 300,795 214,818
Special charges................................. -- -- 56,263
-------- -------- --------
690,762 630,481 542,117
-------- -------- --------
OPERATING INCOME (LOSS).............................. 106,558 87,382 (13,095)
OTHER INCOME (EXPENSE)
Net interest expense............................ (38,926) (40,875) (13,008)
Gain on equity transactions of INSO
Corporation................................... 14,904 -- 13,102
Gain on sale of INSO Corporation common stock... -- 34,261 --
Equity in earnings (losses) of INSO
Corporation................................... 997 (6,815) 1,557
-------- -------- --------
(23,025) (13,429) 1,651
-------- -------- --------
Income (loss) before taxes........................... 83,533 73,953 (11,444)
Income tax (benefit) provision....................... 33,711 30,331 (4,201)
-------- -------- --------
NET INCOME (LOSS).................................... $ 49,822 $ 43,622 $ (7,243)
======== ======== ========
EARNINGS PER SHARE:
Net income (loss) per share - basic............. $ 1.76 $ 1.57 $ (0.26)
Net income (loss) per share - diluted (except
when anti-dilutive)........................... $ 1.73 $ 1.56 $ (0.26)
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE> 25
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss).................................. $ 49,822 $ 43,622 $ (7,243)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization expense......... 89,739 84,335 52,426
Gain on equity transactions of INSO
Corporation................................. (14,904) -- (13,102)
Gain on sale of property and plant............ (3,011) -- (3,889)
Equity in (earnings) losses of INSO
Corporation................................. (997) 6,815 (1,557)
Gain on sale of INSO Corporation stock........ -- (34,261) --
Changes in operating assets and liabilities:
Accounts receivable, net...................... 6,267 18,031 (4,366)
Inventories................................... (5,079) 1,380 (25,388)
Accounts payable.............................. (10,262) (36,969) (5,981)
Royalties, net................................ 4,072 (3,307) (11,698)
Deferred and income taxes payable............. 17,209 25,485 (23,882)
Other, net.................................... 8,993 (3,103) 57,237
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................. 141,849 102,028 12,557
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Book plate expenditures............................ (54,163) (62,080) (46,740)
Acquisition of publishing assets, net of cash
acquired......................................... (9,049) (15,501) (452,888)
Property, plant, and equipment expenditures........ (13,740) (12,863) (7,538)
Proceeds from sale of property and plant........... 5,204 -- 4,628
Proceeds from the sales of INSO Corporation
stock............................................ -- 24,186 --
Purchase of marketable securities.................. (2) (8) (4)
Sale of marketable securities...................... -- -- 16,221
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES.... (71,750) (66,266) (486,321)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Dividends paid on common stock..................... (13,959) (13,371) (12,845)
Issuance (repayment) of commercial paper........... 61,346 (144,612) 144,612
Proceeds from the issuance of long-term
financing........................................ -- 224,785 200,000
Repayment of long-term financing................... (130,000) (109,955) --
Proceeds from the issuance of SAILS................ -- -- 126,643
Purchase of common stock........................... -- -- (957)
Exercise of stock options.......................... 4,782 1,897 2,175
Other.............................................. 1,819 327 465
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................. (76,012) (40,929) 460,093
Decrease in cash and cash equivalents................... (5,913) (5,167) (13,671)
Cash and cash equivalents at beginning of year.......... 11,534 16,701 30,372
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR................ $ 5,621 $ 11,534 $ 16,701
========= ========= =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid.................................. $ 12,890 $ 17,409 $ 18,194
Interest paid...................................... $ 39,366 $ 38,931 $ 10,941
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE> 26
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON CAPITAL
STOCK IN EXCESS RETAINED
$1 PAR VALUE OF PAR VALUE EARNINGS
------------ ------------ --------
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1995................................ $29,518 $22,316 $234,069
Net loss.................................................. -- -- (7,243)
Common stock dividends, $0.465 per share.................. -- -- (12,845)
Stock options exercised................................... -- 776 --
Issuance of restricted stock.............................. -- 252 --
Share repurchases......................................... -- -- --
Executive stock repurchases............................... -- -- --
Other equity transactions, net............................ -- 573 --
Benefits Trust asset remeasurement........................ -- (1,544) --
Valuation allowance on noncurrent marketable securities... -- -- (212)
Stock repurchase commitment............................... -- 7,600 --
Amortization of unearned compensation on restricted
stock................................................... -- -- --
------- ------- --------
Balance at December 31, 1995.............................. 29,518 29,973 213,769
======= ======= ========
Net income................................................ -- -- 43,622
Common stock dividends, $0.48 per share................... -- -- (13,371)
Stock options exercised................................... 44 1,249 (22)
Issuance of restricted stock.............................. -- 1,009 --
Executive stock repurchases............................... -- -- --
Other equity transactions, net............................ -- 505 --
Issuance of stock for contribution to the retirement
savings plan............................................ -- 1,884 --
Benefits Trust asset remeasurement........................ -- 8,856 --
Amortization of unearned compensation on restricted
stock................................................... -- -- --
------- ------- --------
Balance at December 31, 1996.............................. 29,562 43,476 243,998
======= ======= ========
Net income................................................ -- -- 49,822
Common stock dividends, $0.49 per share................... -- -- (13,959)
Stock options exercised................................... 332 7,136 (66)
Issuance of restricted stock.............................. 298 8,201 (142)
Restricted stock forfeited................................ -- 228 --
Executive stock repurchases............................... -- -- --
Other equity transactions, net............................ 27 2,454 (13)
Issuance of stock for contribution to the retirement
savings plan............................................ -- 731 --
Benefits Trust asset remeasurement........................ -- 13,081 --
Valuation allowance on noncurrent marketable securities... -- -- (127)
Amortization of unearned compensation on restricted
stock................................................... -- -- --
------- ------- --------
BALANCE AT DECEMBER 31, 1997.............................. $30,219 $75,307 $279,513
======= ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE> 27
<TABLE>
<CAPTION>
UNEARNED
NOTES RECEIVABLE COMPENSATION TREASURY STOCK
FROM STOCK RELATED TO -------------------- BENEFITS
PURCHASE AGREEMENTS RESTRICTED STOCK SHARES AMOUNT TRUST TOTAL
------------------- ---------------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$(5,841) $ -- (657,370) $(6,091) $(29,498) $244,473
-- -- -- -- -- (7,243)
-- -- -- -- -- (12,845)
-- -- 141,396 1,399 -- 2,175
-- (465) 21,532 213 -- --
-- -- (48,000) (957) -- (957)
344 -- (15,484) (403) -- (59)
(324) -- 10,564 44 4 297
-- -- -- -- 1,544 --
-- -- -- -- -- (212)
-- -- -- -- -- 7,600
-- 116 -- -- -- 116
------- ------- --------- ------- -------- --------
(5,821) (349) (547,362) (5,795) (27,950) 233,345
======= ======= ========= ======= ======== ========
-- -- -- -- -- 43,622
-- -- -- -- -- (13,371)
-- -- 59,088 626 -- 1,897
-- (1,909) 84,828 900 -- --
209 -- -- -- -- 209
(304) -- 24,352 248 (10) 439
-- -- 148,314 1,573 -- 3,457
-- -- -- -- (8,856) --
-- 695 -- -- -- 695
------- ------- --------- ------- -------- --------
(5,916) (1,563) (230,780) (2,448) (36,816) 270,293
======= ======= ========= ======= ======== ========
-- -- -- -- -- 49,822
-- -- -- -- -- (13,959)
-- -- (74,604) (2,620) -- 4,782
-- (8,357) -- -- -- --
-- 647 (24,000) (875) -- --
1,547 -- (8,446) (282) -- 1,265
(259) -- 12,343 210 (26) 2,393
-- -- 43,158 462 -- 1,193
-- -- -- -- (13,081) --
-- -- -- -- -- (127)
-- 2,095 -- -- -- 2,095
------- ------- --------- ------- -------- --------
$(4,628) $(7,178) (282,329) $(5,553) $(49,923) $317,757
======= ======= ========= ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE> 28
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Houghton
Mifflin Company ("the Company") and its wholly-owned subsidiaries. All material
intercompany accounts and transactions are eliminated in consolidation.
Investments in 20% to 50% owned entities are accounted for on the equity
method. The Company uses the income statement method to account for the issuance
of common stock by a subsidiary or equity investee. Under this method gains and
losses on issuance of stock by a subsidiary or equity investee are recognized in
the income statement.
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist primarily of cash in banks and highly
liquid investment securities that have maturities of three months or less when
purchased. The carrying amount approximates fair value due to the short-term
maturity of these instruments.
MARKETABLE SECURITIES AND TIME DEPOSITS AVAILABLE-FOR-SALE:
Marketable securities included in current assets consist of instruments
with original maturities of three months or greater. The securities held consist
primarily of tax-exempt municipal certificates, government agency obligations,
and time deposits and are stated at fair value, which approximates cost due to
the short maturity of the instruments. The fair values are estimated based on
quoted market prices.
Marketable securities included in other assets are classified as "Other
investments and long-term receivables" for consolidated financial statement
purposes. These investments, which consist of equity securities, are carried at
market value. Unrealized holding gains and losses are recognized as a reduction
in stockholders' equity. Investments in companies in which the Company has a 20%
to 50% interest are carried at cost and adjusted for the Company's proportionate
share of their undistributed earnings and losses, and for gains and losses
associated with the issuance of additional stock, as discussed above.
BOOK RETURNS:
A provision for estimated future book returns is made at time of sale, and
consists of the sales value less related inventory value and royalty costs.
INVENTORIES:
Inventory balances at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Finished goods..................................... $130,825 $124,263
Work in process.................................... 9,010 9,162
Raw materials...................................... 5,208 5,122
-------- --------
$145,043 $138,547
======== ========
</TABLE>
Inventories are stated at the lower of cost or market (replacement cost for
raw materials, net realizable value for other inventories). The last-in,
first-out (LIFO) method is used to determine the cost of inventory. If the cost
of all inventories had been determined by the first-in, first-out method (FIFO),
which approximates
26
<PAGE> 29
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
replacement cost, inventory values would have been higher by $19.8 million at
December 31, 1997 and at December 31, 1996.
PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment are carried on the basis of cost.
Depreciation is provided on a straight line basis over the estimated useful
lives as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE
-----------------------------------
<S> <C>
Building and building equipment........... 10 to 35 years
Machinery and equipment................... 3 to 15 years
Leasehold improvements.................... lesser of useful life or lease term
</TABLE>
Balances of major classes of assets and allowances for depreciation and
amortization at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements........................... $ 1,179 $ 1,976
Building and building equipment...................... 19,905 20,884
Machinery and equipment.............................. 66,243 54,850
Leasehold improvements............................... 10,608 10,740
------- -------
Total........................................... 97,935 88,450
Less: allowances for depreciation and amortization... (58,827) (53,020)
------- -------
Property, plant, and equipment, net.................. $39,108 $35,430
======= =======
</TABLE>
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements that extend the useful life of the assets are
capitalized. Depreciation expense was approximately $8.2 million in 1997; $7.3
million in 1996; and $8.8 million in 1995.
BOOK PLATES:
The Company's investment in book plate costs is capitalized and depreciated
on an accelerated basis over three to five years, except for trade and some
reference publication costs, which are expensed when incurred. Amortization
expense was approximately $53.6 million in 1997; $50.3 million in 1996; and
$32.9 million in 1995.
INCOME TAXES:
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Deferred income taxes are recorded to reflect the tax benefit and
consequences of future years differences between the tax bases of assets and
liabilities and their financial reporting amounts.
27
<PAGE> 30
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS:
Intangible assets at December 31, 1997 and 1996, consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill........................................... $515,532 $510,500
Publishing rights.................................. 16,623 16,787
Other.............................................. 4,000 4,000
-------- --------
Total......................................... 536,155 531,287
Less: accumulated amortization..................... (73,271) (45,521)
-------- --------
Intangibles, net................................... $462,884 $485,766
======== ========
</TABLE>
Purchased editorial publishing rights are amortized on a straight-line
basis over the estimated economic life of the titles or contracts, which does
not exceed 15 years. The excess of cost over net assets acquired, or goodwill,
is amortized on a straight-line basis over periods ranging from 10 to 25 years.
Amortization expense on intangible assets, principally goodwill, was
approximately $27.9 million in 1997; $26.7 million in 1996; and $10.7 million in
1995.
IMPAIRMENT EVALUATION:
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of." SFAS 121 establishes accounting standards
for the evaluation and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill. There was no material effect on the
financial statements from the adoption of SFAS 121 because the Company's prior
impairment recognition practice was generally consistent with SFAS 121. Under
provisions of SFAS 121, impairment is indicated when expected future cash flows
are less than the related assets' carrying value. Accordingly, when indicators
of impairment are present, the Company evaluates the carrying value of the
related asset, including goodwill, in relation to the fair value and the
carrying value of the underlying assets is adjusted if the fair value is lower.
BENEFITS TRUST:
The Trust assets consist primarily of 1.3 million shares of the Company's
common stock purchased from the Company's treasury shares at quoted market price
in 1992. The Trust is available to fund certain compensation and benefit plan
obligations. The common stock is carried at market value with changes in share
price from prior reporting periods reflected as an adjustment to capital in
excess of par value.
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 the accompanying financial statements have been restated to reflect the
effect of this stock split.
STOCK-BASED COMPENSATION:
The Company grants stock options for a fixed number of shares to employees
and directors with an exercise price equal to the fair market value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principle Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and, accordingly, recognizes no compensation expense for
the stock option grants. The
28
<PAGE> 31
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company also grants restricted stock and performance restricted stock awards to
key employees, including officers. For such restricted stock awards, the Company
measures compensation equal to the fair market value of the shares at the date
of grant. Compensation expense for these awards is then recognized ratably over
the period of the restriction. For performance restricted stock awards,
adjustments are also made to recognize expense for achievement based upon
financial goals.
In 1996, the Company has adopted the disclosure-only provision of Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation" (see Note 7).
EARNINGS PER SHARE:
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share," ("SFAS 128") which is required to be adopted for fiscal
years ending after December 15, 1997. All earnings per share amounts for all
periods presented have been restated to conform to the SFAS 128 requirements.
See Note 15 for the computation of basic and diluted earnings per share.
RISKS AND UNCERTAINTIES:
Organization:
The Company's business is publishing, primarily operating in two industry
segments in the domestic market. Based on sales, the Company's largest segment
is textbooks and other educational materials and services for the school and
college markets. The other segment is general publishing, whose products are in
a wide variety of topics, formats, and media. The principal markets for
textbooks and other educational materials and services are elementary and
secondary schools and two- and four-year colleges. The principal market for
trade books and reference works in the general publishing segment is retail
stores.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
significant estimates that affect the financial statements include, but are not
limited to, book returns, recoverability of advances to authors, inventory
valuation, and amortization periods, and recoverability of long-term assets such
as book plates, intangibles, and goodwill.
REVENUE RECOGNITION:
The Company recognizes revenues principally upon shipment of products, net
of a provision for returns based on sales.
PENDING ACCOUNTING PRONOUNCEMENTS:
The Financial Accounting Standards Board issued Statement No. 129,
"Disclosure of Information about Capital Structures" in 1997. This statement
does not change the Company's disclosure requirements.
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company is currently
evaluating the effects of implementing these statements.
NOTE 2. 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.
29
<PAGE> 32
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 15 years.
These acquisitions did not materially impact consolidated results,
therefore no pro forma information is provided.
The Company acquired D.C. Heath and Company ("Heath"), a leading publisher
of elementary, high school, and college textbooks, from Raytheon Company
("Raytheon") on October 31, 1995 for approximately $460.6 million, which
includes additional purchase price amounts paid in 1996. The acquisition was
financed through operating cash and $345.0 million of debt. The acquisition was
accounted for as a purchase and the net assets and results of operations have
been included in the consolidated financial statements since the date of
acquisition. The purchase price was allocated on the basis of the estimated fair
market value of the assets acquired and the liabilities assumed, and included
revisions to the preliminary allocation based on further analysis. The cost of
purchased editorial rights and the excess of the net assets acquired, or
goodwill, are being amortized on a straight-line basis over periods that
averages twenty years.
During the second quarter of 1996, the Company acquired all of the
outstanding shares of D.C. Heath, Canada, Limited ("Heath Canada") from Raytheon
following receipt of Canadian regulatory approval. ITP Nelson ("ITP"), a
division of Thomson Canada Limited, subsequently acquired the assets of Heath
Canada from the Company and entered into a series of agreements which expanded
an existing exclusive distribution agreement for the school and college markets.
Cash and licensing fees for these arrangements were approximately $5.0 million,
of which approximately $4.8 million has been paid.
In conjunction with the Heath acquisition, certain charges were recorded in
the fourth quarter of 1995 for indirect costs incurred as a result of the
acquisition ($7.1 million), costs related to the integration of the
administrative and sales functions ($9.3 million), and provisions to adjust the
carrying values of certain inventory and book plates based on strategic
decisions made subsequent to the acquisition ($32.9 million). The integration
costs included the costs to consolidate certain administrative and sales
functions of the combined businesses as well as training and other similar
costs. After completion of the transaction, the Company evaluated its publishing
programs and direction and concluded that assets related to certain overlapping
or duplicative programs should be adjusted based upon the estimated future
revenues of the combined companies.
30
<PAGE> 33
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited summary pro forma information combines the
consolidated results of operations as if Heath and Heath Canada had been
acquired as of January 1, 1995. The pro forma financial information is not
necessarily indicative of the operating results that would have occurred had the
Heath and Heath Canada acquisitions been consummated as of the assumed date, nor
are they necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31, 1995
-------------------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<S> <C>
Net sales.............................................. $705.5
Net loss............................................... (14.9)
Net loss per share..................................... $(0.54)
</TABLE>
NOTE 3. TAXES ON INCOME
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the net deferred tax assets are shown in the following table:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Tax asset-related:
Pension and postretirement benefits.................... $19,394 $15,741
Publishing expense..................................... 19,072 14,827
Allowance for book returns............................. 4,377 3,033
Deferred compensation.................................. 4,145 1,883
Other, net............................................. 3,397 3,708
------- -------
50,385 39,192
------- -------
Tax liability-related:
Depreciation expense................................... (24,715) (3,248)
INSO basis and related differences..................... (9,572) (2,079)
Deferred income........................................ (242) (800)
------- -------
(34,529) (6,127)
------- -------
Net deferred tax asset...................................... $15,856 $33,065
======= =======
</TABLE>
At December 31, 1997, net deferred tax assets represented approximately 2%
of total consolidated assets. The net deferred tax asset balance is started at
prevailing statutory income tax rates. The Company currently does not anticipate
any change in valuation methodology applied to the determination of net deferred
tax assets.
Significant components of the provision (benefit) for income taxes
attributable to income before taxes consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................ $14,539 $20,573 $ 13,201
State and other........................................ 1,963 3,407 2,669
------- ------- --------
Total current..................................... 16,502 23,980 15,870
Deferred:
Federal................................................ 14,315 5,154 (16,246)
State and other........................................ 2,894 1,197 (3,825)
------- ------- --------
Total deferred.................................... 17,209 6,351 (20,071)
------- ------- --------
$33,711 $30,331 $ (4,201)
======= ======= ========
</TABLE>
31
<PAGE> 34
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the income tax rate computed at the U.S. federal
statutory tax rate to reported income tax expense (benefit) attributable to
income before taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate...................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.................. 3.8 4.6 4.6
Non-deductible goodwill amortization........................ 2.5 3.0 (19.8)
Tax-exempt income........................................... 0.0 (1.3) 10.2
Non-deductible meals and entertainment...................... 1.0 0.9 (4.9)
Life insurance.............................................. (0.5) (1.0) 5.2
Other....................................................... (1.4) (0.2) 6.4
----- ----- -----
Effective tax rate.......................................... 40.4% 41.0% 36.7%
===== ===== =====
</TABLE>
As a result of the Stock Appreciation Income-Linked Securities ("SAILS")
transaction, the Company is likely to record a gain on the redemption of these
debt securities. Accordingly, in 1997 and 1996, the Company provided deferred
taxes on the undistributed earnings of INSO, the Company's former wholly-owned
Software Division (see Note 11). Accumulated undistributed earnings of INSO on
which taxes have not been provided were approximately $2.0 million at December
31, 1997 and 1996. Additionally, the Company has provided deferred income taxes
on the gains recognized as a result of any additional equity issuances of INSO.
NOTE 4. DEBT AND BORROWING AGREEMENTS
The Company had $300 million in unsecured credit facilities available at
December 31, 1997 and 1996, respectively, which were supported by commitment
fees. Borrowings under the $300 million facility are outstanding under a
five-year revolving commitment which expires in October 2000. The credit
facility requires the Company to comply with certain covenants, the most
restrictive of which include maintenance of a specific level of net worth,
fixed-charge coverage ratio, and debt to equity ratio.
There was no balance outstanding under this facility at December 31, 1997.
At December 31, 1996, there was $90 million outstanding under this facility at a
weighted average borrowing rate of 5.983%.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
6% Exchangeable Notes, due August 1999, Stock Appreciation
Income-Linked Securities (SAILS).......................... $126,643 $126,643
7.00% Notes due March 1, 2006, interest payable
semi-annually............................................. 124,813 124,791
7.125% Notes due April 1, 2004, interest payable
semi-annually............................................. 99,625 99,565
Borrowings from financial institutions, unsecured, under
committed five-year credit facility, due January 10,
2000...................................................... -- 90,000
5.83% Notes due December 1, 1997, interest payable
semi-annually............................................. -- 40,000
6.07% Notes due December 1, 1998, interest payable
semi-annually............................................. 40,000 40,000
6.29% Notes due December 1, 1999, interest payable
semi-annually............................................. 20,000 20,000
-------- --------
411,081 540,999
Less: portion included in current liabilities............... 40,000 40,000
-------- --------
Total long-term debt........................................ $371,081 $500,999
======== ========
</TABLE>
Long-term debt due in each of the next five years is as follows:
<TABLE>
<CAPTION>
YEARS IN THOUSANDS
----- ------------
<S> <C>
1998........................................................ $ 40,000
1999........................................................ 146,643
2000........................................................ --
2001........................................................ --
2002........................................................ --
</TABLE>
32
<PAGE> 35
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had approximately $61.3 million of commercial paper outstanding
at December 31, 1997 at a weighted average interest rate of 6.76%.
On December 11, 1995, the Company filed a registration statement with the
Securities and Exchange Commission for the offering of $300 million in debt
securities. In March 1996, the Company issued $125 million of non-callable
unsecured notes under this registration statement. The notes mature on March 1,
2006 and were priced at 99.8 to yield an effective rate of 7.02%. In addition,
the Company issued a total of $100 million of non-callable, unsecured medium
term notes under this registration statement; $40 million with a coupon of 5.83%
which matured on December 1, 1997; $40 million with a coupon of 6.07% maturing
on December 1, 1998; and $20 million with a coupon of 6.29% maturing on December
1, 1999. The proceeds from these issuances were used to pay down part of the
commercial paper and credit facility which were used as short-term bridge
financing for the Heath acquisition.
On October 31, 1995, $345 million in credit facilities were drawn upon to
fund the purchase of Heath. These borrowings were subsequently paid off with
$200 million in proceeds from a $300 million five-year credit facility and the
issuance of $145 million in commercial paper.
In August 1995, the Company completed a public offering of 6% Exchangeable
Notes due in 1999 at a principal amount of $34 per SAILS at issue. Net proceeds
of approximately $126.6 million were used for general corporate purposes,
including the repayment of seasonal borrowings and the partial funding of the
acquisition of Heath (see Note 2). Up to 50% of the SAILS may be redeemed at the
Company's option on or after August 1, 1998 until immediately prior to maturity.
The SAILS will be exchangeable for shares of INSO common stock, or at the
Company's option, cash in lieu of shares. If the SAILS are redeemed with shares
of INSO common stock, a gain representing the excess of the redemption amount
over the book value of the Company's investment in INSO would be recorded. The
number of INSO shares that would be exchanged for the SAILS depends, in part, on
the fair market value of the INSO stock price on the redemption date. If the
fair market value is $34 per share, 3.8 million shares of INSO would be
exchanged. As the price of INSO common stock increases, the Company is obligated
to exchange fewer INSO shares to redeem the SAILS. If the price of INSO common
stock is $39.44 or higher at the redemption date, the Company would redeem the
SAILS with 3.3 million shares of INSO common stock. The Company will record as
non-cash interest expense over the remaining term of the SAILS the excess of the
market value of the current INSO common stock price over the maximum redemption
price of $39.44 per INSO share. Based upon INSO's December 31, 1997 stock price,
there is no additional non-cash interest expense to be recorded through August
1999.
In April 1994, the Company issued $100 million of 7.125% medium term notes
through a public debt offering. The medium term notes mature on April 1, 2004
and were priced at 99.4 to yield an effective rate of 7.21%. The proceeds from
the issuance were applied to repay the $100 million short-term credit facilities
used as bridge financing in the March 1994 acquisition of McDougal.
The Company enters into transactions involving financial instruments for
purposes of managing its exposure to interest rate risks and funding costs.
Through the use of interest rate products such as interest rate swap agreements
and interest rate locks, the Company can achieve a predetermined mix of fixed-
and floating-rate debt. At December 31, 1997, the Company had two interest-rate
swaps in place, each with a notional amount of $25 million and terminating on
December 1, 2000. The Company pays the fixed rate on both swaps (5.90% and
5.92%) and receives a variable rate based upon a commercial paper index. In
connection with the Company's issuance of debt securities through the draw-down
of the $300 million shelf registration in 1995, a forward interest rate-lock
agreement was entered into with a counterparty for the notional principal amount
of $100 million at 5.995%. This rate-lock agreement was settled in 1996,
resulting in a net gain of approximately $0.6 million, which is being amortized
over the approximate term of the related borrowings.
Each interest rate swap agreement is designated with all or a portion of
the principal balance and term of a specific debt obligation. These agreements
involve the exchange of amounts based on a variable interest rate
33
<PAGE> 36
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for amounts based on a fixed interest rate over the life of the agreement
without an exchange of the notional amount upon which the payments are based.
The differential to be paid or received as interest rates change is recognized
as an adjustment to interest expense in the current period. The fair value of
the swap agreements and changes in the fair value as a result of changes in
market interest rates are not recognized in the financial statements.
Gains and losses on terminations of interest rate swap agreements are
deferred as an adjustment to the carrying amount of the outstanding designated
debt and amortized as an adjustment to interest expense related to the debt over
the remaining term of the original contract life of the terminated swap
agreement. In the event of the early extinguishment of a designated debt
obligation, any realized or unrealized gain or loss from the swap would be
recognized in income coincident with the extinguishment gain or loss.
Any swap agreements that are not designated with outstanding debt, or
notional amounts (or durations) of interest rate swap agreements in excess of
the principal amounts (or maturities) of the underlying debt obligations, are
recorded as an asset or liability at fair value, with changes in fair value
recorded in other income or expense (the fair value method). There were no such
agreements at December 31, 1997.
NOTE 5. RETIREMENT PLANS
The Company has a noncontributory, qualified defined benefit pension plan
that covers substantially all employees. On January 1, 1997, the pension plan
was changed to a cash balance plan. Plan benefits were previously determined by
years of service, the highest five consecutive years of compensation and age.
Under the new plan provisions, the accrued benefits of participants at December
31, 1996, were converted to balances to which are added future credits based on
pay, service, and interest. This plan change decreased 1997 expense by
approximately 15% from the expense that would apply under the prior plan
provisions. The funded status as of September 30, 1997 and September 30, 1996
reflects this plan change.
The funding policy is to contribute amounts subject to minimum funding
standards set forth by the Employee Retirement Income Security Act of 1974 and
the Internal Revenue Code. The plan's assets consist principally of common
stocks, fixed income securities, investments in registered investment companies,
and cash and cash equivalents. The Company also has a nonqualified defined
benefit plan that covers certain of its executive officers.
Net periodic pension cost for 1997, 1996, and 1995 included the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost (benefits earned during the year)............. $ 4,079 $ 3,557 $ 2,602
Interest cost on projected benefit obligation.............. 7,658 6,541 5,456
Actual return on plan assets............................... (24,331) (10,882) (13,588)
Net amortization and deferral.............................. 15,875 2,984 7,722
-------- -------- --------
Net pension expense........................................ $ 3,281 $ 2,200 $ 2,192
======== ======== ========
Significant actuarial assumptions:
Discount rate......................................... 7.75% 7.75% 8.00%
Increase in future compensation....................... 5.25% 5.25% 6.00%
Expected long-term rate of return on assets........... 9.00% 9.00% 8.50%
</TABLE>
34
<PAGE> 37
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company uses a September 30 measurement date and adjusts for any
contributions made after the measurement date to disclose December 31 accrued
pension liability. The following table sets forth the Plan's funded status at
December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Plan assets at fair value at September 30................... $120,417 $102,883
Projected benefit obligation (PBO).......................... 110,051 101,312
-------- --------
Excess of plan assets over projected benefit obligation at
September 30.............................................. 10,366 1,571
Unrecognized items:
Net gain............................................... (25,476) (13,252)
Prior service cost..................................... 539 574
Net transition asset................................... (875) (1,058)
-------- --------
Accrued pension liability included in other long-term
liabilities............................................... $(15,446) $(12,165)
======== ========
Actuarial present value of accumulated benefits at September
30 (ABO).................................................. $104,717 $ 94,464
Accumulated benefit obligation related to vested benefits at
September 30.............................................. $ 99,807 $ 92,730
Significant actuarial assumptions:
Discount rate.......................................... 7.25% 7.75%
Increase in future compensation........................ 4.75% 5.25%
</TABLE>
The 1996 information above reflects the assets that were transferred from
Raytheon's pension plans and the assumed obligations for the former Heath
employees. With the new cash balance plan, there is a smaller difference between
the ABO and the PBO formula than in the prior years because future salary
increases have a less significant impact under cash balance than under the prior
final average pay formula.
In addition, the Company maintains a defined contribution retirement plan,
the Houghton Mifflin 401(k) Savings Plan, which conforms to Section 401(k) of
the Internal Revenue Code, and covers substantially all of the Company's
employees. Participants may elect to contribute up to 15% of their compensation
subject to an annual limit ($9,500 in 1997) to fourteen funds: eleven equity
funds (three of which are closed to new participants and will be closed to all
participants on October 1, 1998), a fixed income fund, a managed income fund,
and a fund invested solely in the Company's common stock.
In 1996, Company matched employee contributions to the Retirement Savings
Plan in amounts up to 3% of employee compensation. Effective January 1, 1997,
the plan was renamed the Houghton Mifflin 401(k) Savings Plan, and provides a
Company match in amounts up to 4 1/2% of employee compensation. The contribution
expense, which is invested solely in shares of the Company's common stock,
amounted to approximately $3.2 million in 1997; $2.1 million in 1996; and $1.8
million in 1995.
NOTE 6. POSTRETIREMENT BENEFITS
The Company provides postretirement medical benefits to retired full-time,
non-union employees hired before April 1, 1992, who have provided a minimum of
five years of service and attained age 55. Additionally, employees of Heath as
of October 31, 1995 who became Houghton Mifflin employees with the acquisition
of Heath are covered subject to the same age and service requirements.
Under the terms of the Benefits Trust agreement formed in 1992, proceeds
from the periodic sale of assets by the trustee, cash dividends received, and
other trust earnings may be used to pay designated compensation and benefit plan
obligations, including retiree health care benefit costs. The assets in the
Benefits Trust consist principally of the Company's common stock. The fair value
of the Benefits Trust net assets was $49.9 million and $36.8 million at December
31, 1997, and 1996, respectively.
35
<PAGE> 38
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the postretirement benefit liability
recognized in the consolidated balance sheet at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................... $18,235 $18,590
Fully eligible active plan participants................ 3,025 2,484
Other active participants.............................. 4,273 3,827
------- -------
25,533 24,901
Unrecognized net gain....................................... 2,542 2,739
Unrecognized prior service cost............................. 14 15
------- -------
Accrued postretirement benefit liability.................... $28,089 $27,655
======= =======
Significant actuarial assumptions:
Weighted average discount rate......................... 7.00% 7.75%
Ultimate medical inflation rate........................ 3.50% 4.25%
</TABLE>
Net periodic postretirement benefit cost includes the following components
for the twelve months ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost (benefits earned during the year).............. $ 526 $ 529 $ 349
Interest cost on projected benefit obligation............... 1,844 1,801 1,676
Amortization of unrecognized prior service cost............. (1) (1) (68)
Amortization of unrecognized net gain....................... (35) -- --
------ ------ ------
Net periodic postretirement benefit expense................. $2,334 $2,329 $1,957
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Significant actuarial assumptions:
Weighted average discount rate......................... 7.75% 7.25% 7.90%
Medical inflation trend rate........................... 5.25% 6.25% 8.00%
</TABLE>
The change in the medical inflation trend rate reflects the recent
moderation of health care cost increases. As of December 31, 1997, the medical
inflation rate was assumed to decline to a projected ultimate rate of 3.50% in
1999 and thereafter.
An increase of 1% in the assumed medical inflation rate would increase the
combined interest and service cost components of 1997 net periodic
postretirement benefit cost by approximately $0.1 million, and increase the
accumulated postretirement benefit obligation as of December 31, 1997 by $1.5
million. In 1998, the Company expects the discount rate to decline to 7% and the
medical rate to decline to 4.25%.
36
<PAGE> 39
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. STOCK COMPENSATION PLANS
At December 31, 1997, the Company had two stock-based compensation plans
which are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plans. The Company has adopted the
disclosure-only provision of SFAS 123. Accordingly, no compensation cost has
been recognized for its fixed stock compensation plans. Had compensation cost
for the Company's two stock-based compensation plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method of SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net income
As reported............................................ $49.8 $43.6 $ (7.2)
Pro forma.............................................. $48.7 $42.4 $ (7.9)
Earning per share
As reported -- basic................................... $1.76 $1.57 $(0.26)
Pro forma -- basic..................................... $1.72 $1.53 $(0.29)
As reported -- diluted (except when anti-dilutive)..... $1.73 $1.56 $(0.26)
Pro forma -- diluted (except when anti-dilutive)....... $1.69 $1.52 $(0.29)
</TABLE>
The effects on pro forma net income and earnings per share of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on reported net income for future years due to such factors as the
vesting period of the stock options and the potential for issuance of additional
stock options in future years. Additionally, because SFAS 123 is applicable only
to options granted subsequent to December 31, 1994, its pro forma effect will
not be fully reflected until 1999 or 2000.
FIXED STOCK COMPENSATION PLANS
The Company maintains two fixed stock compensation plans, the 1992 Stock
Compensation Plan and the 1995 Stock Compensation Plan. Options outstanding
include some granted under the 1992 Stock Compensation Plan, under which no
further options may be granted. The Company has authorized 1.4 million common
shares under the 1992 Stock Compensation Plan and 1.8 million common shares
under the 1995 Stock Compensation Plan. The plans may be used to grant incentive
and non-qualified stock options, awards of restricted or bonus stock, or other
performance awards to eligible employees. The plans may also be used to grant to
non-employee members of the Board of Directors and to issue shares to Directors
as part of their compensation. Recipients of restricted stock awards may not
sell or transfer the shares until the restriction period lapses, provided that
shares have not been forfeited due to termination of employment. During the
restriction period, the recipient is entitled to the right to vote and receive
dividends. In 1997, grants of 298,034 shares of restricted stock were made; at
December 31, 1997, a total of 262,532 restricted shares were non-vested. The
plans provide that the exercise price for stock options shall not be less than
the fair market value of the shares on the date of grant. Options granted under
all plans become exercisable at such times as the Compensation & Nominating
Committee has determined, but not later than ten years from the date of the
grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------- -------
<S> <C> <C> <C>
Dividend yield........................................... 1.75% 1.89% 1.89%
Range of expected lives (years).......................... 3.9 - 4.7 3 - 4.8 3 - 4.8
Expected volatility...................................... 22.17% 24.90% 27.00%
Range of risk-free interest rates........................ 5.70% - 5.72% 6.21% 5.38%
</TABLE>
37
<PAGE> 40
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's two fixed stock compensation plans
as of December 31, 1997, 1996, and 1995 and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed options
Outstanding at beginning of year............... 1,718 $23 1,578 $22 1,244 $22
Granted........................................ 314 34 416 23 616 22
Exercised...................................... (335) 22 (114) 19 (144) 16
Forfeited...................................... (45) 22 (162) 22 (138) 23
------ ------ ------
Outstanding at end of year..................... 1,652 25 1,718 23 1,578 22
====== ====== ======
Options exercisable at year-end 1997........... 951 922 678
Weighted-average fair value of options granted
during the year.............................. $ 6.37 $ 4.89 $ 4.94
</TABLE>
The following table summarizes information about fixed stock options at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE OUTSTANDING EXERCISE
PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- - ---------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$19 to $21 439,460 2.8 years $ 21 276,366 $ 21
22 to 23 629,050 1.8 23 502,718 23
24 to 27 277,200 3.5 24 102,602 24
28 to 37 306,300 4.7 35 69,253 34
--------- -------
1,652,010 2.9 25 950,939 23
========= =======
</TABLE>
EXECUTIVE STOCK PURCHASE PLAN
In August 1994, pursuant to the 1994 Executive Stock Purchase Plan
("Executive Stock Purchase Plan"), whose purpose was to increase stock ownership
of the Company's Executive Officers, the Company granted 248,544 options under
the 1992 Stock Compensation Plan to certain corporate officers for exercise at
the then market price of $21.313. These options were exercisable only on the
date granted and stock was issued from treasury shares. A note was obtained from
the officers and collateralized by the stock. In addition, each participant has
entered into a risk sharing agreement which, among other things, limits the
gains and losses associated with the stock in the event of a future sale (see
Note 13).
38
<PAGE> 41
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. SPECIAL AND RESTRUCTURING CHARGES
In 1995, the Company incurred special charges to outsource existing
warehousing and distribution operations. These actions are expected to hold down
operating costs and increase efficiency. A summary of the principal actions
taken in 1995 and the related costs is set forth in the table below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
Severance................................................ $ 2,850
Facilities sale and consolidation........................ 2,788
Inventory relocation..................................... 315
Disposal of tangible and intangible assets............... 250
Consulting............................................... 830
-------
7,033
Income tax benefit....................................... 2,743
-------
Net charge to operations................................. $ 4,290
=======
Per share cost $ 0.16
=======
</TABLE>
The Company eliminated approximately 80 positions as a result of these
actions. As of December 31, 1997, approximately $2.9 million had been paid to
employees in the form of salary continuance and other benefits related to these
restructurings. Also, the liabilities related to above-noted charges have been
materially settled at the end of 1997. There were no material differences
between the amounts accrued above and the payments against the liabilities
recognized.
In addition to the charges noted above and in connection with the
acquisition of Heath, a non-recurring charge of $49.3 million ($30.0 million
after-tax), or $1.09 per share, was recognized in 1995. This charge is
principally comprised of integration costs, indirect costs of the acquisition,
and adjustments to reflect strategic decisions made and actions taken subsequent
to the acquisition to state certain inventories and book plates at estimated net
realizable values (see Note 2).
NOTE 9. PREFERRED STOCK PURCHASE PLAN
In December 1988, the Company adopted a Stockholders' Rights Plan and
declared a dividend distribution of one Right for each outstanding share of
common stock. The Rights are attached to the common stock and do not have voting
or dividend rights, and until they become exercisable, can have no dilutive
effect on Company earnings. Each Right, when exercisable, entitles the holder to
purchase one ten-thousandth of a share of Series A Junior Participating
Preferred Stock at an exercise price of $125. The Rights will become exercisable
after a person or group has acquired ownership of 20% or more of the outstanding
common stock, or the commencement of a tender or exchange offer that would
result in a person or group owning 30% or more of the common stock, or the
determination by the Continuing Directors that a person or group which has
acquired a substantial amount (at least 15%) of the outstanding common stock is
an Adverse Person (as defined in the Rights Agreement). Any declaration by the
Continuing Directors that a person is an Adverse Person, any acquisition of 30%
or more of the outstanding common stock (except pursuant to an offer the Outside
Directors have determined is fair to, and in the best interest of, the Company
and its stockholders), and certain mergers, sales of assets, or other
"self-dealing" transactions with a holder of 20% or more of the outstanding
common stock, may entitle each Right holder, other than the potential acquirer,
to receive upon exercise of each Right an amount of common stock, or common
stock of the acquirer in the case of certain mergers or sales of assets, having
a market value equal to twice the exercise price of the Right. In general, the
Company may redeem the Rights in whole at a price of $0.01 per Right at any time
prior to the tenth day after a person or group acquires 20% or more of the
outstanding common stock. The Company may not redeem the
39
<PAGE> 42
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rights if the Continuing Directors have declared someone to be an Adverse
Person. The Rights will expire on July 30, 2007.
NOTE 10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE OBLIGATIONS
The Company has leases for various real property, office facilities, and
warehouse equipment which expire at various dates. Certain leases contain
renewal and escalation clauses for a proportionate share of operating expenses.
The future minimum rental commitments under all noncancelable leases for
real estate and equipment are payable as follows:
<TABLE>
<CAPTION>
YEARS IN THOUSANDS
- - ----- ------------
<S> <C>
1998........................................................ $ 14,819
1999........................................................ 13,533
2000........................................................ 12,752
2001........................................................ 11,773
2002........................................................ 9,805
Thereafter.................................................. 41,753
---------
Total minimum lease payments................................ $ 104,435
=========
</TABLE>
Rent expense, net of sublease income, was approximately $15.7 million in
1997; $16.7 million in 1996; and $13.0 million in 1995.
CONTINGENCIES
The Company is involved in ordinary and routine litigation incidental to
its business. There are no such matters pending that the Company expects to be
material in relation to its financial condition or results of operations.
NOTE 11. SOFTWARE DIVISION PUBLIC OFFERING
In March 1994, the Company's former wholly-owned Software Division, a
developer of software tools for proofreading, reference, and information
management, completed an initial public offering of 6.9 million shares at an
offering price of $7.50 per share for total consideration of $51.8 million. In
connection with the public offering, the Company received a cash dividend of
$32.9 million from the newly-formed successor company, INSO. An after-tax gain
of $22.8 million, or $0.82 per share, was recognized in connection with the
public offering. Deferred taxes were recognized on the transaction. Upon
completion, the assets, businesses, and employees of the Software Division were
transferred to INSO. The Company retained an ownership interest of approximately
40% in the successor company subsequent to the transfer. In addition, the
Company and INSO had entered into a service agreement whereby certain general
administrative services were provided by the Company and reimbursed by INSO. A
portion of the facilities leased by the Company were placed under a subleasing
agreement which was terminated in May 1995.
During 1995, the Company's Trade & Reference Division sold to INSO certain
properties and rights relating to the Information Please(R) almanac product line
for $3.3 million. At the time of the sale, the Company held a 40% equity stake
in INSO, and accordingly, $1.3 million of the gain was deferred, and is being
recognized as income by the Company over a period of three years.
In August 1995, INSO completed an additional public offering of 1.2 million
shares of common stock at a net offering price of $32.74 for total consideration
of $39.3 million. As a result, the Company recorded a gain of $13.1 million,
$7.8 million after-tax, or $0.28 per share, representing the Company's portion
of the increase
40
<PAGE> 43
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in INSO's net assets. As a result of this offering the equity ownership in INSO
was reduced to approximately 36%. On September 1, 1995, INSO effected a
two-for-one common stock split in the form of a 100% stock dividend. All INSO
share references have been restated to reflect the effects of the stock split.
In 1996, the Company received $38.6 million in proceeds from the sale of
770,000 shares of INSO common stock. As a result of the sales, the Company
recorded a gain of approximately $34.3 million ($19.9 million after-tax), or
$0.71 per share. The Company's equity ownership in INSO, after the sale of
common stock, was approximately 30%.
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 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 a
result of this offering the equity ownership in INSO was reduced to
approximately 27%.
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.
Though December 31, 1997, the Company has recorded an undistributed net
loss due to its pro-rata ownership in INSO.
NOTE 12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash, cash equivalents, and
marketable securities.......... $ 6,235 $ 6,235 $ 12,146 $ 12,146
Investments:
INSO........................... 30,194 44,777 13,861 152,909
Cassell PLC.................... 2,178 2,178 2,389 2,389
FINANCIAL LIABILITIES:
SAILS............................ (126,643) (50,160) (126,643) (144,000)
7.00% notes...................... (124,813) (127,688) (124,791) (121,650)
7.125% notes..................... (99,625) (103,620) (99,565) (99,410)
Credit facility.................. -- -- (90,000) (90,000)
5.83% notes...................... -- -- (40,000) (39,940)
6.07% notes...................... (40,000) (40,064) (40,000) (39,772)
6.29% notes...................... (20,000) (20,106) (20,000) (19,860)
Commercial paper................. (61,346) (61,346) -- --
</TABLE>
The fair values of financial instruments are estimates based upon market
conditions and perceived risks at December 31, 1997 and 1996, and require
varying degrees of management judgment. The fair values of the financial
instruments presented may not be indicative of their future values. The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES, AND COMMERCIAL PAPER
The carrying amount approximates fair value due to the short-term maturity
of the instruments.
41
<PAGE> 44
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS
The fair value of the Company's investments is estimated based on the
quoted market prices for these securities at December 31, 1997 and 1996. In
1996, the fair value of the 3.3 million shares of the investment in INSO was
reduced to $39.44 per share to reflect the threshold appreciation price. This is
the maximum amount the Company can realize upon redemption of the SAILS (see
Note 4). Included in the book and fair value of Cassell PLC is approximately
$1.8 million of deferred tax benefit.
LONG-TERM DEBT
The fair value of the SAILS and notes is estimated based upon quoted market
prices. The carrying amount of the credit facility approximates fair value
because of the renewing feature of the facility.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS GAINS (LOSSES)
There were no interest rate swap agreements outstanding at December 31,
1996. The Company does not enter into speculative or leveraged derivative
transactions. During 1997, the Company entered into two interest rate swaps on
commercial paper (see Note 4), the effect of which are not material to the
results of the operations of the Company.
NOTE 13. RELATED PARTIES
The Company presently holds notes receivable for a total of $4.6 million
from certain corporate officers and members of the Board of Directors. The
Company provided financing in 1994 to effect the purchase of an aggregate of
276,544 shares of the Company's common stock pursuant to the 1994 Executive
Stock Purchase Plan and the 1994 Non-Employee Director Stock Purchase Plan at
the fair market value on August 27, 1994, of $21.313 per share. The loans bear
interest at a rate of 8% and are due in the third quarter of 1999. Loans made to
officers are collateralized by the shares of common stock purchased and
supported by a risk-sharing agreement which provides, among other things, for
the Company to share in 50% of the gain on any shares sold before the third
anniversary, and to share in 50% of the loss on any shares sold after the third
anniversary. Loans provided to members of the Board of Directors are unsecured.
A director who sell shares purchased with Company financing is responsible for
100% of any resulting loss. The notes receivable are shown as a reduction in
stockholders' equity in the consolidated financial statements. In 1997, the
Company recognized approximately $0.4 million in interest income in connection
with the outstanding loans.
NOTE 14. SEGMENT INFORMATION
The Company's principal business is publishing and is divided into two
segments: (a) textbooks and other educational materials and services for the
school and college markets; and (b) general publishing, including fiction,
nonfiction, software, children's books, and reference materials.
A comparative summary of segment information for the years 1997, 1996, and
1995 appears below. Net corporate expenses include certain corporate officer
compensation costs, certain corporate development costs, certain occupancy
costs, stockholder reporting expenses, legal costs, and consulting fees.
Corporate assets are principally cash and cash equivalents, marketable
securities, and deferred income taxes.
42
<PAGE> 45
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TEXTBOOKS AND
OTHER EDUCATIONAL
MATERIALS AND GENERAL
SERVICES PUBLISHING CORPORATE CONSOLIDATED
----------------- ---------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Net sales............................. $709,228 $ 88,092 $ -- $ 797,320
-------- -------- -------- ----------
Segment income (loss)................. 130,866 (3,082) -- 127,784
-------- -------- -------- ----------
Net corporate expenses................ -- -- (21,226) (21,226)
Gain on sale of INSO common stock..... -- 14,904 -- 14,904
Interest expense, net................. -- -- (38,926) (38,926)
Equity in earnings of INSO............ -- 997 -- 997
-------- -------- -------- ----------
Income (loss) before taxes............ 130,866 12,819 (60,152) 83,533
-------- -------- -------- ----------
Identifiable assets................... 819,942 87,656 64,453 972,051
Acquired assets....................... 5,959 3,090 -- 9,049
-------- -------- -------- ----------
Total assets.......................... 825,901 90,746 64,453 981,100
-------- -------- -------- ----------
Depreciation and amortization......... 84,325 1,330 4,084 89,739
Purchase of property, plant, and
equipment, including book plates.... 56,164 1,317 10,422 67,903
======== ======== ======== ==========
1996
Net sales............................. $636,055 $ 81,808 $ -- $ 717,863
-------- -------- -------- ----------
Segment income (loss)................. 113,371 (5,138) -- 108,233
-------- -------- -------- ----------
Net corporate expenses................ -- -- (20,851) (20,851)
Gain on sale of INSO common stock..... -- 34,261 -- 34,261
Interest expense, net................. -- -- (40,875) (40,875)
Equity in losses of INSO.............. -- (6,815) -- (6,815)
-------- -------- -------- ----------
Income (loss) before taxes............ 113,371 22,308 (61,726) 73,953
-------- -------- -------- ----------
Identifiable assets................... 816,609 90,906 83,426 990,941
Acquired assets....................... 15,501 -- -- 15,501
-------- -------- -------- ----------
Total assets.......................... 832,110 90,906 83,426 1,006,442
-------- -------- -------- ----------
Depreciation and amortization......... 79,529 1,403 3,403 84,335
Purchase of property, plant, and
equipment, including book plates.... 67,651 1,139 6,153 74,943
======== ======== ======== ==========
1995
Net sales............................. $441,800 $ 87,222 $ -- $ 529,022
-------- -------- -------- ----------
Segment income (loss)................. 63,817 (8,520) -- 55,297
-------- -------- -------- ----------
Net corporate expenses................ -- -- (16,018) (16,018)
Special charges related to the
acquisition of Heath................ (49,230) -- -- (49,230)
Special charges....................... (3,825) (2,700) (508) (7,033)
Gain on sale of warehouse............. -- 3,889 -- 3,889
Gain on equity transactions of INSO... -- 13,102 -- 13,102
Interest expense, net................. -- -- (13,008) (13,008)
Equity in earnings of INSO............ -- 1,557 -- 1,557
-------- -------- -------- ----------
Income (loss) before taxes............ 10,762 7,328 (29,534) (11,444)
-------- -------- -------- ----------
Identifiable assets................... 366,816 114,169 112,576 593,561
Acquired assets....................... 452,888 -- -- 452,888
-------- -------- -------- ----------
Total assets.......................... 819,704 114,169 112,576 1,046,449
-------- -------- -------- ----------
Depreciation and amortization......... 47,393 1,655 3,378 52,426
Purchase of property, plant, and
equipment, including book plates.... 50,566 932 2,780 54,278
======== ======== ======== ==========
</TABLE>
43
<PAGE> 46
HOUGHTON MIFFLIN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earning
per share:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Numerator:
Net income...................................... $49,822 $43,622 $(7,243)
Denominator:
Denominator for basic earnings per share:
weighted-average shares outstanding............. 28,237 27,801 27,609
Effect of dilutive securities:
Employee stock options.......................... 407 90
Restricted stock................................ 146 16
Performance shares.............................. 36 12
------- -------
589 118
Dilutive potential common shares:
Denominator for diluted earnings per share:
adjusted weighted-average shares outstanding and
assumed conversions.......................... 28,826 27,919 27,609
======= ======= =======
Basic earnings (loss) per share................... $ 1.76 $ 1.57 $ (0.26)
======= ======= =======
Diluted earnings (loss) per share (except when
anti-dilutive).................................. $ 1.73 $ 1.56 $ (0.26)
======= ======= =======
</TABLE>
Options to purchase 267,300 shares of common stock were outstanding at
December 31, 1997 but were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the common shares and, therefore, the effect would be
antidilutive. In 1995, 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 antidulutive.
44
<PAGE> 47
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
1997
Net sales.............................. $ 68,747 $202,321 $399,094 $127,158 $797,320
Gross profit (net sales less cost of
sales)............................... 16,524 108,669 249,237 60,389 434,819
Net income (loss)...................... $(26,876) $ 10,825 $ 83,057 $(17,184) $ 49,822
======== ======== ======== ======== ========
Per share:
Net income (loss) -- basic............. $ (0.96) $ 0.38 $ 2.94 $ (0.61) $ 1.76
======== ======== ======== ======== ========
Net income (loss) -- diluted (except
when anti-dilutive).................. $ (0.96) $ 0.38 $ 2.87 $ (0.61) $ 1.73
======== ======== ======== ======== ========
1996
Net sales.............................. $ 62,835 $178,214 $356,669 $120,145 $717,863
Gross profit (net sales less cost of
sales)............................... 12,740 93,873 219,827 61,737 388,177
Net income (loss)...................... $(22,130) $ 9,514 $ 76,047 $(19,809) $ 43,622
======== ======== ======== ======== ========
Per share:
Net income (loss) -- basic............. $ (0.80) $ 0.34 $ 2.73 $ (0.71) $ 1.57
======== ======== ======== ======== ========
Net income (loss) -- diluted (except
when anti-dilutive).................. $ (0.80) $ 0.34 $ 2.72 $ (0.71) $ 1.56
======== ======== ======== ======== ========
</TABLE>
The above quarterly information indicates the seasonal fluctuations of the
Company's educational publishing business.
The increase in the net loss during the first-quarter of 1997 compared to
the same period in 1996 was primarily due to the increase in selling costs.
Selling expense rose due to higher sampling and advertising costs and the
addition of sales people to meet the increased sales opportunities in adoption
states and open territories. The improvement in results during the second-,
third- and fourth-quarters of 1997, when compared to the same periods in 1996,
was primarily due to the increase in sales and lower editorial and distribution
costs.
The Company recognized a gain of $14.9 million ($8.6 million after-tax), or
$0.30 per share, during the first-quarter of 1997 representing the Company's
portion of the increase in INSO's net equity as a result of INSO's completion of
a public offering in 1996. In the second-quarter of 1997, the Company recognized
a charge of $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. In
the third-quarter of 1997, the Company recognized a special charge of $2.0
million ($1.2 million after-tax), or $0.04 per share related to the equity
investment in INSO for: (1) the acquisition of Level Five Research, Inc. and (2)
a restructuring charge affecting INSO's Information Products and certain of its
Information Management Tools products.
During 1996, the Company recorded a gain related to the sales of 770,000
INSO shares. A gain of $14.2 million ($8.2 million after-tax), or $0.30 per
share, was recognized in the first quarter on the sale of 343,000 shares; in the
second quarter a gain of $8.7 million ($5.1 million after-tax), or $0.18 per
share, was recognized on the sale of 194,500 shares; during the third quarter a
$9.6 million gain ($5.6 million after-tax), or $0.20 per share, was recognized
on the sale of 200,000 shares; and in the fourth quarter a $1.8 million gain
($1.1 million after-tax), or $0.04 per share, was recognized on the sales of
32,500 shares.
The second quarter of 1996 included an acquisition charge of $1.4 million
($0.8 million after-tax), or $0.03 per share, related to the Company's
investment in INSO resulting from INSO's acquisition of ImageMark Software Labs,
Inc. During the fourth quarter, an acquisition charge of $10.3 million ($6.4
million after-tax), or $0.23 per share, was recognized relating to INSO's
acquisition of Electronic Book Technologies, Inc.
45
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information with respect to directors is incorporated herein by reference
to the Proxy Statement for the 1998 Annual Meeting of Stockholders ("1998 Proxy
Statement"), and information with respect to Executive Officers follow Part I,
Item 4 of this report under the heading "Executive Officers of the Company" on
pages 5 through 6.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements are listed in the accompanying
Index to Consolidated Financial Statements on page 17.
2. Financial Statement Schedule for the three years ended December 31,
1997:
Schedule II -- Consolidated Valuation and Qualifying Accounts Page 47.
All other schedules have been omitted because the required
information is included in the consolidated financial statements or
notes thereto or they are not required submissions.
3. The Exhibits listed in the accompanying Index to Exhibits on page 49
are filed as part of this Report and are included only on the Form
10-K filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K filed in the fourth quarter of 1997:
None
46
<PAGE> 49
HOUGHTON MIFFLIN COMPANY
SCHEDULE II--CONSOLIDATED VALUATION ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------
CHARGED CHARGED
BALANCE AT TO COST TO OTHER BALANCE
BEGINNING AND ACCOUNTS- DEDUCTIONS AT END
OF YEAR EXPENSE DESCRIBE -DESCRIBE OF YEAR
---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
1997
Allowance for book returns........ $25,166 $68,682 $(6,837)(2) $66,277(3) $20,734
Allowance for authors' advances... 20,975 3,849 -- 534(4) 24,290
1996
Allowance for book returns........ $21,698 $67,176 $ 6,837(2) $70,545(3) $25,166
Allowance for authors' advances... 21,848 2,793 2,033(1) 5,699(4) 20,975
1995
Allowance for book returns........ $12,836 $51,022 $ 6,522(1) $48,682(3) $21,698
Allowance for authors' advances... 11,079 9,557 1,212(1) -- 21,848
</TABLE>
- - ---------------
(1) Reflects additions to the allowance from acquisitions during the year.
(2) This amount represents the estimated book returns for products published by
DK Publishing, Inc. and distributed by the Company. In 1997, these book
returns have reduced payments to DK Publishing, Inc.
(3) Books actually returned during the year.
(4) Write-offs of unearned author advances.
47
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HOUGHTON MIFFLIN COMPANY
Registrant
By: /s/ NADER F. DAREHSHORI
----------------------------------
Nader F. Darehshori
Chairman of the Board, President,
and
Chief Executive Officer
February 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
/s/ NADER F. DAREHSHORI Chairman of the Board, President, and
- - --------------------------------------- Chief Executive Officer, Director
NADER F. DAREHSHORI February 25, 1998
/s/ GAIL DEEGAN Executive Vice President,
- - --------------------------------------- Chief Financial Officer, and
GAIL DEEGAN Treasurer February 25, 1998
/s/ DAVID R. CARON Vice President and Controller
- - ---------------------------------------
DAVID R. CARON February 25, 1998
/s/ JOSEPH A. BAUTE Director
- - ---------------------------------------
JOSEPH A. BAUTE February 25, 1998
/s/ JAMES O. FREEDMAN Director
- - ---------------------------------------
JAMES O. FREEDMAN February 25, 1998
/s/ MARY H. LINDSAY Director
- - ---------------------------------------
MARY H. LINDSAY February 25, 1998
/s/ CHARLES R. LONGSWORTH Director
- - ---------------------------------------
CHARLES R. LONGSWORTH February 25, 1998
/s/ JOHN F. MAGEE Director
- - ---------------------------------------
JOHN F. MAGEE February 25, 1998
/s/ CLAUDINE B. MALONE Director
- - ---------------------------------------
CLAUDINE B. MALONE February 25, 1998
/s/ ALFRED L. MCDOUGAL Director
- - ---------------------------------------
ALFRED L. MCDOUGAL February 25, 1998
/s/ GEORGE PUTNAM Director
- - ---------------------------------------
GEORGE PUTNAM February 25, 1998
/s/ RALPH Z. SORENSON Director
- - ---------------------------------------
RALPH Z. SORENSON February 25, 1998
Director
- - ---------------------------------------
ROBERT J. TARR, JR. February 25, 1998
/s/ DEROY C. THOMAS Director
- - ---------------------------------------
DEROY C. THOMAS February 25, 1998
</TABLE>
48
<PAGE> 51
HOUGHTON MIFFLIN COMPANY
INDEX TO EXHIBITS
(ITEM 14(a)(3))
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER IN THIS REPORT
- - ----------- ----------------------- --------------------------
<S> <C> <C>
(3)(i) Restated Articles of Organization of the Filed as Exhibits (4.1) and (4.2) to
Company Registration Statement No. 33-14850 as
amended, and incorporated herein by
reference thereto
Amendment to Restated Articles of Filed as Exhibit(3)(i) to Form 10-K for the
Organization of the Company in the form of year ended December 31, 1995, and
a certificate of vote of directors incorporated herein by reference thereto
establishing a series of a class of stock
(3)(ii) By-laws of the Company Filed as Exhibit(3)(ii) to Form 10-K for
the year ended December 31, 1995, and
incorporated herein by reference thereto
(4) Registration Statement under the Securities Filed on June 20, 1967, and incorporated
Exchange Act of 1934 on Form 10 dated June herein by reference thereto
20, 1967, as amended, with particular
reference to the description of the common
stock of the Company
Rights Agreement between the Company and Filed as Exhibit(4) to Form 10-K for the
the First National Bank of Boston, as year ended December 31, 1995, and
Rights Agent incorporated herein by reference thereto
Renewed Rights Agreement between the Filed as Exhibit(4) to Form 10-Q for the
Company and BankBoston, N.A., as Rights quarter ended June 30, 1997, and
Agent incorporated herein by reference thereto
Registration Statement under the Securities Filed September 4, 1992, and incorporated
Exchange Act of 1934 on Form S-3 dated herein by reference thereto
September 4, 1992
Indenture dated as of March 15, 1994 Filed as Exhibit(4.1) to Registration
between the Company, as successor trustee Statement No. 33-51700 as amended, and
to the First National Bank of Boston incorporated herein by reference thereto
First Supplemental Indenture dated as of Filed as Exhibit(4.2) to Registration
July 27, 1995 between the Company and State Statement No. 33-64903 as amended, and
Street Bank and Trust Company, as successor incorporated herein by reference thereto
trustee to the First National Bank of
Boston
Registration Statement under the Securities Filed on December 11, 1995 and incorporated
Act of 1933 on Form S-3 dated December 11, herein by reference thereto
1995
(
10)(ii) Lease between Two Twenty Two Berkeley Filed as Exhibit (10)(iii)(D) to Form 10-K
(D) Venture, as landlord, and Houghton Mifflin for the year ended December 31, 1996, and
Company, as tenant incorporated herein by reference thereto
Lease between New England Mutual Life Filed as Exhibit (10)(iii)(D) to Form 10- K
Insurance Company, as sublandlord, and for the year ended December 31, 1996, and
Houghton Mifflin Company, as subtenant incorporated herein by reference thereto
(10)(iii) Benefits Trust Agreement between Houghton Page
(A) Mifflin Company and State Street Bank and
Trust Company dated June 3, 1992*
Severance Agreement between the Company and Filed as Exhibit(10)(iii)(A) to Form 10-K
Mr. Darehshori* for the year ended December 31, 1995, and
incorporated herein by reference thereto
Form of Senior Executive Severance Filed as Exhibit(10)(iii)(A) to Form 10-K
Agreement* for the year ended December 31, 1995, and
incorporated herein by reference thereto
</TABLE>
- - ---------------
<TABLE>
<S> <C> <C>
* Denotes a management contract or compensatory plan.
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER IN THIS REPORT
- - ----------- ----------------------- --------------------------
<S> <C> <C>
(10)(iii) Form of Key Managers' Severance Agreement* Filed as Exhibit(10)(iii)(A) to Form 10-K
(A) for the year ended December 31, 1995, and
incorporated herein by reference thereto
Supplemental Benefits Plan* Filed as Exhibit(10)(iii)(A) to Form 10-K
for the year ended December 31, 1995, and
incorporated herein by reference thereto
Non-Employee Directors Retirement Benefit Filed as Exhibit(10)(iii)(A) to Form 10-K
Plan* for the year ended December 31, 1995, and
incorporated herein by reference thereto
1996 Senior Executive Incentive Filed as Exhibit(10)(iii)(A) to Form 10-K
Compensation Plan* for the year ended December 31, 1996, and
incorporated herein by reference thereto
Restricted Stock Agreement between the Filed as Exhibit(10)(iii)(A) to Form 10-K
Company and Mr. Darehshori* for the year ended December 31, 1996, and
incorporated herein by reference thereto
Restricted Stock Agreement between the Filed as Exhibit(10)(iii)(A) to Form 10-K
Company and Ms. Deegan* for the year ended December 31, 1996, and
incorporated herein by reference thereto
1995 Stock Compensation Plan* Filed as Exhibit(10)(iii)(A) to Form 10-K
for the year ended December 31, 1996, and
incorporated herein by reference thereto
1997 Senior Executive Incentive Filed as Exhibit(10)(iii)(A) to Form 10-Q
Compensation Plan* for the quarter ended June 30, 1997, and
incorporated herein by reference thereto
1997 -- 1998 Restricted Share Plan* Filed as Exhibit(10)(iii)(A) to Form 10-Q
for the quarter ended June 30, 1997, and
incorporated herein by reference thereto
1994 Executive Stock Purchase Plan* Filed as Exhibit(10)(iii)(A) to Form 10-Q
for the quarter ended September 30, 1994,
and incorporated by reference thereto
Form of Option Grant and Exercise Filed as Exhibit(10)(iii)(A) to Form 10-Q
Agreement* for the quarter ended September 30, 1994,
and incorporated by reference thereto
Non-Employee Directors Stock Purchase Plan* Filed as Exhibit(10)(iii)(A) to Form 10-Q
for the quarter ended September 30, 1994,
and incorporated by reference thereto
Forms of Stock Purchase Agreement* Filed as Exhibit(10)(iii)(A) to Form 10-Q
for the quarter ended September 30, 1994,
and incorporated by reference thereto
(12) Computation of Ratio of Earnings to Fixed Page
Charges
(21) List of Subsidiaries Page
(23) Consent of Experts and Counsel Page
(27) Financial Data Schedule Page
</TABLE>
- - ---------------
<TABLE>
<S> <C> <C>
* Denotes a management contract or compensatory plan.
</TABLE>
50
<PAGE> 1
Exhibit (10)(iii)(A)
HOUGHTON MIFFLIN COMPANY
BENEFITS TRUST AGREEMENT
------------------------
TRUST AGREEMENT, dated June 3, 1992, by and between Houghton Mifflin
Company, a Massachusetts corporation (the "Corporation"), and State Street Bank
and Trust Company, as trustee of the Trust created hereby (the "Trustee").
WHEREAS, the Corporation is or may become obligated in respect of its
existing and future compensation and benefit plans, agreements, programs and
arrangements (collectively referred to herein as the "Plans") to make payments
to past, present or future employees or their beneficiaries; and
WHEREAS, for purposes of providing a source of funds for the satisfaction,
in whole or in part, of such obligations, as the Board of Directors of the
Corporation may from time to time determine, the Corporation desires to
establish a trust (the "Trust"), which is a grantor trust within the meaning of
section 671 of the Internal Revenue Code of 1986, as amended (the "Code"), the
assets of which shall be subject to the claims of the Corporation's existing or
future creditors;
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual agreements contained herein
and for other good and valuable consideration, the parties hereto agree as
follows:
ARTICLE I
PURPOSE OF THE TRUST
--------------------
SECTION 1.01 PLANS. The purpose of the Trust is to hold equity securities
of the Corporation ("HM Securities") or other property as herein provided as a
source of funds to satisfy the Corporation's obligations under the Plans. The
Corporation shall continue to be liable to make all payments required to be made
by the Corporation under the terms of the Plans to the extent such payments have
not been made pursuant to this Trust Agreement. Distributions made from the
Trust in respect of the Plans pursuant to Section 3.01 shall, to the extent of
such distributions, satisfy the Corporation's obligations under the Plans.
ARTICLE II
TRUST AND THE TRUST CORPUS
--------------------------
SECTION 2.01 DELIVERY OF FUNDS AND COMMON STOCK. (a) Concurrently with the
execution of this Trust Agreement the Corporation is selling to the Trustee from
its treasury 375,000 shares (the "Acquired Shares")
<PAGE> 3
of common stock of the Corporation, par value $1.00 per share ("Common Stock"),
such Acquired Shares to be administered and disposed of by the Trustee as
provided herein. Concurrently with the execution of this Trust Agreement the
Trustee is delivering to the Corporation, on behalf of the Trust, a Note (the
"Note") of the Trust in payment of the purchase price for the Acquired Shares,
in a principal amount equal to 375,000 multiplied by the last sale price,
regular way, as reported on the New York Stock Exchange, Inc. Composite Tape on
the last trading day immediately preceding such delivery, such Note to be in the
form set forth as Exhibit A annexed hereto.
(b) The Corporation may sell or otherwise deliver to the Trustee
additional amounts of cash or Cash Equivalents or HM Securities to be held in
trust hereunder.
SECTION 2.02 TRUST CORPUS. As used herein, the term "Trust Corpus" shall
mean any cash or Cash Equivalents or HM Securities delivered to the Trustee as
described in Section 2.01(a) hereof, together with any earnings thereon or any
proceeds from the disposition thereof, plus any cash or Cash Equivalents (as
defined below) or HM Securities sold or otherwise delivered thereafter pursuant
to Section 2.01(b) hereof, together
<PAGE> 4
with any earnings thereon or any proceeds from the disposition thereof (and less
such amounts distributed from the Trust pursuant to Sections 3.01 and 3.02
hereof or otherwise pursuant to the terms hereof). As used herein, the term
"Cash Equivalents" shall mean (i) securities issued or directly and fully
guaranteed by the United States or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is pledged in
support thereof) having maturities of less than one year from the date of
acquisition, (ii) Eurodollar time deposits and certificates of deposit or
bankers' acceptances of a bank whose commercial paper, or whose parent's
commercial paper, is rated at least A-1 or the equivalent thereof by Standard &
Poor's Corporation ("S&P") or at least P-1 or the equivalent thereof by Moody's
Investors Service, Inc. ("Moody's") with maturities of not more than one year
from the date of acquisition, and (iii) commercial paper rated at least A-1 or
the equivalent thereof by S&P or at least P-1 or the equivalent thereof by
Moody's. The Trust Corpus shall at all times be limited to HM Securities and
cash or Cash Equivalents.
<PAGE> 5
ARTICLE III
RELEASE OF THE TRUST CORPUS
---------------------------
SECTION 3.01 USE OF ASSETS. {a) In accordance with the provisions hereof,
the Trustee shall apply the Trust Corpus (i) in its discretion to acquire
additional HM Securities, (ii) in its discretion to the payment of any
indebtedness (including the Note) of the Trust which is then outstanding, in
accordance with the terms thereof, or (iii) only as directed by the Corporation
or its delegate (x) on behalf of the Corporation to the satisfaction of the
Corporation's obligations under the Plans or (y) to the reimbursement of
payments made by the Corporation in satisfaction of its obligations under the
Plans; however, the Trustee shall not be required to apply the Trust Corpus to
the satisfaction of any obligation or the reimbursement of any payment made by
the Company in cash or Cash Equivalents during the period that the Company
exercises its right to prevent the Trustee from disposing of HM Securities
pursuant to Section 4.03(b), if and to the extent that, at the time the
Company's direction to so apply the Trust Corpus is received by the Trustee, the
Trust Corpus does not contain sufficient cash or Cash Equivalents to comply with
the Company's direction without disposing of HM Securities.
<PAGE> 6
(b) Except as provided in Sections 3.01(a) and 4.03(b), the
Corporation shall have no power to direct the Trustee to take or omit to take
any action with respect to the Trust Corpus.
SECTION 3.02 DELIVERIES TO CREDITORS OF THE CORPORATION. It is the intent
of the parties hereto that the Trust Corpus is and shall remain at all times
subject to the claims of the general creditors of the Corporation. Accordingly,
neither the Trustee nor the Corporation shall create a security interest in the
Trust Corpus in favor of the Plans or any creditor. If the Trustee receives the
notice provided for in Section 3.03, or if the Trust Department of the Trustee
otherwise receives actual notice that the Corporation is insolvent or bankrupt
as defined in Section 3.03, the Trustee shall make no further distributions of
the Trust Corpus as directed by the Corporation but shall deliver the entire
amount of the Trust Corpus only as a court of competent jurisdiction, or duly
appointed receiver or other person authorized to act by such a court, may
direct. The Trustee shall resume distribution of the Trust Corpus as directed by
the Corporation under the terms hereof, upon no less than 30 days' advance
notice to the Corporation, if it determines that the Corporation was not, or is
no longer,
<PAGE> 7
bankrupt or insolvent. Such determination shall be made in a timely fashion, and
shall be based upon a decision of a court of competent jurisdiction, a report of
a nationally recognized appraisal firm or a certification by the Chief Executive
Officer of the Corporation of a determination of its Board of Directors. Unless
the Trust Department of the Trustee has actual knowledge of the Corporation's
bankruptcy or insolvency, the Trustee shall have no duty to inquire whether the
Corporation is bankrupt or insolvent.
SECTION 3.03 NOTIFICATION OF BANKRUPTCY OR INSOLVENCY. The Corporation
shall advise the Trustee promptly in writing of the Corporation's bankruptcy or
insolvency. The Corporation shall be deemed to be bankrupt or insolvent upon the
occurrence of any of the following:
(i) The Corporation shall make an assignment for the benefit of
creditors, file a petition in bankruptcy, petition or apply to any
tribunal for the appointment of a custodian, receiver, liquidator,
sequestrator, or any trustee for it or a substantial part of its
assets, or shall commence any case under any bankruptcy, insolvency,
reorganiza-
<PAGE> 8
tion, arrangement, readjustment of debt, dissolution, liquidation or
similar law or statute of any jurisdiction (federal or state), whether
now or hereafter in effect; or if there shall have been filed any such
petition or application, or any such case shall have been commenced
against it, in which an order for relief is entered or which remains
undismissed for a period of 120 days; or the Corporation by any act or
omission shall indicate its consent to, approval of or acquiescence in
any such petition, application or case or order for relief or to the
appointment of a custodian, receiver or any trustee for it or any
substantial part of any of its property, or shall suffer any such
custodianship, receivership, or trusteeship to continue undischarged
for a period of 120 days; or
(ii) The Corporation shall generally not pay its debts as such
debts become due or shall cease to pay its debts generally in the
ordinary course of business.
<PAGE> 9
ARTICLE IV
TRUSTEE
-------
SECTION 4.01 TRUSTEE. (a) The duties and responsibilities of the Trustee
shall be limited to those expressly set forth in this Trust Agreement, and no
implied covenants or obligations shall be read into this Trust Agreement against
the Trustee.
(b) If, under circumstances described in Section 3.03 or otherwise,
all or any part of the Trust Corpus is at any time attached, garnished, or
levied upon by any court order, or in case the payment, assignment, transfer,
conveyance or delivery of any such property shall be stayed or enjoined by any
court order, or in case any order, judgment or decree shall be made or entered
by a court affecting such property or any part thereof, then and in any of such
events the Trustee is authorized, in its sole discretion, to rely upon and
comply with any such order, writ, judgment or decree, and it shall not be liable
to the Corporation, any Plan or any participant in any Plan by reason of such
compliance even though such order, writ, judgment or decree subsequently may be
reversed, modified, annulled, set aside or vacated.
<PAGE> 10
(c) The Trustee or its agent shall maintain such books, records and
accounts as may be necessary for the proper administration of the Trust Corpus,
including without limitation as provided in Section 2.01, and shall render to
the Corporation, within 30 days of the end of each calendar quarter following
the date of this Trust Agreement until the termination of the Trust (and on the
date of such termination or as promptly as practicable thereafter), an
accounting with respect to the Trust Corpus as of the end of the then most
recent calendar quarter (and as of the date of such termination).
(d) The Trustee shall not be liable for any act taken or omitted to be
taken hereunder if taken or omitted to be taken by it in good faith. The Trustee
shall also be fully protected in relying upon any notice or instruction given
hereunder which it in good faith believes to be genuine and executed and
delivered in accordance with this Trust.
(e) The Trustee may consult with legal counsel to be selected by it,
including counsel to the Corporation, and the Trustee shall not be liable for
any action taken or omitted to be taken by it in good faith in accordance with
the advice of such counsel.
<PAGE> 11
(f) The Trustee shall be reimbursed by the Corporation for its
reasonable expenses incurred in connection with the performance of its duties
hereunder and shall be paid reasonable fees for the performance of such duties.
Any amounts payable to the Trustee under this paragraph (f) may be payable from
the Trust Corpus.
(g) Except for any damages, losses, claims or expenses resulting from
the Trustee's gross negligence or willful misconduct, the Corporation agrees to
indemnify and hold harmless the Trustee from and against any and all damages,
losses, claims or expenses as incurred (including reasonable expenses of
investigation and reasonable fees, charges and disbursements of counsel to the
Trustee and any taxes imposed on the Trust Corpus or income of the Trust and
including any and all liabilities relating to the Trustee being deemed an
underwriter under applicable federal securities laws) arising out of or in
connection with the performance by the Trustee of its duties hereunder. Without
limiting the generality of the foregoing, the Company, as grantor hereunder,
expressly acknowledges that the Trustee may take any action with respect to the
Trust Corpus which the Trustee deems to be in furtherance of the purposes of
<PAGE> 12
the Trust, without regard to whether such action is otherwise in the interest of
the Company.
(h) The Trustee shall have the following additional powers and
authority, in furtherance of the purposes of the Trust as described in Section
1.01, and consistent with Section 2.02, with respect to property constituting a
part or all of the Trust Corpus:
(i) To acquire and hold HM Securities and cash or Cash
Equivalents; to sell, exchange or transfer any such property at public
or private sale for cash or on credit and grant options for the
purchase or exchange thereof; however, the Trustee shall sell,
exchange or transfer or grant options for the purchase or exchange of
any HM Securities only as provided in Section 4.03;
(ii) To exercise any conversion privilege or subscription right
available in connection with any such property; to oppose or to
consent to the reorganization, consolidation, merger or readjustment
of the finances of any corporation, company or association, or to the
sale, mortgage, pledge or lease of the property of any corporation,
company or associ-
<PAGE> 13
ation, any of the securities of which may at any time be held in the
Trust and to do any act with reference thereto, including the exercise
of options, the making of agreements or subscriptions and the payment
of expenses, assessments or subscriptions, which may be deemed
necessary or advisable in connection therewith, and to hold and retain
any securities or other property which it may so acquire;
(iii) To commence or defend suits or legal proceedings and to
represent the Trust in all suits or legal proceedings; to settle,
compromise or submit to arbitration, any claims, debts or damages, due
or owing to or from the Trust;
(iv) To exercise, personally or by general or limited power of
attorney, any right, including the right to vote, appurtenant to any
HM Securities or other property; to enter into any voting agreement or
voting trust, which voting agreement or voting trust shall be binding
upon any successor trustee but shall not survive as to any HM
Securities disposed of for value by the Trustee;
<PAGE> 14
(v) To engage legal counsel, including counsel to the
Corporation, or any other suitable agents, to consult with such
counsel or agents with respect to the construction of this Trust
Agreement, the duties of the Trustee hereunder, the transactions
contemplated by this Trust Agreement or any act which the Trustee
proposes to take or omit to take, to rely upon the advice of such
counsel or agents, and to pay its reasonable fees, expenses and
compensation;
(vi) To register any securities held by it in its own name or in
the name of any custodian of such property or of its nominee,
including the nominee of any system for the central handling of
securities, with or without the addition of words indicating that such
securities are held in a fiduciary capacity, to deposit or arrange for
the deposit of any such securities with such a system and to hold any
securities in bearer form;
(vii) To make, execute and deliver, as Trustee, any and all
deeds, leases, notes, bonds, guarantees, mortgages, convey-
<PAGE> 15
ances, contracts, waivers, proxies, releases or other instruments in
writing necessary or proper for the exercise of any of the foregoing
powers; and
(viii) To take any other action necessary or advisable in
furtherance of the foregoing powers and the purposes of this Trust.
SECTION 4.02 SUCCESSOR TRUSTEE. The Trustee may resign and be discharged
from its duties hereunder at any time by giving to the Corporation notice in
writing of such resignation specifying a date (not less than 30 days after the
giving of such notice) when such resignation shall take effect. Promptly after
such notice, the Corporation shall appoint a successor trustee, such trustee to
become Trustee hereunder upon the resignation date specified in such notice. The
Trustee shall continue to serve until its successor accepts the trust and
receives delivery of the Trust Corpus. The Corporation may at any time
substitute a new trustee by giving 15 days' notice thereof to the Trustee then
acting. In the event of such removal or resignation, the Trustee shall duly file
with the Corporation a written statement or statements of account as provided in
Section 4.01(c) for
<PAGE> 16
the period since the last previous annual accounting of the Trust, and if
written objection to such account is not filed within 90 days the Trustee shall
to the maximum extent permitted by applicable law be forever released and
discharged from all liability and accountability with respect to the propriety
of its acts and transactions shown in such account.
SECTION 4.03 REGISTRATION RIGHTS; LIMITATIONS ON SALES. (a) Promptly
following the consummation of the transactions contemplated by Section 2.01(a)
the Corporation shall prepare and file, at its own expense, a "shelf"
registration statement on Form S-3 or on any other appropriate form (such
registration statement as it may be amended or supplemented from time to time,
being hereinafter referred to as the "Registration Statement") in accordance
with Rule 415 under the Securities Act of 1993 as amended (the "Act"), with the
Securities and Exchange Commission (the "SEC"} with respect to Acquired Shares
and shall use its reasonable efforts to cause the Registration Statement to
become effective as soon as practicable thereafter. Once effective, except as
otherwise provided in Section 4.03(b), (the Corporation shall use its reasonable
efforts (i} to keep the Registration Statement effective until the second
anniversary
<PAGE> 17
of the date hereof and (ii) thereafter to afford the Trustee reasonable means to
dispose of HM Securities in compliance with applicable securities laws. The
Corporation will notify the Trustee of the effectiveness of the Registration
Statement and shall furnish to the Trustee such number of copies as the Trustee
may reasonably request of the Registration Statement (including any amendments,
supplements and exhibits), the prospectus contained therein (including each
preliminary prospectus and any summary prospectus), any documents incorporated
by reference in the Registration Statement and such other documents as the
Trustee may reasonably request in order to facilitate its sale of the Acquired
Shares in the manner described in the Registration Statement. The Corporation
shall use its reasonable efforts to prepare and file with the SEC from time to
time such amendments and supplements to the Registration Statement and
prospectus used in connection therewith as may be necessary to keep the
Registration Statement effective and to comply with the provisions of the Act
with respect to the disposition of all the Acquired Shares until the later of
(x) such time as all of the Acquired Shares have been disposed of in accordance
with the intended methods of disposition by the Trustee set forth in the
Registration
<PAGE> 18
Statement or (y) the date on which the Registration Statement ceases to be
effective in accordance with the terms of this Section 4.03(a). The Corporation
shall also use its reasonable efforts to register or qualify such shares of
Common Stock covered by the Registration Statement under the "blue sky" or
securities laws of such jurisdictions within the United States as the Trustee
may reasonably request; however, the Corporation need not consent to the general
service of process for all purposes in any jurisdiction where it is not then
qualified to do business.
(b) The Trustee shall not sell, exchange or transfer any HM
Securities or grant any option for the purchase or exchange of any HM Securities
(each a "Securities Transaction") unless the Trustee shall have given the
Corporation 10 business days' prior notice of such Securities Transaction. The
Trustee's notice shall state with respect to such Securities Transaction (i) the
amount of HM Securities involved, (ii) whether it will be effected through the
public markets and (iii) the date it is proposed to be entered into. If the
Corporation is advised in writing by a recognized independent investment banking
firm that such Securities Transaction would adversely affect any financing by
the Corporation that had
<PAGE> 19
been contemplated by the Corporation prior to the receipt of such notice or if
the Corporation determines in the good faith judgment of the general counsel of
the Corporation that such Securities Transaction would require the Corporation
to disclose material information which the Corporation has a bona fide business
purpose for preserving as confidential or that the Corporation is unable to
comply with SEC requirements prior to such Securities Transaction, the
Corporation may give notice to the Trustee not to effect such Securities
Transaction prior to the date specified in the Trustee's notice. Upon receipt of
such a notice from the Corporation, the Trustee shall not effect such Securities
Transaction for a period not to exceed 120 days from the date of the
Corporation's notice or such lesser period as shall be specified in the
Corporation's notice.
ARTICLE V
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
SECTION 5.01 TERMINATION. The Trust shall be terminated on the twentieth
anniversary of the date hereof (the "Termination Date") unless any of the
following events sooner occur: (a) the Common Stock ceases to be registered
under the Securities Exchange Act of 1934, as amended, (b) the Corporation's
obligations under the
<PAGE> 20
Plans are terminated or (c) the Trust Corpus is exhausted. Upon termination of
the Trust, any remaining portion of the Trust Corpus shall be applied in the
following order: first, to satisfy any outstanding indebtedness of the Trust;
second, as directed by the Corporation or its delegate pursuant to Section
3.01(a); and third, to provide grants to charitable organizations qualified
under Section 501(c)(3) of the Code designated by the Corporation or its
delegate. In no event shall the Corporation receive any distribution of the
Trust Corpus except in repayment of indebtedness to the Corporation incurred by
the Trustee or in reimbursement of payments made by the Corporation in
satisfaction of its obligations under the Plans.
SECTION 5.02 AMENDMENT AND WAIVER. Prior to the termination of the Trust,
the Corporation and the Trustee may amend this Trust Agreement (including making
an amendment which terminates the Trust hereunder) by written instrument
executed and duly authorized by the Corporation and the Trustee; however, no
such amendment shall accelerate the Termination Date or permit the Corporation
to receive any distribution prohibited by the last sentence of Section 5.01.
<PAGE> 21
ARTICLE VI
GENERAL PROVISIONS
------------------
SECTION 6.01 CERTAIN PROVISIONS RELATING TO THIS TRUST AGREEMENT. (a) This
Trust Agreement shall be binding upon and inure to the benefit of the parties
and their respective successors and legal representatives.
(b) This Trust Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts, without reference
to any provisions of such laws regarding choice of laws or conflict of laws.
(c) In the event that any provision of this Trust Agreement or
the application thereof to any person or circumstances shall be determined by a
court of proper jurisdiction to be invalid or unenforceable to any extent, the
remainder of this Trust Agreement, or the application of such provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each other provision of this
Trust Agreement shall be valid and enforced to the fullest extent permitted by
law.
<PAGE> 22
(d) Any rights or obligations of the Board of Directors of the
Corporation may be exercised or performed by a committee of such Board of
Directors.
SECTION 6.02 NOTICES. Any notice, report, demand or waiver required or
permitted hereunder shall be in writing and shall be given personally, delivered
by overnight delivery service or sent by telecopier, addressed as follows:
If to the Corporation:
Houghton Mifflin Company
One Beacon Street
Boston, Massachusetts 02108
Telephone No: (617) 725-5000
Attention: General Counsel
If to the Trustee:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Telephone No: (617) 654-3430
Attention: Mark D. Bergin
Assistant Vice President
Notices shall be effective only upon receipt.
The Corporation or Trustee may change the address to which notices,
requests and other communications are to be sent to it by giving written notice
of such address change to the other parties in conformity with this Section
6.02.
<PAGE> 23
SECTION 6.03 GENDER AND NUMBER. Wherever any words are used herein in the
masculine gender, they shall be construed as though they were also used in the
feminine gender in all cases where they would so apply, and wherever any words
are used herein in the singular form, they shall be construed as though they
were also used in the plural form in all cases where they would so apply.
Likewise, wherever any words are used herein in the plural form, they shall be
construed as though they were also used in the singular form in all cases where
they would so apply.
SECTION 6.04 HEADINGS. The headings and subheadings of this Agreement have
been inserted for convenience of reference and are to be ignored in any
construction of the provisions hereof.
SECTION 6.05 NO THIRD PARTY BENEFICIARIES. Nothing in this Trust, express
or implied, is intended to or shall confer on any particular person, other than
the Corporation and the Trustee, any right, benefit or remedy of any nature
whatsoever under or by reason of this Trust, and no such person shall have any
right, title or interest in or any claim to the Trust Corpus except to the
extent expressly provided in Section 5.01 upon termination of this Trust. In
particular, it is the express
<PAGE> 24
intent of the parties that (i) this Trust shall not form part of any of the
Plans, (ii) neither any Plan nor any participant in any of the Plans (nor any
beneficiary of such participant) shall have any right, title or interest in or
any claim to the Trust Corpus, nor shall any such participant have any right to
compel, restrain or otherwise direct the exercise of the respective powers of
Trustee and the Corporation hereunder, it being understood that the rights of
each such participant (and beneficiary) shall be determined in accordance with
the provisions of the Plans, and (iii) the Trust Corpus shall not be deemed to
be held under any trust for the benefit of any such participant (or beneficiary)
or to be collateral security for the performance of the obligations of the
Corporation.
SECTION 6.06 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together constitute but one instrument, which may be sufficiently evidenced by
any counterpart.
<PAGE> 25
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
under seal in their respective names by their duly authorized officers the day
and year first above written.
HOUGHTON MIFFLIN COMPANY
By: /s/ Stephen O. Jabger
------------------------------------
Name: Stephen O. Jabger
Title: Executive Vice President
STATE STREET BANK AND TRUST COMPANY,
solely in its capacity as trustee under this
Trust Agreement
BY: /s/ Harry M. Ostrander
------------------------------------
Name: Harry M. Ostrander
Title: Vice President
<PAGE> 1
EXHIBIT 12
HOUGHTON MIFFLIN COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1997 1996 1995(C) 1994(B) 1993(A)
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings (loss) before fixed charges:
Net income (loss) before extra-
ordinary item and cumulative
effect of accounting changes $ 49.8 $ 43.6 $ (7.2) $ 52.4 $ 31.4
Provision (benefit) for income taxes 33.7 30.3 (4.2) 32.7 17.7
------ ------ ------ ------ ------
Income (loss) from continuing oper-
ations before taxes, extraordinary
item, and cumulative effect of
accounting changes 83.5 74.0 (11.4) 85.1 49.1
Interest expense 39.7 41.6 15.2 7.7 3.6
Interest portion of rent expense* 2.7 3.0 3.8 3.4 3.3
------ ------ ------ ------ ------
Earnings (loss) before fixed charges $125.9 $118.6 $ 7.6 $ 96.2 $ 56.0
Fixed charges:
Interest expense 39.7 41.6 15.2 7.7 3.6
Interest portion of rent expense* 2.7 3.0 3.8 3.4 3.3
Total fixed charges $ 42.4 $ 44.6 $ 19.0 $ 11.1 $ 6.9
Ratio of earnings to fixed charges 3.0 2.7 0.4 8.6 8.1
</TABLE>
(A) On June 4, 1993, the Company completed an early redemption of $25 million
in senior notes due December 15, 1994. The Company recognized an
extraordinary loss of $1.0 million, net of a tax benefit of $0.6 million.
The extraordinary loss was excluded from earnings before fixed charges and
interest expense in calculating the ratio of earning to fixed charges.
(B) On March 30, 1994, the Company completed an early redemption of $25 million
in senior notes due March 30, 1997. The Company recognized an extraordinary
loss of $1.2 million, net of a tax benefit of $0.8 million. This
extraordinary loss is excluded from earnings before fixed charges and
interest expense in calculating the ratio of earning to fixed charges.
(C) The Company would need $11.4 million in additional income to cover its
fixed charges in 1995.
* Includes the portion of rent expense for each period presented that is
deemed by management to be the interest component of such rentals.
<PAGE> 1
EXHIBIT 21
HOUGHTON MIFFLIN COMPANY
LIST OF SUBSIDIARIES
All of the subsidiaries of the Company, all of which are directly or
indirectly wholly owned by the Company, including those significant subsidiaries
listed below, are included in the consolidated financial statements.
1. McDougal Littell Inc., a Delaware corporation.
2. The Riverside Publishing Company, a Delaware corporation.
3. Great Source Educational Group, Inc., a Delaware corporation.
<PAGE> 1
EXHIBIT 23
HOUGHTON MIFFLIN COMPANY
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-69298, 33-59015 and 33-51098) pertaining to the Employees'
Savings and Thrift Plan, the 1992 Stock Compensation Plan and the 1995 Stock
Compensation Plan of Houghton Mifflin Company and in the Registration Statement
(Form S-3 No. 33-64903) of Houghton Mifflin Company and in the related
prospectuses pertaining to the $300 million debt securities of our report dated
January 26, 1998 with respect to the consolidated financial statements and
schedule of Houghton Mifflin Company included in this Annual Report (Form 10-K)
for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> DEC-31-1997
<CASH> 5,621
<SECURITIES> 614
<RECEIVABLES> 180,241
<ALLOWANCES> (20,734)
<INVENTORY> 145,043
<CURRENT-ASSETS> 324,716
<PP&E> 296,428
<DEPRECIATION> (176,040)
<TOTAL-ASSETS> 981,100
<CURRENT-LIABILITIES> 238,725
<BONDS> 0
0
0
<COMMON> 30,219
<OTHER-SE> 287,538
<TOTAL-LIABILITY-AND-EQUITY> 981,100
<SALES> 797,320
<TOTAL-REVENUES> 797,320
<CGS> 362,501
<TOTAL-COSTS> 690,762
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,926
<INCOME-PRETAX> 83,533
<INCOME-TAX> 33,711
<INCOME-CONTINUING> 49,822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,822
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.73
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 12,386
<SECURITIES> 614
<RECEIVABLES> 322,583
<ALLOWANCES> 18,092
<INVENTORY> 148,656
<CURRENT-ASSETS> 489,727
<PP&E> 284,270
<DEPRECIATION> 169,293
<TOTAL-ASSETS> 1,158,529
<CURRENT-LIABILITIES> 334,288
<BONDS> 0
0
0
<COMMON> 30,162
<OTHER-SE> 305,623
<TOTAL-LIABILITY-AND-EQUITY> 1,158,529
<SALES> 399,094
<TOTAL-REVENUES> 399,094
<CGS> 149,857
<TOTAL-COSTS> 248,043
<OTHER-EXPENSES> 1,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,776
<INCOME-PRETAX> 138,429
<INCOME-TAX> 55,372
<INCOME-CONTINUING> 83,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,057
<EPS-PRIMARY> 2.38
<EPS-DILUTED> 2.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,441
<SECURITIES> 614
<RECEIVABLES> 208,159
<ALLOWANCES> 10,819
<INVENTORY> 180,213
<CURRENT-ASSETS> 423,139
<PP&E> 270,016
<DEPRECIATION> 150,418
<TOTAL-ASSETS> 1,109,414
<CURRENT-LIABILITIES> 304,437
<BONDS> 0
0
0
<COMMON> 29,992
<OTHER-SE> 222,658
<TOTAL-LIABILITY-AND-EQUITY> 1,109,414
<SALES> 271,069
<TOTAL-REVENUES> 271,069
<CGS> 145,874
<TOTAL-COSTS> 294,725
<OTHER-EXPENSES> (17,200)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,799
<INCOME-PRETAX> (26,255)
<INCOME-TAX> (10,204)
<INCOME-CONTINUING> (16,051)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,051)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 5,144
<SECURITIES> 614
<RECEIVABLES> 113,012
<ALLOWANCES> 15,487
<INVENTORY> 160,019
<CURRENT-ASSETS> 313,099
<PP&E> 258,401
<DEPRECIATION> 134,801
<TOTAL-ASSETS> 1,002,046
<CURRENT-LIABILITIES> 257,768
<BONDS> 0
0
0
<COMMON> 29,922
<OTHER-SE> 213,390
<TOTAL-LIABILITY-AND-EQUITY> 1,002,046
<SALES> 68,747
<TOTAL-REVENUES> 68,747
<CGS> 52,223
<TOTAL-COSTS> 120,176
<OTHER-EXPENSES> (16,509)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,376
<INCOME-PRETAX> (44,296)
<INCOME-TAX> (17,420)
<INCOME-CONTINUING> (26,876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,876)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-31-1996
<CASH> 11,534
<SECURITIES> 612
<RECEIVABLES> 194,671
<ALLOWANCES> (29,859)
<INVENTORY> 138,547
<CURRENT-ASSETS> 337,969
<PP&E> 261,095
<DEPRECIATION> (144,648)
<TOTAL-ASSETS> 1,006,442
<CURRENT-LIABILITIES> 185,930
<BONDS> 0
0
0
<COMMON> 29,562
<OTHER-SE> 240,731
<TOTAL-LIABILITY-AND-EQUITY> 1,006,442
<SALES> 717,863
<TOTAL-REVENUES> 717,863
<CGS> 329,686
<TOTAL-COSTS> 630,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,875
<INCOME-PRETAX> 73,953
<INCOME-TAX> 30,331
<INCOME-CONTINUING> 43,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,622
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.56
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 18,911
<SECURITIES> 611
<RECEIVABLES> 308,875
<ALLOWANCES> (18,063)
<INVENTORY> 147,755
<CURRENT-ASSETS> 481,546
<PP&E> 249,660
<DEPRECIATION> (140,291)
<TOTAL-ASSETS> 1,157,955
<CURRENT-LIABILITIES> 268,773
<BONDS> 0
29,518
0
<COMMON> 0
<OTHER-SE> 261,392
<TOTAL-LIABILITY-AND-EQUITY> 1,157,955
<SALES> 597,718
<TOTAL-REVENUES> 597,718
<CGS> 271,323
<TOTAL-COSTS> 493,930
<OTHER-EXPENSES> (34,716)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,593
<INCOME-PRETAX> 106,911
<INCOME-TAX> 43,480
<INCOME-CONTINUING> 63,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,431
<EPS-PRIMARY> 2.28
<EPS-DILUTED> 2.28
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,164
<SECURITIES> 604
<RECEIVABLES> 207,335
<ALLOWANCES> 9,589
<INVENTORY> 171,307
<CURRENT-ASSETS> 422,354
<PP&E> 249,564
<DEPRECIATION> 112,483
<TOTAL-ASSETS> 1,111,338
<CURRENT-LIABILITIES> 296,429
<BONDS> 0
29,518
0
<COMMON> 0
<OTHER-SE> 187,445
<TOTAL-LIABILITY-AND-EQUITY> 1,111,338
<SALES> 241,049
<TOTAL-REVENUES> 241,049
<CGS> 134,436
<TOTAL-COSTS> 266,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,271
<INCOME-PRETAX> (21,754)
<INCOME-TAX> (9,138)
<INCOME-CONTINUING> (12,616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,616)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,790
<SECURITIES> 604
<RECEIVABLES> 120,010
<ALLOWANCES> 13,052
<INVENTORY> 167,335
<CURRENT-ASSETS> 333,557
<PP&E> 261,245
<DEPRECIATION> 129,343
<TOTAL-ASSETS> 1,011,243
<CURRENT-LIABILITIES> 205,832
<BONDS> 0
0
0
<COMMON> 29,518
<OTHER-SE> 178,679
<TOTAL-LIABILITY-AND-EQUITY> 1,011,243
<SALES> 62,835
<TOTAL-REVENUES> 62,835
<CGS> 50,095
<TOTAL-COSTS> 106,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,608
<INCOME-PRETAX> (38,155)
<INCOME-TAX> 16,025
<INCOME-CONTINUING> (22,130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,130)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> DEC-31-1994
<PERIOD-END> DEC-31-1995
<CASH> $16,701
<SECURITIES> 604
<RECEIVABLES> 204,542
<ALLOWANCES> 21,698
<INVENTORY> 139,927
<CURRENT-ASSETS> 371,200
<PP&E> 246,991
<DEPRECIATION> 123,891
<TOTAL-ASSETS> 1,046,449
<CURRENT-LIABILITIES> 342,383
<BONDS> 0
0
0
<COMMON> 29,518
<OTHER-SE> 203,827
<TOTAL-LIABILITY-AND-EQUITY> 1,046,449
<SALES> 529,022
<TOTAL-REVENUES> 529,022
<CGS> 271,036
<TOTAL-COSTS> 542,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,008
<INCOME-PRETAX> (11,444)
<INCOME-TAX> (4,201)
<INCOME-CONTINUING> (7,243)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,243)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
