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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-5406
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $1 par value New York Stock Exchange
Preferred Stock Purchase Rights
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant was approximately $1,209,625,000 as of February
29, 2000.
The registrant had outstanding 30,383,039 shares of common stock (exclusive
of Treasury shares) and 30,383,039 Preferred Stock Purchase Rights as of
February 29, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative to
the Company's 2000 Annual Meeting of Stockholders are incorporated into Part
III.
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HOUGHTON MIFFLIN COMPANY
TABLE OF CONTENTS
FORM 10-K
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Securities Holders....... 6
PART II
Item 5. Market for Houghton Mifflin's Common Stock and Related
Stockholder Matters......................................... 9
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 23
Item 8. Consolidated Financial Statements and Supplementary Data.... 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 58
PART III
Item 10. Directors and Executive Officers of Houghton Mifflin........ 58
Item 11. Executive Compensation...................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 58
Item 13. Certain Relationships and Related Transactions.............. 58
PART IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on
Form 8-K.................................................... 58
Index to Consolidated Financial Statements and Financial
Schedules................................................... 58
Financial Statement Schedule................................ 58
Signatures.................................................. 60
Index to Exhibits........................................... 61
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Houghton Mifflin's actual results could differ materially
from the expectations described in the forward-looking statements. Some of the
factors that might cause such a difference are discussed in the section entitled
" 'Safe Harbor' Statement under Private Securities Litigation Reform Act of
1995" on page 12 of this Form 10-K.
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PART I
ITEM 1. BUSINESS
(a) DESCRIPTION OF BUSINESS
Houghton Mifflin Company was incorporated in 1908 in Massachusetts as the
successor to a partnership formed in 1880. Antecedents of the partnership date
back to 1832. Houghton Mifflin has five operating subsidiaries: McDougal Littell
Inc., Evanston, Illinois, publishes educational materials for the secondary
school market; The Riverside Publishing Company, Itasca, Illinois, publishes
assessment materials for the educational and clinical testing markets; Great
Source Education Group, Inc., Wilmington, Massachusetts, publishes supplementary
instructional materials for the elementary and secondary school markets;
Sunburst Technology Corporation (formerly Houghton Mifflin Interactive
Corporation), Somerville, Massachusetts, develops and sells multimedia
instructional products for the elementary and secondary school markets; and
Computer Adaptive Technologies, Inc., Evanston, Illinois, specializes in the
development and delivery of computer-based testing solutions to corporations and
associations worldwide.
Houghton Mifflin's principal business is publishing, and our operations are
classified into three operating segments:
- K-12 Publishing, which includes textbooks and other educational materials
and services for the kindergarten through grade twelve, or K-12, school
markets;
- College Publishing, which includes textbooks and other educational
materials and services for the post-secondary higher education market;
and
- Other, which includes fiction, nonfiction, children's books, dictionary
and reference materials in a variety of formats and media and
computer-based testing solutions.
In this description of our business, all subsidiaries are treated as part
of Houghton Mifflin.
In May 1999, we acquired all of the outstanding stock of Sunburst
Communications, Inc., a leading developer of software and video instructional
materials for the elementary and secondary school markets, for approximately
$34.1 million in cash. The financial statements include Sunburst's operating
results from the date of acquisition in the K-12 Publishing segment.
In January 1999, we acquired the assets of Little Planet Literacy Series, a
leading technology-based pre-kindergarten to grade three literacy program, from
Applied Learning Technologies, Inc. for approximately $4.4 million in cash. The
financial statements reflect the impact of Little Planet Literacy on our
operating results from the date of acquisition in the K-12 Publishing segment.
In March 1994, Houghton Mifflin's former Software Division successfully
completed an initial public offering. We retained an equity interest in the
successor company, INSO Corporation, of approximately 40%. On August 2, 1999, we
elected to deliver approximately 1.9 million shares of INSO common stock to
repay the remaining 6% Exchangeable Notes due 1999 -- Stock Appreciation Income
Linked Securities, or SAILS. In December 1999, we sold our remaining shares of
INSO common stock.
(b) FINANCIAL INFORMATION ABOUT THE OPERATING SEGMENTS
Financial information about Houghton Mifflin's operating segments is in
Part II, Item 8, the Notes to Consolidated Financial Statements, in Note 12
under the heading "Segment and Related Information" on page 52 and the schedule
titled "Five-Year Financial Summary" on page 10.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
As a publisher, Houghton Mifflin shapes ideas, information, and
instructional methods into various media that satisfy the lifelong need of
people to learn, gain proficiency, and be entertained. We seek out, select, and
generate worthwhile concepts and then enhance their value and accessibility
through creative development, design, production (performed by outside
suppliers), marketing, sales, and distribution. While Houghton Mifflin's works
have been published principally in printed form, we publish many programs or
works in other formats including computer software, laser discs, CD-ROM, and
other electronic media.
K-12 PUBLISHING
This operating segment includes textbooks and instructional materials,
tests for measuring achievement and aptitude, clinical/special needs testing
products, multimedia instructional programs for the K-12 market, and a
computer-based career and college guidance information system in versions for
both junior and senior high school students. The principal markets for these
products are elementary and secondary schools. Beginning in 1999, we focused
Sunburst Technology's (formerly Houghton Mifflin Interactive Corporation)
business on the growing educational technology marketplace rather than on the
retail market. Therefore, the 1999 information relating to Sunburst Technology
is included in the K-12 Publishing segment.
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.
Houghton Mifflin's major regional sales offices for this segment are in
California, Georgia, Illinois, Massachusetts, New Jersey, New York, and Texas.
Each of these divisions has its own dedicated sales force. We distribute
products of the School Division, McDougal, and Great Source from two facilities
located in Indianapolis, Indiana and Geneva, Illinois. In addition, some states
require us to use in-state textbook depositories for educational materials sold
in that state. Sunburst's products are shipped from its facility located in
Pleasantville, New York, and Riverside's products are shipped directly from
vendor site locations.
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, or to describe a school
or school
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district's selection and purchase of instructional materials. After adopting, or
selecting, instructional materials, schools later decide the quantity and timing
of their purchases.
In general, Houghton Mifflin presents products to schools and teachers by
sending samples to teachers in a school market which is considering a purchase.
Sending sample copies is an essential part of marketing instructional materials.
Since any educational program may have many individual components, and samples
are widely distributed, the cost of sampling a new program can be substantial.
In addition, once a program is purchased, we provide a variety of ancillary
materials (such as teachers' editions, charts, classroom displays, classroom
handouts, and tests) to purchasers at no cost. We also conduct training sessions
within a school district that has purchased our materials to help teachers learn
to use our products effectively. These free materials, usually called
"implementation" and "in-service" training, are a cost of doing business.
The elementary school market, which consists of kindergarten through grade
eight, has four major disciplines:
- reading and language arts (which includes handwriting and spelling),
- mathematics,
- science and health, and
- social studies.
The School Division develops and markets its products for all four of these
disciplines.
The secondary school market, which consists of sixth grade through twelfth
grade, has six major disciplines:
- literature and language arts,
- mathematics,
- social studies,
- world languages,
- science and health, and
- vocational studies.
McDougal develops and markets its products for four of these disciplines:
literature and language arts, social studies, mathematics, and world languages.
Great Source develops and distributes supplemental materials for the
kindergarten through twelfth grade market principally in the following
disciplines: reading and language arts, mathematics, and social studies.
Sunburst develops and distributes educational software and video
instructional materials for the kindergarten through twelfth grade market.
Sunburst develops computer-based programs in areas such as problem solving,
early learning tools, language arts, and mathematics and video instructional
programs on subjects such as conflict resolution, self esteem, drug education,
and success skills.
Riverside publishes tests for educational and psychological assessment and
provides career guidance products and service. Educational tests include
norm-referenced tests that compare students to national performance levels.
Riverside also contracts with states to custom develop criterion-referenced,
standards-based educational assessments. Psychological tests are administered to
one person at a time by a trained clinician or specialist.
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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, served by the national sales
office in Boston, Massachusetts, or by the regional sales office in St. Charles,
Illinois. Houghton Mifflin also sells these products for high school advanced
placement courses (through the McDougal sales force) and to for-profit,
certificate-granting institutions, or private career schools, which offer
skill-based training and job placement. Products for this segment are
distributed from the Indianapolis, Indiana facility.
In the college and private career school markets, the faculty generally
selects the texts and other materials to be used in class, acting either as a
committee or individually. The College Division sales force promotes product to
faculty through a combination of on-campus visits, shipment of sample copies of
products to instructors, and e-mail correspondence. In addition, targeted
marketing and advertising to faculty, in both print and electronic form, are an
important part of the selling process. For high school advanced placement
courses, the selection of college product is made through the adoption process.
For the college market, once the faculty selects the educational content
for a course, students have the option of purchasing product from several
different sources:
- bookstores;
- through an Internet bookstore site; or
- direct from the publisher.
A bookstore or Internet site may purchase product for a course "new" from
the publisher or, in the case of product with a copyright older than one year,
"used" from other students. Approximately 30% of all student purchases in the
college market are used product. In the private career school market, the
institution generally purchases product directly from the publisher and requires
students to purchase the product from the institution as part of the tuition.
The College Division publishes in approximately eighteen disciplines,
including mathematics, chemistry, business, history, English, and modern
languages. Most textbooks are on a three- or four-year revision cycle. Textbooks
with a current-year copyright date are referred to in the industry as
"frontlist," and textbooks with an older copyright date are referred to as
"backlist." The success of each year's frontlist titles significantly influences
sales of backlist titles in subsequent years. Consequently, most of the selling
and marketing activities of college publishers focus on promoting frontlist
titles.
OTHER
In 1999, Houghton Mifflin's Other operating segment consists of unallocated
corporate-related items and two divisions:
- The Trade & Reference, or Trade, Division; and
- Computer Adaptive Technologies, Inc., or CAT.
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. The Trade Division's publications are sold by its own sales
force, as well as some of Houghton Mifflin's other divisional sales forces and
commission agents. The division's
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major corporate sales and support offices are in Massachusetts and New York.
Products for the Trade Division are distributed from our leased facility in
Indianapolis, Indiana.
CAT specializes in developing and delivering computer-based testing
solutions. Its principal markets are corporations and associations worldwide.
CAT's products are sold by its own sales force, and its major corporate sales
and support offices are in Illinois.
COMPANY BUSINESS AS A WHOLE
Book printing and binding capacity and the availability of raw materials
remained at satisfactory levels throughout the year. Houghton Mifflin is not
dependent on any one supplier. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 12.
We derive approximately 90% of our 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 impact on
Houghton Mifflin's year-to-year revenues. Although the loss of a single customer
or a few customers would not have a materially adverse effect on our business,
schedules of school adoptions and market acceptance of its products can affect
year-to-year revenue performance. In 1999, the increase in statewide adoption
opportunities and funding in the social studies and science disciplines for the
elementary school market and in the mathematics and social studies disciplines
in the secondary school market, more than offset fewer open territory and
adoption opportunities in the reading and language arts disciplines, as compared
to 1998. See "Summary of Quarterly Results of Operations (unaudited)" for the
two-year period ended December 31, 1999 on page 56.
Houghton Mifflin expects that in 2000 there will be an increase in
statewide adoption opportunities, as well as additional funding opportunities,
for instructional and assessment materials and services in both adoption and
open territory states. The adoption opportunities will be primarily in the
science and reading and language arts disciplines for the elementary school
market and in the literature and language arts and world language disciplines
for the secondary school market. Houghton Mifflin also expects growth
opportunities in the other divisions to contribute to higher revenues in 2000
compared to 1999. During 2000, we will continue to invest in new products and
services to take advantage of opportunities in all publishing segments. Houghton
Mifflin will also continue to invest in and improve operating and support
systems. These investments will help us maintain a market-leading educational
product line, as well as improve our efficiency, profitability, and service to
customers.
We sell our products in highly competitive markets and believe the major
competitive factors are quality of product and customer service. There are four
significant publishers serving the elementary and secondary school markets, and
seven significant publishers serving the college market.
At December 31, 1999, Houghton Mifflin employed approximately 3,300 people.
We anticipate no substantial expenditures for compliance with environmental
laws or regulations.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND EXPORT SALES
Export sales are not significant to Houghton Mifflin's three business
segments.
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ITEM 2. PROPERTIES
Houghton Mifflin's principal executive office is located at 222 Berkeley
Street, Boston, Massachusetts.
The following table describes the approximate building areas, principal
uses, and the years of expiration on leased premises of Houghton Mifflin's
significant operating properties at December 31, 1999. We believe that these
properties are suitable and adequate for our present and anticipated business
needs, satisfactory for the uses to which each is put, and, in general, fully
utilized.
EXPIRATION APPROXIMATE PRINCIPAL
YEAR: LEASED AREA USE
LOCATION PREMISES IN SQUARE FEET OF SPACE SEGMENT USED BY
- ---------------------------------- ------------ -------------- ---------------- ------------------------------
OWNED PREMISES
Indianapolis, Indiana............. 503,000 Offices & K-12 Publishing and College
Warehouse Publishing
Geneva, Illinois.................. 486,000 Offices & K-12 Publishing; sales office
Warehouse
Pleasantville, New York........... 50,000 Offices & K-12 Publishing
Warehouse
LEASED PREMISES
Indianapolis, Indiana............. 2007 310,000 Warehouse Other
Boston, Massachusetts............. 2007 301,000 Executive & All segments and
222 Berkeley Street/ Business offices Corporate headquarters
500 Boylston Street
West Chicago, Illinois............ 2001 129,000 Warehouse K-12 Publishing
Itasca, Illinois.................. 2006 75,000 Offices K-12 Publishing; sales office
Evanston, Illinois................ 2004 70,000 Offices K-12 Publishing; sales office
Dallas, Texas..................... 2005 70,000 Offices & K-12 Publishing; sales office
Warehouse
Wilmington, Massachusetts......... 2005 50,000 Offices K-12 Publishing; corporate
support; sales office
Morris Plains, New Jersey......... 2006 40,000 Office K-12 Publishing; sales office
Kennesaw, Georgia................. 2004 39,000 Warehouse K-12 Publishing
New York, New York................ 2004 30,000 Offices College Publishing and Other
Evanston, Illinois................ 2004 20,000 Offices K-12 Publishing
Evanston, Illinois................ 2004 19,000 Offices Other
St. Charles, Illinois............. 2006 17,000 Offices College Publishing; sales
office
Somerville, Massachusetts......... 2001 12,000 Offices K-12 Publishing
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Houghton Mifflin did not submit any matters to a stockholder vote during
the last quarter of the fiscal year ended December 31, 1999.
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EXECUTIVE OFFICERS OF HOUGHTON MIFFLIN
OTHER
OFFICE POSITIONS
AGE AT HELD WITH THE
NAME 2/29/00 OFFICE SINCE COMPANY
- ---- ------- ------------------------------------------- ------ ---------
Nader F. Darehshori..... 63 Chairman, President, and Chief Executive 1991 Director
Officer
Arthur S. Battle, 49 Vice President, Human Resources 1998 --
Jr. ..................
Albert Bursma, Jr. ..... 62 Executive Vice President; President, Great 1995 --
Source Education Group, Inc.
David R. Caron.......... 39 Vice President, Controller 1997 --
Gail Deegan............. 53 Executive Vice President and Chief 1996 --
Financial Officer
Richard C. Gershon...... 40 Senior Vice President, Strategic Technology 1999 --
Integration
Elizabeth L. Hacking.... 58 Senior Vice President, Strategic 1993 --
Development
John E. Laramy.......... 55 Senior Vice President; President, The 1999 --
Riverside Publishing Company
George A. Logue......... 49 Executive Vice President, School Division 1997 --
Julie A. McGee.......... 57 Executive Vice President; President, 1995 --
McDougal Littell Inc.
Mark E. Mooney.......... 47 Senior Vice President, Chief Technology 1997 --
Officer
John H. Oswald.......... 50 Executive Vice President; President, 1999 --
Computer Adaptive Technologies, Inc.
Conall E. Ryan.......... 42 Senior Vice President; President, Sunburst 1997 --
Technology Corporation
Gary L. Smith........... 55 Senior Vice President, Administration 1991 --
June Smith.............. 56 Executive Vice President, College Division 1994 --
Wendy J. Strothman...... 49 Executive Vice President, Trade & Reference 1996 --
Division
Paul D. Weaver.......... 57 Senior Vice President, Clerk, Secretary, 1989 --
and General Counsel
The following information provides a brief description of the business
experience of each executive officer during the past five years. Each executive
officer, other than Mr. Battle, Mr. Bursma, Mr. Caron, Ms. Deegan, Mr. Gershon,
Mr. Mooney, Mr. Ryan, and Ms. Strothman, has been employed by Houghton Mifflin
for more than five years.
Nader F. Darehshori
1991 -- Chairman, President, and Chief Executive Officer
Arthur S. Battle, Jr.
1998 -- Vice President, Human Resources
1995 -- Divisional Vice President, Human Resources, Corning, Inc.
Albert Bursma, Jr.
1995 -- Executive Vice President; President, Great Source Education Group, Inc.*
David R. Caron
1997 -- Vice President, Controller
1996 -- Assistant Controller
1995 -- Director -- Corporate Accounting, NYNEX
Gail Deegan
1998 -- Executive Vice President and Chief Financial Officer
1996 -- Executive Vice President, Chief Financial Officer, and Treasurer
1995 -- Senior Vice President, Regulatory and Government Affairs, NYNEX
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Richard C. Gershon
1999 -- Senior Vice President, Strategic Technology Integration
1998 -- Senior Vice President; President, Computer Adaptive Technologies, Inc.*
1984 -- President and Chief Executive Officer, Computer Adaptive Technologies,
Inc. (Computer Adaptive Technologies, Inc. was not affiliated with
Houghton Mifflin prior to its acquisition on July 21, 1998.)
Elizabeth L. Hacking
1993 -- Senior Vice President, Strategic Development
John E. Laramy
1999 -- Senior Vice President; President, The Riverside Publishing Company*
1994 -- Vice President, Director of Sales, The Riverside Publishing Company*
George A. Logue
1998 -- Executive Vice President, School Division
1997 -- Senior Vice President, School Division
1994 -- Vice President, Sales and Marketing, School Division
Julie A. McGee
1995 -- Executive Vice President; President, McDougal Littell Inc.*
Mark E. Mooney
1997 -- Senior Vice President, Chief Technology Officer
1996 -- Vice President, Director of Information Technology, The Bureau of
National Affairs
1991 -- Director of Information Services, The Bureau of National Affairs
John H. Oswald
1999 -- Executive Vice President; President, Computer Adaptive Technologies,
Inc.*
1993 -- Executive Vice President; President, The Riverside Publishing Company*
Conall E. Ryan
1999 -- Senior Vice President; President, Sunburst Technology Corporation*
1997 -- Senior Vice President; President, Houghton Mifflin Interactive
Corporation*
1996 -- President, Houghton Mifflin Interactive Corporation*
1995 -- Corporate Vice President, Houghton Mifflin Interactive
Gary L. Smith
1991 -- Senior Vice President, Administration
June Smith
1994 -- Executive Vice President, College Division
Wendy J. Strothman
1996 -- Executive Vice President, Trade & Reference Division
1995 -- Vice President, Publisher, Adult Trade and Reference
Paul D. Weaver
1989 -- Senior Vice President, Clerk, Secretary, and General Counsel
* A subsidiary of Houghton Mifflin
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PART II
ITEM 5. MARKET FOR HOUGHTON MIFFLIN'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Houghton Mifflin's common stock trades on the New York Stock Exchange. As
of February 29, 2000, Houghton Mifflin had approximately 5,940 stockholders of
record.
The following table shows information about stock prices and dividends paid
per share.
HOUGHTON MIFFLIN COMPANY
STOCK PRICES AND DIVIDENDS PAID PER SHARE (UNAUDITED)
1999 1998
---------------------------- ----------------------------
DIVIDEND DIVIDEND
HIGH LOW PAID HIGH LOW PAID
------ ------ -------- ------ ------ --------
First Quarter....................... $47.63 $40.00 $0.125 $39.00 $26.94 $0.125
Second Quarter...................... 50.31 42.63 0.125 35.31 31.06 0.125
Third Quarter....................... 52.50 40.50 0.130 33.56 30.19 0.125
Fourth Quarter...................... 43.25 34.88 0.130 47.25 30.44 0.125
------ ------
Year................................ $0.510 $0.500
====== ======
ITEM 6. SELECTED FINANCIAL DATA
The per-share amounts presented in the Five-Year Financial Summary on the
next page and in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, are calculated using the diluted weighted
average shares outstanding, unless the per-share amounts are specifically
identified as basic. For further discussion of earnings per share, see Note 13
in the Notes to the Consolidated Financial Statements on page 55.
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HOUGHTON MIFFLIN COMPANY
FIVE-YEAR FINANCIAL SUMMARY
(UNAUDITED, IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- ---------- ---------- ----------
OPERATING RESULTS
Net sales....................................... $ 920,118 $861,657 $ 797,320 $ 717,863 $ 529,022
Operating income (loss)......................... 111,960 102,020 106,558 87,382 (13,095)
Net interest expense............................ 29,770 33,981 38,926 40,875 13,008
Gains (losses) on INSO Corporation common stock
and equity in earnings (losses) of INSO
Corporation................................... (5,100) 18,797 15,901 27,446 14,659
Loss on sale of long-term investment............ -- (3,017) -- -- --
Acquired in-process research and development.... -- (3,500) -- -- --
Income (loss) before taxes and extraordinary
item.......................................... 77,090 79,269 83,533 73,953 (11,444)
Extraordinary gain on extinguishment of debt,
net of tax.................................... 30,320 18,010 -- -- --
Net income (loss)............................... 76,304 63,649 49,822 43,622 (7,243)
---------- -------- ---------- ---------- ----------
PER COMMON SHARE
Basic:
Income (loss) before extraordinary item....... $1.60 $1.59 $1.76 $1.57 $(0.26)
Extraordinary gain on extinguishment of
debt........................................ 1.05 0.63 -- -- --
----- ----- ----- ------ -----
Basic net income (loss) per share............. $2.65 $2.22 $1.76 $1.57 $(0.26)
===== ===== ===== ====== ======
Diluted:
Income (loss) before extraordinary item....... $1.57 $1.57 $1.73 $1.56 $(0.26)
Extraordinary gain on extinguishment of
debt........................................ 1.03 0.62 -- -- --
----- ----- ----- ------ ------
Basic net income (loss) per share............. $2.60 $2.19 $1.73 $1.56 $(0.26)
===== ===== ===== ====== ======
Dividends declared per share.................... $0.51 $0.50 $0.49 $0.48 $0.465
Book value...................................... 14.41 13.20 10.61 9.22 8.05
Stock price -- High............................. 52.50 47.25 40.25 28.32 27.38
Low............................... 34.88 26.94 26.31 20.25 19.82
Close............................. 42.19 47.25 38.38 28.32 21.50
FINANCIAL DATA
Total assets.................................... $1,038,743 $983,668 $1,000,648 $1,017,283 $1,054,116
Long-term debt less current portion............. 254,638 274,521 371,081 500,999 426,148
Additions to book plates and property, plant,
and equipment................................. 98,314 73,984 67,903 74,943 54,278
Dividends paid.................................. 14,748 14,388 13,959 13,371 12,845
Weighted average shares outstanding:
Basic......................................... 28,823 28,689 28,237 27,801 27,609
Diluted....................................... 29,308 29,111 28,826 27,919 27,609
NET SALES -- CLASSES OF SIMILAR PRODUCTS
K-12 Publishing................................. $ 657,289 $611,770 $ 560,259 $ 497,709 $ 359,523
College Publishing.............................. 172,240 160,677 148,969 138,346 82,277
Other........................................... 90,589 89,210 88,092 81,808 87,222
---------- -------- ---------- ---------- ----------
$ 920,118 $861,657 $ 797,320 $ 717,863 $ 529,022
========== ======== ========== ========== ==========
On August 2, 1999, the remaining 50%, or $65.3 million in aggregate
principal, of the outstanding 6% Exchangeable Notes, or SAILS, matured. Houghton
Mifflin elected to deliver approximately 1.9 million shares of INSO common stock
to repay the remaining SAILS. The transaction represented a surrender of the
shares and generated a non-cash loss of $5.6 million ($3.2 million after tax),
or $0.11 per share. In addition, we also recognized a $52.3 million
extraordinary gain ($30.3 million after tax), or $1.03 per share, as a result of
the extinguishment of the SAILS indebtedness. In 1999, we recorded a gain of
$0.5 million ($0.3 million after tax), or $0.01 per share, on the sale of our
remaining shares of INSO common stock.
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Beginning in 1999, Houghton Mifflin implemented a change in the method of
accounting for the amortization of book plate assets. The change is from a class
of assets method previously used to a specific identification method by which
amortization commences in the year of publication. This change was made
prospectively for book plate additions beginning in 1999. This change resulted
in a decrease in amortization expense of approximately $5.1 million ($3.1
million after tax), or $0.10 per share, for the twelve months ended December 31,
1999.
On August 1, 1998, Houghton Mifflin redeemed 50%, or $65.3 million in
aggregate principal amount, of the outstanding 6% Exchangeable Notes, or SAILS,
with approximately 1.9 million shares of INSO common stock. The redemption
represented a surrender of the shares and generated a non-cash gain on the INSO
shares of $15.4 million ($8.9 million after tax), or $0.31 per share. In
addition, we recorded a $31.1 million extraordinary gain ($18.0 million after
tax), or $0.62 per share, as a result of the extinguishment of the SAILS
indebtedness. In 1998, Houghton Mifflin recorded items related to INSO resulting
from INSO's special charge of $2.8 million in connection with its acquisitions
of Henderson Software, Inc. and ViewPort Development AB. Our portion of these
charges amounted to approximately $0.8 million ($0.5 million after tax), or
$0.01 per share. We also recorded a gain of $3.2 million ($1.9 million after
tax), or $0.06 per share, resulting from INSO's sale of its linguistic software
net assets.
Houghton Mifflin recognized a loss of $3.0 million ($2.0 million after
tax), or $0.07 per share, on the sale of our investment in Cassell Plc in 1998.
Houghton Mifflin's acquisition of CAT in July 1998 included the purchase of
certain technology under research and development, which resulted in a charge of
$3.5 million, or $0.12 per share.
In 1997, Houghton Mifflin recognized a gain of $14.9 million ($8.6 million
after tax), or $0.30 per share, representing our portion of the increase in
INSO's net equity as a result of INSO's completion of a public offering of 1.2
million shares of common stock at a net offering price of approximately $47 per
share in the fourth quarter of 1996 (see Note 1 and Note 9 in the Notes to the
Consolidated Financial Statements for a summary of Houghton Mifflin's
recognition policy). The 1997 results include special charges of $2.5 million
($1.5 million after tax), or $0.05 per share, related to INSO's acquisition of
the Mastersoft line of products from Adobe Systems Incorporated, the acquisition
of Level Five Research, Inc., and a restructuring charge affecting INSO's
Information Products and certain of its Information Management Tools products.
In 1996, Houghton Mifflin recorded a gain of $34.3 million ($19.9 million
after tax), or $0.71 per share, on the sale of 770,000 shares of INSO common
stock. We also recorded special charges in 1996 of $11.7 million ($7.1 million
after tax), or $0.25 per share, relating to our investment in INSO, resulting
from INSO's acquisitions of ImageMark Software Labs, Inc. and Electronic Book
Technologies, Inc.
In October 1995, Houghton Mifflin completed the acquisition of D.C. Heath
and Company from Raytheon Company in a purchase transaction. As a result, we
recorded in 1995 charges totaling $49.3 million ($30.0 million after tax), or
$1.09 per share, associated with the integration of the Heath business. In 1995,
there was a $2.2 million charge, or $0.08 per share, relating to our investment
in INSO resulting from INSO's acquisition of Systems Compatibility Corporation.
We also recorded a gain in 1995 of $13.1 million ($7.8 million after tax), or
$0.28 per share, in connection with an additional public offering of 1.2 million
shares made by INSO.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1999
"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.
RESULTS OF OPERATIONS
Net income:
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------------------
DILUTED EARNINGS
(LOSS) PER SHARE
---------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ----- ----- -----
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
Income after tax, but excluding extraordinary
and infrequent items:........................ $48,943 $40,750 $42,650 $1.67 $1.40 $1.48
Extraordinary and infrequent items, net of
taxes, where applicable:
Extraordinary gain on extinguishment of
debt...................................... 30,320 18,010 -- 1.03 0.62 --
Gain (loss) on surrender of INSO
Corporation common stock to satisfy
indebtedness.............................. (3,241) 8,913 -- (0.11) 0.31 --
Gain on sale of INSO Corporation common
stock..................................... 282 24 -- 0.01 -- --
Loss on sale of long-term investment......... -- (1,961) -- -- (0.07) --
Acquired in-process research and
development............................... -- (3,500) -- -- (0.12) --
Gain on equity transaction of INSO
Corporation............................... -- -- 8,645 -- -- 0.30
Other gains (losses)......................... -- 1,413 (1,473) -- 0.05 (0.05)
------- ------- ------- ----- ----- -----
Net income..................................... $76,304 $63,649 $49,822 $2.60 $2.19 $1.73
======= ======= ======= ===== ===== =====
Consolidated net income in 1999 was $76.3 million, or $2.60 per share,
compared to net income of $63.6 million, or $2.19 per share, in 1998 and net
income of $49.8 million, or $1.73 per share, in 1997.
Income after tax, but excluding extraordinary and infrequent items, for
1999 was $48.9 million, or $1.67 per share, compared to income after tax, but
excluding extraordinary and infrequent items, of $40.8 million, or $1.40 per
share, in 1998. The primary reasons for the increase were higher net sales,
operating efficiencies, product mix, and lower interest expense, partially
offset by higher
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development costs, increased selling expenses related to sales opportunities in
2000 and beyond, and additional goodwill amortization resulting from the
acquisitions of CAT, DiscoveryWorks, and Sunburst Communications.
Income after tax, but excluding infrequent items, was $40.8 million, or
$1.40 per share, in 1998, compared to $42.7 million, or $1.48 per share, in
1997. The primary reasons for the decrease were the dilution arising from the
operating expenses and goodwill amortization of CAT (acquired in July 1998) and
costs related to Houghton Mifflin's unsuccessful bid for a portion of Simon &
Schuster's publishing assets. Increases in product development spending, higher
selling expenses, and additional costs related to information systems
initiatives and the Year 2000 computer issue were offset by higher sales.
During 1999, Houghton Mifflin recorded a non-cash loss of $5.6 million
($3.2 million after tax), or $0.11 per share, resulting from the surrender of
INSO common stock upon maturity of the remaining outstanding SAILS. We also
recognized an extraordinary gain of $52.3 million ($30.3 million after tax), or
$1.03 per share, on the extinguishment of the SAILS indebtedness. In addition,
we sold our remaining shares of INSO and recognized a gain of $0.5 million ($0.3
million after tax), or $0.01 per share.
During 1998, Houghton Mifflin recognized a non-cash gain of $15.4 million
($8.9 million after tax), or $0.31 per share, resulting from the surrender of
INSO common stock used to redeem one-half of the outstanding SAILS. We also
recognized an extraordinary gain of $31.1 million ($18.0 million after tax), or
$0.62 per share, on the extinguishment of the SAILS indebtedness. In 1998,
Houghton Mifflin recognized a loss of $3.0 million ($2.0 million after tax), or
$0.07 per share, on the sale of our investment in Cassell Plc. The acquisition
of CAT included the purchase of certain technology under research and
development which resulted in a charge of $3.5 million, or $0.12 per share.
During 1998, Houghton Mifflin also recorded a one-time gain (net of charges) of
$2.4 million ($1.4 million after tax), or $0.05 per share, related to the equity
investment in INSO.
In 1997, Houghton Mifflin recognized a gain of $14.9 million ($8.6 million
after tax), or $0.30 per share, representing its portion of the increase in
INSO's net equity as a result of INSO's completion of a public offering in 1996,
and a special charge of $2.5 million ($1.5 million after tax), or $0.05 per
share, related to the equity investment in INSO.
Net sales:
INCREASE (DECREASE)
------------------------------
TWELVE MONTHS ENDED DECEMBER 31, 1999 VS. 1998 1998 VS. 1997
--------------------------------- ------------- --------------
1999 1998 1997 $ % $ %
--------- --------- --------- ------- --- ------- ----
(IN THOUSANDS OF DOLLARS, EXCEPT PERCENT AMOUNTS)
K-12 Publishing............... $657,289 $611,770 $560,259 $45,519 7.4% $51,511 9.2%
College Publishing............ 172,240 160,677 148,969 11,563 7.2 11,708 7.9
Other......................... 90,589 89,210 88,092 1,379 1.5 1,118 1.3
-------- -------- -------- ------- -------
Total net sales..... $920,118 $861,657 $797,320 $58,461 6.8% $64,337 8.1%
======== ======== ======== ======= =======
Houghton Mifflin's net sales in 1999 increased $58.5 million, or 6.8%, to
$920.1 million from $861.7 million in 1998. The K-12 Publishing segment's net
sales of $657.3 million in 1999 were $45.5 million, or 7.4%, above 1998 net
sales of $611.8 million. All divisions in the K-12 Publishing segment reported
increased revenues in 1999 even though the sales opportunities were limited in
elementary and secondary school reading and language arts. New product lines
such as reading intervention and Math Steps contributed to the net sales gain,
as did the inclusion of sales of DiscoveryWorks, the elementary school science
program we acquired in December 1998, and multimedia instructional materials we
acquired with Sunburst in May 1999. The College Publishing segment's net sales
of $172.2 million in 1999 increased $11.6 million, or 7.2%, from $160.7 million
in 1998. The increase was primarily due to higher sales of new frontlist titles
and additional sales to the high school
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advanced placement market. The Other segment's net sales in 1999 increased by
$1.4 million, or 1.5%, to $90.6 million from $89.2 million in 1998. This was
primarily due to the Trade Division's increased sales from its adult trade list,
partially offset by the shift of Sunburst Technology, formerly Houghton Mifflin
Interactive, to the K-12 Publishing segment in 1999.
Houghton Mifflin's net sales in 1998 increased $64.3 million, or 8.1%, to
$861.7 million from $797.3 million in 1997. The K-12 Publishing segment's net
sales of $611.8 million in 1998 were $51.5 million, or 9.2%, above 1997 net
sales of $560.3 million. All divisions in the K-12 Publishing segment reported
increased revenues in 1998 due to strong sales performance in statewide adoption
and open territory opportunities, as well as increased funding for instructional
and assessment materials. The College Publishing segment's net sales of $160.7
million in 1998 increased $11.7 million, or 7.9%, from $149.0 million in 1997.
Sales of both new editions and backlist titles in the college market rose, and
sales to the high school advanced placement market increased significantly. The
Other segment's net sales in 1998 increased by $1.1 million, or 1.3%, to $89.2
million from $88.1 million in 1997. The Trade Division's net sales were higher
in 1998 compared to 1997 due to increased sales of adult, children's, and
reference products, partially offset by lower guidebook sales, reflecting the
expiration of the Insight Travel Guide distribution arrangement on December 31,
1997. The Other net sales increase also reflected the inclusion of sales from
CAT, acquired in 1998. Lower net sales at Sunburst Technology partially offset
these net sales increases. Sunburst Technology's sales declined year over year
due to increased competition in the retail market.
Costs and expenses:
INCREASE (DECREASE)
-------------------------------
TWELVE MONTHS ENDED DECEMBER 31, 1999 VS. 1998 1998 VS. 1997
--------------------------------- -------------- --------------
1999 1998 1997 $ % $ %
--------- --------- --------- ------- ---- ------- ----
(IN THOUSANDS OF DOLLARS, EXCEPT PERCENT AMOUNTS)
Cost of sales.................. $411,114 $390,922 $362,501 $20,192 5.2% $28,421 7.8%
Selling and administrative,
excluding intangible asset
amortization................. 365,176 340,207 300,347 24,969 7.3 39,860 13.3
Intangible asset
amortization................. 31,868 28,508 27,914 3,360 11.8 594 2.1
-------- -------- -------- ------- -------
Total costs and
expenses........... $808,158 $759,637 $690,762 $48,521 6.4% $68,875 10.0%
======== ======== ======== ======= =======
Cost of sales:
In 1999, cost of sales increased $20.2 million, or 5.2%, to $411.1 million
from $390.9 million during 1998. The increased cost of sales was primarily due
to higher net sales and increased editorial expense related to new program
development and product revisions in preparation for the sales opportunities in
the year 2000 and beyond, partially offset by lower plate amortization primarily
due to the accounting change regarding book plate amortization. Beginning in
1999, Houghton Mifflin implemented a change in the method of accounting for the
amortization of book plate assets. The change is from a class of assets method
previously used to a specific identification method by which amortization
commences in the year of publication. This change was made prospectively for
book plate additions beginning in 1999. This change resulted in a decrease in
amortization expense of approximately $5.1 million for the twelve months ended
December 31, 1999. As a percent of sales, cost of sales decreased to 44.7% in
1999 from 45.4% in 1998. The lower percentage was primarily due to higher net
sales, lower plate amortization expense and lower manufacturing and royalty
costs.
In 1998, cost of sales increased $28.4 million, or 7.8%, to $390.9 million
from $362.5 million during 1997. The increased cost of sales was due to higher
net sales and increased editorial expense and plate amortization. As a percent
of sales, cost of sales decreased slightly to 45.4% in 1998 from 45.5% in 1997.
Although editorial expenses and plate amortization were considerably higher in
absolute dollars, the net sales gains offset the percentage increase in these
items.
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Selling and administrative:
Selling and administrative expenses, excluding intangible asset
amortization, were $365.2 million in 1999, an increase of $25.0 million, or
7.3%, over the $340.2 million recorded in 1998. As a percent of sales, selling
and administrative expense increased slightly to 39.7% in 1999 from 39.5% in
1998. 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 CAT and Sunburst, and increased
spending on efforts to improve customer support systems and to address the Year
2000 computer issue. The increases were partially offset by lower distribution
costs. Implementation of a new warehouse automation system and in-sourcing of
the Trade Division's distribution function contributed to the lower distribution
costs.
In 1998, selling and administrative expenses, excluding intangible asset
amortization, were $340.2 million, an increase of $39.9 million, or 13.3%, from
$300.3 million in 1997. As a percent of sales, selling and administrative
expense increased to 39.5% in 1998 from 37.7% in 1997. The primary reasons for
this increase were higher costs related to information systems initiatives and
the Year 2000 computer issue, the additional selling and administrative costs
for the operations of CAT, and increased selling expenses related to sales
opportunities in 1999.
Intangible asset amortization:
Due to the 1998 acquisitions of CAT and DiscoveryWorks, the January 1999
acquisition of Little Planet, and the May 1999 acquisition of Sunburst
Communications, intangible asset amortization increased to $31.9 million in 1999
from $28.5 million in 1998.
Intangible asset amortization increased to $28.5 million in 1998 from $27.9
million in 1997 due to the 1998 acquisitions of CAT and DiscoveryWorks and the
1997 acquisitions of Wintergreen/ Orchard House and Chapters Publishing.
Net interest expense:
Net interest expense of $29.8 million in 1999 decreased $4.2 million from
$34.0 million in 1998. The reduction was primarily due to the maturity on August
2, 1999 of $65.3 million of SAILS, the redemption of $65.3 million of SAILS on
August 1, 1998, and the repayment of $39.5 million of debt at the end of 1998.
Net interest expense of $34.0 million in 1998 decreased $4.9 million from
$38.9 million in 1997. The reduction was primarily due to repayment of $68.7
million of debt in the fourth quarter of 1997 and the redemption of $65.3
million of SAILS debt in August 1998.
Equity in earnings (losses) of INSO Corporation:
During 1998, Houghton Mifflin recognized $3.4 million in equity earnings of
INSO, representing a one-time gain of $3.2 million and $1.0 million of INSO's
earnings, partially offset by $0.8 million of one-time charges recognized by
INSO. During 1997, we recognized $1.0 million in equity earnings of INSO, of
which $3.5 million related to INSO's earnings, offset by $2.5 million related to
one-time charges recognized by INSO.
Other expense:
In 1998, Houghton Mifflin recognized a $1.1 million pre-tax charge related
to our unsuccessful bid for a portion of Simon & Schuster's publishing assets.
Income taxes:
The provision for taxes in 1999 decreased $2.5 million, or 7.5%, from 1998.
This decrease was primarily due to lower income and a decrease in the effective
tax rate to 40.4% in 1999 from 42.4%
15
18
in 1998. The decrease in the effective tax rate reflects the non-deductible
charge for acquired in-process research and development from CAT in 1998.
The provision for taxes in 1998 decreased $0.1 million from 1997. This
decrease was primarily due to the decrease in operating income in 1998 compared
to 1997, offset by an increase in the effective tax rate to 42.4% in 1998 from
40.4% in 1997. The increase in the effective tax rate was primarily due to the
acquired in-process research and development charge from CAT.
Houghton Mifflin recognized net deferred tax assets aggregating $7.6
million at December 31, 1999 and $0.4 million at December 31, 1998. The assets
related principally to pension and post-retirement benefits, inventory, and tax
liabilities related principally to differences in the depreciation of fixed
assets and amortization of book plates. In view of the consistent profitability
of our past operations, we believe that these assets will be substantially
recovered and that no significant additional valuation allowances are necessary.
K-12 PUBLISHING
The K-12 Publishing segment's net sales of $657.3 million in 1999
represented a $45.5 million, or 7.4%, increase over 1998 net sales of $611.8
million. All divisions in this segment reported higher net sales in 1999 as
compared to 1998. Although sales opportunities were limited in elementary school
reading and language arts, the School Division's strongest markets and the
markets to which its customers direct the most funding, the School Division's
net sales increased year over year. This increase was due to the acquisition of
DiscoveryWorks and new product lines such as reading intervention and Math
Steps. Great Source reported increased net sales primarily due to higher sales
of the Write Source product line and new products in mathematics and social
studies. Riverside's slightly higher sales were primarily due to the increased
sales in clinical and custom products, mostly offset by lower state contract
sales. McDougal's net sales increased only slightly over 1998 and were lower
than expected. Increases in social studies revenues were offset by
lower-than-expected funding in both adoption and open territory states and lower
math sales. Sunburst Technology's net sales rose sharply, reflecting the May
acquisition of Sunburst Communications.
Operating income for the K-12 Publishing segment decreased $0.8 million, or
0.8%, to $97.1 million in 1999 from $97.9 million in 1998. The resulting
operating margin for 1999 was 14.8% compared to 16.0% in 1998. This decrease in
operating margin was primarily due to an increase in cost of sales, selling and
administrative expenses, and intangible asset amortization. Cost of sales
increased due to higher editorial expenses incurred for new program development
and product revisions in preparation for sales opportunities in the year 2000
and beyond, partially offset by lower plate amortization. Selling expenses
increased due to expansion of the sales staff and higher sampling and
promotional expenses in anticipation of the increased sales opportunities in the
year 2000 and beyond. Administrative expenses rose due to efforts to improve
customer support systems and to address the Year 2000 computer issue. The shift
of Sunburst Technology to the K-12 Publishing segment also accounted for some of
the increase in selling and administrative costs. The increase in intangible
asset amortization was due to the 1998 acquisition of DiscoveryWorks and the
1999 acquisitions of Little Planet and Sunburst Communications.
The K-12 Publishing segment's net sales of $611.8 million in 1998 were
$51.5 million, or 9.2%, above 1997 net sales of $560.3 million. This increase
was due to strong sales performance in statewide adoption and open territory
opportunities, as well as increased funding for instructional and assessment
materials. McDougal's sales increased due to its strong performance in
mathematics and social studies adoptions. Riverside reported an increase in
sales due to higher sales of group assessment and clinical tests. Riverside
benefited both from increased funding for assessment programs and from its
strategy to invest in the development of criterion-referenced tests. Great
Source had a significant sales increase, principally in its Write Source and
mathematics product lines. The School Division's English, spelling, and new
reading intervention programs performed extremely
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well in both adoption states and open territories. The School Division's reading
program did not generate increased sales year over year, but sales from this
product line were higher than originally expected. The School Division's math
program had higher sales year over year, but less than originally expected.
Overall, the School Division had a year-over-year net sales gain, rather than
the decline initially expected.
Operating income for the K-12 Publishing segment increased $1.1 million, or
1.2%, to $97.9 million in 1998 from $96.8 million in 1997. The resulting
operating margin for 1998 was 16.0% compared to 17.3% in 1997. The decrease in
operating margin was primarily due to the increase in editorial costs incurred
for product revisions and new product development and a change in the mix of
products sold, which included a higher percent of revenues from products with
lower margins. Increased selling expense also contributed to this decrease.
Higher selling expense was related to the cost of preparing for anticipated
sales opportunities in 1999. The year-over-year increase in administrative
expense as a percent of sales was primarily due to additional costs related to
information systems initiatives and the Year 2000 computer issue and the
inclusion of gains recorded on the sales of property in 1997, which, in turn,
lowered administrative expense in 1997.
COLLEGE PUBLISHING
The College Publishing segment reported 1999 net sales of $172.2 million, a
7.2% increase over 1998 net sales of $160.7 million. This increase was primarily
due to strong sales of new products and higher sales to the high school advanced
placement market.
In 1999, operating income for the College Publishing segment increased $4.0
million, or 20.3%, to $23.7 million from $19.7 million in 1998. The resulting
operating margin for 1999 was 13.8% compared to 12.3% in 1998. The operating
margin improvement was primarily due to the increase in net sales and lower
manufacturing, editorial, and distribution expenses as a percent of sales in
1999 compared to 1998. These decreases were partially offset by higher
administrative expenses.
The College Publishing segment reported net sales of $160.7 million in
1998, a 7.9% increase over 1997 net sales of $149.0 million. Sales of both
frontlist and backlist titles as well as sales to the high school advanced
placement market increased significantly.
Operating income for the College Publishing segment increased $3.9 million,
or 24.5%, to $19.7 million in 1998 from $15.9 million in 1997. The resulting
operating margin for 1998 was 12.3% compared to 10.6% in 1997. The operating
margin improvement was primarily due to the increase in net sales and lower
manufacturing and editorial expense as a percent of sales. These decreases were
partially offset by higher administrative expense. The higher administrative
expense was due to additional costs related to information system initiatives
and the Year 2000 computer issue.
OTHER
In 1999, the Other segment's net sales increased by $1.4 million, or 1.5%,
to $90.6 million from $89.2 million in 1998. The Trade Division was the major
contributor to this gain with a sales increase due to higher sales of adult
trade titles. The sales increase for the segment was also due to the inclusion
of CAT, which was acquired in July 1998. Lower revenues due to the shift of
Sunburst Technology to the K-12 Publishing segment beginning in 1999 partially
offset these increases.
The Other segment's operating loss was $8.9 million in 1999 compared to
$15.7 million in 1998. The lower operating loss was primarily due to the shift
of Sunburst Technology to the K-12 publishing segment, higher net sales, and
lower manufacturing and distribution costs for the Trade Division, partially
offset by the operating expenses and intangible asset amortization of CAT.
The Other segment's net sales in 1998 increased by $1.1 million to $89.2
million from $88.1 million in 1997. This increase was primarily attributable to
the Trade Division, due to higher sales of adult, children's, and reference
titles. Excluding the 1997 revenues from Insight Travel Guides, which
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were no longer being distributed by this division after December 1997, sales
would have increased by more than 10%. The sales increase in this segment was
also due to the inclusion of sales from CAT, a new division acquired in 1998.
Lower net sales from Sunburst Technology partially offset these increases.
The Other segment's operating loss was $15.7 million in 1998 compared to
$6.1 million in 1997. The increased operating loss was primarily due to the
operating loss attributable to Houghton Mifflin's acquisition of CAT, the higher
loss at Sunburst Technology due to lower sales, and costs incurred in moving the
Trade Division's distribution facility in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Houghton Mifflin's principal businesses are seasonal, with almost 90% of
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 posts 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.
Net cash provided by operating activities was $143.8 million in 1999, a
decrease of $3.0 million from $146.8 million in 1998. Net income excluding
non-cash items increased $12.2 million in 1999 from 1998. Changes in operating
assets and liabilities used $15.2 million more cash in 1999 than 1998 due to an
increase in tax payments and higher accounts receivable and inventories,
partially offset by higher accounts payable. Higher accounts receivable were
primarily due to the timing of sales, as fourth-quarter sales in 1999 increased
significantly over the fourth quarter of 1998. Inventory levels increased in
anticipation of greater sales opportunities in 2000.
In 1998, net cash provided by operating activities was $146.8 million, an
increase of $5.0 million from $141.8 million in 1997. Net income excluding
non-cash items increased by $11.5 million in 1998 from 1997. Changes in
operating assets and liabilities used $6.5 million more cash during 1998 than in
1997. This increase was primarily due to the increase in income tax payments
relating to the surrender of INSO common stock and the redemption of the SAILS,
offset by lower working capital requirements.
Houghton Mifflin anticipates that cash provided by operating activities in
2000 will be higher than in 1999 due to higher earnings.
Houghton Mifflin used $144.0 million in cash for investing activities in
1999, an increase of $46.2 million over the $97.8 million used during 1998. The
increase reflects a $20.4 million increase for acquisitions of publishing and
technology assets, a $13.7 million increase for book plate expenditures, and a
$10.6 million increase in property, plant, and equipment expenditures. The
increases were principally due to the following: the acquisitions of Sunburst
Communications and the Little Planet Literacy Series and a contingent
consideration payment related to the 1998 acquisition of CAT; higher investments
in new products; increased spending on information systems initiatives; and the
build out of Trade Division's distribution facility.
Houghton Mifflin used $97.8 million in cash for investing activities in
1998, an increase of $26.0 million over the $71.8 million used during 1997. The
increase reflected a $15.8 million increase for acquisitions of publishing and
technology assets, an increase in property, plant, and equipment expenditures of
$7.0 million incurred primarily for information systems initiatives in 1998, and
the $5.2 million in proceeds from the sales of property and plant in 1997. We
received $0.8 million in proceeds from the sale of 400,000 ordinary shares of
Cassell Plc in 1998.
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Net proceeds from financing activities were $8.3 million in 1999, primarily
due to the net issuance of $39.3 million of debt partially offset by common
stock repurchases of $17.9 million and common stock dividend payments of $14.7
million. Total debt decreased to $346.0 million as of December 31, 1999 from
$369.7 million at the end of 1998. Houghton Mifflin's percentage of debt
(commercial paper borrowings, current portion of long-term debt, and long-term
debt) to total capitalization (debt plus stockholders' equity) decreased to
44.4% at the end of 1999 from 48.1% at the end of 1998. The decrease in debt was
due to the following factors: non-cash redemption of the remaining $63.3 million
in principal amount of outstanding SAILS using INSO common stock, repayment of
$20.0 million of medium-term notes, and repayment of $30.0 million outstanding
under our five-year revolving credit facility, offset by the issuance of $80.0
million of medium-term notes and commercial paper borrowings of $9.5 million.
Houghton Mifflin used $50.7 million for financing activities in 1998,
primarily to make net repayments of $39.5 million of debt in the fourth quarter
of 1998 and pay dividends. Total borrowing decreased $102.7 million to $369.7
million as of December 31, 1998 from $472.4 million at the end of 1997. Our
percentage of debt (commercial paper borrowings, current portion of long-term
debt, and long-term debt) to total capitalization (debt plus stockholders'
equity) decreased to 48.1% at the end of 1998 from the 59.8% at the end of 1997.
The decrease in debt was due to the non-cash redemption of 50%, or $63.3 million
in principal amount, of outstanding SAILS using INSO common stock, repayment of
$40 million of medium-term notes, and repayment of $49.5 million of commercial
paper borrowings, offset by $50 million of borrowings under our five-year
revolving credit facility.
In 1999, Houghton Mifflin's average short-term borrowing was $113.6
million, an increase of $41.3 million from 1998. Seasonal borrowing needs
increased as a result of higher operating expenditures, increased working
capital requirements, and the acquisition of Sunburst Communications, Inc.
In 1998, Houghton Mifflin's average short-term borrowing was $72.3 million,
an increase of $5.4 million from 1997. Seasonal borrowing needs increased as a
result of higher operating expenditures and increased working capital
requirements.
In August 1995, Houghton Mifflin completed a $126.6 million public offering
of 6% Exchangeable Notes due in 1999 at a public offering price of $34 per
SAILS. In August 1998, we redeemed 50%, or $65.3 million in aggregate principal
amount, of the outstanding SAILS. The SAILS were redeemed at an exchange rate
equal to two shares of the common stock of INSO, par value $0.01 per share, for
each SAILS, or approximately 1.9 million shares, and cash of $2.0 million for
the payment of accrued and unpaid interest at the date of the redemption. On
August 2, 1999, the remaining 50%, or $65.3 million in aggregate principal, of
the outstanding SAILS matured. In accordance with the terms of the SAILS, we
elected to deliver two shares of the common stock of INSO for each SAILS, or
approximately 1.9 million shares, and cash of $2.0 million for the payment of
all accrued and unpaid interest on the outstanding SAILS.
In May 1999, Houghton Mifflin filed a registration statement on Form S-3
with the Securities and Exchange Commission covering up to $200 million of debt
securities and common stock, which may be issued in one or more offerings from
time to time. At December 31, 1999, we had not issued any debt securities or
common stock covered by this registration statement.
At December 31, 1999, Houghton Mifflin had a $300 million unsecured
revolving credit facility for which we pay annual commitment fees. Borrowings
under the revolving credit facility are outstanding under a five-year commitment
revolving credit facility which expires on October 31, 2000. The revolving
credit facility requires us to comply with certain covenants, the most
restrictive of which include maintenance of a specific level of net worth,
fixed-charge coverage ratio, and debt-to-equity ratio. At December 31, 1999, the
outstanding balance on the revolving credit facility was
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$20 million, at a weighted average interest rate of 6.75%. At December 31, 1998,
the outstanding balance on the revolving credit facility was $50 million, at a
weighted average interest rate of 5.5875%. Management routinely evaluates
interest rates available to Houghton Mifflin under the revolving credit facility
as compared to those available through the issuance of commercial paper.
Houghton Mifflin currently expects that cash flow from operations for the
full year 2000 will be sufficient to cover investment activities and dividend
payments as well as to repay by year-end a portion of the debt outstanding at
the beginning of 2000. We intend to continue using the short-term debt market,
primarily commercial paper, for seasonal liquidity needs.
PENDING ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Investments and Hedging Activities," which was
amended by Financial Accounting Standards Board Statement No. 137, which
deferred the adoption of FAS 133 until fiscal years beginning after June 15,
2000. Houghton Mifflin is currently evaluating the effects of implementing this
statement.
IMPACT OF INFLATION AND CHANGING PRICES
Although inflation is currently well below levels in prior years and has,
therefore, benefited recent Houghton Mifflin results, particularly in the area
of manufacturing costs, there are offsetting costs. Our ability to adjust
selling prices has always been limited by competitive factors and long-term
contractual arrangements which either prohibit price increases or limit the
amount by which prices may be increased. Further, a weak domestic economy at a
time of low inflation could cause lower tax receipts at the state and local
level, and the funding and buying patterns for textbooks and other educational
materials could be adversely affected.
Prices for paper moderated in 1998 and 1999. We expect a modest increase in
paper prices in 2000.
The most significant investments affected by inflation include book plates;
other property, plant, and equipment; and inventories. Houghton Mifflin uses the
last-in, first-out (LIFO) method to value substantially all inventory, and
therefore, the cost of inventory charged against income approximates replacement
value. The incremental replacement cost expense amounted to $20.0 million in
1999 compared with $15.8 million in 1998.
Houghton Mifflin's publishing business requires a high level of investment
in book plates for our educational and reference works, which represented
approximately 9.5% of total assets at December 31, 1999, and, increasingly, in
other property, plant, and equipment, which represented 7.1% of consolidated
assets at December 31, 1999. We expect to continue to commit funds to the
publishing areas through both internal growth and acquisitions.
Houghton Mifflin believes that by valuing our inventory using the LIFO
method, continuing to emphasize technological improvements, and quality control,
we can continue to moderate the impact of inflation on our operating results and
financial position.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition of CAT in July 1998, Houghton Mifflin
wrote off in-process research and development totaling $3.5 million in the third
quarter of 1998. 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 an
application module called CAT Software System Version 7. This project
represented an integrated application suite of products whose functionality
included test development, automated assembly and test production, test
administration, scoring, automated test reporting, and test security.
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23
The nature of the efforts required to develop the acquired in-process
research and development into a commercially viable product principally relate
to the completion of all planning, designing, prototyping, verification, and
testing activities that are necessary to establish that the product can be
produced to meet its 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 product and the stage
of completion of the product and discounting these cash flows to the net present
value. The resulting projected net cash flows from the project were based on
management's estimates of revenues and operating profits related to the product.
The revenue estimates we used to value the in-process 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%. This discount rate took into account the time value of
money and investment risk factors described above.
The estimates used 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.
The original estimate was to complete the development of CAT Software
System Version 7 in 1998 at a cost of an additional $0.1 million. Initial market
availability of the product was expected by 1999. Due to technology issues, the
CAT Software System Version 7 release was cancelled. Instead, Houghton Mifflin
decided to improve the product with a new release CAT System Software Version 8.
Although Version 8 will use some of the features created with Version 7, the
expected completion date is now early 2000 at an additional cost of
approximately $1.4 million.
OUTLOOK
We expect that revenue opportunities in the K-12 market in 2000 will be
greater than in 1999 due to an increase in statewide adoption opportunities, as
well as additional funding available at the state level for educational and
assessment materials. The sales growth will include the effect of having
Sunburst Communications, Inc. for a full year. We expect all other divisions
will also have growth opportunities, and that sales will increase in 2000 by
approximately 15-17%.
Houghton Mifflin anticipates that the sales growth will generate increased
gross margin due to a more favorable product mix, the completion of a major
product development cycle, and the benefits from investments made in systems and
business processes. In the past two years, product development costs have
increased in order to develop new programs for sale in major adoption
opportunities in 2000-2002. In 2000, editorial expenses and plate amortization
are expected to remain in the same absolute dollar range as in 1999. Due to the
higher sales expected in 2000, editorial and plate amortization are expected to
decrease as a percentage of sales, declining approximately two percentage points
as compared to 1999. We expect selling and administrative expenses, which
include selling, distribution, administrative costs, and intangible asset
amortization to decrease as a percentage of sales, declining two to three
percentage points in 2000 compared to 1999. Each of the components is projected
to decline as a percent of sales. We expect selling expenses to increase due to
increased sales and marketing efforts and product sampling associated with the
adoption cycle for 2000 and 2001, but as a percent of sales, to decline.
Houghton Mifflin expects distribution expenses will continue to decrease as a
percent of sales, reflecting more efficient warehouse operations. We believe
administrative costs will benefit from process improvements as well as the
resolution of the Year 2000 computer issue, and due to higher sales, intangible
asset amortization will decline as a percent of sales.
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EFFECT OF THE YEAR 2000 COMPUTER ISSUE
Houghton Mifflin used both internal and external resources to reprogram or
replace and test software for Year 2000 modifications. As of December 31, 1999,
Houghton Mifflin had spent approximately $30 million ($16 million expensed and
$14 million capitalized for new systems) on its Year 2000 computer project and
the development of new systems and systems modifications. To date, we have not
experienced any material problems related to Year 2000 issues.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Houghton Mifflin's exposure to market risk for changes in interest rates
relates primarily to borrowings under our commercial paper program and our
unsecured credit facility. Houghton Mifflin does not enter into speculative or
leveraged derivative transactions.
Houghton Mifflin from time to time enters into transactions involving
financial instruments for purposes of managing our exposure to interest rate
risks and funding costs. Through the use of interest rate products such as
interest rate swap agreements and interest rate locks, Houghton Mifflin attempts
to achieve a predetermined mix of fixed- and floating-rate debt. At December 31,
1999, Houghton Mifflin had two interest-rate swaps in place, each with a
notional amount of $25 million and terminating on December 1, 2000. We pay the
fixed rate on both swaps (5.90% and 5.95%) and receive a variable rate based
upon a commercial paper index.
Each interest rate swap agreement is designated with all or a portion of
the principal balance and term of a specific debt obligation. These agreements
involve the exchange of amounts based on a variable interest rate for amounts
based on a fixed interest rate over the life of the agreement without an
exchange of the notional amount upon which the payments are based. The
differential to be paid or received as interest rates change is recognized as an
adjustment to interest expense in the current period. The fair market value of
the swap agreements and changes in the fair market value as a result of changes
in market interest rates are not recognized in the financial statements.
Gains and losses on terminations of interest rate swap agreements are
deferred as an adjustment to the carrying amount of the outstanding designated
debt and amortized as an adjustment to interest expense related to the debt over
the remaining term of the original contract life of the terminated swap
agreement. In the event of the early extinguishment of a designated debt
obligation, any realized or unrealized gain or loss from the swap would be
recognized in income coincident with the extinguishment gain or loss.
Any swap agreements that are not designated with outstanding debt, or
notional amounts (or durations) of interest rate swap agreements in excess of
the principal amounts (or maturities) of the underlying debt obligations, are
recorded as an asset or liability at fair market value, with changes in fair
market value recorded in "Other income or expense" (the fair market value
method). There were no such agreements at December 31, 1999.
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The following table provides information about Houghton Mifflin's financial
instruments that are sensitive to changes in interest rates. For investment
securities and debt obligations, the table presents principal cash flows and
related weighted-average interest rates by expected maturity dates.
Weighted-average variable rates are based on implied forward rates as derived
from appropriate annual spot rate observation as of the reporting date. For
interest rate swaps, the table presents notional amounts and weighted-average
interest rates by contractual maturity dates. Notional amounts are used to
calculate the contractual cash flows to be exchanged under the contract.
INTEREST RATE SENSITIVITY
PRINCIPAL (NOTIONAL) AMOUNTS AND
AVERAGE INTEREST RATES
FAIR MARKET
VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
------- ------- ------- ------- ------- ---------- -------- -----------
(IN THOUSANDS OF DOLLARS, EXCEPT PERCENT AMOUNTS)
LIABILITIES
Commercial paper............. $21,358 -- -- -- -- -- $ 21,358 $ 21,358
Average interest rate........ 6.42% -- -- -- -- --
Long-term debt, including
current portion
Fixed rate................. $50,037 $30,034 -- -- $99,745 $124,859 $304,675 $297,229
Average interest rate...... 5.93% 5.99% -- -- 7.13% 7.00%
Variable rate.............. $20,000 -- -- -- -- -- $ 20,000 $ 20,000
Average interest rate...... 6.75% -- -- -- -- --
INTEREST RATE DERIVATIVE FINANCIAL INSTRUMENTS RELATED TO DEBT
Interest rate swaps
Notional amount of swap
(Pay fixed/receive
variable)................ $50,000 -- -- -- -- --
Average pay rate........... 5.93% -- -- -- -- --
Average receivable rate.... 6.14% -- -- -- -- --
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Management's Responsibility for Financial Statements........ 26
Report of Independent Auditors.............................. 27
Consolidated Balance Sheets at December 31, 1999 and 1998... 28
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 31
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. 32
Notes to Consolidated Financial Statements.................. 34
SUPPLEMENTARY DATA
Summary of Quarterly Results of Operations (unaudited) is presented on page 56.
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MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Houghton Mifflin Company is responsible for all
information and representations contained in the financial statements and other
sections of this annual report. Management is also responsible for the internal
consistency of such information and representations. In preparing the financial
statements it is necessary for management to make informed judgments and
estimates and to select accounting principles which it believes are in
accordance with generally accepted accounting principles appropriate in the
circumstances.
In meeting its responsibility for the reliability of the financial
statements, management relies on Houghton Mifflin's internal control systems and
procedures. In designing such control procedures, management recognizes that
errors or irregularities may nevertheless occur and that estimates and judgments
are needed to assess and balance the relative costs and expected benefits of
controls. However, management believes that Houghton Mifflin's accounting
controls do provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with corporate
policy and management's authorization. As a further safeguard, Houghton Mifflin
has a program of internal audits and appropriate follow-up by management.
The financial statements have been audited by Houghton Mifflin's
independent auditors, Ernst & Young LLP, in accordance with generally accepted
auditing standards. In connection with its audit, Ernst & Young LLP develops and
maintains an understanding of Houghton Mifflin's accounting and financial
controls, and conducts such tests and related procedures as it deems necessary
to render its opinion on the financial statements. The adequacy of Houghton
Mifflin's internal financial controls and the accounting principles employed in
financial reporting are under the general surveillance of the Audit Committee of
the Board of Directors, consisting of five independent directors. The
independent auditors and internal auditors have free and direct access to the
Audit Committee and meet with the committee periodically to discuss accounting,
auditing, and financial reporting matters.
Houghton Mifflin has distributed to its employees a statement regarding,
among other things, potentially conflicting outside business interests of
employees, and proper conduct of domestic and international business activities.
It has developed and instituted additional internal controls and audit
procedures designed to prevent or detect violations of these policies.
Management believes this provides reasonable assurance that its operations meet
a high standard of business conduct.
Nader F. Darehshori Gail Deegan
Chairman, President, Executive Vice President and
and Chief Executive Officer Chief Financial Officer
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Houghton Mifflin Company
We have audited the accompanying consolidated balance sheets of Houghton
Mifflin Company as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of Houghton Mifflin's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Houghton Mifflin Company at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the financial statements, in 1999 Houghton
Mifflin Company changed its method of accounting for the amortization of book
plate assets.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 25, 2000, except for the second
paragraph of Note 14, as to
which the date is February 29, 2000.
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1999 1998
---------- --------
(IN THOUSANDS OF
DOLLARS, EXCEPT SHARE
AND PER-SHARE AMOUNTS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 12,041 $ 3,953
Marketable securities and time deposits available for
sale, at fair value................................... 638 49,203
Accounts receivable.................................... 178,887 170,706
Less: allowance for bad debts and book returns.... 31,207 27,969
---------- --------
147,680 142,737
Notes receivable....................................... 1,633 --
Inventories............................................ 164,228 151,669
Deferred income taxes.................................. 35,889 15,986
Prepaid expenses....................................... 3,000 2,279
---------- --------
Total current assets.............................. 365,109 365,827
Property, plant, and equipment, net......................... 73,342 49,412
Book plates, less accumulated amortization of $115,222 in
1999 and $127,156
in 1998................................................... 98,894 80,853
OTHER ASSETS
Royalty advances to authors, less allowance of $29,631
in 1999 and $23,589 in 1998........................... 26,711 24,482
Goodwill and other intangible assets, net.............. 452,338 445,223
Other investments and long-term receivables............ 22,349 17,871
---------- --------
Total other assets................................ 501,398 487,576
---------- --------
$1,038,743 $983,668
========== ========
See accompanying Notes to Consolidated Financial Statements.
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1999 1998
---------- --------
(IN THOUSANDS OF
DOLLARS, EXCEPT SHARE
AND PER-SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................................... $ 55,601 $ 39,029
Commercial paper....................................... 21,358 11,894
Royalties.............................................. 51,141 48,371
Salaries, wages, and commissions....................... 29,814 27,177
Other accrued expenses................................. 31,246 27,019
Current portion of long-term debt...................... 70,037 83,322
---------- --------
TOTAL CURRENT LIABILITIES......................... 259,197 236,812
Long-term debt.............................................. 254,638 274,521
Accrued royalties payable................................... 967 1,148
Other liabilities........................................... 33,406 28,459
Accrued postretirement benefits............................. 29,213 28,839
Deferred income taxes....................................... 28,301 15,601
Commitments and contingencies (Notes 4 and 8)
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; 500,000 shares
authorized, none issued............................... -- --
Common stock, $1 par value; 70,000,000 shares
authorized; 31,098,023 shares issued in 1999 and
30,549,706 shares issued in 1998...................... 31,098 30,550
Capital in excess of par value......................... 108,627 95,740
Retained earnings...................................... 392,225 330,672
---------- --------
531,950 456,962
Notes receivable from stock purchase agreements........ (4,645) (4,621)
Unearned compensation related to restricted stock...... (3,029) (2,318)
Common shares held in treasury, at cost, 1,045,493
shares in 1999 and 374,052 shares in 1998............. (36,411) (8,681)
Benefits Trust assets, at market....................... (54,844) (61,432)
Accumulated other comprehensive income................. -- 18,378
---------- --------
TOTAL STOCKHOLDERS' EQUITY........................ 433,021 398,288
---------- --------
$1,038,743 $983,668
========== ========
See accompanying Notes to Consolidated Financial Statements.
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS OF DOLLARS, EXCEPT
PER-SHARE AMOUNTS)
NET SALES.................................................. $920,118 $861,657 $797,320
COSTS AND EXPENSES
Cost of sales......................................... 411,114 390,922 362,501
Selling and administrative............................ 397,044 368,715 328,261
-------- -------- --------
808,158 759,637 690,762
-------- -------- --------
OPERATING INCOME........................................... 111,960 102,020 106,558
OTHER INCOME (EXPENSE)
Net interest expense.................................. (29,770) (33,981) (38,926)
Gains (losses) on INSO Corporation common stock and
equity in earnings (losses) of INSO Corporation..... (5,100) 18,797 15,901
Loss on sale of investment............................ -- (3,017) --
Acquired in-process research and development.......... -- (3,500) --
Other expense......................................... -- (1,050) --
-------- -------- --------
(34,870) (22,751) (23,025)
-------- -------- --------
Income before taxes and extraordinary item................. 77,090 79,269 83,533
Income tax provision....................................... 31,106 33,630 33,711
-------- -------- --------
Income before extraordinary item........................... 45,984 45,639 49,822
Extraordinary gain on extinguishment of debt, net of tax of
$21,956 in 1999 and $13,042 in 1998...................... 30,320 18,010 --
-------- -------- --------
Net income................................................. $ 76,304 $ 63,649 $ 49,822
======== ======== ========
EARNINGS PER SHARE:
Basic
Income before extraordinary item...................... $ 1.60 $ 1.59 $ 1.76
Extraordinary gain on extinguishment of debt.......... 1.05 0.63 --
-------- -------- --------
Net income............................................ $ 2.65 $ 2.22 $ 1.76
======== ======== ========
Diluted
Income before extraordinary item...................... $ 1.57 $ 1.57 $ 1.73
Extraordinary gain on extinguishment of debt.......... 1.03 0.62 --
-------- -------- --------
Net income............................................ $ 2.60 $ 2.19 $ 1.73
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- -------- ---------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income.......................................... $ 76,304 $ 63,649 $ 49,822
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain on extinguishment of debt,
net of tax................................... (30,320) (18,010) --
Depreciation and amortization expense.......... 94,115 95,681 89,739
Amortization of unearned compensation on
restricted stock............................. 1,200 5,177 2,095
Losses (gains) on INSO Corporation common stock
and equity in earnings of INSO Corporation... 5,100 (18,797) (15,901)
Loss on sale of long-term investment........... -- 3,017 --
Acquired in-process research and development... -- 3,500 --
Gain on sale of property....................... -- -- (3,011)
Changes in operating assets and liabilities:
Accounts receivable............................ (1,534) 16,805 6,267
Inventories.................................... (11,266) (1,626) (5,079)
Accounts payable............................... 15,640 (9,006) (10,262)
Royalties, net................................. (1,619) 6,356 4,072
Deferred and income taxes payable.............. (12,283) (10,877) 17,209
Other, net..................................... 8,449 10,928 6,898
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NET CASH PROVIDED BY OPERATING
ACTIVITIES.............................. 143,786 146,797 141,849
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Book plate expenditures............................. (66,979) (53,255) (54,163)
Acquisition of publishing and technology assets, net
of cash acquired.................................. (45,266) (24,845) (9,049)
Property, plant, and equipment expenditures......... (31,335) (20,729) (13,740)
Issuance of notes receivable........................ (1,133) -- --
Proceeds from sale of property...................... -- -- 5,204
Proceeds from the sale of INSO Corporation stock.... 682 210 --
Proceeds from the sale of long-term investment...... -- 835 --
Purchase of marketable securities................... -- (24) (2)
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NET CASH USED IN INVESTING ACTIVITIES..... (144,031) (97,808) (71,750)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Dividends paid on common stock...................... (14,748) (14,388) (13,959)
Issuance (repayment) of commercial paper............ 9,464 (49,452) 61,346
Proceeds from the issuance of long-term financing... 80,000 50,000 --
Payment of long-term financing...................... (50,181) (40,000) (130,000)
Exercise of stock options........................... 1,583 2,875 4,782
Purchase of common stock............................ (17,873) -- --
Other............................................... 88 308 1,819
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NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.............................. 8,333 (50,657) (76,012)
Increase (decrease) in cash and cash equivalents......... 8,088 (1,668) (5,913)
Cash and cash equivalents at beginning of year........... 3,953 5,621 11,534
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CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 12,041 $ 3,953 $ 5,621
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SUPPLEMENTARY DISCLOSURE OF CASH FL