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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 JULY 1, 1999 TO SEPTEMBER 30, 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 October 31, 1999.
Class Outstanding at October 31, 1999
- --------------------------------- ---------------------------------
Common Stock, $1 par value 31,095,798
Preferred Stock Purchase Rights 31,095,798
1 of 40
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HOUGHTON MIFFLIN COMPANY
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
<S> <C>
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
September 30, 1999 and 1998 and December 31, 1998 3-4
Consolidated Condensed Statements of Operations,
Comprehensive Income, and Retained Earnings --
Three Months Ended September 30, 1999 and 1998 5
Consolidated Condensed Statements of Operations,
Comprehensive Income, and Retained Earnings --
Nine Months Ended September 30, 1999 and 1998 6
Consolidated Condensed Statements of Cash Flows --
Nine Months Ended September 30, 1999 and 1998 7
Notes to Unaudited Consolidated Condensed
Financial Statements 8-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-37
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 39
Item 6. Exhibits and Reports on Form 8-K 39
Signatures 40
</TABLE>
<PAGE> 3
HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1999 1998 1998
------------- ------------- ------------
ASSETS
- ------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 8,591 $ 15,828 $ 3,953
Marketable securities and time deposits
available for sale, at fair value 819 37,957 49,203
Accounts receivable 365,021 350,448 170,706
Less: allowance for bad debts and book returns 29,532 30,597 27,969
---------- ---------- ----------
335,489 319,851 142,737
Inventories
Finished goods 161,828 143,173 141,457
Work in process 6,541 5,535 4,294
Raw materials 5,300 4,909 5,918
---------- ---------- ----------
173,669 153,617 151,669
Deferred income taxes 181 12,160 --
Prepaid expenses 3,586 2,496 2,279
---------- ---------- ----------
Total current assets 522,335 541,909 349,841
Property, plant, and equipment
and book plates (net of accumulated
depreciation and amortization of $195,428 at
September 30, 1999, $183,796 at September 30, 1998
and $193,277 at December 31, 1998) 148,177 114,968 130,265
Goodwill and other intangible assets, net 452,489 449,850 445,223
Deferred income taxes 8,394 3,807 7,885
Other assets 49,276 45,222 42,353
---------- ---------- ----------
$1,180,671 $1,155,756 $ 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 AMOUNTS)
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1999 1998 1998
------------- ------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C>
Current liabilities
Accounts payable $ 82,285 $ 63,764 $ 39,029
Commercial paper 89,418 110,022 11,894
Royalties 41,122 37,849 48,371
Salaries, wages, and commissions 28,328 28,253 27,177
Current and deferred income taxes 56,029 66,389 7,500
Other 40,477 35,589 27,019
Current portion of long-term debt 20,077 103,322 83,322
----------- ----------- -----------
Total current liabilities 357,736 445,188 244,312
Long-term debt 304,631 244,500 274,521
Accrued royalties payable 1,005 1,543 1,148
Other liabilities 31,506 27,418 28,459
Accrued postretirement medical benefits 29,295 28,651 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; 31,072,823 shares
issued at September 30, 1999, 30,472,049 shares
issued at September 30, 1998, and 30,549,706
shares issued at December 31, 1998) 31,073 30,472 30,550
Capital in excess of par value 100,717 71,596 95,740
Retained earnings 411,755 352,948 330,672
----------- ----------- -----------
543,545 455,016 456,962
Notes receivable from stock purchase agreements (4,553) (4,567) (4,621)
Unearned compensation related to
restricted stock (3,571) (5,130) (2,318)
Common shares held in treasury, at cost
(762,497 shares at September 30, 1999, 357,575
shares at September 30, 1998, and 374,052
shares at December 31, 1998) (25,621) (7,973) (8,681)
Benefits Trust assets, at market (53,293) (40,814) (61,432)
Accumulated other comprehensive income (loss) (9) 11,924 18,378
----------- ----------- -----------
Total stockholders' equity 456,498 408,456 398,288
----------- ----------- -----------
$ 1,180,671 $ 1,155,756 $ 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 SEPTEMBER 30, 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 $ 342,038 $ 338,962
College Publishing 87,084 79,863
Other 28,668 28,035
--------- ---------
457,790 446,860
Costs and expenses:
Cost of sales 169,398 168,011
Selling and administrative 123,692 122,095
--------- ---------
293,090 290,106
Operating income 164,700 156,754
Other income (expense):
Net interest expense (8,535) (9,292)
Gains (losses) on INSO Corporation common stock
and equity in earnings of INSO Corporation (5,586) 18,841
Acquired in-process research and development -- (3,500)
--------- ---------
(14,121) 6,049
--------- ---------
Income before taxes and extraordinary item 150,579 162,803
Income tax provision 60,263 66,893
--------- ---------
Income before extraordinary item 90,316 95,910
Extraordinary gain on extinguishment of debt,
net of tax of $21,958 and $13,042 30,323 18,010
--------- ---------
Net income 120,639 113,920
Other comprehensive income, net of tax:
Unrealized gain on available for sale securities 34 11,781
--------- ---------
Comprehensive income $ 120,673 $ 125,701
========= =========
Retained earnings at beginning of period $ 294,882 $ 242,627
Net income 120,639 113,920
Dividends paid (3,766) (3,599)
--------- ---------
Retained earnings at end of period $ 411,755 $ 352,948
========= =========
Earnings per share:
Basic
Income before extraordinary item $ 3.13 $ 3.35
Extraordinary gain on extinguishment of debt, net of tax 1.05 0.63
--------- ---------
Net income $ 4.18 $ 3.98
========= =========
Diluted
Income before extraordinary item $ 3.07 $ 3.31
Extraordinary gain on extinguishment of debt, net of tax 1.03 0.62
--------- ---------
Net income $ 4.10 $ 3.93
========= =========
Cash dividends paid per common share $ 0.130 $ 0.125
</TABLE>
See accompanying notes to unaudtied consolidated condensed financial statements.
5
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS,
COMPREHENSIVE INCOME, AND RETAINED EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 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 $ 572,114 $ 539,511
College Publishing 123,810 116,521
Other 67,030 65,201
--------- ---------
762,954 721,233
Costs and expenses:
Cost of sales 328,247 316,526
Selling and administrative 302,257 278,487
--------- ---------
630,504 595,013
Operating income 132,450 126,220
Other income (expense):
Net interest expense (23,754) (27,398)
Gains (losses) on INSO Corporation common stock
and equity in earnings of INSO Corporation (5,586) 18,815
Acquired in-process research and development -- (3,500)
Other expense -- (1,050)
--------- ---------
(29,340) (13,133)
--------- ---------
Income before taxes and extraordinary item 103,110 113,087
Income tax provision 41,373 47,007
--------- ---------
Income before extraordinary item 61,737 66,080
Extraordinary gain on extinguishment of debt,
net of tax of $21,958 and $13,042 30,323 18,010
--------- ---------
Net income 92,060 84,090
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available for sale securities (223) 11,924
--------- ---------
Comprehensive income $ 91,837 $ 96,014
========= =========
Retained earnings at beginning of period $ 330,672 $ 279,640
Net income 92,060 84,090
Dividends paid (10,977) (10,782)
--------- ---------
Retained earnings at end of period $ 411,755 $ 352,948
========= =========
Earnings per share:
Basic
Income before extraordinary item $ 2.14 $ 2.31
Extraordinary gain on extinguishment of debt, net of tax 1.05 0.63
--------- ---------
Net income $ 3.20 $ 2.94
========= =========
Diluted
Income before extraordinary item $ 2.10 $ 2.28
Extraordinary gain on extinguishment of debt, net of tax 1.03 0.62
--------- ---------
Net income $ 3.14 $ 2.90
========= =========
Cash dividends paid per common share $ 0.380 $ 0.375
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
6
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 92,060 $ 84,090
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain on extinguishment of debt, net of tax (30,323) (18,010)
Depreciation and amortization 72,581 78,265
Amortization of unearned compensation on restricted stock 846 2,366
(Gains) losses on INSO Corporation common stock
and equity in earnings of INSO Corporation 5,586 (18,815)
Acquired in-process research and development -- 3,500
Changes in operating assets and liabilities:
Accounts receivable, net (189,375) (160,299)
Inventories (20,728) (8,574)
Accounts payable 42,325 15,620
Royalties, net (9,207) (2,465)
Deferred and income taxes payable 39,734 44,622
Salaries, wages, and commissions 543 6,519
Other, net 13,222 9,375
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,264 36,194
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from the sale of INSO Corporation common stock -- 210
Book plate expenditures (39,583) (38,298)
Acquisition of publishing and technology assets (43,201) (14,484)
Property, plant, and equipment expenditures (20,145) (12,787)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (102,929) (65,359)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Dividends paid on common stock (10,977) (10,782)
Issuance of commercial paper 77,524 48,675
Issuance of long-term financing 80,000 --
Payment of long-term financing (50,128) --
Exercise of stock options 1,397 1,765
Purchase of treasury stock (7,580) --
Other 67 (286)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 90,303 39,372
Increase in cash and cash equivalents 4,638 10,207
Cash and cash equivalents at beginning of period 3,953 5,621
--------- ---------
Cash and cash equivalents at end of period $ 8,591 $ 15,828
========= =========
Supplementary disclosure of cash flow information:
Income taxes paid $ 1,526 $ 1,812
Interest paid $ 22,981 $ 33,390
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
7
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
Houghton Mifflin Company and its subsidiaries 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.
Due to rounding for the nine months ended September 30, 1999, the earnings
per share amounts do not total to net income earnings per share.
(2) MARKETABLE SECURITIES
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.
During the third quarter of 1999, Houghton Mifflin elected to deliver
approximately 1.9 million shares of the common stock of INSO to repay its
outstanding 6% Exchangeable Notes due 1999 - Stock Appreciation Linked
Securities, or SAILS (see Note 4).
(3) ACQUISITIONS
On May 5, 1999, Houghton Mifflin acquired all of the outstanding stock of
Sunburst Communications, Inc., or Sunburst, a leading developer of software and
video instructional materials. This acquisition was accounted for as a purchase,
and the net 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 for the acquisition amounted to
approximately $33.9 million, of which $32.0 million was paid to the former
shareholders of Sunburst and $1.9 million was expended to repay debt and pay
other acquisition-related fees. The cost of the acquisition was allocated on the
basis of the estimated fair market value of the assets acquired and liabilities
assumed. Goodwill and other intangible assets of $23.5 million were recorded as
part of the acquisition.
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 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
8
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(3) ACQUISITIONS - continued
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 purchase price over the net assets
acquired, or goodwill, will be amortized on a straight-line basis over a period
of eight years.
On December 16, 1998, Houghton Mifflin acquired 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 $11.1 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 which
resulted in additional goodwill. In addition, based on the acquisition
agreement, there remains up to $4.0 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 represented 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.
Since none of the above acquisitions materially affect consolidated
results, no pro forma information is provided.
9
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(4) STOCK APPRECIATION INCOME-LINKED SECURITIES
On August 1, 1998, Houghton Mifflin redeemed 50%, or $65.3 million in
aggregate principal, of its outstanding SAILS. Redemption of the SAILS was made
at the option of Houghton Mifflin pursuant to Section 1301 (b) of the Indenture
dated as of March 15, 1994 between Houghton Mifflin and State Street Bank and
Trust Company (successor to the First National Bank of Boston), as Trustee, as
supplemented by a First Supplemental Indenture dated as of July 27, 1995.
The SAILS were redeemed at an exchange rate equal to (i) two shares of the
common stock of INSO, par value $0.01 per share, for each SAILS, or
approximately 1.9 million shares, and (ii) cash of $2.0 million for the payment
of all accrued and unpaid interest at the date of the redemption. The redemption
represented a disposition of the shares and generated a one-time non-cash gain
of $15.4 million ($8.9 million after tax), or $0.31 per share. Houghton Mifflin
also recognized an $18.0 million extraordinary after-tax gain, or $0.62 per
share, on the early extinguishment of debt resulting from the redemption.
On August 2, 1999, the remaining 50%, or $65.3 million in aggregate
principal, of the outstanding SAILS matured. In accordance with the terms of the
SAILS, Houghton Mifflin elected to deliver (i) two shares of the common stock of
INSO for each SAILS, or approximately 1.9 million shares, and (ii) cash of $2.0
million for the payment of all accrued and unpaid interest on the outstanding
SAILS. The transaction represented a disposition of the shares and generated a
non-cash loss of $5.6 million ($3.2 million after tax), or $0.11 per share.
Houghton Mifflin also recognized a $30.3 million extraordinary after-tax gain,
or $1.03 per share, on the extinguishment of debt resulting from the maturity.
(5) GOODWILL AND INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 1998
--------- --------- ------------
(in thousands)
<S> <C> <C> <C>
Goodwill and other
intangible assets $ 555,947 $ 522,618 $ 525,279
Publishing rights 17,724 17,724 17,724
Other 4,000 4,000 4,000
Less: accumulated amortization (125,182) (94,492) (101,780)
--------- --------- ---------
Total $ 452,489 $ 449,850 $ 445,223
========= ========= =========
</TABLE>
The carrying value 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.
10
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(6) EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted earnings
per share for the three months ended September 30, 1999 and September 30, 1998
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------
1999 1998
---- ----
<S> <C> <C>
Numerator:
Income before extraordinary item $ 90,316 $ 95,910
Extraordinary gain on extinguishment of debt, net of tax 30,323 18,010
-------- --------
Net income $120,639 $113,920
======== ========
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding 28,876 28,610
Effect of dilutive securities:
Employee stock options 508 318
Restricted stock 23 26
-------- --------
531 344
Denominator for diluted earnings per share:
Adjusted weighted-average shares
outstanding and assumed conversions 29,407 28,954
======== ========
Basic earnings per share:
Income before extraordinary item $ 3.13 $ 3.35
Extraordinary gain on extinguishment of debt, net of tax 1.05 0.63
-------- --------
Net income $ 4.18 $ 3.98
======== ========
Diluted earnings per share:
Income before extraordinary item $ 3.07 $ 3.31
Extraordinary gain on extinguishment of debt, net of tax 1.03 0.62
-------- --------
Net income $ 4.10 $ 3.93
======== ========
</TABLE>
11
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(6) EARNINGS PER SHARE - continued
The table below sets forth the computation of basic and diluted earnings
per share for the nine months ended September 30, 1999 and September 30, 1998
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1999 1998
---- ----
<S> <C> <C>
Numerator:
Income before extraordinary item $61,737 $66,080
Extraordinary gain on extinguishment of debt, net of tax 30,323 18,010
------- -------
Net income $92,060 $84,090
======= =======
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding 28,798 28,564
Effect of dilutive securities
Employee stock options 525 359
Restricted stock 26 35
------- -------
551 394
Denominator for diluted earnings per share: ------- -------
Adjusted weighted-average shares
outstanding and assumed conversions 29,349 28,958
======= =======
Basic earnings per share:
Income before extraordinary item $ 2.14 $ 2.31
Extraordinary gain on extinguishment of debt, net of tax 1.05 0.63
------- -------
Net income $ 3.20 $ 2.94
======= =======
Diluted earnings per share:
Income before extraordinary item $ 2.10 $ 2.28
Extraordinary gain on extinguishment of debt, net of tax 1.03 0.62
------- -------
Net income $ 3.14 $ 2.90
======= =======
</TABLE>
There were no options for which the exercise price exceeded the average
market price of the common shares for the three months ended September 30, 1999.
Options to purchase 340,218 shares of common stock at September 30, 1998 were
not included in the computation of diluted earnings per share for the three
months ended September 30, 1998 because the options' exercise prices were
greater than the average market price of the common shares, and therefore, the
effect would be anti-dilutive.
For the nine months ended September 30, 1999, options to purchase 22,000
shares of common stock at September 30, 1999 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 anti-dilutive. For the same reason, options to purchase
246,734 shares of common stock at September 30, 1998 were not included in the
computation of diluted earnings per share.
12
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(7) ACCOUNTING CHANGE
In the first quarter of 1999, Houghton Mifflin 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 and will be 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 resulted in a
decrease in amortization expense of approximately $2.0 million for the three
months ended September 30, 1999 and approximately $3.1 million for the nine
months ended September 30, 1999.
(8) 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.
(9) 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
software for internal use, 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
software for internal use. This change did not have a material effect on results
for the nine months ended September 30, 1999.
(10) SEGMENT AND RELATED INFORMATION
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., Sunburst Technology
(formerly Houghton Mifflin Interactive Corporation, or HMI), and The Riverside
Publishing Company. Beginning in 1999, Houghton Mifflin focused Sunburst
Technology's business on the growing educational technology marketplace rather
than on the retail market. Sunburst Technology's products are sold primarily in
the K-12 school marketplace; therefore, the 1999 information relating to
Sunburst Technology is 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.
13
<PAGE> 14
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(10) SEGMENT AND RELATED INFORMATION - continued
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 technology-based instructional materials and
services for introductory and upper level courses in 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.
Other: This segment consists of the Trade & Reference Division, CAT, and
unallocated corporate-related items. In 1998, Sunburst Technology'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 United 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 tables summarize 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 income
or loss, income and expense not allocated to reportable segments.
14
<PAGE> 15
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(10) SEGMENT AND RELATED INFORMATION - continued
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
K-12 COLLEGE
PUBLISHING PUBLISHING OTHER CONSOLIDATED
---------- ---------- ----- ------------
(in thousands)
<S> <C> <C> <C> <C>
1999
Net sales from external customers $342,038 $ 87,084 $ 28,668 $457,790
Segment operating income 133,988 27,819 2,893 164,700
1998
Net sales from external customers $338,962 $ 79,863 $ 28,035 $446,860
Segment operating income (loss) 135,900 25,078 (4,224) 156,754
</TABLE>
RECONCILIATION OF SEGMENT INCOME TO THE CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS:
<TABLE>
<CAPTION>
September 30,
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Total income from reportable segments $ 164,700 $ 156,754
Unallocated income (expense):
Net interest expense (8,535) (9,292)
Gains (losses) on INSO Corporation common stock
and equity earnings of INSO Corporation (5,586) 18,841
Acquired in-process research and development -- (3,500)
========= =========
Income before taxes and extraordinary item $ 150,579 $ 162,803
========= =========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
K-12 COLLEGE
PUBLISHING PUBLISHING OTHER CONSOLIDATED
---------- ---------- ----- ------------
(in thousands)
<S> <C> <C> <C> <C>
1999
Net sales from external customers $572,114 $123,810 $ 67,030 $762,954
Segment operating income (loss) 125,490 12,817 (5,857) 132,450
1998
Net sales from external customers $539,511 $116,521 $ 65,201 $721,233
Segment operating income (loss) 125,214 11,077 (10,071) 126,220
</TABLE>
15
<PAGE> 16
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(10) SEGMENT AND RELATED INFORMATION - continued
RECONCILIATION OF SEGMENT INCOME TO THE CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS:
<TABLE>
<CAPTION>
September 30,
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Total income from reportable segments $ 132,450 $ 126,220
Unallocated income (expense):
Net interest expense (23,754) (27,398)
Gains (losses) on INSO Corporation common stock
and equity earnings of INSO Corporation (5,586) 18,815
Acquired in-process research and development -- (3,500)
Other expense -- (1,050)
--------- ---------
Income before taxes and extraordinary item $ 103,110 $ 113,087
========= =========
</TABLE>
(11) DEBT AND BORROWING AGREEMENTS
In April 1999, Houghton Mifflin issued $50 million of floating rate and $30
million of 5.99% medium-term notes through a public offering. The $50 million
medium-term notes mature on December 1, 2000. The $50 million of floating rate
debt was swapped to a fixed rate using two interest-rate swaps (5.90% and
5.95%), each with a notional amount of $25 million. The $30 million medium-term
notes mature on December 3, 2001 and were priced at $100 to yield an effective
rate of 5.99%. The proceeds from these issuances were used to repay existing
commercial paper debt.
In May 1999, Houghton Mifflin filed a registration statement on Form S-3
with the Securities and Exchange Commission covering up to $200 million of debt
securities and common stock, which may be issued in one or more offerings from
time to time.
(12) SUBSEQUENT EVENTS
At its October 27, 1999 meeting, the Board of Directors declared a
quarterly dividend of $0.13 per share, payable on November 24, 1999, to
shareholders of record on November 10, 1999.
16
<PAGE> 17
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:
- The School Division, which publishes for the elementary school
market;
- McDougal Littell Inc., which publishes for the secondary school
market;
- Great Source Education Group, Inc., which publishes supplementary
materials for both the elementary and secondary school markets;
- Sunburst Technology Corporation (formerly Houghton Mifflin
Interactive Corporation), which develops and sells multimedia
instructional products for both the elementary and secondary school
markets; and
- 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 approved, or "adopted," by the particular state's governing body.
17
<PAGE> 18
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 and 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,
technology-based instructional materials, and other 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 products 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:
- The Trade & Reference, or Trade, Division; and
- Computer Adaptive Technologies, Inc., or CAT.
18
<PAGE> 19
The Trade Division publishes fiction and nonfiction for adults and
children, dictionaries, and other 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 approximately
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 material adverse effect on Houghton
Mifflin's business, schedules of school adoptions and market acceptance of its
products can affect year-to-year revenue performance.
19
<PAGE> 20
RESULTS OF OPERATIONS:
THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998
in thousands of dollars, except per share amounts
NET INCOME:
<TABLE>
<CAPTION>
Three months ended September 30,
-----------------------------------------------------
Diluted earnings
(loss) per share
-----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income after tax, but excluding extraordinary and
infrequent items: $ 93,556 $ 88,598 $ 3.18 $ 3.06
Extraordinary and infrequent items, net of taxes,
where applicable:
Extraordinary gain on extinguishment of debt 30,323 18,010 1.03 0.62
Gain (loss) on surrender of INSO Corporation
common stock to satisfy indebtedness (3,240) 8,924 (0.11) 0.31
Gain on sale of INSO Corporation common stock -- 24 -- --
Acquired in-process research and development -- (3,500) -- (0.12)
Other gains (losses) -- 1,864 -- 0.06
--------- --------- ------ ------
Net income $ 120,639 $ 113,920 $ 4.10 $ 3.93
========= ========= ====== ======
</TABLE>
For the quarter ended September 30, 1999, consolidated net income was
$120.6 million, or $4.10 per share, compared to net income of $113.9 million, or
$3.93 per share, for the same period in 1998.
Income after tax, but excluding extraordinary and infrequent items, for the
third quarter of 1999 was $93.6 million, or $3.18 per share, compared to income
after tax, but excluding extraordinary and infrequent items, of $88.6 million,
or $3.06 per share, in the third quarter of 1998. The primary reasons for the
increase were higher net sales, a decrease in manufacturing and distribution
costs, lower plate amortization, and lower interest expense, partially offset by
increases in editorial expenses incurred for new program development and
product revisions, higher selling costs related to greater sales opportunities
in 1999 and beyond, and higher intangible asset amortization.
On August 2, 1999, the remaining one-half, or $63.3 million, of the 6%
Exchangeable Notes due 1999 - Stock Appreciation Income Linked Securities
("SAILS") matured. Houghton Mifflin delivered approximately 1.9 million shares
20
<PAGE> 21
of INSO common stock upon maturity of the SAILS. The transaction represented a
surrender of INSO common stock, and resulted in a non-cash loss of $5.6 million
($3.2 million after tax), or $0.11 per share. Houghton Mifflin also recognized
an extraordinary gain of $52.3 million ($30.3 million after tax), or $1.03 per
share, on the extinguishment of the remaining SAILS indebtedness. In the third
quarter of 1998, Houghton Mifflin recognized a non-cash gain of $15.4 million
($8.9 million after tax), or $0.31 per share, resulting from the surrender of
INSO common stock to redeem one-half of the outstanding SAILS, and an
extraordinary gain of $31.1 million ($18.0 million after tax), or $0.62 per
share, on the extinguishment of the SAILS indebtedness. Houghton Mifflin's
acquisition of CAT in July 1998 included a one-time write-off of acquired
in-process research and development of $3.5 million, or $0.12 per share. In
addition, during the third quarter of 1998 Houghton Mifflin recognized a
one-time gain of $3.2 million ($1.9 million after tax), or $0.06 per share,
related to INSO's sale of its linguistic software net assets.
NET SALES:
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------------------
Increase (decrease)
1999 1998 $ %
---- ---- --- ---
<S> <C> <C> <C> <C>
K-12 Publishing $342,038 $338,962 $ 3,076 0.9%
College Publishing 87,084 79,863 7,221 9.0%
Other 28,668 28,035 633 2.3%
-------- -------- --------
Total net sales $457,790 $446,860 $ 10,930 2.4%
======== ======== ========
</TABLE>
Net sales of $457.8 million for the quarter ended September 30, 1999
increased $10.9 million, or 2.4%, from $446.9 million reported in the third
quarter of 1998. The K-12 Publishing segment's net sales of $342.0 million in
the third quarter of 1999 increased $3.1 million, or 0.9%, from net sales of
$339.0 million in the third quarter of 1998. The increase was primarily
attributable to higher sales of School Division's science program, Sunburst
Technology's products, and Great Source Education Group's Write Source products.
The December 1998 acquisition of the elementary school science program
DiscoveryWorks and the May 1999 acquisition of Sunburst contributed to
21
<PAGE> 22
the K-12 Publishing segment's growth in the third quarter. These increases were
partially offset by a limited number of elementary and secondary school reading
and language arts adoptions, which affected the School Division and McDougal
Littell. These divisions reported slightly lower sales in the third quarter of
1999 than in the same period last year when both divisions benefited from
increased sales opportunities in the disciplines of reading, literature, and
language arts. The College Publishing segment's net sales of $87.1 million in
the third quarter of 1999 increased $7.2 million, or 9.0%, from net sales of
$79.9 million in the third quarter of 1998. The increase was largely due to
higher frontlist sales and sales to the high school advanced placement market.
The Other segment's net sales in the third quarter of 1999 increased $0.6
million, or 2.3%, to $28.7 million from last year's third-quarter net sales of
$28.0 million. This was primarily due to the Trade Division's higher sales of
adult trade titles, partially offset by lower revenues due to the shift of
Sunburst Technology to the K-12 Publishing segment beginning in 1999.
COSTS AND EXPENSES:
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------------------
Increase (decrease)
1999 1998 $ %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cost of sales $169,398 $168,011 $ 1,387 0.8%
Selling and administrative, excluding
intangible asset amortization 115,682 114,960 722 0.6%
Intangible asset amortization 8,010 7,135 875 12.3%
-------- -------- --------
Total costs and expenses $293,090 $290,106 $ 2,984 1.0%
======== ======== ========
</TABLE>
Cost of sales:
Cost of sales in the third quarter of 1999 increased $1.4 million, or 0.8%,
to $169.4 million from $168.0 million in the third quarter of 1998. The
increased cost of sales was due to higher editorial expenses, incurred for the
development of new programs and services and product revisions in preparation
for the sales opportunities in 2000 and beyond. Lower plate amortization and
lower manufacturing costs partially offset this increase. Lower manufacturing
costs were due to a change in the mix of products sold, which included a higher
22
<PAGE> 23
percentage of revenues from products with higher margins, and a continued focus
on controlling manufacturing costs. Lower plate amortization was due to the
accounting change regarding book plate amortization (see Note 7) and lower plate
spending. As a result of higher net sales, cost of sales decreased as a
percentage of sales, to 37.0% in the third quarter of 1999 from 37.6% in the
third quarter of 1998.
Selling and administrative:
In the third quarter of 1999, selling and administrative expenses,
excluding intangible asset amortization, were $115.7 million, an increase of
$0.7 million, or 0.6%, from $115.0 million in the third quarter of 1998. This
increase was due to higher selling and administrative expenses partially offset
by lower distribution costs. Selling expense increased due to expansion of the
sales staff and higher promotional expense related to the greater number of
sales opportunities in 1999 and beyond. In addition, the acquisitions of CAT and
Sunburst contributed to increased selling and administrative expenses in 1999.
The increases were partially offset by lower distribution costs. Implementation
of a new warehouse automation system and in-sourcing of the Trade Division's
distribution function contributed to the lower distribution costs. As a
percentage of sales, selling and administrative expenses, excluding intangible
asset amortization, decreased to 25.3% in the third quarter of 1999 from 25.7%
in the third quarter of 1998.
Intangible asset amortization:
Due to the 1998 acquisitions of CAT and DiscoveryWorks, the January 1999
acquisition of Little Planet, and the May 1999 acquisition of Sunburst
Communications, intangible asset amortization increased to $8.0 million in the
third quarter of 1999 from $7.1 million in the same period last year.
NET INTEREST EXPENSE:
Net interest expense of $8.5 million for the third quarter of 1999 was $0.8
million lower than in the same period in 1998. The reduction was due to the
23
<PAGE> 24
maturity of $63.3 million of SAILS on August 2, 1999 and the repayment of $39.5
million of debt at the end of 1998.
INCOME TAXES:
The income tax provision decreased $6.6 million, or 9.9%, over the same
period last year. This decrease was due to lower income and a decrease in the
effective tax rate to 40.2% in the third quarter of 1999 from 41.1% in the third
quarter of 1998. The decrease in the effective tax rate was primarily due to the
acquired in-process research and development charge in 1998.
K-12 PUBLISHING:
Operating income for the K-12 Publishing segment decreased $1.9 million, or
1.4%, to $134.0 million in the third quarter of 1999 from $135.9 million for the
same period in 1998. The slight decrease was primarily due to higher editorial
expenses and selling costs, partially offset by higher sales and lower plate
amortization, distribution, and manufacturing costs. Increased editorial
expenses, incurred for new program development and product revisions in
preparation for the sales opportunities in the year 2000 and beyond, were
partially offset by lower plate amortization. The increase in selling expense
was due to expansion of the sales staff and higher promotional expense related
to the increase in sales opportunities in 1999 and beyond. Lower distribution
costs were due to implementation of a new warehouse automation system. Lower
manufacturing costs were the result of favorable product mix, which included a
higher percentage of revenues from products with higher margins, and a continued
focus on controlling manufacturing costs.
COLLEGE PUBLISHING:
The College Publishing segment's operating income was $27.8 million in the
third quarter of 1999, compared to $25.1 million for the same period in 1998.
The increase was primarily due to higher sales, partially offset by higher
selling expenses. The increase in selling expenses was due to expansion of the
sales staff and higher promotional costs for sales opportunities in 1999 and
beyond.
24
<PAGE> 25
OTHER:
The Other segment's operating income was $2.9 million in the third quarter
of 1999 compared to an operating loss of $4.2 million in the same period in
1998. The significant improvement was primarily due to lower cost of sales and
lower distribution costs. The decrease in cost of sales was a result of lower
manufacturing costs and editorial costs, primarily due to the shift of Sunburst
Technology to the K-12 Publishing segment beginning in 1999. The decrease in
distribution costs was due to the shift of Trade's fulfillment process in-house,
which is more cost effective.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
in thousands of dollars, except per share amounts
NET INCOME:
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------------------------
Diluted earnings
(loss) per share
------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income after tax, but excluding extraordinary and
infrequent items: $ 64,977 $ 59,219 $ 2.21 $ 2.04
Extraordinary and infrequent items, net of taxes,
where applicable:
Extraordinary gain on extinguishment of debt 30,323 18,010 1.03 0.62
Gain (loss) on surrender of INSO Corporation
common stock to satisfy indebtedness (3,240) 8,924 (0.11) 0.31
Gain on sale of INSO Corporation common stock -- 24 -- --
Acquired in-process research and development -- (3,500) -- (0.12)
Other gains -- 1,413 -- 0.05
-------- -------- ------ ------
Net income $ 92,060 $ 84,090 $ 3.14 $ 2.90
======== ======== ====== ======
</TABLE>
Consolidated net income for the nine months ended September 30, 1999 was
$92.1 million, or $3.14 per share, compared to net income of $84.1 million, or
$2.90 per share, for the same period in 1998.
Income after tax, but excluding extraordinary and infrequent items, for the
nine months ended September 30, 1999 was $65.0 million, or $2.21 per share,
25
<PAGE> 26
compared to $59.2 million, or $2.04 per share, for the same period in 1998. The
primary reasons for the increase were higher sales, favorable product mix, lower
plate amortization, and lower interest expense, partially offset by increased
editorial costs, higher selling and administrative expenses, CAT's losses, and
additional intangible asset amortization.
During the first nine months of 1999, Houghton Mifflin recorded a non-cash
loss of $5.6 million ($3.2 million after tax), or $0.11 per share, resulting
from the surrender of INSO common stock upon maturity of the remaining
outstanding SAILS. In addition, Houghton Mifflin also recognized a $52.3 million
($30.3 million after tax), or $1.03 per share, extraordinary gain as a result of
the extinguishment of the remaining SAILS indebtedness. During 1998, Houghton
Mifflin recognized a non-cash gain of $15.4 million ($8.9 million after tax), or
$0.31 per share, resulting from the surrender of INSO common stock to redeem
one-half of the outstanding SAILS, and an extraordinary gain of $31.1 million
($18.0 million after tax), or $0.62 per share, on the extinguishment of the
SAILS indebtedness. The acquisition of CAT included a one-time write-off of
acquired in-process research and development of $3.5 million, or $0.12 per
share. During 1998, Houghton Mifflin also recorded a one-time gain (net of
charges) of $2.4 million ($1.4 million after tax), or $0.05 per share, related
to the equity investment in INSO.
NET SALES:
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------------------------
Increase (decrease)
1999 1998 $ %
---- ---- --- ---
<S> <C> <C> <C> <C>
K-12 Publishing $572,114 $539,511 $ 32,603 6.0%
College Publishing 123,810 116,521 7,289 6.3%
Other 67,030 65,201 1,829 2.8%
-------- -------- --------
Total net sales $762,954 $721,233 $ 41,721 5.8%
======== ======== ========
</TABLE>
Net sales for the nine months ended September 30, 1999 were $763.0 million,
an increase of 5.8% from the $721.2 million reported in the same period in 1998.
26
<PAGE> 27
The K-12 Publishing segment's net sales increased $32.6 million, or 6.0%, to
$572.1 million from $539.5 million in the same period in 1998. The increase was
due to higher net sales in all divisions in the K-12 Publishing segment.
Although sales opportunities were limited in elementary and secondary school
reading and language arts, new product lines such as reading intervention and
MathSteps contributed to the net sales gain, as well as the inclusion of sales
of DiscoveryWorks, the elementary school science program acquired in December
1998, and multimedia instructional materials acquired with Sunburst in May 1999.
The College Publishing segment's net sales of $123.8 million for the nine months
ended September 30, 1999 increased $7.3 million, or 6.3%, from net sales of
$116.5 million during the same period in 1998. The increase was primarily due to
higher sales of new frontlist titles and sales to the high school advanced
placement market. The Other segment's net sales for the nine months ended
September 30, 1999 increased $1.8 million, or 2.8%, to $67.0 million from $65.2
million in the first nine months of 1998. This was primarily due to the Trade
Division's increased sales from its adult trade list.
COSTS AND EXPENSES:
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------------------------
Increase (decrease)
1999 1998 $ %
---- ---- --- ---
<S> <C> <C> <C> <C>
Cost of sales $328,247 $316,526 $ 11,721 3.7%
Selling and administrative, excluding
intangible asset amortization 278,854 257,266 21,588 8.4%
Intangible asset amortization 23,403 21,221 2,182 10.3%
-------- -------- --------
Total costs and expenses $630,504 $595,013 $ 35,491 6.0%
======== ======== ========
</TABLE>
Cost of sales:
During the nine months ended September 30, 1999, cost of sales increased
$11.7 million, or 3.7%, to $328.2 million from $316.5 million during the same
period in 1998. The increased cost of sales was due to higher net sales and
increased editorial expense related to new program development and product
revisions in preparation for the sales opportunities in the year 2000 and
beyond. Higher editorial expenses were partially offset by lower manufacturing
27
<PAGE> 28
costs, a result of favorable product mix and continued focus on controlling
manufacturing costs, and lower plate amortization. As a percent of sales, cost
of sales decreased to 43.0% in 1999 from 43.9% in 1998.
Selling and administrative:
For the nine months ended September 30, 1999, selling and administrative
expenses, excluding intangible asset amortization, were $278.9 million, an
increase of $21.6 million, or 8.4%, from $257.3 million for the same period in
1998. The primary reasons for this increase were higher selling costs related to
sales opportunities in 1999 and beyond, the acquisitions of CAT and Sunburst,
and increased spending on efforts to improve customer support systems and to
address the Year 2000 computer issue.
Intangible Asset Amortization:
Due to the 1998 acquisitions of CAT and DiscoveryWorks, the January 1999
acquisition of Little Planet, and the May 1999 acquisition of Sunburst,
intangible asset amortization increased to $23.4 million in the nine months
ended September 30, 1999 from $21.2 million in the same period last year.
NET INTEREST EXPENSE:
Net interest expense for the nine months ended September 30, 1999 decreased
by $3.6 million to $23.8 million from $27.4 million for the same period in 1998.
The reduction was primarily due to the maturity on August 2, 1999 of $63.3
million of SAILS, the redemption of $63.3 million of SAILS on August 1, 1998,
and the repayment of $39.5 million of debt at the end of 1998.
EQUITY IN EARNINGS (LOSSES) OF INSO CORPORATION:
During the nine months ended September 30, 1998, Houghton Mifflin
recognized $3.4 million in equity earnings of INSO, comprised of a $3.2 million
one-time gain and $1.0 million of INSO's earnings, partially offset by $0.8
million of one-time charges recognized by INSO.
28
<PAGE> 29
OTHER EXPENSE:
In 1998, Houghton Mifflin recognized a $1.1 million pre-tax charge related
to its unsuccessful bid for a portion of Simon & Schuster's publishing assets.
INCOME TAX PROVISION:
The income tax provision decreased $5.6 million, or 12.0%, during the nine
months ended September 30, 1999 compared to the same period last year, primarily
due to lower income in 1999 than in 1998. This decrease was also due to a
decrease in the effective tax rate to 40.1% in 1999 from 41.6% in 1998. The
decrease in the effective tax rate reflects the non-deductible charge for
acquired in-process research and development from CAT in 1998.
K-12 PUBLISHING:
The K-12 Publishing segment's net sales of $572.1 million during the nine
months ended September 30, 1999 increased $32.6 million, or 6.0%, from net sales
of $539.5 million in the same period of 1998. The increase was attributable to
strong sales of the School Division's reading intervention products, MathSteps,
and science program; McDougal Littell's social studies products; Great Source
Education Group's Write Source products; The Riverside Publishing Company's
custom testing products; and Sunburst Technology's products.
Operating income for the K-12 Publishing segment was $125.5 million in the
first nine months of 1999 compared to $125.2 million in the same period of 1998.
Cost of sales, selling and administrative expenses, and intangible asset
amortization increased in the first nine months of 1999. Cost of sales rose due
to higher editorial expenses incurred for new program development and product
revisions in preparation for the sales opportunities in the year 2000 and
beyond, partially offset by lower plate amortization. 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 and beyond.
Administrative expenses rose as spending on efforts to improve customer support
29
<PAGE> 30
systems and to address the Year 2000 computer issue increased. Higher selling
and administrative expenses were also due to the shift of Sunburst Technology to
the K-12 Publishing segment. The increase in intangible asset amortization was
due to the December 1998 acquisition of DiscoveryWorks, the January 1999
acquisition of Little Planet, and the May 1999 acquisition of Sunburst.
COLLEGE PUBLISHING:
The College Publishing segment's operating income was $12.8 million in the
first nine months of 1999, compared to $11.1 million for the same period in
1998. The increase in operating income was primarily caused by higher net sales,
partially offset by higher selling expenses.
OTHER:
The Other segment's net sales for the nine months ended September 30, 1999
increased $1.8 million, or 2.8%, to $67.0 million from $65.2 million in the same
period of 1998. The increase was primarily due to increased sales of adult trade
titles by the Trade Division. 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 Sunburst Technology to the K-12 Publishing
segment beginning in 1999.
The Other segment's operating loss was $5.9 million during the nine months
ended September 30, 1999 compared to a loss of $10.1 million in the same period
of 1998. The lower operating loss was primarily due to the shift of Sunburst
Technology to the K-12 Publishing segment, higher net sales and lower
manufacturing and distribution costs for the Trade Division, partially offset by
the operating expenses and intangible asset amortization of CAT.
30
<PAGE> 31
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
approximately 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 nine months ended September 30, 1999, Houghton Mifflin used
$107.4 million of net borrowings to cover its seasonal working capital needs and
to fund publishing and capital investments. During the nine months ended
September 30, 1998, Houghton Mifflin used $48.7 million of net borrowings to
cover its seasonal working capital needs and to fund publishing and capital
investments.
Net cash provided by operating activities was $17.3 million during the nine
months ended September 30, 1999, a $18.9 million decrease from the $36.2 million
provided during the same period in 1998. Net income excluding non-cash items
increased by $11.7 million. Changes in operating assets and liabilities used
$30.7 million more cash during the nine months ended September 30, 1999 than in
the same period in 1998 as a result of higher accounts receivable and
inventories partially offset by higher accounts payable.
Cash used in investing activities was $102.9 million during the nine months
ended September 30, 1999, an increase of $37.6 million from the $65.4 million
used in the same period in 1998. The increase was principally due to the
acquisitions of Sunburst Communications and the Little Planet Literacy Series, a
contingent consideration payment related to the 1998 acquisition of CAT, and a
$7.4 million increase in property, plant and equipment expenditures.
31
<PAGE> 32
Net proceeds from financing activities increased by $50.9 million during
the nine months ended September 30, 1999 from the same period in 1998. In the
first quarter of 1999, Houghton Mifflin made common stock repurchases totaling
approximately $7.6 million.
In January 1999, Houghton Mifflin refinanced $50 million outstanding under
its Revolving Credit Facility by issuing commercial paper. In April 1999,
Houghton Mifflin issued $80 million of medium-term notes; proceeds from this
issuance were 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 foreseeable future.
On May 7, 1999, Houghton Mifflin filed a registration statement on Form S-3
with the Securities and Exchange Commission covering up to $200 million 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
32
<PAGE> 33
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 varying extents
and in a variety of ways that are uncertain at the date of this report.
To address this issue, Houghton Mifflin has created a plan under the
direction of a Program 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 has focused 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 determined that it had 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 was 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
replacement of the existing royalty system has been delayed until 2000 due to a
lack of resources to complete the project. Instead, Houghton Mifflin has
remediated the existing system to be Year 2000 compliant. The following chart
33
<PAGE> 34
(which excludes the customer order management system), includes the remediation
of the existing royalty system and presents the estimated average status of
completion for the information technology area and the expected completion date
for 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 80 November 30, 1999
- -------------------------------------------------------------------------------------------------------------------
Implementation 99 November 30, 1999
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The estimated completion date for the testing and implementation phase has
been extended to November 30, 1999. The extension is mainly due to the
complexity of remediating and testing the mainframe operating environment.
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
and in order to provide adequate testing. Houghton Mifflin has completed the
assessment phase of this system and is approximately 90% complete with the
replacement phase and 80% complete with the testing and certification phase. The
replacement and testing phase is expected to be completed by February 2000.
Houghton Mifflin has instituted the contingency plan for this system, which
includes remediation of the existing system. The assessment and remediation of
the existing customer order management system has been completed and the testing
is expected to be completed by November 30, 1999.
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 100 Completed
- -------------------------------------------------------------------------------------------------------------------
Implementation 100 Completed
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Houghton Mifflin has assessed the compliance of its technology product
lines by testing the products in a Year-2000-compliant environment. In most
34
<PAGE> 35
cases, there was no need for remediation or replacement of the product.
Houghton Mifflin has completed all phases of its product review. Based upon the
results, Houghton Mifflin does not expect that the effect of Year 2000 issues on
Houghton Mifflin's technology products will present 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
properly correct their own Year 2000 computer issues. Houghton Mifflin continues
to monitor the responses and progress of these parties. In addition, Houghton
Mifflin is testing 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 September 30, 1999,
Houghton Mifflin had spent approximately $25 million ($13 million expensed and
$12 million capitalized for new systems) on its Year 2000 computer project and
the development of new systems and systems modifications.
35
<PAGE> 36
Houghton Mifflin has assessed the Year 2000 readiness of Sunburst
Communications, a company acquired in May 1999, and expects any remediation
actions to be completed by November 30, 1999. The above discussion, therefore,
does not include the effect of Sunburst on Houghton Mifflin's Year 2000
readiness.
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 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,
36
<PAGE> 37
Houghton Mifflin has developed contingency plans for critical facilities,
critical applications and the infrastructure that support those applications.
The contingency plans include the use of manual or alternate processes.
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.
37
<PAGE> 38
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.
Due to the seasonal nature of its business, Houghton Mifflin's borrowings
under its commercial paper program typically increase through the third quarter
of each year. The outstanding commercial paper balance was $89.4 million at
September 30, 1999, $11.9 million at December 31, 1998, and $110.0 million at
September 30, 1998. The average interest rate on the commercial paper for the
nine months ended September 30, 1999 was 5.20%. The carrying value of the
commercial paper equals fair value due to the short-term maturity of the
instrument.
During the nine months ended September 30, 1999, an additional $30.0
million of long-term debt was issued at a fixed rate of 5.99%. The fair value of
this debt at September 30, 1999 was $29.6 million.
"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 could adversely affect selling expenses; (vi)
regulatory changes which could 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.
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<PAGE> 39
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
None
39
<PAGE> 40
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: November 15, 1999 /s/ Gail Deegan
-------------------------
Gail Deegan
Executive Vice President,
Chief Financial Officer
Dated: November 15, 1999 /s/ David R. Caron
-------------------------
David R. Caron
Vice President, Corporate
Controller
40
<PAGE> 41
Houghton Mifflin Company
Index To Exhibits
Item 6(a)
<TABLE>
<CAPTION>
Exhibit No Description of Document Page Number in This Report
- ---------- ----------------------- --------------------------
<S> <C> <C>
(27) Financial Data Schedule
</TABLE>
41
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,591
<SECURITIES> 819
<RECEIVABLES> 365,021
<ALLOWANCES> 29,532
<INVENTORY> 173,669
<CURRENT-ASSETS> 522,335
<PP&E> 343,605
<DEPRECIATION> 195,428
<TOTAL-ASSETS> 1,180,671
<CURRENT-LIABILITIES> 357,736
<BONDS> 0
0
0
<COMMON> 31,073
<OTHER-SE> 425,425
<TOTAL-LIABILITY-AND-EQUITY> 1,180,671
<SALES> 457,790
<TOTAL-REVENUES> 457,790
<CGS> 169,398
<TOTAL-COSTS> 293,090
<OTHER-EXPENSES> 5,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,535
<INCOME-PRETAX> 150,579
<INCOME-TAX> 60,263
<INCOME-CONTINUING> 90,316
<DISCONTINUED> 0
<EXTRAORDINARY> 30,323
<CHANGES> 0
<NET-INCOME> 120,639
<EPS-BASIC> 4.18
<EPS-DILUTED> 4.10
</TABLE>
