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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD FROM JANUARY 1, 2000 TO MARCH 31, 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 April 30, 2000.
Class Outstanding at April 30, 2000
- ------------------------------- -----------------------------
Common Stock, $1 par value 31,577,409
Preferred Stock Purchase Rights 31,577,409
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HOUGHTON MIFFLIN COMPANY
INDEX
Part I. Financial Information Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 2000 and 1999 and December 31, 1999 3 - 4
Condensed Consolidated Statements of Operations,
Comprehensive Loss, and Retained Earnings --
Three Months Ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2000 and 1999 6
Notes to Unaudited Condensed Consolidated
Financial Statements 7 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
<PAGE> 3
HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, March 31, December 31,
2000 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,530 $ 4,494 $ 12,041
Marketable securities and time deposits
available for sale, at fair value 638 15,329 638
Accounts receivable 109,550 94,079 178,887
Less: allowance for bad debts and book returns 24,905 21,009 31,207
---------- ---------- ----------
84,645 73,070 147,680
Notes receivable 1,654 146 1,633
Inventories
Finished goods 177,482 161,241 152,818
Work in process 5,064 4,919 5,584
Raw materials 7,203 5,483 5,826
---------- ---------- ----------
189,749 171,643 164,228
Deferred income taxes 62,848 55,285 35,889
Prepaid expenses 15,276 12,227 3,000
---------- ---------- ----------
Total current assets 361,340 332,194 365,109
Property, plant, and equipment
and book plates (net of accumulated
depreciation and amortization of $167,775 at
March 31, 2000, $166,899 at March 31, 1999,
and $192,009 at December 31, 1999) 187,885 139,002 172,236
Goodwill and other intangible assets, net 444,608 443,969 452,338
Other assets 51,081 48,348 49,060
---------- ---------- ----------
$1,044,914 $ 963,513 $1,038,743
========== ========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
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HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, March 31, December 31,
2000 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 93,550 $ 75,552 $ 55,601
Commercial paper 105,195 38,413 21,358
Royalties 21,745 20,286 51,141
Salaries, wages, and commissions 8,337 5,475 29,814
Other accrued expenses 28,047 28,678 31,246
Current portion of long-term debt 50,045 83,322 70,037
----------- ----------- -----------
Total current liabilities 306,919 251,726 259,197
Long-term debt 254,672 304,362 254,638
Accrued royalties payable 982 1,057 967
Other liabilities 34,772 28,675 33,406
Accrued postretirement benefits 29,442 28,991 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; 31,567,584 shares issued at
March 31, 2000, 30,729,587 shares issued at March 31, 1999,
and 31,098,023 shares issued at December 31, 1999) 31,568 30,730 31,098
Capital in excess of par value 124,446 100,154 108,627
Retained earnings 349,129 290,116 392,225
----------- ----------- -----------
505,143 421,000 531,950
Notes receivable from stock purchase agreements (15,629) (4,631) (4,645)
Unearned compensation related to
restricted stock (2,956) (2,780) (3,029)
Common shares held in treasury, at cost
(1,170,479 shares at March 31, 2000, 602,059
shares at March 31, 1999, and 1,045,493 shares
at December 31, 1999) (41,397) (18,158) (36,411)
Benefits Trust assets, at market (55,335) (61,094) (54,844)
Accumulated other comprehensive loss -- (1,236) --
----------- ----------- -----------
Total stockholders' equity 389,826 333,101 433,021
----------- ----------- -----------
$ 1,044,914 $ 963,513 $ 1,038,743
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS,
COMPREHENSIVE LOSS, AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Net sales by industry segment:
K-12 Publishing $ 62,404 $ 51,971
College Publishing 15,387 14,864
Other 20,703 17,446
--------- ---------
98,494 84,281
Costs and expenses:
Cost of sales 65,284 57,238
Selling and administrative 91,959 81,862
--------- ---------
157,243 139,100
Operating loss (58,749) (54,819)
Other income (expense):
Net interest expense (6,429) (6,769)
--------- ---------
Loss before taxes (65,178) (61,588)
Income tax benefit (25,819) (24,635)
--------- ---------
Net loss (39,359) (36,953)
Other comprehensive loss, net of tax:
Unrealized loss on available for sale securities -- (19,614)
--------- ---------
Comprehensive loss $ (39,359) $ (56,567)
========= =========
Retained earnings at beginning of period $ 392,225 $ 330,672
Net loss (39,359) (36,953)
Dividends paid (3,737) (3,603)
--------- ---------
Retained earnings at end of period $ 349,129 $ 290,116
========= =========
Loss per share:
Net loss per share - basic $ (1.37) $ (1.29)
Net loss per share - diluted (except when anti-dilutive) $ (1.37) $ (1.29)
Cash dividends paid per common share $ 0.130 $ 0.125
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
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HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $(39,359) $(36,953)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 15,662 13,544
Amortization of unearned compensation on restricted stock 337 146
Changes in operating assets and liabilities:
Accounts receivable, net 62,998 69,667
Inventories (25,521) (19,674)
Accounts payable 37,971 36,523
Royalties, net (30,185) (30,858)
Deferred and income taxes payable (30,309) (24,971)
Salaries, wages, and commissions (21,477) (21,702)
Other, net (10,278) (9,775)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (40,161) (24,053)
CASH FLOWS USED IN INVESTING ACTIVITIES
Book plate expenditures (18,885) (8,998)
Acquisition of publishing and technology assets (310) (7,912)
Property, plant, and equipment expenditures (4,764) (5,425)
Issuance of notes receivable (472) (146)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (24,431) (22,481)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Dividends paid on common stock (3,737) (3,603)
Issuance of commercial paper 83,837 56,519
Debt repayment (20,013) --
Exercise of stock options 3,368 1,718
Purchase of treasury stock (4,734) (7,580)
Other 360 21
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 59,081 47,075
Increase (decrease) in cash and cash equivalents (5,511) 541
Cash and cash equivalents at beginning of period 12,041 3,953
-------- --------
Cash and cash equivalents at end of period $ 6,530 $ 4,494
======== ========
Supplementary disclosure of cash flow information:
Income taxes paid $ 4,454 $ 432
Interest paid $ 6,236 $ 7,185
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
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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 March 31, 1999 balance consisted primarily of equity securities. The
fair market value of these securities, $14.7 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 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.
7
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --Continued--
(3) ACQUISITIONS - continued
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
of the acquisition. Net cash consideration for the acquisition amounted to
approximately $4.4 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, is being amortized on a straight-line basis over a period
of approximately 8 years.
Since neither of the above acquisitions materially affects consolidated
results, no pro forma information is provided.
(4) GOODWILL AND INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999 1999
--------- --------- ------------
(in thousands)
<S> <C> <C> <C>
Goodwill $ 545,653 $ 529,497 $ 545,251
Publishing rights and titles 24,634 17,724 24,874
Other 11,860 6,060 15,860
Less: accumulated amortization (137,539) (109,312) (133,647)
--------- --------- ---------
Total $ 444,608 $ 443,969 $ 452,338
========= ========= =========
</TABLE>
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.
8
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --Continued--
(5) LOSS PER SHARE
The table below sets forth the computation of basic and diluted loss per
share for the three months ended March 31, 2000 and March 31, 1999 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Numerator:
Net loss $ (39,359) $ (36,953)
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding 28,803 28,750
Effect of dilutive securities: -- --
Denominator for diluted earnings per share:
Adjusted weighted-average shares --------- ---------
outstanding and assumed conversions 28,803 28,750
========= =========
Basic loss per share: $ (1.37) $ (1.29)
========= =========
Diluted loss per share: $ (1.37) $ (1.29)
========= =========
</TABLE>
In the first quarter of 2000 and the first quarter of 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.
9
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --Continued--
(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 for the K-12 market, 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.
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 Standards 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.
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --Continued--
(6) SEGMENT AND RELATED INFORMATION - continued
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999:
<TABLE>
<CAPTION>
K-12 COLLEGE
PUBLISHING PUBLISHING OTHER CONSOLIDATED
---------- ---------- ----- ------------
(in thousands)
<S> <C> <C> <C> <C>
2000
Net sales from external customers $ 62,404 $ 15,387 $ 20,703 $ 98,494
Segment operating loss (42,799) (11,005) (4,945) (58,749)
1999
Net sales from external customers 51,971 14,864 17,446 84,281
Segment operating loss (41,686) (8,900) (4,233) (54,819)
</TABLE>
RECONCILIATION OF SEGMENT LOSSES TO THE CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS:
<TABLE>
<CAPTION>
March 31,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Total loss from reportable segments $(58,749) $(54,819)
Unallocated expense:
Interest expense (6,429) (6,769)
-------- --------
Loss before taxes $(65,178) $(61,588)
======== ========
</TABLE>
(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.
11
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --Continued--
(8) PENDING ACCOUNTING PRONOUNCEMENT
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 second fiscal quarter of the fiscal year beginning
after December 15, 1999. Houghton Mifflin is currently evaluating the effects
of implementing this bulletin.
(9) SUBSEQUENT EVENTS
At its April 26, 2000 meeting, the Board of Directors declared a quarterly
dividend of $0.13 per share, payable on May 24, 2000, to shareholders of record
on May 10, 2000.
On May 3, 2000, Houghton Mifflin acquired the net assets of Virtual
Learning Technologies, Inc., an educational testing company that specializes in
online assessments, for approximately $14.3 million. The acquisition will be
accounted for as a purchase, and the net assets acquired and results of
operations will be included in Houghton Mifflin's consolidated financial
statements from the date of the acquisition. The cost of the acquisition will be
allocated on the basis of the estimated fair market value of the assets acquired
and the liabilities assumed.
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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 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 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; and (ix) 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 for the K-12 market, 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.
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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.
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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
15
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school adoptions and market acceptance of our products can affect year-to-year
revenue performance.
RESULTS OF OPERATIONS:
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
in thousands of dollars, except per share amounts
NET LOSS:
Three months ended March 31,
--------------------------------------------------------------
Diluted loss
Per share
--------------------
2000 1999 2000 1999
---- ---- ---- ----
Net loss $(39,359) $(36,953) $ (1.37) $ (1.29)
======== ======== ======== ========
For the quarter ended March 31, 2000, the consolidated net loss was $39.4
million, or $1.37 per share, compared to a net loss of $37.0 million, or $1.29
per share, for the same period in 1999. The 2000 first-quarter seasonal net loss
was higher than last year's first-quarter loss due to higher selling costs
related to greater sales opportunities in 2000 and higher product development
costs due to spending to complete new programs for sale in 2000 and 2001,
partially offset by higher sales.
NET SALES:
Three months ended March 31,
-------------------------------------------------------
Increase (decrease)
2000 1999 $ %
------- ------- ------- -----
K-12 Publishing $62,404 $51,971 $10,433 20.1%
College Publishing 15,387 14,864 523 3.5%
Other 20,703 17,446 3,257 18.7%
------- ------- -------
Total net sales $98,494 $84,281 $14,213 16.9%
======= ======= =======
Net sales of $98.5 million for the quarter ended March 31, 2000 increased
$14.2 million, or 16.9%, from $84.3 million reported in the first quarter of
1999. The K-12 Publishing segment's net sales of $62.4 million in the first
quarter of 2000 increased $10.4 million, or 20.1%, from net sales of $52.0
million in the first quarter of 1999. The increase was attributable in part to
increased sales of instructional materials in California. The May 1999
acquisition of Sunburst Communications also contributed to the K-12 Publishing
segment's growth in the first quarter. The College Publishing segment's net
sales rose
16
<PAGE> 17
3.5% in the first quarter of 2000, to $15.4 million from $14.9 million in the
first quarter of 1999. The Other segment's net sales in the first quarter of
2000 increased $3.3 million, or 18.7%, to $20.7 million from last year's
first-quarter net sales of $17.4 million. This was primarily due to the Trade
Division's higher sales of adult trade titles.
COSTS AND EXPENSES:
Three months ended March 31,
-----------------------------------------
Increase (decrease)
2000 1999 $ %
-------- -------- -------- -----
Cost of sales $ 65,284 $ 57,238 $ 8,046 14.1%
Selling and administrative, excluding
intangible asset amortization 83,828 74,329 9,499 12.8%
Intangible asset amortization 8,131 7,533 598 7.9%
-------- -------- --------
Total costs and expenses $157,243 $139,100 $ 18,143 13.0%
======== ======== ========
Cost of sales:
Cost of sales in the first quarter of 2000 increased $8.0 million, or
14.1%, to $65.3 million from $57.2 million in the first 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 editorial expenses and plate
amortization incurred for new program development and product revisions in
preparation for the sales opportunities in 2000 and beyond. As a result of
higher net sales, cost of sales decreased as a percentage of sales, to 66.3% in
the first quarter of 2000 from 67.9% in the first quarter of 1999.
Selling and administrative:
In the first quarter of 2000, selling and administrative expenses,
excluding intangible asset amortization, were $83.8 million, an increase of $9.5
million, or 12.8%, from $74.3 million in the first quarter of 1999. Higher
selling and administrative expenses were partially offset by lower distribution
costs. Selling expense increased due to expansion of the sales staff and higher
sampling and promotional expenses relating to the greater number of sales
opportunities in our markets in 2000 and beyond. Administrative costs increased
primarily due to the inclusion of Sunburst
17
<PAGE> 18
Communications, acquired in the second quarter of 1999, and higher spending on
technology initiatives. Implementation of a new warehouse automation system and
in-sourcing of the Trade Division's distribution function contributed to the
lower distribution expenses. Due to higher net sales, selling and administrative
expenses, excluding intangible asset amortization, decreased as a percentage of
sales, to 85.1% in the first quarter of 2000 from 88.2% in the first quarter of
1999.
Intangible Asset Amortization:
Due to the May 1999 acquisition of Sunburst Communications, intangible
asset amortization increased to $8.1 million in the first quarter of 2000 from
$7.5 million in the same period last year.
NET INTEREST EXPENSE:
Net interest expense of $6.4 million for the first quarter of 2000 was $0.3
million lower than in the same period in 1999. The reduction was primarily due
to the maturity of $65.3 million of SAILS in the third quarter of 1999.
INCOME TAXES:
The income tax benefit increased $1.2 million, or 4.8%, over the same
period last year. This increase was due to the higher operating loss and a
decrease in the effective tax rate to 39.6% in the first quarter of 2000 from
40% in the first quarter of 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 increased $1.1 million,
or 2.7%, to $42.8 million in the first quarter of 2000 from $41.7 million for
the same period in 1999. The increase in the operating loss was primarily due to
higher editorial expense, plate amortization, and selling and administrative
costs, partially offset by higher net sales and lower distribution costs.
Increased editorial expenses and plate amortization were
18
<PAGE> 19
incurred for new product development and product revisions in preparation for
sales opportunities in the year 2000 and beyond. The increase in selling
expenses was due to expansion of the sales staff and higher sampling and
promotional expenses related to the increased sales opportunities in 2000.
Administrative costs increased primarily due to the inclusion of Sunburst
Communications, acquired in the second quarter of 1999. Lower
distribution expenses were primarily due to the implementation of a new
warehouse automation system.
COLLEGE PUBLISHING:
The College Publishing segment's operating loss was $11.0 million in the
first quarter of 2000, compared to $8.9 million for the same period in 1999. The
increase in the operating loss was primarily due to higher 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 due to the expansion of the sales staff and
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 $4.9 million in the first quarter of
2000 compared to $4.2 million in the same period in 1999. The increased
operating loss was primarily due to higher royalty and administrative expenses,
partially offset by higher sales. The higher royalty costs were due to product
mix, as the sale of adult trade titles, which carry higher royalty costs,
increased in the quarter. Administrative costs rose as spending increased on
technology initiatives.
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, 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.
19
<PAGE> 20
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 first quarter of 2000, Houghton Mifflin used $5.5 million of
cash on hand at year-end 1999, as well as $63.8 million of net borrowings, to
cover our seasonal operating loss and working capital needs and to fund
publishing and capital investments. During the first quarter of 1999, Houghton
Mifflin used $56.5 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 $40.2 million in the first
quarter of 2000, a $16.1 million increase from the $24.1 million of cash used in
operating activities during the first quarter of 1999. Net loss excluding
non-cash items increased by $0.1 million. Changes in operating assets and
liabilities used $16.0 million more cash during the first quarter of 2000 than
in the same period in 1999 due to higher accounts receivable and inventories and
higher taxes paid. Higher accounts receivable was primarily due to the timing of
sales, as first-quarter sales in 2000 increased significantly over the first
quarter of 1999. Inventory levels increased in anticipation of greater sales
opportunities in 2000.
Cash required for investing activities was $24.4 million in the first
quarter of 2000, an increase of $2.0 million from the $22.5 million used in the
same period in 1999. Higher plate expenditures due to increased investment in
new products for sales opportunities in 2000 and beyond were partially offset by
the acquisition of The Little Planet Literacy Series and a contingent
consideration payment related to the acquisition of CAT included in the first
quarter of 1999.
Net proceeds from financing activities increased by $12.0 million in the
first quarter of 2000 from the same period in 1999. Houghton Mifflin's net
borrowings increased by $7.3 million in the first quarter of 2000 as compared to
the same period in 1999. In the first quarter of 2000, Houghton Mifflin made
20
<PAGE> 21
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 finance the Virtual Learning
Technologies acquisition, 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.
21
<PAGE> 22
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 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 $105.2 million at
March 31, 2000, $21.4 million at December 31, 1999, and $38.4 million at March
31, 1999. The average interest rate on the commercial paper for the three months
ended March 31, 2000 was 5.99%. The carrying value of the commercial paper
equals fair value due to the short-term maturity of the instrument.
22
<PAGE> 23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. (10)(iii)(A)
Houghton Mifflin Company 2000 Chief Executive Officer Incentive
Compensation Plan
Houghton Mifflin Company 2000 Senior Executive Incentive
Compensation Plan
Houghton Mifflin Company 2000 Senior Management and Director
Stock Purchase Plan
Option Grant and Exercise Agreement
Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
None
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUGHTON MIFFLIN COMPANY
------------------------
Registrant
Dated: May 15, 2000 /s/ Gail Deegan
------------------------
Gail Deegan
Executive Vice President,
Chief Financial Officer
Dated: May 15, 2000 /s/ David R. Caron
------------------------
David R. Caron
Vice President, Corporate
Controller
24
<PAGE> 1
Exhibit (10)(iii)(A)
January, 2000
HOUGHTON MIFFLIN COMPANY
2000 CHIEF EXECUTIVE OFFICER
INCENTIVE COMPENSATION PLAN
A. PURPOSE. The purpose of the Plan is to motivate and reward performance that
contributes to the achievement of divisional and corporate strategy.
B. PAYMENT THRESHOLDS.
1. FINANCIAL OBJECTIVES. Payment of incentive compensation for achievement
of individual financial factors may occur if
a. 80% or more of the budget for that financial factor is achieved;
and
b. Company income exceeds 70% of budget or $_________million;
2. OPERATING OBJECTIVES. Payment of incentive compensation for achievement
of operating objectives only may occur if the weighted average achievement of
all Company financial factors exceeds 50% and Company net income exceeds 50% of
budget, or $_______ million.
C. PAYMENTS.
1. FINANCIAL OBJECTIVES. Payment of incentive compensation for achievement
of financial objectives is based on the degree to which those financial
objectives are achieved.
a. Payment of incentive compensation is determined by the extent to
which targeted Company and operating unit financial performance is achieved.
Each 1% achievement of the financial objective above 80% through 120%
performance (actual to budget) for any individual financial factor provides
incentive compensation of 5% of the incentive target for that financial factor.
Based on this payment schedule, achievement at targeted Company and operating
unit financial performance for all financial objectives provides payment in cash
of up to 56-2/3% of the participant's December 31, 2000 salary as incentive
compensation.
b. Additional incentive compensation may be earned if one or more
financial targets exceeds 120% performance. If the weighted average financial
achievement of targeted Company and operating unit financial factors is equal to
or greater than 120% of budget, an additional 5% of the incentive target for all
financial factors is earned for each 1% weighted financial performance above
120%.
<PAGE> 2
2. OPERATING OBJECTIVES. Payment of incentive compensation for achievement
of operating objectives is based on the Compensation & Nominating Committee's
assessment of the Chief Executive Officer's degree of success in achieving
operating objectives. Maximum payment for achievement of operating objectives is
10% of the participant's December 31, 2000 salary.
3. PAYMENTS IN EXCESS OF 66-2/3% OF DECEMBER 31, 2000 SALARY. If the total
incentive compensation earned exceeds 66-2/3% of the Chief Executive Officer's
December 31, 2000 salary, the excess amount is paid in shares of Houghton
Mifflin Company restricted common stock.
a. The number of shares awarded will be determined on the basis of the
average closing price of Houghton Mifflin Company common stock on the New York
Stock Exchange during the last calendar quarter.
b. Full ownership of the restricted stock will occur after three
years, provided that the recipient is still employed by Houghton Mifflin Company
on that date. If the recipient ceases to be employed by the Company prior to the
expiration of the restrictions, all shares are forfeited to the Company without
payment to the recipient.
c. During the period of restriction, the recipient is entitled to vote
any restricted shares awarded and to receive any dividends paid on the shares.
Any additional shares issued with respect to the restricted shares (e.g., as a
result of a stock split, dividend, or other distribution) shall be subject to
the same restrictions as the underlying shares.
d. The recipient may not sell, assign, transfer, exchange, pledge,
hypothecate, or otherwise encumber any of the shares until the restrictions
lapse.
e. The shares shall be held by the Registrar and Transfer Agent until
the restrictions lapse.
f. In the event of retirement after age 55 with at least five years of
service, death, or permanent disability during the period of restriction, the
recipient, or his or her heirs, shall be entitled to receive, free of
restrictions, a pro rata number of shares based on a fraction, the numerator of
which is the number of whole months from January 1 of the year the shares were
awarded, and the denominator of which is 36.
g. All restrictions shall lapse in the event of a "Change of Control"
as defined in this Plan.
h. The Compensation and Nominating Committee of the Board of
Directors, or the Board of Directors, acting by a majority of its directors who
are not employees of the Company, may at any time accelerate the time at which
the restrictions lapse.
2
<PAGE> 3
4. MAXIMUM PAYMENT. The maximum amount of incentive compensation, including
any restricted stock portion, which may be awarded to the participant is 100% of
the participant's December 31, 2000 salary.
D. ELIGIBILITY.
1. Participation in this Plan is limited to the Chief Executive Officer as
designated by the Compensation & Nominating Committee.
2. In the event of retirement, death, or permanent disability, a pro rata
share of the award (based on the number of months of eligible employment during
that year) will be paid to the participant, or his or her heirs, based upon the
extent of partial achievement of applicable objectives. In the event of a leave
of absence during the year, a pro rata share of the award may be paid.
3. The eligibility of a participant whose participation ceases during the
year will be determined by the Compensation & Nominating Committee of the Board
of Directors.
4. Nothing contained in the Plan shall be construed to limit in any way the
right of the Company to terminate the participant's employment or to adjust the
participant's position or salary at any time, or be evidence of any agreement or
understanding, expressed or implied, that any person will be employed in a
particular position or at a particular rate of compensation.
5. The Compensation and Nominating Committee of the Board of Directors
reserves the right to amend the terms of this Plan whenever in its best judgment
it is in the best interest of the Company to do so.
E. INTERPRETATION. The Compensation and Nominating Committee of the Board of
Directors ("Committee") shall administer this plan and approve any payments
pursuant to the Plan. Any interpretations of the Plan, including adjustments to
the financial objectives under the Plan, shall be made by the Committee.
Determinations of the Committee shall be final and binding on all participants.
F. CHANGE IN CONTROL.
1. For purposes of the Plan, a "Change in Control" of the Company shall be
deemed to have occurred if any of the following occurs:
i) any "Person" (as defined in this Section F) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities
of the Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
3
<PAGE> 4
ii) during any period of no more than two consecutive years beginning
after the date of this Amendment and Restatement individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director whose initial assumption of office is in connection with an actual or
threatened election contest relating to the election of the directors of the
Company) whose election by the Board or nomination for election by the Company's
stockholders was approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors at the beginning
of the period or whose election or whose nomination for election was previously
so approved or recommended, cease for any reason to constitute at least a
majority thereof;
iii) there occurs a merger or consolidation of the Company or a
subsidiary thereof with or into any other entity, other than (x) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity or any parent thereof), more than 75% of the combined voting
power of the voting securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or consolidation or (y)
a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no Person acquires 25% or more of the
combined voting power of the Company's then outstanding securities; or
iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
company of all or substantially all of the Company's assets.
2. For purposes of the Plan, "Person" has the meaning given such term in
Section 3(a) (9) of the Exchange Act, as modified and used in Sections 13(d) and
14(d) of the Exchange Act, but excludes (a) the Company or any of its
subsidiaries, (b) any trustee or other fiduciary holding securities under an
employee benefit plan of the Company (or of any subsidiary of the Company), (c)
any corporation owned, directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the Company
and (d) an underwriter temporarily holding securities pursuant to an offering of
such securities.
4
<PAGE> 5
Exhibit (10)(iii)(A)
January, 2000
HOUGHTON MIFFLIN COMPANY
2000 SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
A. PURPOSE. The purpose of the Plan is to motivate and reward performance that
contributes to the achievement of divisional and corporate strategy.
B. PAYMENT THRESHOLDS.
1. FINANCIAL OBJECTIVES. Payment of incentive compensation for achievement
of individual financial factors may occur if
a. 80% or more of the budget for that financial factor is achieved; and
b. Company income exceeds 70% of budget or $____ million;
2. OPERATING OBJECTIVES. Payment of incentive compensation for achievement
of operating objectives only may occur if the weighted average achievement of
all Company financial factors exceeds 50% and Company net income exceeds 50% of
budget, or $____ million.
C. PAYMENTS.
1. FINANCIAL OBJECTIVES. Payment of incentive compensation for achievement
of financial objectives is based on the degree to which those financial
objectives are achieved.
a. Payment of incentive compensation is determined by the extent to
which targeted Company and operating unit financial performance is achieved.
Each 1% achievement of the financial objective above 80% through 120%
performance (actual to budget) for any individual financial factor provides
incentive compensation of 5% of the incentive target for that financial factor.
Based on this payment schedule, achievement at targeted Company and operating
unit financial performance for all financial objectives provides payment in cash
of up to 30% of the participant's December 31, 2000 salary as incentive
compensation.
b. Additional incentive compensation may be earned if one or more
financial targets exceeds 120% performance. If the weighted average financial
achievement of targeted Company and operating unit financial factors is equal to
or greater than 120% of budget, an additional 5% of the incentive target for all
financial factors is earned for each 1% weighted financial performance above
120%.
2. OPERATING OBJECTIVES. Payment of incentive compensation for achievement
of operating objectives is based on the Chief Executive Officer's assessment of
each participant's degree of success in achieving operating objectives. Maximum
<PAGE> 6
payment for achievement of operating objectives is 10% of the participant's
December 31, 2000 salary.
3. PAYMENTS IN EXCESS OF 40% OF DECEMBER 31, 2000 SALARY. If the total
incentive compensation earned exceeds 40% of a participant's December 31, 2000,
the excess amount is paid in shares of Houghton Mifflin Company restricted
common stock.
a. The number of shares awarded will be determined on the basis of the
average closing price of Houghton Mifflin Company common stock on the New York
Stock Exchange during the last calendar quarter.
b. Full ownership of the restricted stock will occur after three
years, provided that the recipient is still employed by Houghton Mifflin Company
on that date. If the recipient ceases to be employed by the Company prior to the
expiration of the restrictions, all shares are forfeited to the Company without
payment to the recipient.
c. During the period of restriction, the recipient is entitled to vote
any restricted shares awarded and to receive any dividends paid on the shares.
Any additional shares issued with respect to the restricted shares (e.g., as a
result of a stock split, dividend, or other distribution) shall be subject to
the same restrictions as the underlying shares.
d. The recipient may not sell, assign, transfer, exchange, pledge,
hypothecate, or otherwise encumber any of the shares until the restrictions
lapse.
e. The shares shall be held by the Registrar and Transfer Agent until
the restrictions lapse.
f. In the event of retirement after age 55 with at least five years of
service, death, or permanent disability during the period of restriction, the
recipient, or his or her heirs, shall be entitled to receive, free of
restrictions, a pro rata number of shares based on a fraction, the numerator of
which is the number of whole months from January 1 of the year the shares were
awarded, and the denominator of which is 36.
g. All restrictions shall lapse in the event of a "Change of Control"
as defined in this Plan.
h. The Compensation and Nominating Committee of the Board of
Directors, or the Board of Directors, acting by a majority of its directors who
are not employees of the Company, may at any time accelerate the time at which
the restrictions lapse.
4. MAXIMUM PAYMENT. The maximum amount of incentive compensation, including
any restricted stock portion, which may be awarded to any participant is 100% of
the participant's December 31, 2000 salary.
2
<PAGE> 7
D. ELIGIBILITY.
1. Participants in this plan include executive vice presidents, division
heads, and corporate staff senior executives as designated by the Chief
Executive Officer. Individuals who become participants after the beginning of
the year participate on a prorated basis.
2. In the event of retirement, death, or permanent disability, a pro rata
share of the award (based on the number of months of eligible employment during
that year) will be paid to the participant, or his or her heirs, based upon the
extent of partial achievement of applicable objectives. In the event of a leave
of absence during the year, a pro rata share of the award may be paid.
3. A participant whose employment terminates, voluntarily or involuntarily,
for reasons other than retirement after age 55 with at least five years of
service, death, or permanent disability, is not eligible for an incentive award.
4. The eligibility of a participant whose participation ceases during the
year will be determined by the Chief Executive Officer.
5. If the participant during the year transfers to another position and
continues to participate in the Plan, the employee's performance will be
measured against the objectives in each position and then prorated on the number
of months each position was held.
6. Nothing contained in the Plan shall be construed to limit in any way the
right of the Company to terminate a participant's employment or to adjust an
employee's position or salary at any time, or be evidence of any agreement or
understanding, expressed or implied, that any person will be employed in a
particular position or at a particular rate of compensation.
7. The Compensation and Nominating Committee of the Board of Directors
reserves the right to amend the terms of this Plan whenever in its best judgment
it is in the best interest of the Company to do so.
E. INTERPRETATION. The Compensation and Nominating Committee of the Board of
Directors ("Committee") shall administer this plan and approve any payments
pursuant to the Plan. Any interpretations of the Plan, including adjustments to
the financial objectives under the Plan, shall be made by the Committee.
Determinations of the Committee shall be final and binding on all participants.
F. CHANGE IN CONTROL.
1. For purposes of the Plan, a "Change in Control" of the Company shall be
deemed to have occurred if any of the following occurs:
3
<PAGE> 8
i) any "Person" (as defined in this Section F) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities
of the Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
ii) during any period of no more than two consecutive years beginning
after the date of this Amendment and Restatement individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director whose initial assumption of office is in connection with an actual or
threatened election contest relating to the election of the directors of the
Company) whose election by the Board or nomination for election by the Company's
stockholders was approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors at the beginning
of the period or whose election or whose nomination for election was previously
so approved or recommended, cease for any reason to constitute at least a
majority thereof;
iii) there occurs a merger or consolidation of the Company or a
subsidiary thereof with or into any other entity, other than (x) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity or any parent thereof), more than 75% of the combined voting
power of the voting securities of the Company or such surviving entity or any
parent thereof outstanding immediately after such merger or consolidation or (y)
a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no Person acquires 25% or more of the
combined voting power of the Company's then outstanding securities; or
iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
company of all or substantially all of the Company's assets.
2. For purposes of the Plan, "Person" has the meaning given such term in
Section 3(a) (9) of the Exchange Act, as modified and used in Sections 13(d) and
14(d) of the Exchange Act, but excludes (a) the Company or any of its
subsidiaries, (b) any trustee or other fiduciary holding securities under an
employee benefit plan of the Company (or of any subsidiary of the Company), (c)
any corporation owned, directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the Company
and (d) an underwriter temporarily holding securities pursuant to an offering of
such securities.
4
<PAGE> 9
Exhibit (10)(iii)(A)
HOUGHTON MIFFLIN COMPANY
2000 SENIOR MANAGEMENT AND DIRECTOR
STOCK PURCHASE PLAN
1. PURPOSE. The Houghton Mifflin Company 2000 Senior Management and Director
Stock Purchase Plan (the "Plan"), adopted pursuant to the Houghton Mifflin
Company 1998 Stock Compensation Plan (the "1998 Plan"), is designed to
facilitate the immediate purchase, by senior managers and key employees
(collectively, the "Employees") and Directors of Houghton Mifflin Company
and its subsidiaries (collectively, the "Company"), of the Company's common
stock, par value $1.00 per share ("Common Stock"). The purchases
facilitated by the Plan are intended to achieve the following specific
purposes:
a. more closely align Employees' and Directors' financial rewards with
the financial rewards realized by other Company stockholders;
b. increase Employees' and Directors' motivation to manage the Company as
owners; and
c. increase the ownership of Common Stock among Employees and Directors
of the Company.
2. ELIGIBILITY AND PARTICIPATION. Individuals eligible to participate are
those Employees and Directors granted options to purchase shares of Common
Stock by vote of the Compensation and Nominating Committee of the Company's
Board of Directors (the "Committee") on February 28, 2000. To become a Plan
participant ("Participant"), an eligible individual must:
a. submit a completed and executed Option Grant and Exercise Agreement;
and
b. promptly complete and execute all necessary agreements and other
documents relating to the Plan and the loan contemplated by Section 3
hereof.
<PAGE> 10
Senior Management and Director
2000 Stock Purchase Plan
February 29, 2000
The agreements and other documents specified in this Section 2 must be in
such form and must be submitted at such times and to such Company officers
as are specified by the Company. No eligible individual is required to
participate in the Plan.
3. PAYMENT OF EXERCISE PRICE. Each Participant must deliver consideration
equivalent to 100% of the price for the shares of the Common Stock
purchased pursuant to this Plan ("Purchased Shares") at the time, place,
and manner specified by the Company. The exercise price per share shall be
equal to the fair market value of the share, as determined by the Committee
in good faith. The Purchased Shares will not be issued in the Participant's
name until the Company has received such consideration. The Company will,
on request, provide a loan (the "Loan") as consideration to fund the
purchase of the Purchased Shares. If a Loan is provided as consideration to
fund the Purchased Shares, the Purchased Shares shall be treasury shares.
The Participant is fully obligated to repay all principal and interest on
the Loan when due and payable.
4. SECURITY FOR LOAN. The Company may take all action relating to the
Participant and his or her assets which the Committee deems reasonable and
necessary to provide security for the Loan provided by the Company,
including, without limitation, a pledge of the Purchased Shares.
5. REGISTRATION OF SHARES. The Purchased Shares will be registered in the name
of the Participant. Purchased Shares which secure a Loan will be held in
book form. Any certificate issued will bear a legend referring to the Plan
and the agreements between the Participant and the Company relating to the
Purchased Shares. The certificates for the Purchased Shares, together with
all non-cash and other extraordinary dividends on the Purchased Shares,
will be held by the Company until all restrictions on the Purchased Shares
have lapsed and the Loan is no longer outstanding. Each Participant shall
deliver to the Company a stock power endorsed in blank with respect to
Purchased Shares which secure a Loan.
6. TERMINATION OF EMPLOYMENT. The issuance or exercise of an option under the
Plan will not confer upon the Participant any
2
<PAGE> 11
Senior Management and Director
2000 Stock Purchase Plan
February 29, 2000
right or obligation with respect to continuance of employment by the
Company, nor will it interfere in any way with any right of the the Company
to terminate the Participant's employment at any time. Termination of
employment will not affect a Participant's obligation to repay the Loan
according to its terms.
7. STOCKHOLDER RIGHTS. During the period in which the Purchased Shares are
subject to pledge or restrictions on transfer, unless and until the
Participant has defaulted in any obligation under the Loan agreements or
this Plan, each Participant will have all other rights of a stockholder
with respect to the Purchased Shares, including the right to vote the
Purchased Shares and the right to receive all regular cash dividends paid
with respect to the Purchased Shares. To the extent required by the Plan,
the loan agreements and other documents relating to the Plan, the Company's
Transfer Agent will be irrevocably directed to deliver all such dividends
directly to the Company for payment of loan interest on the Loan. Any
regular cash dividends with respect to the Purchased Shares in excess of
required interest payments will, at the Participant's option, either be
paid directly to the Participant or deposited in a bank account designated
by the Participant.
8. RESTRICTIONS ON SALE OF PURCHASED SHARES. Each Participant is permitted to
sell or transfer all or any portion of the Purchased Shares, subject to the
following restrictions:
a. except in the event of (i) a Participant's death or disability (as
determined by the Company, in its sole discretion); (ii) termination
of an Employee's employment (whether voluntary or involuntary); or
(iii) a Change in Control (as defined in Section 9 below), no
Participant may sell or transfer any portion of the Purchased Shares
before the first anniversary of the Participant's payment of the
exercise price;
b. no Participant may sell or transfer any portion of the Purchased
Shares unless all principal and interest due on the Loan have
previously been paid or all proceeds of the sale are simultaneously
applied first to the payment of all such principal and interest; and
3
<PAGE> 12
Senior Management and Director
2000 Stock Purchase Plan
February 29, 2000
c. the Company has the right to impose additional restrictions on the
timing, amount, and form of the sale or transfer of the Purchased
Shares with respect to any Participant to the extent it determines
that such restrictions are necessary or advisable in order to comply
with any applicable securities law; and
d. each Participant must notify the Company of his or her intention to
sell or transfer the Purchased Shares before such a sale or transfer
may be implemented. The Company may elect, by notice directed to the
Participant on the business day immediately following receipt of such
notification, to allow the Participant to sell the Purchased Shares in
the open market or to repurchase the Purchased Shares itself. If the
Company repurchases the Purchased Shares, the purchase price will be
the closing sale price of a share of Common Stock as reported in the
New York Stock Exchange Composite Index on the day of the notification
to the Company of the intent to sell.
9. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control"
shall be deemed to have occurred if:
a. any person as defined in subsection (d) of this Section 9 is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
directly or indirectly, of securities of the Company representing 25%
or more of the combined voting power of the Company's then outstanding
securities;
b. the stockholders of the Company approve a merger or consolidation of
the Company with any other entity, other than (i) a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 75% of the combined
voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger
4
<PAGE> 13
Senior Management and Director
2000 Stock Purchase Plan
February 29, 2000
or consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction)
in which no person acquires 25% or more of the combined voting power
of the Company's then outstanding securities; or
c. the stockholders of the Company approve a plan of complete liquidation
of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
As used in subsection (a) of this Section 9, the term "person" has the
meaning given such term in Section 3(a)(9) of the Exchange Act, as modified
and used in Sections 13(d) and 14(d) of the Exchange Act, but excludes (i)
the Company, (ii) any trustee or other fiduciary holding securities under
an employee benefit plan of the Company (or of any subsidiary of the
Company), and (iii) any corporation owned, directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
10. 1998 PLAN AND AMENDMENT OF THIS PLAN. The Plan is governed by the
provisions of the 1998 Plan, except as otherwise expressly stated herein.
Subject to the provisions of the 1998 Plan, the Committee may amend the
Plan at any time it determines an amendment to be in the best interests of
the Company. In accordance with the 1998 Plan, no such amendment may
adversely affect the rights of a Participant without the consent of the
Participant.
5
<PAGE> 14
Exhibit (10)(iii)(A)
OPTION GRANT AND EXERCISE AGREEMENT
No. of Shares: << NO_SHARES >> As of February 29, 2000
Pursuant to its 1998 Stock Compensation Plan (the "Plan"), approved on April 29,
1998 by its stockholders, and pursuant to its 2000 Senior Management and
Director Stock Purchase Plan established thereunder (the "Purchase Plan"),
Houghton Mifflin Company (the "Company") hereby grants to << PARTICIPANT >>
(the "Optionee") an option (the "Option") to purchase on the date hereof all or
any part of <<NO_SHARES>> shares (the "Option Shares") of common stock of the
Company, par value $1.00 per share (the "Common Stock"), at a price of $39.8125
per share, subject to the terms and conditions set forth herein and in the Plan
and the Purchase Plan.
1. MANNER OF EXERCISE. The Optionee may exercise this Option and elect to
purchase the Option Shares by delivering to the Company on the date hereof an
executed copy of this Agreement, (the "Purchased Shares"). Said executed
agreement shall be accompanied by payment for the Option Shares either in cash
or through a loan to the Optionee as described in Paragraph 2 hereof. No
certificates for the Purchased Shares will be issued to the Optionee until the
Company has completed all steps required by law to be taken in connection with
the issue and sale of the Purchased Shares, including, without limitation,
receipt of any agreements or representations from the Optionee necessary to
prevent a resale or distribution of the Purchased Shares in violation of federal
or state securities laws. In accordance with the Purchase Plan, Purchased Shares
for which the purchase price was paid through the loan referenced in Paragraph 2
will be held in book form, and certificates representing the Purchased Shares
issued to the Optionee will be held by the Company, until all restrictions on
such shares have lapsed and the loan referred to in Paragraph 2 hereof is no
longer outstanding, as the case may be. In the event that the Optionee fails to
exercise this Option by timely delivery of an executed copy of this Agreement as
provided in this paragraph, the Option granted hereby shall terminate and be of
no further force and effect.
2. FINANCING OF EXERCISE PRICE. In order to permit the Optionee to exercise
the Option, the Company will extend to the Optionee a loan (the "Loan") to fund
up to 100% of the purchase price for the Purchased Shares. In connection with
the Loan, the Optionee is delivering to the Company simultaneously herewith such
documentation as the Company may require to evidence the Loan, including any
documentation the Company may require in connection with the pledge of the
Purchased Shares as security therefor. As security for the obligation of the
Optionee under the Loan, the Optionee is granting to the Company a security
interest in the Purchased Shares and will execute such documents and
<PAGE> 15
Option Grant and Exercise Agreement
February 29, 2000
take such other action as the Company may require to evidence and perfect such
security interest, such grant to become effective upon delivery of an executed
copy of this Agreement as set forth in Paragraph 1 hereof. The Optionee further
agrees that the Company may take all action which the Company deems reasonable
and necessary for the Company to obtain security for the Loan.
3. TERMS OF PURCHASE PLAN; RESTRICTIONS ON SALE. The Company and the Optionee
acknowledge and agree that the Purchased Shares will be subject to all of the
terms and conditions set forth in the Plan and the Purchase Plan, including,
without limitation, the restrictions on the sale of the Purchased Shares set
forth in Section 8 of the Purchase Plan.
4. TRANSFERABILITY. This Option is personal to the Optionee, is not
transferable by the Optionee in any manner by operation of law or otherwise, and
is exercisable only on the date hereof and only by the Optionee.
5. TERMINATION OF EMPLOYMENT. This Option will not confer upon the Optionee
any right or obligation with respect to continuance of employment by the Company
or its subsidiaries, nor will it interfere in any way with any right of the
Optionee's employer to terminate the Optionee's employment at any time.
6. MISCELLANEOUS. Notices hereunder shall be mailed or delivered to the
Company at its principal place of business, 222 Berkeley Street, Boston,
Massachusetts 02116, Attention: Treasurer, and shall be mailed or delivered to
the Optionee at the Optionee's address set forth below, or in either case at
such other address as one party may subsequently furnish to the other party in
writing. This Agreement is entered into by the Optionee and the Company pursuant
to the terms and provisions of the Plan and the Purchase Plan and expressly
incorporates herein all of the terms and provisions of the Plan and the Purchase
Plan. Notwithstanding anything in this Agreement to the contrary, in the event
that any inconsistency arises between any term or provision of the Plan or the
Purchase Plan and any term or provision of this Agreement, then the applicable
term or provision of the Plan or the Purchase Plan, as the case may be, shall
control.
7. GOVERNING LAW. This Agreement shall be governed and construed in accordance
with the laws of the Commonwealth of Massachusetts without regard to principles
thereof relating to conflicts of law.
8. INCOME TAX WITHHOLDING. In connection with the exercise of all or any part
of the Option granted hereunder and all arrangements and
-2-
<PAGE> 16
Option Grant and Exercise Agreement
February 29, 2000
transactions relating to the Purchased Shares, the Company is expressly
authorized to take any and all steps it deems necessary to comply with its tax
withholding obligations under state and federal laws, if any, including without
limitation (i) withholding cash in an amount sufficient to satisfy the Company's
tax withholding obligations, with respect to the Optionee from the compensation
then or thereafter payable to the Optionee, (ii) conditioning the delivery of
stock to the Optionee upon the payment to the Company of an amount sufficient to
satisfy the Company's tax withholding obligations, with respect to the Optionee,
or (iii) reducing the number of shares deliverable to the Optionee by such
number as is sufficient in value to satisfy the Company's tax withholding
obligations with respect to the Optionee, provided that such reduction does not
cause the Optionee to incur liability under Section 16(b) of the Securities
Exchange Act of 1934, as amended.
HOUGHTON MIFFLIN COMPANY
By: _______________________________
Arthur S. Battle
Vice President, Human Resources
Receipt of the Option and its terms and conditions and the terms and conditions
of the Purchase Plan are hereby acknowledged and agreed to, and notice of the
exercise of the Option as to the number of Shares set forth below is hereby
given, as of February 29, 2000.
Number of shares ____________________________________
as to which Option Name:<<PARTICIPANT>>
exercised:
<<NO_SHARES>> SHARES ____________________________________
(Address)
____________________________________
(City, State, Zip)
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,530
<SECURITIES> 638
<RECEIVABLES> 109,550
<ALLOWANCES> 24,905
<INVENTORY> 189,749
<CURRENT-ASSETS> 361,340
<PP&E> 355,660
<DEPRECIATION> 167,775
<TOTAL-ASSETS> 1,044,914
<CURRENT-LIABILITIES> 306,919
<BONDS> 0
0
0
<COMMON> 31,568
<OTHER-SE> 358,258
<TOTAL-LIABILITY-AND-EQUITY> 1,044,914
<SALES> 98,494
<TOTAL-REVENUES> 98,494
<CGS> 65,284
<TOTAL-COSTS> 157,243
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,429
<INCOME-PRETAX> (65,178)
<INCOME-TAX> (25,819)
<INCOME-CONTINUING> (39,359)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,359)
<EPS-BASIC> (1.37)
<EPS-DILUTED> (1.37)
</TABLE>
