<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD FROM JANUARY 1, 1999 TO MARCH 31, 1999
COMMISSION FILE NUMBER 1-5406
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................to ....................
-------------------------------
HOUGHTON MIFFLIN COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1456030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 BERKELEY ST., BOSTON 02116-3764
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 351-5000
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 1999.
Class Outstanding at April 30, 1999
- ------------------------------- -----------------------------
Common Stock, $1 par value 30,743,899
Preferred Stock Purchase Rights 30,743,899
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HOUGHTON MIFFLIN COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 1999 and 1998 and December 31, 1998 3 - 4
Consolidated Condensed Statements of Operations, Comprehensive
Income, and Retained Earnings -- Three Months Ended
March 31, 1999 and 1998 5
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 6
Notes to Unaudited Consolidated Condensed
Financial Statements 7 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
</TABLE>
<PAGE> 3
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, March 31, December 31,
1999 1998 1998
-------- -------- --------
ASSETS
- ------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 4,494 $ 4,813 $ 3,953
Marketable securities and time deposits
available for sale, at fair value 15,329 614 49,203
Accounts receivable 94,225 103,105 170,706
Less: allowance for bad debts and book returns 21,009 16,856 27,969
-------- -------- --------
73,216 86,249 142,737
Inventories
Finished goods 161,241 163,798 141,457
Work in process 4,919 8,029 4,294
Raw materials 5,483 7,167 5,918
-------- -------- --------
171,643 178,994 151,669
Deferred income taxes 31,799 37,494 --
Prepaid expenses 12,227 9,730 2,279
-------- -------- --------
Total current assets 308,708 317,894 349,841
Property, plant, and equipment
and book plates (net of accumulated
depreciation and amortization of
$166,899 in 1999, $170,331 in 1998
and $193,277 at December 31, 1998) 139,002 127,263 130,265
Goodwill and other intangible assets, net 443,969 457,111 445,223
Deferred income taxes 7,885 -- 7,885
Other assets 48,348 77,978 42,353
-------- -------- --------
$947,912 $980,246 $975,567
======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, March 31, December 31,
1999 1998 1998
------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C>
Current liabilities
Accounts payable $ 75,552 $ 78,979 $ 39,029
Commercial paper 38,413 110,564 11,894
Royalties 20,286 16,764 48,371
Salaries, wages, and commissions 5,475 3,336 27,177
Deferred income taxes -- -- 7,500
Other 28,678 24,533 27,019
Current portion of long-term debt 83,322 40,000 83,322
-------- -------- --------
Total current liabilities 251,726 274,176 244,312
Long-term debt 304,362 371,102 274,521
Accrued royalties payable 1,057 1,346 1,148
Other liabilities 28,675 25,286 28,459
Accrued postretirement benefits 28,991 28,239 28,839
Stockholders' equity
Preferred stock, $1 par value;
(500,000 shares authorized, none issued) -- -- --
Common stock, $1 par value;
(70,000,000 shares authorized; 30,729,587 shares
issued in 1999, 30,310,879 shares issued in 1998, and
30,549,706 shares issued at December 31, 1998) 30,730 30,311 30,550
Capital in excess of par value 100,154 69,269 95,740
Retained earnings 290,116 241,108 330,672
-------- -------- --------
421,000 340,688 456,962
Notes receivable from stock purchase agreements (4,631) (4,460) (4,621)
Unearned compensation related to
restricted stock (2,780) (6,940) (2,318)
Common shares held in treasury, at cost
(602,059 shares in 1999, 286,025
shares in 1998, and 374,052 shares
at December 31, 1998) (18,158) (5,660) (8,681)
Benefits Trust assets, at market (61,094) (41,632) (61,432)
Accumulated other comprehensive income (loss) (1,236) (1,899) 18,378
-------- -------- --------
Total stockholders' equity 333,101 280,097 398,288
-------- -------- --------
$947,912 $980,246 $975,567
======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS,
COMPREHENSIVE INCOME, AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net sales by industry segment:
K-12 Publishing $ 51,971 $ 39,252
College Publishing 14,864 15,393
Other 17,446 16,987
-------- --------
84,281 71,632
Costs and expenses:
Cost of sales 57,238 53,223
Selling and administrative 81,862 71,798
-------- --------
139,100 125,021
Operating loss (54,819) (53,389)
Other income (expense):
Net interest expense (6,769) (8,300)
Equity in earnings of INSO Corporation -- 497
-------- --------
(6,769) (7,803)
-------- --------
Loss before taxes (61,588) (61,192)
Income tax benefit (24,635) (24,477)
-------- --------
Net loss (36,953) (36,715)
Other comprehensive income (loss), net of tax:
Unrealized loss on available for sale securities (19,614) (1)
-------- --------
Comprehensive loss $(56,567) $(36,716)
======== ========
Retained earnings at beginning of period $330,672 $281,411
Net loss (36,953) (36,715)
Dividends paid (3,603) (3,588)
-------- --------
Retained earnings at end of period $290,116 $241,108
======== ========
Loss per share:
Net loss per share - basic $ (1.29) $ (1.29)
Net loss per share - diluted (except when anti-dilutive) $ (1.29) $ (1.29)
Cash dividends paid per common share $ 0.125 $ 0.125
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
5
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $(36,953) $(36,715)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 13,544 14,825
Amortization of unearned compensation on restricted stock 146 555
Equity in earnings of INSO Corporation -- (497)
Changes in operating assets and liabilities:
Accounts receivable, net 69,521 73,258
Inventories (19,674) (33,951)
Accounts payable 36,523 31,367
Royalties, net (30,858) (25,383)
Deferred and income taxes payable (24,971) (25,442)
Salaries, wages, and commissions (21,702) (18,289)
Other, net (9,775) (10,987)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (24,199) (31,259)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Book plate expenditures (8,998) (10,281)
Acquisition of publishing and technology assets (7,912) (1,290)
Property, plant, and equipment expenditures (5,425) (4,309)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (22,335) (15,880)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Dividends paid on common stock (3,603) (3,588)
Issuance of commercial paper 56,519 49,218
Exercise of stock options 1,718 457
Purchase of treasury stock (7,580) --
Other 21 244
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 47,075 46,331
Increase in cash and cash equivalents 541 (808)
Cash and cash equivalents at beginning of period 3,953 5,621
-------- --------
Cash and cash equivalents at end of period $ 4,494 $ 4,813
======== ========
Supplementary disclosure of cash flow information:
Income taxes paid $ 432 $ 946
Interest paid $ 7,185 $ 8,149
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
6
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated condensed financial statements of
Houghton Mifflin Company and its subsidiaries have been prepared in accordance
with generally accepted accounting principles for interim financial information.
All adjustments (consisting of normal recurring accruals) that, in the opinion
of management, are necessary for the fair presentation of this interim financial
information have been included.
Results of interim periods are not necessarily indicative of results to be
expected for the year as a whole. The effect of seasonal business fluctuations
and the occurrence of many costs and expenses in annual cycles require certain
estimations in the determination of interim results.
The information contained in the interim financial statements should be
read in conjunction with Houghton Mifflin's latest Annual Report on Form 10-K,
as amended by Form 10-K/A, filed with the Securities and Exchange Commission.
Certain reclassifications have been made to prior period financial
statements in order to conform to the presentation used in the 1999 interim
financial statements.
(2) INSO Corporation
----------------
During the third quarter of 1998, Houghton Mifflin's ownership of INSO
Corporation, or INSO, dropped below 20%; therefore, Houghton Mifflin no longer
records its investment in INSO under the equity method. Instead, Houghton
Mifflin accounts for the remaining shares held of INSO common stock in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." These securities are
classified as available for sale and are carried at fair market value based on
the quoted market price.
The fair market value of these securities, $14.7 million, is included as
marketable securities in current assets, due to Houghton Mifflin's option and
expectation to use them to redeem the remaining $63.3 million aggregate
principal amount of its outstanding 6% Exchangeable Note due 1999 - Stock
Appreciation Income Linked Securities, or SAILS, due on August 1, 1999.
Prior to the third quarter of 1998, these securities were included in other
assets and carried at cost, adjusted for Houghton Mifflin's proportionate share
of INSO's undistributed earnings and losses, and the effect of INSO's equity
activity.
(3) Acquisitions
------------
On January 8, 1999, Houghton Mifflin acquired the assets of Little Planet
Literacy Series, a leading technology-based pre-kindergarten to grade three
literacy program, from Applied Learning Technologies, Inc. The acquisition is
accounted for as a purchase, and the net assets and results of operations are
included in Houghton Mifflin's consolidated financial statements from the date
of the acquisition. Net cash consideration for the acquisition amounted to
approximately $4.9 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, will be
amortized on a straight-line basis over a period of eight years.
7
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(3) Acquisitions - continued
------------
On December 16, 1998, Houghton Mifflin acquired the assets of
DiscoveryWorks, a science program for the elementary school market, from Silver
Burdett Ginn Inc., a subsidiary of Pearson Plc. The acquisition was accounted
for as a purchase, and the net assets and results of operations are included in
Houghton Mifflin's consolidated financial statements from the date of the
acquisition. Net cash consideration for the acquisition amounted to
approximately $10.5 million. The cost of the acquisition was allocated on the
basis of the estimated fair market value of the assets acquired. The excess of
the net assets acquired, or goodwill, is being amortized on a straight-line
basis over a period of twelve years.
On July 21, 1998, Houghton Mifflin acquired all of the outstanding stock of
Computer Adaptive Technologies, Inc., or CAT, which specializes in developing
and delivering computer-based testing solutions to organizations worldwide. The
acquisition was accounted for as a purchase, and the assets acquired,
liabilities assumed, and results of operations are included in Houghton
Mifflin's consolidated financial statements from the date of the acquisition.
Net cash consideration paid at the time of the acquisition amounted to
approximately $10.7 million, of which $8.0 million was paid to the former
shareholders of CAT and $2.7 million was expended to repay debt, cash out
certain warrants, and pay other acquisition-related fees. In January 1999, an
additional $2.0 million was paid to the former shareholders of CAT based on the
achievement of operational targets set forth in the acquisition agreement. In
addition, based on the acquisition agreement, there remains up to $4 million of
additional consideration that is contingent upon the achievement of certain
future financial targets. A charge for acquired in-process research and
development of $3.5 million was also recorded as part of the acquisition. As of
the acquisition date, CAT had only one product that qualified as in-process
research and development, CAT Software System Version 7. This project represents
an integrated application suite of products whose functionality includes test
development, automated assembly and test production, test administration,
scoring, automated test reporting, and test security. The amount of the charge
represents the calculated value based on residual cash flows related to this
in-process research and development project. At the date of acquisition, the
development of this project had not yet reached technological feasibility, and
the research and development in progress had no alternative uses. Accordingly,
these costs were expensed as of the acquisition date. The cost of the
acquisition was allocated on the basis of the estimated fair market value of the
assets acquired and the liabilities assumed, including the acquired in-process
research and development. Goodwill and other intangible assets of $9.4 million
were recorded as part of the acquisition and are being amortized on a
straight-line basis over periods ranging from approximately three to ten years.
Additional goodwill will be recorded if the contingent consideration is earned.
None of the above acquisitions materially affect consolidated results;
therefore, no pro forma information is provided.
8
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(4) Goodwill and Intangible Assets
------------------------------
Goodwill and other intangible assets consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Goodwill $531,557 $515,717 $525,279
Publishing rights 17,724 17,724 17,724
Other 4,000 4,000 4,000
Less: accumulated amortization (109,312) (80,330) (101,780)
-------- -------- --------
Total $443,969 $457,111 $445,223
======== ======== ========
</TABLE>
The carrying values of goodwill and other intangibles is periodically
reviewed to determine recoverability based upon projected net cash flows over
the remaining life of the related business unit. If the analysis indicates that
impairment has occurred, Houghton Mifflin will adjust the book value of the
intangible asset to the undiscounted net cash flow amount.
(5) Loss Per Share
--------------
The following table sets forth the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
March 31,
1999 1998
-------- --------
(in thousands,
except per share amounts)
<S> <C> <C>
Numerator:
Net loss $(36,953) $(36,715)
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding 28,750 28,443
Effect of dilutive securities: -- --
Denominator for diluted earnings per share:
Adjusted weighted-average shares outstanding -------- --------
and assumed conversions 28,750 28,443
======== ========
Basic loss per share $ (1.29) $ (1.29)
======== ========
Diluted loss per share (except when anti-dilutive) $ (1.29) $ (1.29)
======== ========
</TABLE>
In the first quarter of 1999 and the first quarter of 1998, no dilutive
securities were included in the computation of diluted earnings per share
because Houghton Mifflin had a net loss, and the effect would have been
anti-dilutive.
9
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(6) Accounting Change
-----------------
Houghton Mifflin has implemented a change in the method of accounting for
the amortization of book plate assets. The change is from a class of assets
method to a specific identification method by which amortization will commence
in the year of publication. This change is being made prospectively for book
plate additions beginning in 1999. The change reflects a better match of
amortization expense with the related revenue and is consistent with the method
used by other major publishers. This change did not have a material effect on
first-quarter 1999 results.
(7) Cost of Start-up Activities
---------------------------
In 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities," which was
required to be adopted for fiscal years beginning after December 15, 1998. This
statement requires costs of start-up activities to be expensed as incurred. The
adoption of this Statement had no effect on Houghton Mifflin's results.
(8) Cost of Computer Software Developed or Obtained for Internal Use
----------------------------------------------------------------
In 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-1, or SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which was required to be adopted for
fiscal years beginning after December 15, 1998. This statement requires costs of
internal use software, which includes software that is acquired, internally
developed, or modified solely to meet the entity's internal needs, to be
capitalized. Prior to the adoption of SOP 98-1, Houghton Mifflin had expensed
internally incurred costs in the application development stage relating to
internal use software. This change did not have a material effect on
first-quarter 1999 results.
(9) Segment and Related Information
-------------------------------
In 1998, Houghton Mifflin adopted the Financial Accounting Standards
Board's Statement No. 131, "Disclosure About Segments of an Enterprise and
Related Information," which requires public companies to report financial and
descriptive information about their operating segments in interim financial
reports to shareholders.
Houghton Mifflin has eight divisions with separate management teams and
infrastructures that offer different products and services. These divisions have
been aggregated in three reportable segments based on the similar nature of
their products and services, the nature of the production process, class of
customers, and distribution method, as follows:
K-12 Publishing: This segment consists of five divisions: School Division,
McDougal Littell Inc., Great Source Education Group, Inc., Houghton Mifflin
Interactive Corporation, or HMI, and The Riverside Publishing Company. Beginning
in 1999, Houghton Mifflin focused HMI's business on the growing education
marketplace rather than on the retail market. HMI's products will be sold
primarily in the K-12 school marketplace; therefore, the 1999 information
relating to HMI will be included in the K-12 Publishing segment. This operating
segment includes textbooks and instructional materials and services, tests for
measuring achievement and aptitude, clinical/special needs testing products,
computer-assisted as well as computer-managed instructional programs for the
K-12 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.
College Publishing: The College Division is the sole business unit reported in
this segment. This operating segment includes textbooks, ancillary products such
as workbooks and study guides, and other technology-based instructional
materials and services for introductory and upper level courses for the
post-secondary education market. The principal markets for these products are
two- and four-year colleges and universities. Other markets in which these
products are sold include high school advanced placement courses and for-profit,
certificate-granting institutions that offer skill-based training and job
placement.
10
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(9) Segment and Related Information - continued
-------------------------------
Other: This segment consists of the Trade & Reference Division, CAT, and
unallocated corporate-related items. In 1998, HMI's products, chiefly CD-ROM
titles sold in the retail children's, reference, and adult-hobby markets, were
included in the Other segment. The Trade & Reference Division publishes fiction
and nonfiction for adults and children, dictionaries, and other reference works.
The division also sells book reprint rights to paperback publishers, book clubs,
and other publishers in the United States and abroad. Its principal markets are
retail stores, including Internet bookstore sites, and wholesalers. It also
sells reference materials to schools, colleges, office supply distributors, and
businesses. CAT specializes in the development and delivery of computer-based
testing solutions. Its principal markets are organizations worldwide.
Houghton Mifflin's geographic area of operation is predominantly the United
States. Export sales for locations outside the Unites States are not significant
to Houghton Mifflin's three business segments. Houghton Mifflin does not have
any customers which exceed 10% of net sales, and the loss of a single customer,
in management's opinion, would not have a material adverse effect on net sales.
Houghton Mifflin evaluates the performance of its operating segments based
on the profit and loss from operations before interest income and expense,
income taxes, and infrequent and extraordinary items.
The following table summarizes financial information concerning Houghton
Mifflin's reportable segments. The "Other" column includes unallocated
corporate-related items, operations which do not meet the quantitative
thresholds of SFAS 131, nonrecurring items and, as it relates to segment profit
(loss), income and expense not allocated to reportable segments.
<TABLE>
<CAPTION>
K-12 COLLEGE
PUBLISHING PUBLISHING OTHER CONSOLIDATED
---------- ---------- ----- ------------
(in thousands)
<S> <C> <C> <C> <C>
1999
Net sales from external customers $51,971 $14,864 $17,446 $84,281
Segment operating loss (41,686) (8,900) (4,233) (54,819)
1998
Net sales from external customers 39,252 15,393 16,987 71,632
Segment operating loss (41,741) (9,322) (2,326) (53,389)
</TABLE>
11
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(9) Segment and Related Information - continued
-------------------------------
RECONCILIATION OF SEGMENT LOSSES TO THE CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS:
<TABLE>
<CAPTION>
March 31,
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Total loss from reportable segments $(54,819) $(53,389)
Unallocated income (expense):
Net interest expense (6,769) (8,300)
Equity in earnings of INSO Corporation -- 497
-------- --------
Loss before taxes $(61,588) $(61,192)
======== ========
</TABLE>
(10) Subsequent Events
-----------------
On May 5, 1999, Houghton Mifflin acquired all of the outstanding stock of
Sunburst Communications, Inc., a leading developer of software and video
instructional materials, for approximately $33.5 million, including assumption
of debt. This acquisition will be accounted for as a purchase, and the net
assets acquired, liabilities assumed, and results of operations will be included
in Houghton Mifflin's consolidated financial statements from the date of the
acquisition. The cost of the acquisition will be allocated on the basis of the
estimated fair market value of the assets acquired and liabilities assumed.
In April 1999, Houghton Mifflin issued $80 million of medium-term notes
with proceeds from this issuance used to repay existing commercial paper debt.
On May 7, 1999, Houghton Mifflin filed a registration statement on Form S-3
with the Securities and Exchange Commission covering up to $200,000,000 of debt
securities and common stock, which may be issued in one or more offerings from
time to time.
At its April 28, 1999 meeting, the Board of Directors declared a quarterly
dividend of $0.125 per share, payable on May 26, 1999, to shareholders of record
on May 12, 1999.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Houghton Mifflin's principal business is publishing, and its operations are
classified in three operating segments: K-12 Publishing, College Publishing, and
Other.
K-12 Publishing
This operating segment includes textbooks and instructional materials and
services, tests for measuring achievement and aptitude, clinical/special needs
testing products, computer-assisted as well as computer-managed instructional
programs for the K-12 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.
Beginning in 1999, K-12 Publishing consists of five Houghton Mifflin
divisions:
o The School Division, which publishes for the elementary school
market;
o McDougal Littell Inc., which publishes for the secondary school
market;
o Great Source Education Group, Inc., which publishes supplementary
materials for both the elementary and secondary school markets;
o Houghton Mifflin Interactive Corporation, which develops and
sells multimedia instructional products for both the elementary
and secondary school markets; and
o The Riverside Publishing Company, which publishes tests for
educational and psychological assessment and provides career
guidance products and services.
In the school market, which consists of kindergarten through grade twelve,
the process by which elementary and secondary schools select and purchase new
instructional materials is referred to as the "adoption" process. Twenty-one
states, representing approximately one-half of the United States elementary and
secondary school-age population, select new instructional materials on a
statewide basis for a particular subject 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 that
have been
13
<PAGE> 14
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 both to
describe a state governing body's approval process, or to describe a school or
school district's selection and purchase of instructional materials. After
adopting, or selecting, instructional materials, schools later decide the
quantity and timing of their purchases.
College Publishing
This operating segment, which consists of the College Division, includes
textbooks, ancillary products such as workbooks and study guides, and other
technology-based instructional materials and services for introductory and upper
level courses in the post-secondary higher education market. Products may be in
print or electronic form. The principal markets for these products are two- and
four-year colleges and universities, high school advanced placement courses, and
for-profit, certificate-granting institutions that offer skill-based training
and job placement.
In the college and private career school markets, the faculty generally
selects the texts and other materials to be used in class, acting either as a
committee or individually. The College Division sales force promotes product to
faculty through a combination of on-campus visits, shipment of sample copies of
products to instructors, and e-mail correspondence. In addition, targeted
marketing and advertising to faculty, in both print and electronic form, are an
important part of the selling process. For high school advanced placement
courses, college-level products are selected through the adoption process.
Other
In 1999, Houghton Mifflin's Other operating segment consists of unallocated
corporate-related items and two divisions:
o The Trade & Reference, or Trade, Division; and
o Computer Adaptive Technologies, Inc., or CAT.
The Trade Division publishes fiction and nonfiction for adults and
children, dictionaries, and other
14
<PAGE> 15
reference works. 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 sells book reprint rights to paperback publishers, book clubs, and
other publishers in the United States and abroad, and reference materials to
schools, colleges, office supply distributors, and businesses. CAT specializes
in developing and delivering computer-based testing solutions to organizations
worldwide.
Company Business as a Whole
Houghton Mifflin derives almost 90% of its revenues from educational
publishing in the K-12 and College Publishing segments, which are markedly
seasonal businesses. 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, Houghton Mifflin realizes more than 50%
of net sales and a substantial portion of annual net income during the third
quarter, making third-quarter results material to full-year performance.
Houghton Mifflin also characteristically posts a net loss in the first and
fourth quarters of the year, when fewer educational institutions are making
purchases.
Sales of K-12 instructional materials are also cyclical, with some years
offering more sales opportunities than others. The amount of funding available
at the state level for educational materials also has a significant effect on
Houghton Mifflin's year-to-year revenues. Although the loss of a single customer
or a few customers would not have a materially adverse effect on Houghton
Mifflin's business, schedules of school adoptions and market acceptance of its
products can affect year-to-year revenue performance.
15
<PAGE> 16
RESULTS OF OPERATIONS:
- ---------------------
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
- -------------------------------------------------
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
NET INCOME:
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------------
Loss per share
1999 1998 1999 1998
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Loss after tax, but excluding infrequent items: $(36,953) $(36,601) $(1.29) $(1.29)
Other losses -- (114) -- --
-------- -------- ------ ------
Net loss $(36,953) $(36,715) $(1.29) $(1.29)
======== ======== ====== ======
</TABLE>
For the quarter ended March 31, 1999, the consolidated net loss was $37.0
million, or $1.29 per share, compared to a net loss of $36.7 million, or $1.29
per share, for the same period in 1998.
Loss after tax, but excluding infrequent items, for the first quarter of
1999 was $37.0 million, or $1.29 per share, compared to loss after tax, but
excluding infrequent items, $36.6 million, or $1.29 per share, in the first
quarter of 1998. The 1999 first-quarter seasonal net loss was the same as last
year's first quarter, because higher net sales in the first quarter of 1999 were
offset by higher selling costs related to greater sales opportunities in 1999,
operating expenses and goodwill amortization of CAT (acquired in July 1998),
increases in product development spending, and additional costs related to
information systems initiatives and the Year 2000 computer issue.
In the first quarter of 1998, Houghton Mifflin recognized an infrequent
charge of $0.2 million ($0.1 million after tax) related to INSO's acquisition of
Henderson Software.
NET SALES:
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------------
Increase(decrease)
1999 1998 $ %
------- ------- ------- ----
<S> <C> <C> <C> <C>
K-12 Publishing $51,971 $39,252 $12,719 32.4%
College Publishing 14,864 15,393 (529) (3.4)
Other 17,446 16,987 459 2.7
------- ------- -------
Total net sales $84,281 $71,632 $12,649 17.7%
======= ======= =======
</TABLE>
16
<PAGE> 17
Net sales of $84.3 million for the quarter ended March 31, 1999 increased
$12.6 million, or 17.7%, from $71.6 million reported in the first quarter of
1998. The K-12 Publishing segment's net sales of $52.0 million in the first
quarter of 1999 increased $12.7 million, or 32.4%, from net sales of $39.3
million in the first quarter of 1998. The increase was attributable to
double-digit net sales gains for the School Division, McDougal Littell, Great
Source Education Group, and The Riverside Publishing Company. The net sales gain
was partially due to earlier-than-anticipated ordering, but was also a result of
positive customer response to Houghton Mifflin's products, the continued
strength of the market for instructional materials, as well as sales generated
from the elementary school science market due to the DiscoveryWorks acquisition
in December 1998. The College Publishing segment's net sales of $14.9 million in
the first quarter of 1999 were slightly lower than the first quarter of 1998.
The Other segment's net sales in the first quarter of 1999 increased $0.5
million, or 2.7%, to $17.4 million from last year's first-quarter net sales of
$17.0 million. This was primarily due to the Trade Division's increased sales
from its adult list, field guides, and cooking line.
COSTS AND EXPENSES:
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------
Increase (decrease)
1999 1998 $ %
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Cost of sales $57,238 $53,223 $4,015 7.5%
Selling and administrative, excluding
intangible asset amortization 74,329 64,739 9,590 14.8
Intangible asset amortization 7,533 7,059 474 6.7
-------- -------- -------
Total costs and expenses $139,100 $125,021 $14,079 11.3%
======== ======== =======
</TABLE>
Cost of sales:
Cost of sales in the first quarter of 1999 increased $4.0 million, or 7.5%,
to $57.2 million from $53.2 million in the first quarter of 1998. The increased
cost of sales was due to higher manufacturing costs, which are the result of
higher net sales, and increased editorial expenses incurred for new program
development and product revisions in preparation for the sales opportunities in
2000 and beyond. Lower
17
<PAGE> 18
plate amortization partially offset these increases. As a result of the higher
net sales, cost of sales decreased as a percentage of sales, to 67.9% in the
first quarter of 1999 from 74.3% in the first quarter of 1998.
Selling and administrative:
In the first quarter of 1999, selling and administrative expenses,
excluding intangible asset amortization, were $74.3 million, an increase of $9.6
million, or 14.8%, from $64.7 million in the first quarter of 1998. This
increase was due to higher selling, distribution, and administrative expenses.
Selling expense increased due to expansion of the sales staff and higher
promotional expense relating to the greater number of sales opportunities in our
markets in 1999. Distribution expenses increased due to the higher sales volume
and warehousing fees; administrative expenses rose as spending on efforts to
improve customer support systems and to address the Year 2000 computer issue
increased. Due to higher net sales, selling and administrative expenses,
excluding intangible asset amortization, decreased as a percentage of sales, to
88.2% in the first quarter of 1999 from 90.4% in the first quarter of 1998.
Intangible Asset Amortization:
Due to the 1998 acquisitions of CAT and DiscoveryWorks, and the January
1999 acquisition of Little Planet, intangible asset amortization increased to
$7.5 million in the first quarter of 1999 from $7.1 million in the same period
last year.
OTHER INCOME AND EXPENSE:
In the first quarter of 1998, Houghton Mifflin recognized $0.5 million in
equity earnings of INSO Corporation representing $0.7 million of INSO's
earnings, offset by a one-time charge of $0.2 million related to INSO's
acquisition of Henderson Software.
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<PAGE> 19
NET INTEREST EXPENSE:
Net interest expense of $6.8 million for the first quarter of 1999 was
$1.5 million lower than in the same period in 1998. The reduction was primarily
due to the redemption on August 1, 1998 of $63.3 million of SAILS and the
paydown of $39.5 million of debt at the end of 1998.
INCOME TAXES:
The income tax benefit increased $0.2 million over the same period last
year, primarily due to the higher operating loss in the first quarter of 1999.
The effective tax rate for the first quarter of 1999 and 1998 was 40%.
K-12 PUBLISHING:
The K-12 Publishing segment's net sales of $52.0 million in the first
quarter of 1999 were $12.7 million, or 32.4%, higher than net sales of $39.3
million in the first quarter of 1998. The increase was attributable to
double-digit net sales gains for the School Division, McDougal Littell, Great
Source Education Group, and The Riverside Publishing Company. The net sales gain
was partially due to earlier-than-anticipated ordering, but was also a result of
positive customer response to Houghton Mifflin's products, the continued
strength of the market for instructional materials, as well as the sales
generated from the elementary school science market due to the DiscoveryWorks
acquisition in December 1998.
Despite higher net sales, the operating loss for the K-12 Publishing
segment was $41.7 million in the first quarter of 1999, same as in 1998's first
quarter. Cost of sales and selling and administrative expenses increased in the
first quarter of 1999 compared to the first quarter of 1998. Cost of sales
increased due to higher manufacturing costs, which are the result of higher net
sales, increased editorial expenses incurred for new program development and
product revisions in preparation for the sales opportunities in 2000 and beyond.
Lower plate amortization partially offset these increases. The increase in
selling expenses was due to expansion of the sales staff and higher promotional
expense related to the increase in sales opportunities in 1999 over 1998.
Distribution expenses increased due to
19
<PAGE> 20
higher sales volume and warehousing fees. Administrative expenses rose due to
additional costs related to information system initiatives and the Year 2000
computer issue.
COLLEGE PUBLISHING:
The College Publishing segment's net sales of $14.9 million in the first
quarter of 1999 were slightly lower than the first quarter of 1998. The
operating loss was $8.9 million in the first quarter of 1999, compared to $9.3
million for the same period in 1998. The decrease in the operating loss was
primarily due to slightly lower cost of sales and selling and administrative
expenses, partially offset by lower net sales.
OTHER:
The Other segment's net sales in the first quarter of 1999 increased $0.5
million, or 2.7%, to $17.4 million from last year's first-quarter net sales of
$17.0 million. The increase was primarily due to the Trade Division, which had
increased sales from its adult list, field guides, and cooking line. The sales
increase was also due to the inclusion of CAT, which was acquired in July 1998.
Partially offsetting these increases was lower revenue due to the shift of HMI
to the K-12 Publishing segment beginning in 1999.
The Other segment's operating loss was $4.2 million in the first quarter of
1999 compared to $2.3 million in the same period in 1998. The increased
operating loss was primarily due to the operating expenses and goodwill
amortization of CAT, higher distribution expenses, and higher administrative
expenses, partially offset by higher net sales. Distribution expenses increased
due to the higher sales volume and warehousing fees; administrative expenses
rose due to higher costs related to information system initiatives and the Year
2000 computer issue.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Houghton Mifflin's principal businesses are seasonal, with almost 90% of
its revenues derived from educational publishing in the K-12 and College
Publishing segments, markedly seasonal businesses. Houghton Mifflin realizes
more than 50% 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 Houghton Mifflin's operating cash flow.
Houghton Mifflin normally incurs a net cash deficit from all of its activities
through the middle of the third quarter of the year. Houghton Mifflin funds the
deficit through the draw-down of cash and marketable securities, supplemented by
short-term borrowings, principally commercial paper.
During the first quarter of 1999, Houghton Mifflin used $56.5 million of
net borrowings to cover its seasonal operating loss and working capital needs
and to fund publishing and capital investments. During the first quarter of
1998, Houghton Mifflin used $0.8 million of cash on hand at year-end 1997, as
well as $49.2 million of net borrowings, to cover its seasonal operating loss
and working capital needs and to fund publishing and capital investments.
Net cash used in operating activities was $24.2 million in the first
quarter of 1999, a $7.1 million improvement from the $31.3 million of cash used
in operating activities during the first quarter of 1998. Net loss excluding
non-cash items increased by $1.4 million. Changes in operating assets and
liabilities provided $8.5 million more cash during the first quarter of 1999
than in the same period in 1998, primarily due to lower working capital
requirements.
Cash required for investing activities was $22.3 million in the first
quarter of 1999, an increase of $6.4 million from the $15.9 million required in
the same period in 1998. The increase was principally due to a $6.6 million
increase in acquisitions of publishing and technology assets related to the
acquisition of the Little Planet Literacy Series and a contingent consideration
payment related to the
21
<PAGE> 22
1998 acquisition of CAT. The increase was also related to a $1.1 million
increase in property, plant, and equipment expenditures, partially offset by a
$1.3 million decrease in book plate expenditures.
Net proceeds from financing activities increased by $0.7 million in the
first quarter of 1999 from the same period in 1998. In the first quarter of
1999, Houghton Mifflin made common stock repurchases totaling approximately $7.6
million. An additional $7.3 million of commercial paper was issued in the first
quarter of 1999 than in the same period in 1998.
In January 1999, Houghton Mifflin refinanced $50 million outstanding
under the Revolving Credit Facility by issuing commercial paper. In April 1999,
Houghton Mifflin issued $80 million of medium-term notes with proceeds from this
issuance used to repay existing commercial paper debt.
Houghton Mifflin believes its existing cash, expected positive cash flow
from operations, proceeds from the issuance of $80 million of medium-term notes,
and its existing credit facilities will be sufficient to finance the Sunburst
acquisition, fund publishing capital expenditures and dividend payments, and
cover working capital requirements for the full year.
On May 7, 1999, Houghton Mifflin filed a registration statement on Form
S-3 with the Securities and Exchange Commission covering up to $200,000,000 of
debt securities and common stock, which may be issued in one or more offerings
from time to time.
EFFECT OF THE YEAR 2000 COMPUTER ISSUE
- --------------------------------------
The statements in this section are "Year 2000 Readiness Disclosure" within
the meaning of the Year 2000 Information and Readiness Disclosure Act.
The Year 2000 computer issue is the result of computer programs being
written using two digits rather than four digits to define the applicable year.
Any of Houghton Mifflin'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, ship products, or engage in similar normal business
activities. In addition to hardware and software, the Year 2000 computer issue
may also affect printers, facsimile machines, security systems, elevators, and
other systems that are controlled by microprocessors. The Year 2000 computer
issue will affect Houghton Mifflin, its vendors and suppliers, customers, and
other third parties with whom Houghton Mifflin does business.
To address this issue, Houghton Mifflin has created a plan under the
direction of a Program
22
<PAGE> 23
Management Office, which consists of a team of Houghton Mifflin personnel and
third-party consultants. The phases of the plan include assessment, remediation
or replacement, testing and certification, and implementation. As part of this
effort, the Program Management Office provides regular updates to management and
the Board of Directors, as well as information bulletins to the entire company.
Houghton Mifflin is focusing on the following four areas of exposure:
information technology; non-information technology, or non-IT systems (for
example, climate control systems, copy machines, security systems, etc.);
technology products sold by Houghton Mifflin; and third-party relationships.
Houghton Mifflin is using the status-of-completion method to evaluate its
progress on the Year 2000 computer issue. This method compares the level of
effort necessary to complete the task with the level of effort expended to date.
Information technology includes mainframe applications, client server
applications, end-user applications, infrastructure hardware and software, and
networks and voice systems. Houghton Mifflin has completed the assessment of all
information technology systems that it believes could be significantly affected
by the Year 2000 computer issue, and has determined that it will have to modify
or replace significant portions of its software and certain hardware so that
those systems will properly utilize dates beyond December 31, 1999. The
assessment also showed that for certain older systems, such as customer order
management, accounts receivable, royalty, and human resources, complete
replacement of the applications is the best alternative. Complete replacement
will not only remediate the Year 2000 computer issue but will expand the current
system capabilities and provide a platform for Houghton Mifflin's future growth.
The following chart (excluding the customer order management system) presents
the estimated average status of completion for this area, and the expected
completion date for each phase.
23
<PAGE> 24
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
RESOLUTION PHASE ESTIMATED AVERAGE % COMPLETION EXPECTED COMPLETION DATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Assessment 100% Completed
- ------------------------------------------------------------------------------------------------
Remediation or Replacement 85 July 31, 1999
- ------------------------------------------------------------------------------------------------
Testing and Certification 60 August 31, 1999
- ------------------------------------------------------------------------------------------------
Implementation 60 August 31, 1999
- ------------------------------------------------------------------------------------------------
</TABLE>
The expected completion date of the customer order management system has
been extended due to an increase in the scope of work to complete the project.
Houghton Mifflin has completed the assessment phase of this system and is
approximately 50% complete with the replacement phase. The replacement, testing,
and implementation phases are expected to be completed by October 31, 1999.
Houghton Mifflin is also developing a contingency plan for this system, which
includes remediation of the existing system.
The following chart presents the estimated average status of completion
for critical non-IT systems and the expected completion date of each phase.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
RESOLUTION PHASE ESTIMATED AVERAGE % COMPLETION EXPECTED COMPLETION DATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Assessment 100% Completed
- ------------------------------------------------------------------------------------------------
Remediation or Replacement 100 Completed
- ------------------------------------------------------------------------------------------------
Testing and Certification 78 June 30, 1999
- ------------------------------------------------------------------------------------------------
Implementation 60 June 30, 1999
- ------------------------------------------------------------------------------------------------
</TABLE>
Houghton Mifflin is also in the process of assessing the compliance of its
technology product lines by testing the products in a Year-2000-compliant
environment. The test results will determine any required action, including
remediation, replacement, or retirement. In most cases, Houghton Mifflin
believes there will be no need for remediation or replacement of the product.
Houghton Mifflin has completed the assessment phase and believes that it will be
able to complete any appropriate remedial actions by December 31, 1999. Based
upon preliminary results, Houghton Mifflin does not expect that the effect of
Year 2000 issues on Houghton Mifflin's technology products presents a material
exposure.
Houghton Mifflin has identified its most important customers, suppliers,
and business partners (for example, printers, paper suppliers, distributors, and
financial institutions), and has contacted them to determine the extent to which
Houghton Mifflin may be vulnerable in the event that those parties fail to
24
<PAGE> 25
properly correct their own Year 2000 computer issues. Houghton Mifflin is
monitoring the responses and progress of these parties. In addition, Houghton
Mifflin intends to test critical systems interfaces, such as order entry and
inventory transactions. Houghton Mifflin is in the process of working with the
parties with whom it has these interfaces to reduce the risk of business
interruptions. To date, Houghton Mifflin is not aware of any third party whose
Year 2000 issues would have a material effect on Houghton Mifflin, but has no
independent means of ensuring that third parties will be Year 2000 ready or
whether their remediation efforts will be compatible with those of Houghton
Mifflin.
Houghton Mifflin is using both internal and external resources to
reprogram or replace and test software for Year 2000 modifications. Management
currently expects 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, to be approximately $30-35 million, which is being
funded through operating cash flows. Of this total, approximately $10-14 million
is for the purchase of new software and hardware that will be capitalized. The
remaining $17-21 million will be expensed as incurred. As of March 31, 1999,
Houghton Mifflin had spent approximately $19 million ($10 million expensed and
$9 million capitalized for new systems) on its Year 2000 computer project and
the development of new systems and systems modifications.
Houghton Mifflin believes that it has an effective program in place to
resolve any Year 2000 computer issues in a timely manner. Although Houghton
Mifflin has not yet completed all the necessary phases of its Year 2000 program,
it 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, or if a material third
party fails to properly remediate its computer problems, or if the costs are
higher than expected, the Year 2000 computer issue could have a material effect
on Houghton Mifflin's operations. While Houghton Mifflin is not presently aware
of any significant exposure, it cannot be sure that all Year 2000 remediation
processes will be completed and properly tested before the Year 2000, or that
contingency plans will be sufficient to mitigate the risk of all forms of Year
2000 readiness problems
25
<PAGE> 26
for Houghton Mifflin and its significant customers, suppliers, and business
partners. In the event that Houghton Mifflin or any of its material suppliers or
other third parties do not complete the necessary remediation, Houghton Mifflin
could be subject to interruption of its normal business activities, including
its ability to take customer orders, manufacture and ship products, invoice
customers, collect payments, or engage in similar routine operations, and there
could be a material adverse effect on Houghton Mifflin's revenues. Houghton
Mifflin could also be subject to litigation for computer systems failures or
problems with its technology products. In addition, disruptions in the economy
generally resulting from the Year 2000 computer issue could have a material
adverse effect on Houghton Mifflin. The amount of potential liability and lost
revenues cannot reasonably be estimated at this time.
To prepare for the possibility that it or a third party may be unable to
remediate or replace and properly test critical systems on a timely basis,
Houghton Mifflin will develop appropriate contingency plans after its assessment
of risk is complete. Houghton Mifflin has prepared preliminary contingency plans
for many of its information technology systems and will develop final plans
during 1999 for those areas Houghton Mifflin determines are at risk.
The projected costs and the dates on which Houghton Mifflin 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, many of which are not subject to Houghton
Mifflin's control. Houghton Mifflin 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 issues, and other uncertainties
referred to from time to time in Houghton Mifflin's filings with the Securities
and Exchange Commission.
26
<PAGE> 27
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For financial market risks related to changes in interest rates and equity
prices, reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This report includes forward-looking statements which reflect Houghton
Mifflin's current views about future events and financial performance. Words
such as "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 Houghton
Mifflin's expectations, and Houghton Mifflin expressly does not undertake any
duty to update forward-looking statements. These factors include, but are not
limited to: (i) cost of development and market acceptance of Houghton Mifflin's
educational and testing products and services; (ii) the seasonal and cyclical
nature of Houghton Mifflin's educational sales; (iii) possible changes in
funding in school systems throughout the nation, which may result in both
cancellation of planned purchases of educational and testing products and
services and shifts in timing of purchases; (iv) changes in purchasing patterns
by elementary and secondary schools and colleges; (v) changes in the competitive
environment, including those which would adversely affect selling expenses; (vi)
regulatory changes which would affect the purchase of educational and testing
products and services; (vii) strength of the retail market for general-interest
publications and market acceptance of newly published titles; (viii)
unanticipated expenses or delays in resolving Year 2000 computer issues by
either Houghton Mifflin or those with whom Houghton Mifflin does business; and
(ix) other factors detailed from time to time in Houghton Mifflin's filings with
the Securities and Exchange Commission.
27
<PAGE> 28
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. (10) (iii) (A):
Houghton Mifflin 1999 Chief Executive Officer Incentive
Compensation Plan
Houghton Mifflin 1999 Senior Executive Incentive Compensation
Plan
Exhibit No. (18) Letter re: change in accounting principles
Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
None
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUGHTON MIFFLIN COMPANY
------------------------------------
Registrant
Dated: May 13, 1999 /s/ Gail Deegan
------------------------------------
Gail Deegan
Executive Vice President, Chief
Financial Officer
Dated: May 13, 1999 /s/ David R. Caron
------------------------------------
David R. Caron
Vice President, Corporate Controller
29
<PAGE> 30
Houghton Mifflin Company
Index To Exhibits
Item 6(a)
Exhibit No Description of Document Page Number in This Report
- ---------- ----------------------- --------------------------
(10)(iii)(A) Houghton Mifflin 1999 Chief Executive 32
Officer Incentive Compensation Plan
Houghton Mifflin 1999 Senior Executive 36
Incentive Compensation Plan
(18) Letter re: change in accounting principles 41
(27) Financial Data Schedule 43
30
<PAGE> 1
Exhibit (10)(iii)(A)
HOUGHTON MIFFLIN COMPANY
1999 CHIEF EXECUTIVE OFFICER
INCENTIVE COMPENSATION PLAN
PURPOSE. The purpose of the Plan is to motivate and reward performance that
contributes to the achievement of divisional and corporate strategy.
PAYMENT THRESHOLDS.
1. FINANCIAL OBJECTIVES. Payment of incentive compensation for achievement
of individual financial factors may occur if
a. 80% or more of the budget for that financial factor is achieved;
and
b. Company income exceeds 70% of budget or $37.1 million;
2. OPERATING OBJECTIVES. Payment of incentive compensation for achievement
of operating objectives only may occur if the weighted average achievement of
all financial factors exceeds 50% and Company net income exceeds 50% of budget,
or $26.5 million.
PAYMENTS.
1. FINANCIAL OBJECTIVES. Payment of incentive compensation for achievement
of financial objectives is based on the degree to which those financial
objectives are achieved.
a. Payment of incentive compensation is determined by the extent to
which targeted Company and operating unit financial performance is achieved.
b. Achievement of targeted levels of financial performance for all
financial objectives provides payment in cash of up to 56-2/3% of the
participant's December 31, 1999 salary as incentive compensation.
c. Additional incentive compensation may be earned if one or more
financial targets are exceeded.
2. OPERATING OBJECTIVES. Payment of incentive compensation for achievement
of operating objectives is based on the Compensation & Nominating Committee's
assessment of the Chief Executive Officer's degree of success in achieving
operating objectives. Maximum payment for achievement of operating objectives is
10% of the participant's December 31, 1999 salary.
<PAGE> 2
3. PAYMENTS IN EXCESS OF 66-2/3% OF DECEMBER 31, 1999 SALARY. If the total
incentive compensation earned exceeds 66-2/3% of a participant's December 31,
1999 salary, the excess amount is paid in shares of Houghton Mifflin Company
restricted common stock.
a. The number of shares awarded will be determined on the basis of
the average closing price of Houghton Mifflin Company common stock on the New
York Stock Exchange during the last calendar quarter.
b. Full ownership of the restricted stock will occur after three
years, provided that the recipient is still employed by Houghton Mifflin Company
on that date. If the recipient ceases to be employed by the Company prior to the
expiration of the restrictions, all shares are forfeited to the Company without
payment to the recipient.
c. During the period of restriction, the recipient is entitled to
vote any restricted shares awarded and to receive any dividends paid on the
shares. Any additional shares issued with respect to the restricted shares
(e.g., as a result of a stock split, dividend, or other distribution) shall be
subject to the same restrictions as the underlying shares.
d. The recipient may not sell, assign, transfer, exchange, pledge,
hypothecate, or otherwise encumber any of the shares until the restrictions
lapse.
e. The shares shall be held by the Registrar and Transfer Agent
until the restrictions lapse.
f. In the event of retirement after age 55 with at least five
years of service, death, or permanent disability during the period of
restriction, the recipient, or his or her heirs, shall be entitled to receive,
free of restrictions, a pro rata number of shares based on a fraction, the
numerator of which is the number of whole months from January 1 of the year the
shares were awarded, and the denominator of which is 36.
g. All restrictions shall lapse in the event of a "Change of
Control" as defined in this Plan.
h. The Compensation and Nominating Committee of the Board of
Directors, or the Board of Directors, acting by a majority of its directors who
are not employees of the Company, may at any time accelerate the time at which
the restrictions lapse.
4. MAXIMUM PAYMENT. The maximum amount of incentive compensation, including
any restricted stock portion, which may be awarded to the participant is 100% of
the participant's December 31, 1999 salary.
2
<PAGE> 3
D. ELIGIBILITY.
1. Participation in this Plan is limited to the Chief Executive Officer as
designated by the Compensation & Nominating Committee.
2. In the event of retirement, death, or permanent disability, a pro rata
share of the award (based on the number of months of eligible employment during
that year) will be paid to the participant, or his or her heirs, based upon the
extent of partial achievement of applicable objectives. In the event of a leave
of absence during the year, a pro rata share of the award may be paid.
3. The eligibility of a participant whose participation ceases during the
year will be determined by the Compensation & Nominating Committee of the Board
of Directors.
4. Nothing contained in the Plan shall be construed to limit in any way the
right of the Company to terminate the participant's employment or to adjust the
participant's position or salary at any time, or be evidence of any agreement or
understanding, expressed or implied, that any person will be employed in a
particular position or at a particular rate of compensation.
7. The Compensation and Nominating Committee of the Board of Directors
reserves the right to amend the terms of this Plan whenever in its best judgment
it is in the best interest of the Company to do so.
E. INTERPRETATION. The Compensation and Nominating Committee of the Board of
Directors ("Committee") shall administer this plan and approve any payments
pursuant to the Plan. Any interpretations of the Plan, including adjustments to
the financial objectives under the Plan, shall be made by the Committee.
Determinations of the Committee shall be final and binding on all participants.
F. CHANGE IN CONTROL.
1. For purposes of the Plan, a "Change in Control" of the Company shall be
deemed to have occurred if any of the following occurs:
i) any "Person" (as defined in this Section F) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities
of the Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
ii) during any period of no more than two consecutive years
beginning after the date of this Amendment and Restatement individuals who at
the beginning of such period constitute the Board, and any new director (other
than a director whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the directors
of the Company) whose election
3
<PAGE> 4
by the Board or nomination for election by the Company's stockholders was
approved or recommended by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the period or
whose election or whose nomination for election was previously so approved or
recommended, cease for any reason to constitute at least a majority thereof;
iii) there occurs a merger or consolidation of the Company or a
subsidiary thereof with or into any other entity, other than (x) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity or any parent thereof), more than 75% of the combined voting
power of the voting securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or consolidation or (y)
a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no Person acquires 25% or more of the
combined voting power of the Company's then outstanding securities; or
iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
2. For purposes of the Plan, "Person" has the meaning given such term in
Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and
14(d) of the Exchange Act, but excludes (a) the Company or any of its
subsidiaries, (b) any trustee or other fiduciary holding securities under an
employee benefit plan of the Company (or of any subsidiary of the Company), (c)
any corporation owned, directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the
Company and (d) an underwriter temporarily holding securities pursuant to an
offering of such securities.
4
<PAGE> 5
Exhibit (10)(iii)(A)
HOUGHTON MIFFLIN COMPANY
1999 SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
PURPOSE. The purpose of the Plan is to motivate and reward performance that
contributes to the achievement of divisional and corporate strategy.
PAYMENT THRESHOLDS.
1. FINANCIAL OBJECTIVES. Payment of incentive compensation for achievement
of individual financial factors may occur if
a. 80% or more of the budget for that financial factor is achieved;
and
b. Company income exceeds 70% of budget or $37.1 million;
2. OPERATING OBJECTIVES. Payment of incentive compensation for achievement
of operating objectives only may occur if the weighted average achievement of
all financial factors exceeds 50% and Company net income exceeds 50% of budget,
or $26.5 million.
PAYMENTS.
1. FINANCIAL OBJECTIVES. Payment of incentive compensation for achievement
of financial objectives is based on the degree to which those financial
objectives are achieved.
a. Payment of incentive compensation is determined by the extent to
which targeted Company and operating unit financial performance is achieved.
b. Achievement at targeted Company and operating unit financial
performance for all financial objectives provides payment in cash of up to 30%
of the participant's December 31, 1999 salary as incentive compensation.
c. Additional incentive compensation may be earned if one or more
financial targets are exceeded.
2. OPERATING OBJECTIVES. Payment of incentive compensation for achievement
of operating objectives is based on the Chief Executive Officer's assessment of
each participant's degree of success in achieving operating objectives. Maximum
payment for achievement of operating objectives is 10% of the participant's
December 31, 1999 salary.
<PAGE> 6
3. PAYMENTS IN EXCESS OF 40% OF DECEMBER 31, 1999 SALARY. If the total
incentive compensation earned exceeds 40% of a participant's December 31, 1999
salary (66-2/3% for the CEO), the excess amount is paid in shares of Houghton
Mifflin Company restricted common stock.
a. The number of shares awarded will be determined on the basis of
the average closing price of Houghton Mifflin Company common stock on the New
York Stock Exchange during the last calendar quarter.
b. Full ownership of the restricted stock will occur after three
years, provided that the recipient is still employed by Houghton Mifflin Company
on that date. If the recipient ceases to be employed by the Company prior to the
expiration of the restrictions, all shares are forfeited to the Company without
payment to the recipient.
c. During the period of restriction, the recipient is entitled to
vote any restricted shares awarded and to receive any dividends paid on the
shares. Any additional shares issued with respect to the restricted shares
(e.g., as a result of a stock split, dividend, or other distribution) shall be
subject to the same restrictions as the underlying shares.
d. The recipient may not sell, assign, transfer, exchange, pledge,
hypothecate, or otherwise encumber any of the shares until the restrictions
lapse.
e. The shares shall be held by the Registrar and Transfer Agent
until the restrictions lapse.
f. In the event of retirement after age 55 with at least five
years of service, death, or permanent disability during the period of
restriction, the recipient, or his or her heirs, shall be entitled to receive,
free of restrictions, a pro rata number of shares based on a fraction, the
numerator of which is the number of whole months from January 1 of the year the
shares were awarded, and the denominator of which is 36.
g. All restrictions shall lapse in the event of a "Change of
Control" as defined in this Plan.
h. The Compensation and Nominating Committee of the Board of
Directors, or the Board of Directors, acting by a majority of its directors who
are not employees of the Company, may at any time accelerate the time at which
the restrictions lapse.
4. MAXIMUM PAYMENT. The maximum amount of incentive compensation, including
any restricted stock portion, which may be awarded to any participant is 100% of
the participant's December 31, 1999 salary.
2
<PAGE> 7
D. ELIGIBILITY.
1. Participants in this plan include executive vice presidents, division
heads, and corporate staff senior executives as designated by the Chief
Executive Officer. Individuals who become participants after the beginning of
the year participate on a prorated basis.
2. In the event of retirement, death, or permanent disability, a pro rata
share of the award (based on the number of months of eligible employment during
that year) will be paid to the participant, or his or her heirs, based upon the
extent of partial achievement of applicable objectives. In the event of a leave
of absence during the year, a pro rata share of the award may be paid.
3. A participant whose employment terminates, voluntarily or involuntarily,
for reasons other than retirement after age 55 with at least five years of
service, death, or permanent disability, is not eligible for an incentive award.
4. The eligibility of a participant whose participation ceases during the
year will be determined by the Chief Executive Officer.
5. If the participant during the year transfers to another position and
continues to participate in the Plan, the employee's performance will be
measured against the objectives in each position and then prorated on the number
of months each position was held.
6. Nothing contained in the Plan shall be construed to limit in any way the
right of the Company to terminate a participant's employment or to adjust an
employee's position or salary at any time, or be evidence of any agreement or
understanding, expressed or implied, that any person will be employed in a
particular position or at a particular rate of compensation.
7. The Compensation and Nominating Committee of the Board of Directors
reserves the right to amend the terms of this Plan whenever in its best judgment
it is in the best interest of the Company to do so.
E. INTERPRETATION. The Compensation and Nominating Committee of the Board of
Directors ("Committee") shall administer this plan and approve any payments
pursuant to the Plan. Any interpretations of the Plan, including adjustments to
the financial objectives under the Plan, shall be made by the Committee.
Determinations of the Committee shall be final and binding on all participants.
F. CHANGE IN CONTROL.
1. For purposes of the Plan, a "Change in Control" of the Company shall be
deemed to have occurred if any of the following occurs:
3
<PAGE> 8
i) any "Person" (as defined in this Section F) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities
of the Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
ii) during any period of no more than two consecutive years
beginning after the date of this Amendment and Restatement individuals who at
the beginning of such period constitute the Board, and any new director (other
than a director whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of the directors
of the Company) whose election by the Board or nomination for election by the
Company's stockholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or whose nomination for
election was previously so approved or recommended, cease for any reason to
constitute at least a majority thereof;
iii) there occurs a merger or consolidation of the Company or a
subsidiary thereof with or into any other entity, other than (x) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity or any parent thereof), more than 75% of the combined voting
power of the voting securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or consolidation or (y)
a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no Person acquires 25% or more of the
combined voting power of the Company's then outstanding securities; or
iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
2. For purposes of the Plan, "Person" has the meaning given such term in
Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and
14(d) of the Exchange Act, but excludes (a) the Company or any of its
subsidiaries, (b) any trustee or other fiduciary holding securities under an
employee benefit plan of the Company (or of any subsidiary of the Company), (c)
any corporation owned, directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the
Company and (d) an underwriter temporarily holding securities pursuant to an
offering of such securities.
4
<PAGE> 1
Exhibit (18)
May 12, 1999
Ms. Gail Deegan
Executive Vice President and
Chief Financial Officer
Houghton Mifflin Company
222 Berkeley Street
Boston, MA 02116-3764
Dear Ms. Deegan:
Note 6 of the Notes to the unaudited consolidated condensed financial statements
of Houghton Mifflin Company included in its Form 10-Q for the three months ended
March 31, 1999 describes a change in the method of accounting for the
amortization of book plate assets from a class of assets method to a specific
identification method by which amortization will commence in the year of
publication. This change is being made prospectively for book plate additions
beginning in 1999. You have advised us that you believe that the change is to a
preferable method in your circumstances because by commencing amortization of
the book plate assets when publication first occurs it better matches the
amortization expense with the related revenue and is consistent with the method
used by other major publishers.
There are no authoritative criteria for determining a `preferable' book plate
asset amortization method based on the particular circumstances; however, we
conclude that the change in the method of accounting for book plate amortization
is to an acceptable alternative method which, based on your business judgment to
make this change for the reason cited above, is preferable in your
circumstances. We have not conducted an audit in accordance with generally
accepted auditing standards of any consolidated financial statements of the
Company as of any date or for any period subsequent to December 31, 1998, and
therefore we do not express any opinion on any consolidated financial statements
of Houghton Mifflin Company subsequent to that date.
Very truly yours,
/s/ Ernst & Young LLP
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<FISCAL-YEAR-END> DEC-31-1999
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<CASH> 4,494
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