<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD FROM APRIL 1, 2000 TO JUNE 30, 2000
COMMISSION FILE NUMBER 1-5406
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .............. to .................
HOUGHTON MIFFLIN COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1456030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 BERKELEY ST., BOSTON 02116-3764
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 351-5000
NOT APPLICABLE
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 2000.
Class Outstanding at July 31, 2000
------------------------------- ----------------------------
Common Stock, $1 par value 30,586,962
Preferred Stock Purchase Rights 30,586,962
1 of 32
<PAGE> 2
HOUGHTON MIFFLIN COMPANY
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2000 and 1999 and December 31, 1999 3 - 4
Condensed Consolidated Statements of Income,
Comprehensive Income, and Retained Earnings --
Three Months Ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Operations,
Comprehensive Loss, and Retained Earnings --
Six Months Ended June 30, 2000 and 1999 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 7
Notes to Unaudited Condensed Consolidated
Financial Statements 8 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
<PAGE> 3
HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE AMOUNTS)
June 30, June 30, December 31,
2000 1999 1999
-------- -------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 11,425 $ 7,698 $ 12,041
Marketable securities and
time deposits available
for sale, at fair value 638 11,079 638
Accounts receivable 215,046 197,237 178,887
Less: allowance for bad
debts and book returns 19,396 17,450 31,207
---------- ---------- ----------
195,650 179,787 147,680
Notes receivable 2,510 597 1,633
Inventories
Finished goods 208,584 183,308 152,818
Work in process 7,335 4,009 5,584
Raw materials 9,975 5,739 5,826
---------- ---------- ----------
225,894 193,056 164,228
Deferred and refundable
income taxes 53,614 52,716 35,889
Prepaid expenses 9,036 9,005 3,000
---------- ---------- ----------
Total current assets 498,767 453,938 365,109
Property, plant, and equipment
(net of accumulated
depreciation and amortization
of $84,657 at June 30, 2000,
$71,559 at June 30, 1999, and
$76,787 at December 31, 1999) 75,938 59,715 73,342
Book plates (net of accumulated
amortization of $94,694 at
June 30, 2000, $108,853 at
June 30, 1999 and $115,222
at December 31, 1999) 130,026 91,533 98,894
Goodwill and other intangible
assets, net 448,594 460,150 452,338
Other assets 52,601 50,507 49,060
---------- ---------- ----------
$1,205,926 $1,115,843 $1,038,743
========== ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE AMOUNTS)
June 30, June 30, December 31,
2000 1999 1999
----------- ---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 72,788 $ 62,622 $ 55,601
Commercial paper 249,046 185,586 21,358
Royalties 29,002 25,948 51,141
Salaries, wages, and
commissions 14,370 9,610 29,814
Other accrued expenses 34,744 32,865 31,246
Current portion of
long-term debt 50,029 83,468 70,037
---------- ---------- ----------
Total current liabilities 449,979 400,099 259,197
Long-term debt 254,693 304,630 254,638
Accrued royalties payable 2,163 1,157 967
Other liabilities 36,113 30,210 33,406
Accrued postretirement
benefits 29,592 29,144 29,213
Deferred income taxes 28,301 15,601 28,301
Stockholders' equity
Preferred stock, $1 par
value; 500,000 shares
authorized, none issued -- -- --
Common stock, $1 par value;
(70,000,000 shares
authorized; 31,740,183
shares issued at
June 30, 2000,
30,930,077 shares
issued at June 30, 1999,
and 31,098,023 shares
issued at December 31,
1999) 31,740 30,930 31,098
Capital in excess of
par value 133,999 105,194 108,627
Retained earnings 360,605 294,882 392,225
---------- ---------- ----------
526,344 431,006 531,950
Notes receivable from stock
purchase agreements (15,672) (4,665) (4,645)
Unearned compensation related
to restricted stock (2,881) (2,674) (3,029)
Common shares held in treasury,
at cost (1,179,926 shares at
June 30, 2000, 718,843
shares at June 30, 1999 and
1,045,493 shares at December 31,
1999) (41,681) (23,468) (36,411)
Benefits Trust assets, at market (61,025) (61,496) (54,844)
Accumulated other comprehensive
loss -- (3,701) --
---------- ---------- ----------
Total stockholders' equity 405,085 335,002 433,021
---------- ---------- ----------
$1,205,926 $1,115,843 $1,038,743
========== ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements
4
<PAGE> 5
HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME,
COMPREHENSIVE INCOME, AND RETAINED EARNINGS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2000 1999
-------- --------
Net sales by industry segment:
K-12 Publishing $203,650 $178,105
College Publishing 22,997 21,861
Other 24,139 20,917
-------- --------
250,786 220,883
Costs and expenses:
Cost of sales 110,086 101,626
Selling and administrative 105,034 96,688
Acquired in-process research and development 1,300 --
-------- --------
216,420 198,314
Operating income 34,366 22,569
Other income (expense):
Net interest expense (8,512) (8,450)
-------- --------
Income before taxes 25,854 14,119
Income tax provision 10,595 5,746
-------- --------
Net income 15,259 8,373
Other comprehensive income (loss), net of tax:
Unrealized loss on available for sale securities -- (2,465)
-------- --------
Comprehensive income $ 15,259 $ 5,908
======== ========
Retained earnings at beginning of period $349,129 $290,116
Net income 15,259 8,373
Dividends paid (3,783) (3,607)
-------- --------
Retained earnings at end of period $360,605 $294,882
======== ========
Earnings per share:
Net income per share - basic $ 0.52 $ 0.29
Net income per share - diluted $ 0.52 $ 0.29
Cash dividends paid per common share $ 0.130 $ 0.125
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE> 6
HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS,
COMPREHENSIVE LOSS, AND RETAINED EARNINGS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2000 1999
--------- ---------
Net sales by industry segment:
K-12 Publishing $ 266,053 $ 230,076
College Publishing 38,385 36,726
Other 44,842 38,362
--------- ---------
349,280 305,164
Costs and expenses:
Cost of sales 175,370 158,863
Selling and administrative 196,992 178,549
Acquired in-process research
and development 1,300 --
--------- ---------
373,662 337,412
Operating loss (24,382) (32,248)
Other income (expense):
Net interest expense (14,941) (15,220)
--------- ---------
Loss before taxes (39,323) (47,468)
Income tax benefit (15,224) (18,889)
--------- ---------
Net loss (24,099) (28,579)
Other comprehensive
loss, net of tax:
Unrealized loss on available
for sale securities -- (22,079)
--------- ---------
Comprehensive loss $ (24,099) $ (50,658)
========= =========
Retained earnings at beginning
of period $ 392,225 $ 330,672
Net loss (24,099) (28,579)
Dividends paid (7,521) (7,211)
--------- ---------
Retained earnings at end
of period $ 360,605 $ 294,882
========= =========
Earnings per share:
Net loss per share - basic $ (0.83) $ (0.99)
Net loss per share - diluted $ (0.83) $ (0.99)
Cash dividends paid per common share $ 0.260 $ 0.250
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED; IN THOUSANDS)
2000 1999
--------- ---------
CASH FLOWS PROVIDED BY
(USED IN) OPERATING ACTIVITIES
Net loss $ (24,099) $ (28,579)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 40,766 35,085
Amortization of unearned
compensation on restricted stock 550 496
Acquired in-process research
and development 1,300 --
Changes in operating assets and
liabilities:
Accounts receivable, net (46,998) (33,680)
Inventories (61,666) (40,115)
Accounts payable 17,122 22,661
Royalties, net (21,438) (25,667)
Deferred and income taxes payable (21,075) (22,876)
Salaries, wages, and commissions (15,509) (18,175)
Other, net 1,424 1,631
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (129,623) (109,219)
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES
Book plate expenditures (47,359) (22,150)
Acquisition of publishing and
technology assets (14,589) (42,760)
Property, plant, and equipment expenditures (10,590) (11,201)
Issuance of notes receivable (1,407) (590)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (73,945) (76,701)
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES
Dividends paid on common stock (7,521) (7,211)
Issuance of commercial paper 227,688 123,692
Issuance of long-term financing -- 80,000
Debt repayment (20,030) (39)
Exercise of stock options 6,936 759
Purchase of treasury stock (4,734) (7,580)
Other 613 44
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 202,952 189,665
Increase (decrease) in cash and
cash equivalents (616) 3,745
Cash and cash equivalents at
beginning of period 12,041 3,953
--------- ---------
Cash and cash equivalents at
end of period $ 11,425 $ 7,698
========= =========
Supplementary disclosure of cash
flow information:
Income taxes paid $ 5,521 $ 1,216
Interest paid $ 15,729 $ 14,779
See accompanying notes to unaudited condensed consolidated financial statements.
7
<PAGE> 8
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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
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 2000 interim
financial statements.
(2) MARKETABLE SECURITIES
Houghton Mifflin accounts for its investment in equity securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," or SFAS 115.
The June 30, 1999 balance consisted primarily of equity securities. The
fair market value of these securities, $10.4 million, was included as marketable
securities in current assets, due to Houghton Mifflin's option and expectation
to use them to redeem the remaining $65.3 million aggregate principal amount of
its outstanding 6% Exchangeable Notes due 1999 - Stock Appreciation Income
Linked Securities, or SAILS, due on August 1, 1999. Houghton Mifflin exercised
its option and used the shares of INSO to redeem the SAILS in the third quarter
of 1999.
(3) ACQUISITIONS
On May 3, 2000, Houghton Mifflin acquired the net assets of Virtual
Learning Technologies, Inc., or VLT, an educational testing company that
specializes in on-line assessments. VLT will be integrated into The Riverside
Publishing Company. This 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 for the acquisition amounted to
approximately $14.3 million paid to the former shareholders of VLT. The cost of
the acquisition was allocated on the basis of the estimated fair market value of
the assets acquired and liabilities assumed, including the acquired in-process
research and development. A charge for acquired in-process research and
development of $1.3 million was also recorded as part of the acquisition.
Goodwill and other intangible assets of $12.5 million were recorded as part of
the acquisition, and are being amortized on a straight-line basis over periods
ranging from approximately 2 to 7 years.
8
<PAGE> 9
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--Continued--
(3) ACQUISITIONS - continued
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 $34.4 million, of which $32.0 million was paid to the former
shareholders of Sunburst and $2.4 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 $31.0 million were recorded as
part of the acquisition, and are being amortized on a straight-line basis over
periods ranging from approximately 7 to 20 years.
Since neither of the above acquisitions materially affect consolidated
results, no pro forma information is provided.
(4) GOODWILL AND INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following:
June 30, December 31,
2000 1999 1999
-------- -------- ------------
(in thousands)
Goodwill $554,682 $555,598 $545,251
Publishing rights 24,634 17,724 24,874
Other 15,330 4,000 15,860
Less: accumulated amortization (146,052) (117,172) (133,647)
-------- -------- --------
Total $448,594 $460,150 $452,338
======== ======== ========
Houghton Mifflin examines the carrying value of goodwill and other
intangible assets to determine whether there are any impairment losses. If
indicators of impairment are present, and the estimated undiscounted cash flows
to be derived from the related assets are not expected to be sufficient to
recover the assets' carrying amount, an impairment loss is charged to expense in
the period identified based upon the difference between the carrying amount and
the discounted cash flows.
9
<PAGE> 10
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--Continued--
(5) EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted earnings
per share for the three months ended June 30, 2000 and June 30, 1999 (in
thousands, except per share amounts):
Three months ended
June 30,
-----------------
2000 1999
------- -------
Numerator:
Net income $15,259 $ 8,373
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding 29,068 28,788
Effect of dilutive securities:
Employee stock options 216 534
Restricted stock 6 27
------- -------
222 561
Denominator for diluted earnings per share:
Adjusted weighted-average shares
outstanding and assumed conversions 29,290 29,349
======= =======
Basic earnings per share $ 0.52 $ 0.29
======= =======
Diluted earnings per share $ 0.52 $ 0.29
======= =======
The table below sets forth the computation of basic and diluted loss per
share for the six months ended June 30, 2000 and June 30, 1999 (in thousands,
except per share amounts):
Six months ended
June 30,
--------------------
2000 1999
-------- --------
Numerator:
Net loss $(24,099) $(28,579)
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding 28,938 28,772
Effect of dilutive securities -- --
Denominator for diluted earnings per share:
Adjusted weighted-average shares
outstanding and assumed conversions 28,938 28,772
======== ========
Basic loss per share $ (0.83) $ (0.99)
======== ========
Diluted loss per share $ (0.83) $ (0.99)
======== ========
10
<PAGE> 11
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--Continued--
(5) EARNINGS PER SHARE - continued
Options to purchase 41,000 shares of common stock were outstanding at June
30, 2000, and options to purchase 22,000 shares of common stock were outstanding
at June 30, 1999, but were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market prices of the common shares, and therefore, the effect would have been
anti-dilutive.
For the six months ended June 30, 2000 and 1999, 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.
(6) 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
Corporation and The Riverside Publishing Company. This operating segment
includes textbooks and instructional materials and services, tests for measuring
achievement and aptitude, clinical/special needs testing products, multimedia
instructional programs, and career guidance products and services. 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, technology-based instructional materials, and
services for introductory and upper level courses in the post-secondary
education market. Products may be in print or electronic form. 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, Computer
Adaptive Technologies, or CAT, and unallocated corporate-related items. The
Trade & Reference Division publishes fiction and nonfiction for adults and
children, dictionaries, and other reference works. The division also licenses
book rights to paperback publishers, book clubs, Web sites, and other publishers
and electronic businesses 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.
11
<PAGE> 12
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--Continued--
(6) SEGMENT AND RELATED INFORMATION - continued
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.
Summarized financial information concerning Houghton Mifflin's reportable
segments is shown in the following tables. The "Other" column includes
unallocated corporate-related items, operations which do not meet the
quantitative thresholds of Statement of Financial Accounting Standard No. 131,
"Disclosures About Segments of an Enterprise and Related Information,"
nonrecurring items, and as it relates to segment profit (loss), income and
expense not allocated to reportable segments.
THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999:
<TABLE>
<CAPTION>
K-12 COLLEGE
PUBLISHING PUBLISHING OTHER CONSOLIDATED
---------- ---------- ----- ------------
(in thousands)
<S> <C> <C> <C> <C>
2000
Net sales from external customers $203,650 $22,997 $24,139 $250,786
Segment operating income (loss) 41,271 (5,390) (1,515) 34,366
1999
Net sales from external customers 178,105 21,861 20,917 220,883
Segment operating income (loss) 33,186 (6,101) (4,516) 22,569
</TABLE>
RECONCILIATION OF SEGMENT INCOME TO THE CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS:
June 30,
2000 1999
------- --------
(in thousands)
Total income from reportable segments $ 34,366 $ 22,569
Unallocated expense:
Net interest expense (8,512) (8,450)
-------- --------
Income before taxes $ 25,854 $ 14,119
======== ========
12
<PAGE> 13
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--Continued
(6) SEGMENT AND RELATED INFORMATION - continued
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999:
<TABLE>
<CAPTION>
K-12 COLLEGE
PUBLISHING PUBLISHING OTHER CONSOLIDATED
---------- ---------- ----- ------------
(in thousands)
<S> <C> <C> <C> <C>
2000
Net sales from external customers $266,053 $38,385 $44,842 $349,280
Segment operating loss (1,676) (16,266) (6,440) (24,382)
1999
Net sales from external customers 230,076 36,726 38,362 305,164
Segment operating loss (8,498) (15,001) (8,749) (32,248)
</TABLE>
RECONCILIATION OF SEGMENT LOSSES TO THE CONSOLIDATED CONDENSED STATEMENTS OF
OPERATIONS:
June 30,
2000 1999
-------- --------
(in thousands)
Total loss from reportable segments ($24,382) ($32,248)
Unallocated income (expense):
Net interest expense (14,941) (15,220)
-------- --------
Loss before taxes ($39,323) ($47,468)
======== ========
(7) EXECUTIVE STOCK PURCHASE PLAN
On February 29, 2000, Houghton Mifflin provided financing for the purchase
of an aggregate of 281,430 shares of Houghton Mifflin common stock pursuant to
the 2000 Senior Management and Director Stock Purchase Plan. The purchases were
made at fair market value of $39.813 per share. The loans, which totaled
approximately $11.2 million, have an interest rate of 8.0% and are due on
February 28, 2005. The loans are collateralized by the shares of common stock
purchased and have full recourse against the borrower.
(8) PENDING ACCOUNTING PRONOUNCEMENTS
In 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, which must be
adopted no later than the fourth fiscal quarter of the fiscal year beginning
after December 15, 1999. Houghton Mifflin is currently evaluating the effects of
implementing this SAB.
On March 31, 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, which will be effective beginning July 1, 2000. Houghton Mifflin
is currently evaluating the effects of implementing this FASB Interpretation.
13
<PAGE> 14
HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--Continued
(9) SUBSEQUENT EVENTS
At its July 26, 2000 meeting, the Board of Directors declared a quarterly
dividend of $0.13 per share, payable on August 23, 2000, to shareholders of
record on August 9, 2000.
14
<PAGE> 15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"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 other similar expressions that
predict or indicate future events or trends, or that do not relate to historical
matters, 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 our expectations, and we expressly do 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 our educational and testing
products and services; (ii) the seasonal and cyclical nature of our 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 in elementary and secondary school and
college markets; (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 and new electronic products; (viii) delays
or unanticipated expenses in connection with development of new CAT products or
establishment of CAT testing facilities; (ix) operating and capital needs risks
that could impair investments in equity securities; and (x) other factors
detailed from time to time in Houghton Mifflin's filings with the Securities and
Exchange Commission.
Houghton Mifflin's principal business is publishing, and our 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, multimedia instructional programs, and career guidance
products and services. The principal markets for these products are elementary
and secondary schools.
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, 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.
15
<PAGE> 16
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. 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, or private career
schools, which 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, the selection of college product is made through the adoption process.
16
<PAGE> 17
Other
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.
The Trade Division publishes fiction and nonfiction for adults and
children, dictionaries, and other reference works. Its principal markets are
retail stores, including Internet bookstore sites, and wholesalers. The division
also sells reference materials to schools, colleges, office supply distributors,
and businesses. 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 licenses book rights and content to paperback publishers, book
clubs, Web sites, and other publishers and electronic businesses in the United
States and abroad. CAT specializes in the development and delivery of
computer-based testing solutions to corporations and associations worldwide.
Company Business as a Whole
We derive approximately 90% of our annual 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, we realize 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. We also
characteristically post 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 our business,
schedules of school adoptions and market acceptance of our products can affect
year-to-year revenue performance.
17
<PAGE> 18
RESULTS OF OPERATIONS:
SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
NET INCOME:
Three months ended June 30,
------------------------------------
Diluted earnings
(loss) per share
2000 1999 2000 1999
-------- ------- ----- -----
Income after tax, but
excluding infrequent items: $ 16,039 $ 8,373 $0.55 $0.29
Acquired in-process research
and development, (780) -- (0.03) --
net of taxes
-------- ------- ----- -----
Net income $ 15,259 $ 8,373 $0.52 $0.29
======== ======= ===== =====
For the quarter ended June 30, 2000, consolidated net income was $15.3
million, or $0.52 per share, compared to net income of $8.4 million, or $0.29
per share, for the same period in 1999.
Income after tax, but excluding infrequent items, for the second quarter of
2000 was $16.0 million, or $0.55 per share, compared to $8.4 million, or $0.29
per share, in the second quarter of 1999. The primary reasons for the increase
were higher net sales, operating efficiencies, and greater proportion of more
profitable products being sold, partially offset by higher selling costs related
to greater sales opportunities in 2000 and higher intangible asset amortization.
In the second quarter of 2000, the acquisition of Virtual Learning Technologies,
Inc., or VLT, included the purchase of certain technology under research and
development, which resulted in a charge of $1.3 million ($0.8 million after
tax), or $0.03 per share.
NET SALES:
Three months ended June 30,
---------------------------------------
Increase (decrease)
2000 1999 $ %
-------- -------- -------- ----
K-12 Publishing $203,650 $178,105 $ 25,545 14.3%
College Publishing 22,997 21,861 1,136 5.2
Other 24,139 20,917 3,222 15.4
-------- -------- -------- ----
Total net sales $250,786 $220,883 $ 29,903 13.5%
======== ======== ======== ====
Net sales of $250.8 million for the quarter ended June 30, 2000 increased
$29.9 million, or 13.5%, from
18
<PAGE> 19
$220.9 million reported in the second quarter of 1999. The K-12 Publishing
segment's net sales of $203.7 million in the second quarter of 2000 increased
$25.5 million, or 14.3%, from net sales of $178.1 million in the second quarter
of 1999. All divisions in the K-12 Publishing segment reported increased
revenues, attributable in part to increased sales of instructional materials in
California and Texas. The May 1999 acquisition of Sunburst Communications also
contributed to the K-12 Publishing segment's growth in the second quarter. The
College Publishing segment's net sales rose 5.2% in the second quarter of 2000,
to $23.0 million from $21.9 million in the second quarter of 1999. The Other
segment's net sales in the second quarter of 2000 increased $3.2 million, or
15.4%, to $24.1 million from last year's second-quarter net sales of $20.9
million. This was primarily due to the Trade Division's higher sales of adult
trade titles and the sale of publishing rights.
COSTS AND EXPENSES:
Three months ended June 30,
---------------------------------------
Increase (decrease)
2000 1999 $ %
-------- -------- -------- ---
Cost of sales $110,086 $101,626 $ 8,460 8.3%
Selling and administrative, excluding
intangible asset amortization 96,520 88,828 7,692 8.7
Intangible asset amortization 8,514 7,860 654 8.3
Acquired in-process research
and development 1,300 -- 1,300 --
-------- -------- -------- ---
Total costs and expenses $216,420 $198,314 $ 18,106 9.1%
======== ======== ======== ===
Cost of sales:
Cost of sales in the second quarter of 2000 increased $8.5 million, or
8.3%, to $110.1 million from $101.6 million in the second quarter of 1999. The
increased cost of sales was due to higher manufacturing and royalty costs, which
were the result of higher net sales, and increased plate amortization incurred
for new program development and product revisions in preparation for sales
opportunities in 2000 and beyond. As a percent of sales, cost of sales decreased
to 43.9% in the second quarter of 2000 from 46.0% in the second quarter of 1999.
Manufacturing costs and editorial expenses declined as percents of net sales.
Lower manufacturing costs as a percent of net sales were due to a greater
proportion of more profitable products being sold
19
<PAGE> 20
as well as continued cost control. Editorial costs have begun to decline as a
percent of net sales, reflecting the winding down of the current product
development schedule; this was partially offset by new product development,
particularly in Internet and other technology initiatives.
Selling and administrative:
In the second quarter of 2000, selling and administrative expenses,
excluding intangible asset amortization, were $96.5 million, an increase of $7.7
million, or 8.7%, from $88.8 million in the second quarter of 1999. Higher
selling expenses were partially offset by lower distribution and administrative
costs. Selling expense increased due to higher sampling and implementation
expenses relating to the greater number of sales opportunities in our markets in
2000. Implementation of a new warehouse automation system and in-sourcing of the
Trade Division's distribution function contributed to the lower distribution
costs. Administrative expenses decreased primarily due to completion of the
Company's Y2K effort during 1999. Due to higher net sales and lower
distribution and administrative costs, selling and administrative expenses,
excluding intangible asset amortization, decreased as a percentage of sales, to
38.5% in the second quarter of 2000 from 40.2% in the second quarter of 1999.
Intangible asset amortization:
Due to the May 2000 acquisition of VLT and May 1999 acquisition of Sunburst
Communications, intangible asset amortization increased to $8.5 million in the
second quarter of 2000 from $7.9 million in the same period last year.
NET INTEREST EXPENSE:
Net interest expense of $8.5 million for the second quarter of 2000 was
flat compared to the same period in 1999. Lower interest expense due to the
maturity of $65.3 million of SAILS in the third quarter of 1999 was offset by
higher seasonal borrowing needs and higher short-term interest rates.
20
<PAGE> 21
INCOME TAXES:
The income tax provision increased $4.8 million, or 84.4% over the same
period last year. This increase was due to higher operating income and an
increase in the effective tax rate to 41.0% in the second quarter of 2000 from
40.7% in the second quarter of 1999. The increase in the effective tax rate was
due to a higher amount of non-deductible intangible asset amortization.
K-12 PUBLISHING:
Operating income for the K-12 Publishing segment increased $8.1 million, or
24.4%, to $41.3 million in the second quarter of 2000 compared to $33.2 million
in the second quarter of 1999. The resulting operating margin for the second
quarter of 2000 was 20.3% compared to 18.6% in the second quarter of 1999. The
increase in the operating margin was primarily due to higher net sales and lower
distribution and administrative costs, partially offset by higher selling
expenses and the acquired in-process research and development charge related to
the VLT acquisition. The decrease in distribution costs was due to benefits from
the new warehouse systems implemented over the last two years. Administrative
costs were lower due to the completion of our Y2K initiative at the end of 1999.
The increase in selling expenses was due to higher sampling and implementation
expenses related to the increase in sales opportunities in 2000.
COLLEGE PUBLISHING:
The College Publishing segment's operating loss was $5.4 million in the
second quarter of 2000 compared to $6.1 million for the same period in 1999. The
decrease in the operating loss was primarily due to higher net sales and lower
manufacturing and distribution costs, partially offset by higher editorial and
selling expenses. Lower manufacturing costs were due to a greater proportion of
more profitable products being sold as well as continued cost control. Lower
distribution expenses were primarily due to the continued benefits of
implementing a new warehouse automation system. Increased editorial expenses
were incurred for new program development for sales opportunities in the year
2000 and beyond. The increase in selling costs was primarily due to the higher
sampling costs for sales opportunities in 2000.
21
<PAGE> 22
OTHER:
The Other segment's operating loss was $1.5 million in the second quarter
of 2000 compared to $4.5 million in the same period in 1999. The decreased
operating loss was primarily due to higher net sales and lower manufacturing and
distribution costs in the Trade Division, partially offset by higher
administrative costs. Lower manufacturing costs were due to a greater proportion
of more profitable products being sold. Distribution expenses decreased due to
the in-sourcing of the Trade Division's distribution function. Administrative
costs rose as spending increased on technology initiatives.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
NET LOSS:
Six months ended June 30,
--------------------------------------------
Diluted loss per
share
2000 1999 2000 1999
---- ---- ---- ----
Loss after tax, but excluding
infrequent items: $(23,319) $(28,579) $(0.81) $(0.99)
Acquired in-process research
and development,
net of taxes (780) -- (0.03) --
-------- -------- ------ ------
Net loss $(24,099) $(28,579) $(0.83) $(0.99)
======== ======== ====== ======
The consolidated net loss for the six months ended June 30, 2000 was $24.1
million, or $0.83 per share, compared to a net loss of $28.6 million, or $0.99
per share, for the same period in 1999.
The loss after tax, but excluding infrequent items, for the six months
ended June 30, 2000 was $23.3 million, or $0.81 per share, compared to $28.6
million, or $0.99 per share, for the same period in 1999. The improvement in
first-half 2000 results was due to higher net sales and more efficient
operations, partially offset by higher selling and product development costs.
The acquisition of VLT included the purchase of certain technology under
research and development, which resulted in a one-time charge of $1.3 million
($0.8 million after tax), or $0.03 per share.
22
<PAGE> 23
NET SALES:
Six months ended June 30,
--------------------------------------------
Increase (decrease)
2000 1999 $ %
-------- -------- --------- --------
K-12 Publishing $266,053 $230,076 $35,977 15.6%
College Publishing 38,385 36,726 1,659 4.5
Other 44,842 38,362 6,480 16.9
-------- -------- ------- ----
Total net sales $349,280 $305,164 $44,116 14.5%
======== ======== ======= ====
Net sales for the six months ended June 30, 2000 were $349.3 million, an
increase of 14.5% from the $305.2 million reported in the same period in 1999.
The K-12 Publishing segment's net sales increased $36.0 million, or 15.6%, to
$266.1 million in the six months ended June 30, 2000 from net sales of $230.1
million in the same period in 1999. The increase was due to higher net sales in
all divisions in the K-12 Publishing segment due to greater sales opportunities,
new product offerings, and robust funding in California. The increase was also
due to sales of multimedia instructional materials acquired with Sunburst
Communications in May 1999. The College Publishing segment's net sales of $38.4
million in the first half of 2000 increased $1.7 million, or 4.5%, from $36.7
million in the same period in 1999. The Other segment's net sales for the six
months ended June 30, 2000 increased $6.5 million, or 16.9%, to $44.8 million
from $38.4 million in the first half of 1999. This was primarily due to
increased sales from the Trade Division's adult list and publishing rights.
COSTS AND EXPENSES:
Six months ended June 30,
----------------------------------------
Increase (decrease)
2000 1999 $ %
-------- -------- -------- ----
Cost of sales $175,370 $158,863 $ 16,507 10.4%
Selling and administrative,
excluding intangible asset
amortization 180,347 163,156 17,191 10.5
Intangible asset amortization 16,645 15,393 1,252 8.1
Acquired in-process research
and development 1,300 -- 1,300 --
-------- -------- -------- ----
Total costs and expenses $373,662 $337,412 $ 36,250 10.7%
======== ======== ======== ====
23
<PAGE> 24
Cost of sales:
During the six months ended June 30, 2000, cost of sales increased $16.5
million, or 10.4%, to $175.4 million from $158.9 million during the same period
in 1999. The increased cost of sales was due to higher manufacturing and royalty
costs, which were the result of higher net sales, and increased editorial and
plate amortization incurred for new program development and product revisions in
preparation for sales opportunities in 2000 and beyond. As a result of higher
net sales, cost of sales decreased as a percentage of sales, to 50.2% in 2000
from 52.1% in 1999.
Selling and administrative:
For the six months ended June 30, 2000, selling and administrative
expenses, excluding intangible asset amortization, were $180.3 million, an
increase of $17.2 million, or 10.5%, from $163.2 million for the same period in
1999. The primary reasons for this increase were higher selling costs related to
sales opportunities in 2000 and beyond, the additional selling and
administrative costs for the operations of Sunburst, and the increased spending
on technology initiatives. The increases were partially offset by lower
distribution costs. Implementation of a new warehouse automation system in 1999
and in-sourcing of the Trade Division's distribution function contributed to the
lower distribution costs. As a percent of sales, selling and administrative
expense decreased to 51.6% for the six months ended June 30, 2000 compared to
53.5% in the first six months of 1999.
Intangible Asset Amortization:
Due to the May 2000 acquisition of VLT and the May 1999 acquisition of
Sunburst Communications, intangible asset amortization increased to $16.6
million in the six months ended June 30, 2000 from $15.4 million in the same
period last year.
24
<PAGE> 25
NET INTEREST EXPENSE:
Net interest expense for the six months ended June 30, 2000 decreased by
$0.3 million to $14.9 million from $15.2 million for the same period in 1999.
The reduction was primarily due to the maturity on August 2, 1999 of $65.3
million of SAILS, mostly offset by higher seasonal borrowing needs and higher
short-term interest rates.
INCOME TAX PROVISION:
The income tax benefit decreased $3.7 million, or 19.4%, over the same
period last year. The decrease was due to the lower operating loss in 2000 and
decrease in the effective tax rate to 38.7% in the first six months of 2000 from
39.8% for the same period in 1999. The decrease in the effective tax rate was
due to a higher amount of non-deductible intangible asset amortization.
K-12 PUBLISHING:
The operating loss for the K-12 Publishing segment decreased $6.8 million,
or 80.3%, to $1.7 million in the first half of 2000 from $8.5 million for the
same period of 1999. The decrease in the operating loss was primarily due to
higher net sales in all divisions and decreased distribution costs, partially
offset by higher cost of sales and selling expenses and the acquired in-process
research and development charge related to the VLT acquisition. Lower
distribution expenses were primarily due to the implementation of a new
warehouse automation system. Cost of sales rose due to higher manufacturing and
royalty costs, which were the result of higher net sales and higher editorial
expense and plate amortization for new product development and product revisions
in preparation for sales opportunities in the year 2000 and beyond. The increase
in selling expense was due to higher sampling and implementation expense related
to the increase in sales opportunities in 2000.
COLLEGE PUBLISHING:
The College Publishing segment's operating loss was $16.3 million in the
first half of 2000, compared to $15.0 million for the same period in 1999. The
increase in the operating loss was primarily due to higher
25
<PAGE> 26
editorial costs and selling and administrative expenses. Increased editorial
expenses were incurred for new program development for sales opportunities in
the year 2000 and beyond. The increase in selling expenses was primarily due to
sampling costs for sales opportunities in 2000. Administrative expenses rose due
to additional costs related to technology initiatives.
OTHER:
The Other segment's operating loss was $6.4 million during the six months
ended June 30, 2000 compared to $8.7 million in the same period of 1999. The
decrease in operating loss was primarily due to higher net sales and lower
distribution expenses in the Trade Division.
LIQUIDITY AND CAPITAL RESOURCES
Houghton Mifflin's principal businesses are seasonal, with almost 90% of
annual revenues derived from educational publishing in the K-12 and College
Publishing segments, which are markedly seasonal businesses. We realize
approximately 50% of net sales and a substantial portion of net income during
the third quarter and characteristically post a net loss in the first and fourth
quarters of the year.
This sales seasonality affects our operating cash flow. Houghton Mifflin
normally incurs a net cash deficit from all of our activities through the middle
of the third quarter of the year. We fund the deficit through the draw-down of
cash and marketable securities, supplemented by short-term borrowings,
principally commercial paper.
During the six months ended June 30, 2000, Houghton Mifflin used $207.7
million of net borrowings to cover our seasonal operating loss and working
capital needs and to fund publishing and capital investments. During the six
months ended June 30, 1999, Houghton Mifflin used $203.7 million of net
borrowings to cover our seasonal working capital needs and to fund publishing
and capital investments.
Net cash used in operating activities was $129.6 million during the six
months ended June 30, 2000, a $20.4 million increase from the $109.2 million of
cash used in operating activities during the same period in
26
<PAGE> 27
1999. Net income excluding non-cash items increased by $11.5 million. Changes in
operating assets and liabilities used $31.9 million more cash during the six
months ended June 30, 2000 than in the same period in 1999 due to higher
accounts receivable and inventories. Higher accounts receivable was primarily
due to the timing of sales, as second-quarter sales in 2000 increased
significantly over the second quarter of 1999. Inventory levels increased in
anticipation of greater sales opportunities in 2000.
Cash used for investing activities was $73.9 million during the six
months ended June 30, 2000, a decrease of $2.8 million from the $76.7 million
required in the same period in 1999. The decrease was principally due to the May
1999 acquisition of Sunburst Communications, partially offset by the May 2000
acquisition of VLT, and higher plate expenditures due to increased investments
in new products for sales opportunities in 2000 and beyond.
Net proceeds from financing activities increased by $13.3 million during
the six months ended June 30, 2000 from the same period in 1999. Houghton
Mifflin's net borrowings increased by $4.0 million during the six months ended
June 30, 2000 as compared to the same period in 1999. For the six months ended
June 30, 2000, Houghton Mifflin made common stock repurchases totaling
approximately $4.7 million, $2.8 million less than the same period last year.
Houghton Mifflin currently expects that positive cash flow from operations
for the full year 2000 will be sufficient to fund publishing capital
expenditures and dividend payments as well as to repay by year-end a portion of
the debt outstanding at the beginning of 2000. We intend to continue using the
short-term debt market, primarily commercial paper, for seasonal liquidity
needs.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition of VLT in May 2000, Houghton Mifflin
wrote off in-process research and development totaling $1.3 million ($0.8
million after tax) in the second quarter of 2000. The charge was necessary
because the acquired technology had not yet reached technological feasibility
and had no future alternative use. This amount represents an allocation of the
purchase price related to new versions of
27
<PAGE> 28
CyberSTAR and ActNow!.
CyberSTAR is a web-based assessment product specifically targeted at the
K-12 market that provides student testing, scoring, and reporting of test
questions. The CyberSTAR in-process project will replace the existing CyberSTAR
product and will include the following features and functions: (1) test
formatting/printing which will allow for production of a test booklet from
CyberSTAR; (2) database storage, which involves storing test results to a new
area of the database and production of reports from that new area; (3) grouping
student specific records written in Java which will replace the existing Visual
Basic Code that exists around student and course management; and (4) a portal,
which provides on-line delivery of the test and view of the grade report.
ActNow! is a complete web-based training program that offers educational
professionals anytime, anywhere precision training in a wide variety of industry
standard desktop software applications. The ActNow! in-process project involves
the creation of fully web-enabled delivery software; the current ActNow! product
delivers assessments from the local PC drive.
Houghton Mifflin anticipates that the products using the acquired
in-process research and development will be released during 2000. We expect that
the acquired in-process research and development will be successfully developed,
but we can not be sure that the products will be commercially successful.
The nature of the efforts required to develop the acquired in-process
research and development into commercially viable products principally relate to
the completion of all planning, designing, prototyping, verification, and
testing activities necessary to establish that the products can meet design
specifications, including functions, features and technical performance
requirements.
We determined the value of the acquired in-process research and development
by estimating the projected net cash flows related to the products and the stage
of completion of the products and discounting these cash flows to the net
present value. We based the resulting projected net cash flows on management's
estimates of revenues and operating profits related to the products. The revenue
estimates we used to value the in-process
28
<PAGE> 29
research and development were based on estimates of relevant market sizes and
growth factors, expected trends in the related technology, and the nature and
expected timing of new product introductions by Houghton Mifflin and our
competitors. The rates utilized to discount the net cash flows to the net
present value were based on a discount rate of 30% for CyberSTAR and 25% for
ActNow!. These discount rates took into account the time value of money and
investment risk factors described above.
The stage of completion at the time of acquisition was 29% for CyberSTAR
and 41% for ActNow!. The expected cost to complete is $0.3 million for CyberStar
and $0.2 million for ActNow!, and both projects are expected to be completed by
September 2000.
The estimates used by Houghton Mifflin in valuing the in-process research
and development were based upon assumptions we believe to be reasonable but
which are inherently uncertain and unpredictable. Our assumptions may be
incomplete or inaccurate, and unanticipated events and circumstances may occur.
Accordingly, actual results may vary from the projected results. Any such
variances may adversely affect the sales and profitability of future periods.
Additionally, the value of other intangible assets may become impaired.
29
<PAGE> 30
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, 1999.
Due to the seasonal nature of our business, Houghton Mifflin's borrowings
under our commercial paper program typically increase through the third quarter
of each year. The outstanding commercial paper balance was $249.0 million at
June 30, 2000, $21.4 million at December 31, 1999, and $185.6 million at June
30, 1999. The average interest rate on the commercial paper for the six months
ended June 30, 2000 was 6.48%. The carrying value of the commercial paper equals
fair value due to the short-term maturity of the instrument.
30
<PAGE> 31
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on April 26, 2000, at which
a quorum was present, the stockholders approved the following
proposals by the number of shares of common stock voted as noted:
Proposal #1 - Election of Class II Directors for a three-year term:
Number of Shares
Voted For Withheld
----------- --------
James O. Freedman 25,446,205 171,720
Charles R. Longsworth 25,440,386 177,539
Alfred L. McDougal 25,446,836 171,089
The following directors continued their terms in office: Nader F.
Darehshori, Michael Goldstein, Gail H. Klapper, Claudine B. Malone,
Ralph Z. Sorenson, and Robert J. Tarr, Jr.
Proposal #2 - Ratification of Ernst & Young LLP as independent
auditors for the fiscal year ended December 31, 2000.
For 25,567,579
Against 15,449
Abstained 34,897
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
None
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUGHTON MIFFLIN COMPANY
-------------------------
Registrant
Dated: August 9, 2000 /s/ Gail Deegan
--------------------------
Gail Deegan
Executive Vice President, Chief Financial Officer
Dated: August 9, 2000 /s/ David R. Caron
---------------------------
David R. Caron
Vice President, Corporate Controller
32
<PAGE> 33
Houghton Mifflin Company
Index To Exhibits
Item 6(a)
EXHIBIT NO DESCRIPTION OF DOCUMENT PAGE NUMBER IN THIS REPORT
(27) Financial Data Schedule
33
