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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, 1996 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 $816,390,025 as of February
28, 1997.
The registrant had outstanding 14,843,455 shares of common stock (exclusive
of Treasury shares) and 14,843,455 Preferred Stock Purchase Rights as of
February 28, 1997.
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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 1997 Annual Meeting of Stockholders are incorporated into Part
III.
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HOUGHTON MIFFLIN COMPANY
TABLE OF CONTENTS
FORM 10-K
Part I
Page
------
Item 1. Business .................................................................. 1
Item 2. Properties ............................................................... 3
Item 3. Legal Proceedings ......................................................... 3
Item 4. Submission of Matters to a Vote of Securities Holders ..................... 4
Part II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters ... 5
Item 6. Selected Financial Data ................................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................... 7
Item 8. Consolidated Financial Statements and Supplementary Data .................. 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................... 34
Part III
Item 10. Directors and Executive Officers of the Company ........................... 34
Item 11. Executive Compensation ................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 34
Item 13. Certain Relationships and Related Transactions ........................... 34
Part IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on Form 8-K ...... 34
Index to Consolidated Financial Statements and Financial Schedules ...... 34
Financial Statement Schedule ............................................. 34
Signatures ............................................................... 36
Index to Exhibits ......................................................... 37
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. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain 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 11 of
this Form 10-K.
PART I
Item 1. Business
(a) Description of Business
Houghton Mifflin Company (the "Company") was incorporated in 1908 in
Massachusetts as the successor to a partnership formed in 1880. Antecedents of
the partnership date back to 1832. The Company has three significant
subsidiaries: McDougal Littell Inc., Evanston, Illinois, publishes educational
materials for the secondary school market; The Riverside Publishing Company,
Chicago, Illinois, publishes assessment materials for the educational and
clinical testing markets; and Great Source Education Group, Inc., Wilmington,
Massachusetts, publishes supplementary instructional material for the elementary
and secondary school markets. The Company's principal business is publishing,
and its operations are classified into two industry segments: (1) textbooks and
other educational materials and services for the school and college markets; and
(2) general publishing, including fiction, nonfiction, children's books, and
dictionary and reference materials in a variety of formats and media. In this
description of the Company's business, all subsidiaries are treated as part of
the Company.
In October 1995, the D.C. Heath and Company ("Heath") division of Raytheon
Company was acquired in a purchase transaction for net cash consideration of
$460.6 million. Heath is a publisher of textbooks and supplemental materials for
the elementary and secondary school and college markets. Heath's operating
results from the date of acquisition have been included in the educational
publishing segment of the Company's consolidated financial statements.
In March 1994, the Company's former Software Division successfully
completed an initial public offering. The Company retained an equity interest in
the successor company, INSO Corporation ("INSO"), of approximately 40%. In
August 1995, INSO completed a new public offering of 1.2 million shares of
common stock which reduced the Company's ownership interest to approximately
36%. INSO declared a stock split in the form of a 100% stock dividend to be paid
in September 1995. All INSO share references have been restated to reflect the
effects of the stock split. In 1996, the Company sold 770,000 shares of INSO
common stock, reducing the Company's ownership interest to approximately 30%.
(b) Financial Information About the Industry Segments
Financial information about the Company's industry segments is set forth in
Note 14 to the Consolidated Financial Statements (Part II, Item 8) under the
heading "Segment Information" on page 31 herein, and in the schedule "Five-Year
Financial Summary" on page 6 herein.
(c) Narrative Description of Business
For the Company, the business of publishing is the shaping of ideas,
information, and instructional methods into various media that satisfy the
lifelong need for people to learn, gain proficiency, and be entertained. The
Company seeks out, selects, and generates worthwhile concepts and then enhances
their value and accessibility through creative development, design, production
(performed by outside suppliers), marketing, sales, and distribution. While the
Company's works have been published principally in the form of printed
materials, many programs or works are published in other formats including
computer software, laser discs, CD-ROM, and other electronic and multimedia
products.
Textbooks and Other Educational Materials and Services
This industry segment includes textbooks and instructional materials,
materials for measuring achievement and aptitude, clinical/special needs
assessment testing products, computer-assisted as well as computer-
managed instructional programs on all educational levels, computer tools and
operating systems for the college market, and a computer-based career and
college guidance information system in versions for both junior and senior high
school students. The principal markets in this segment are elementary and
secondary schools and two- and four-year colleges. Major regional sales offices
are located in Illinois, Texas, Georgia, Massachusetts, New Jersey, and
California. The Company is required by certain states to use state textbook
depositories for the distribution of educational materials. Textbooks and
materials for the elementary school market are sold by the School Division;
sales for the secondary school market are made by McDougal Littell Inc.
("McDougal"); sales of supplemental instructional material for the elementary
and secondary school markets are made by Great Source Education Group, Inc.
("Great Source"); the educational and clinical testing materials markets are
serviced by The Riverside Publishing Company ("Riverside"); and the two- and
four-year higher education markets are serviced by the College Division. All
operating divisions have their own dedicated sales forces. The distribution
operations for the shipment of product components for the School Division,
McDougal, Great Source, and College Division are from its two distribution
facilities located in Indianapolis, Indiana and Geneva, Illinois.
1
General Publishing
This industry segment includes trade books of fiction and nonfiction for
adults and children, dictionaries, and other reference works. The principal
markets for trade books and reference works in this segment are retail stores.
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. In 1995 and 1994, book
reprint rights were sold to paperback publishers, book clubs, and publishers in
the U.S. and internationally. Reference and dictionary materials are also sold
to schools, colleges, office supply distributors, and businesses. In 1995, the
Trade & Reference Division ("Trade Division") announced the launch of a new
imprint, "Houghton Mifflin Interactive," whose principal initiative is the
development of CD-ROM titles for sale in the multimedia consumer product
markets. These products are created from new and existing Houghton Mifflin
titles, and include children's, reference and adult hobby titles. The Trade
Division's publications are sold by its own sales force, as well as the
Company's other divisional sales forces, commission agents, and wholesalers.
Major corporate sales and support offices are maintained in Massachusetts and
New York.
Company Business as a Whole
The availability of printing and binding capacity and raw materials
continued at satisfactory levels throughout the year. The Company is not
dependent upon any one supplier. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" set forth on page 7 herein.
The Company's principal businesses are seasonal and consist of sales
predominately to schools and colleges, with approximately 70% of sales normally
occurring in the second and third quarters as purchases are made for the school
year which begins in September. Third-quarter results are material to the
full-year performance of the Company, which realizes more than 40% of its net
sales and a substantial portion of its net income during the third quarter. The
acquisition of Heath has not materially changed the seasonal nature of the
Company's net sales or operating profits. See "Summary of Quarterly Results of
Operations (unaudited)" for the two-year period ended December 31, 1996, set
forth on page 33 herein.
Sales of educational materials are cyclical as a result of purchasing
patterns that are based on both the academic year and the textbook adoption
process. Approximately one-half of the United States school population adopts
new elementary and secondary school textbooks on a statewide basis for a
particular subject every five to seven years. Although 1996 was not a strong
adoption year, it is expected that 1997 will offer greater sales opportunities
due to an increase in the number of states expected to adopt elementary and
secondary school products. The loss of a single customer or a few customers
would not have a materially adverse effect on the business of the Company, but
as discussed above, the timing of adoption opportunities may affect year-to-year
revenue performance.
The Company's products are sold in highly competitive markets due to the
extensive consolidations that have occurred in the publishing industry in recent
years. The major competitive factors in the industry are believed to be quality
of product and customer service. The elementary and secondary school markets are
concentrated in approximately 10 significant publishers; in the college book
market the Company competes with 8 significant publishers. In the diverse trade
and juvenile book markets, approximately 60% of the total industry sales is
shared by 11 major publishers including Houghton Mifflin.
At December 31, 1996, the Company employed approximately 2,420 people.
The Company anticipates no substantial expenditures for compliance with
environmental laws or regulations.
(d) Financial Information About Foreign and Export Sales
Operations in foreign countries were substantially reduced in 1992 with the
sale of the Gollancz publishing and distribution businesses in the United
Kingdom and school publications of the Company's Canadian subsidiary. Export
sales are not at present significant to either of the Company's two business
segments.
2
Item 2. Properties
The Company's principal executive office is located at 222 Berkeley Street,
Boston, Massachusetts.
The following table describes the approximate building areas and principal
uses of the significant operating properties of the Company and its subsidiaries
at December 31, 1996. The Company believes that its owned and leased properties
are suitable and adequate for its present and anticipated business needs,
satisfactory for the uses to which each is put, and in general fully utilized.
APPROXIMATE AREA PRINCIPAL USE SEGMENT USED
LOCATION IN SQUARE FEET OF SPACE BY
- --------------------------- ------------------- ------------------- --------------------------------------
Owned Premises
- --------------------------
Geneva, Illinois 486,000 Offices & Textbooks and other educational
warehouse materials; sales office
Palo Alto, California 17,000 Office Textbooks and other educational
materials; sales office
Indianapolis, Indiana 503,000 Offices & Textbooks and other educational
warehouse materials
Leased Premises
- --------------------------
Boston, Massachusetts 301,000 Executive & (1) Textbooks and other
222 Berkeley Street/ business offices educational materials and services,
500 Boylston Street (2) General publishing, and
(3) Corporate headquarters
Batavia, Illinois 120,000 Offices & Textbooks and other educational
warehouse materials and services
Itasca, Illinois 75,000 Offices Textbooks and other educational
materials and services, sales office
Dallas, Texas 70,000 Offices & Textbooks and other educational
warehouse materials and services; sales office
Evanston, Illinois 62,000 Offices Textbooks and other educational
materials; sales office
Wilmington, Massachusetts 41,000 Offices Educational materials and services;
corporate support; sales office
Atlanta, Georgia 31,000 Offices & Textbooks and other educational
warehouse materials; sales office
New York, New York 30,000 Offices General publishing; sales office
St. Charles, Illinois 14,000 Offices Textbooks and other educational
materials; sales office
Somerville, Massachusetts 12,000 Offices General publishing; sales office
Princeton, New Jersey 5,700 Offices Textbooks and other educational
materials; sales office
The years of expiration on leased premises are as follows:
Boston, Massachusetts 2007
Batavia, Illinois 2006
Itasca, Illinois 2006
Dallas, Texas 2005
Evanston, Illinois 2004
Wilmington, Massachusetts 2005
Atlanta, Georgia 1999
New York, New York 2004
St. Charles, Illinois 2006
Somerville, Massachusetts 1999
Princeton, New Jersey 1999
Item 3. Legal Proceedings
None
3
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 1996.
Executive Officers of the Company
Other
Office positions
Age at held with the
Name 2/28/97 Office since Company
- ---------------------- ------------ --------------------------------------- ----------- -----------
Nader F. Darehshori 60 Chairman, President, and 1991 Director
Chief Executive Officer
Albert Bursma, Jr. 59 Executive Vice President; President, 1995 --
Great Source Education Group, Inc.
Gail Deegan 50 Executive Vice President, Chief 1996 --
Financial Officer, and Treasurer
Margaret M. Doherty 58 Senior Vice President, Human 1994 --
Resources
Elizabeth L. Hacking 55 Senior Vice President, Strategic 1993 --
Development
Michael J. Lindgren 39 Vice President, Controller 1994 --
Julie A. McGee 54 Executive Vice President; President, 1995 --
McDougal Littell Inc.
Mark Mooney 44 Senior Vice President, Chief 1997 --
Technology Officer
John H. Oswald 47 Executive Vice President; President, 1992 --
The Riverside Publishing Company
Conall E. Ryan 39 Senior Vice President; President, 1997 --
Houghton Mifflin Interactive
Corporation
Gary L. Smith 52 Senior Vice President, 1991 --
Administration
June Smith 53 Executive Vice President, College 1994 --
Division
Wendy Strothman 46 Executive Vice President, Trade & 1996 --
Reference Division
Paul D. Weaver 54 Senior Vice President, Clerk, 1989 --
Secretary and General Counsel
William J. Wisneski 50 Executive Vice President, School 1992 --
Division
Below is a brief account of the business experience of each executive
officer during the past five years. Each executive officer has been employed by
the Company for more than five years with the exception of Mr. Bursma, Ms.
Deegan, Mr. Lindgren, Ms. McGee, Mr. Mooney, Mr. Oswald, Mr. Ryan, Ms. Smith,
and Ms. Strothman.
Nader F. Darehshori
1991--Chairman, President, and Chief Executive Officer
Albert Bursma, Jr.
1995--Executive Vice President; President, Great Source Education Group, Inc.*
1994--Executive Vice President, D.C. Heath and Company; President, School
Division (D.C. Heath and Company was a publisher not affiliated with the
Company prior to its acquisition on October 31, 1995.)
Gail Deegan
1996--Executive Vice President, Chief Financial Officer, and Treasurer
1995--Senior Vice President, Regulatory and Government Affairs, NYNEX
1994--Vice President and Chief Financial Officer, New England Telephone, a
wholly-owned subsidiary of NYNEX
Margaret M. Doherty
1994--Senior Vice President, Human Resources
Elizabeth L. Hacking
1993--Senior Vice President, Strategic Development
1993--Vice President, Strategic Development
1992--Vice President, Higher Education Planning, Research, and Development,
College Division
Michael J. Lindgren
1995--Vice President, Controller
1994--Vice President and Controller
4
1994--Divisional Vice President and Controller
1993--Director of Planning & Analysis, ITT Sheraton
1992--Director of Accounting and Management Reporting, ITT Sheraton (ITT
Sheraton is a hotel and real estate subsidiary of ITT Corporation,
primarily an insurance and financial services holding company not
affiliated with the Company)
Julie A. McGee
1995--Executive Vice President; President, McDougal Littell Inc.*
1994--Senior Vice President
1994--President, McDougal Littell/Houghton Mifflin Inc.*
1991--President, McDougal, Littell & Company (McDougal, Littell & Company was a
publisher not affiliated with the Company prior to its acquisition on March
1, 1994.)
Mark Mooney
1997--Senior Vice President, Chief Technology Officer
1996--Vice President, Director of Information Technology, The Bureau of National
Affairs
1992--Director of Information Services, The Bureau of National Affairs
John H. Oswald
1993--Executive Vice President; President, The Riverside Publishing Company*
1992--President, The Riverside Publishing Company*
1992--Vice President
1991--Executive Vice President for Sales, Customer Service, and Operations for
The Psychological Corporation of Harcourt Brace Jovanovich, Inc. (a
publisher not affiliated with the Company)
Conall E. Ryan
1997--Senior Vice President; President, Houghton Mifflin Interactive Corporation
1996--President, Houghton Mifflin Interactive Corporation
1995--Corporate Vice President, Houghton Mifflin Interactive
1994--Director, New Media, Trade and Reference Division, and Chairman, On
Technology Corporation; Vice President, Publishing for Knowledge Adventure
(a publisher not affiliated with the Company)
1990--President, Chief Executive Officer, On Technology, Inc. (renamed On
Technology Corporation in 1993)
Gary L. Smith
1991--Senior Vice President, Administration
June Smith
1994--Executive Vice President, College Division
1992--Vice President, Editorial Director, College Division
1991--Editorial Director and Publisher--College Division of McGraw-Hill, Inc. (a
publisher not affiliated with the Company)
Wendy Strothman
1996--Executive Vice President, Trade & Reference Division
1995--Vice President, Publisher, Adult Trade and Reference
1995--Director, Beacon Press (a publisher not affiliated with the Company)
Paul D. Weaver
1989--Senior Vice President, Clerk, Secretary, and General Counsel
William J. Wisneski
1992--Executive Vice President, School Division
1991--Senior Vice President; President, The Riverside Publishing Company*
* A subsidiary of the Company
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The Company's common stock is traded on the New York Stock Exchange. As of
February 28, 1997, the approximate number of holders of common stock of the
Company was 5,140.
5
Information about stock prices and dividends paid per share is set forth
under the heading "Stock Prices and Dividends Paid Per Share" presented below:
HOUGHTON MIFFLIN COMPANY
Stock Prices and Dividends Paid Per Share (Unaudited)
1996 1995
------------------------------------- -------------------------------------
Dividend Dividend
High Low Paid High Low Paid
--------- --------- ----------- --------- --------- ----------
First Quarter ...... $45.38 $40.50 $0.240 $47.13 $39.75 $0.225
Second Quarter ...... 49.75 42.38 0.240 54.75 45.88 0.225
Third Quarter ...... 50.50 46.13 0.240 52.88 44.88 0.240
Fourth Quarter ...... 56.63 45.38 0.240 46.75 39.63 0.240
------- -------
Year ............... $0.960 $0.930
======= =======
Item 6. Selected Financial Data
The response to this item is set forth below under the heading "Five-Year
Financial Summary."
HOUGHTON MIFFLIN COMPANY
Five-Year Financial Summary
(In thousands of dollars, except per share amounts)
(Unaudited) Years ended December 31, 1996 1995 1994 1993 1992
------------ ------------ ----------- ----------- ----------
OPERATING RESULTS
Net sales $ 717,863 $ 529,022 $483,076 $462,969 $454,706
Operating income (loss) 87,382 (13,095) 53,464 51,370 44,310
Net interest expense 40,875 13,008 6,509 2,347 2,339
Gain on sale of INSO Corporation
common stock 34,261 -- -- -- --
One-time acquisition charges, INSO
Corporation (11,698) (2,200) -- -- --
Gain on equity transactions of INSO
Corporation and sale of interest in
Software Division -- 13,102 36,212 -- --
Loss on disposition of foreign
publishing operations -- -- -- -- (13,527)
Income (loss) before taxes, extra-
ordinary item and accounting change 73,953 (11,444) 85,140 49,023 28,444
Cumulative effect of accounting
changes -- -- -- -- (14,657)
Net income (loss) 43,622 (7,243) 51,191 30,371 4,414
- ---------------------------------------------------- --------- --------- --------- --------- --------
PER COMMON SHARE
Net income (loss) per share of common stock $ 3.13 $ (0.52) $ 3.70 $ 2.20 $ 0.31
Dividends declared per share 0.96 0.93 0.87 0.83 0.79
Book value 19.40 16.89 17.74 16.15 14.52
Stock price--High 56.63 54.75 53.00 50.38 39.88
Low 40.50 39.63 36.13 36.38 26.63
Close 56.63 43.00 45.38 48.63 39.88
- --------------------------------------------- --------- --------- --------- --------- --------
FINANCIAL DATA
Total assets $1,006,442 $1,046,449 $497,266 $398,086 $371,421
Long-term debt less current portion 500,999 426,148 99,445 26,438 52,608
Additions to book plates and property,
plant, and equipment 74,943 54,278 33,720 36,524 38,186
Dividends paid 13,371 12,845 12,026 11,475 11,037
Average number of shares available for
earnings per share (in thousands) 13,933 13,812 13,822 13,823 14,029
- ---------------------------------------------------- --------- --------- --------- --------- --------
Net Sales--Classes of Similar Products
Textbooks and other educational
materials and services
School publishing $ 497,709 $ 359,523 $303,370 $267,106 $272,289
College publishing 138,346 82,277 84,057 90,092 81,212
--------- --------- --------- --------- --------
636,055 441,800 387,427 357,198 353,501
General publishing 81,808 87,222 95,649 105,771 101,205
--------- --------- --------- --------- --------
$ 717,863 $ 529,022 $483,076 $462,969 $454,706
========= ========= ========= ========= ========
6
In 1996, the Company recorded a gain of $34.3 million ($19.9 million
after-tax), or $1.43 per share, on the sale of 770,000 shares of INSO common
stock. In 1996, the Company recorded a one-time acquisition charge of $11.7
million ($7.2 million after-tax), or $0.52 per share, of special charges
relating to its the investment in INSO, resulting from INSO's acquisition of
ImageMark Software Labs, Inc. and Electronic Book Technologies, Inc. In 1995,
there was a $2.2 million charge, or $0.16 per share, relating to its investment
in INSO resulting from INSO's acquisition of Systems Compatibility Corporation.
In October 1995, the Company completed the acquisition of Heath from
Raytheon Company in a purchase transaction (See Note 2). As a result, certain
charges of $49.3 million ($30.0 million after-tax), or $2.17 per share,
associated with the integration of the Heath business were recorded in 1995.
A gain of $13.1 million ($7.8 million after-tax), or $0.56 per share, was
recognized in 1995 in connection with an additional public offering of 1.2
million shares made by INSO. In 1994, the Company recognized a gain of $36.2
million ($22.8 million after-tax), or $1.65 per share, in connection with the
initial public offering of INSO, the successor company to the former Software
Division.
In March 1994, the Company acquired the assets of McDougal, Littell &
Company in a purchase transaction (See Note 2).
In 1992, the Company adopted the provision of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 109,
"Accounting for Income Taxes."
In 1992, the Company recognized a loss associated with the sale of certain
foreign operations.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Three Years Ended December 31, 1996.
The consolidated net income in 1996 was $43.6 million, or $3.13 per share,
compared to a consolidated net loss in 1995 of $7.2 million, or $0.52 per share.
The Company recorded a gain of approximately $34.3 million ($19.9 million
after-tax), or $1.43 per share, in 1996 on the sale of 770,000 shares of INSO
common stock. Included in 1996's results were one-time acquisition charges of
$11.7 million ($7.2 million after-tax), or $0.52 per share, related to INSO's
acquisition of ImageMark Software Labs, Inc. and Electronic Book Technologies,
Inc. Included in 1995's results were special charges of $49.3 million ($30.0
million after-tax), or $2.17 per share, related to the integration of the Heath
operation, $7.0 million ($4.3 million after-tax), or $0.31 per share, related to
the outsourcing of distribution operations, and charges of $2.2 million, or
$0.16 per share, related to INSO's acquisition of Systems Compatibility
Corporation. The 1995 results also include a gain of $13.1 million ($7.8 million
after-tax), or $0.56 per share, for the sale of additional common shares by
INSO, and a gain of $3.8 million ($2.3 million after-tax), or $0.17 per share,
on the sale of the Burlington, Massachusetts distribution facility. Consolidated
net income in 1994 was $51.2 million, or $3.70 per share. Included in 1994
results were a gain of $36.2 million ($22.8 million after-tax), or $1.65 per
share, recognized in connection with the public offering by the former Software
Division, INSO, a special charge of $6.5 million ($4.0 million after-tax), or
$0.29 per share, for restructuring, and an extraordinary item of $1.2 million,
or $0.09 per share, related to the early extinguishment of long-term debt.
Excluding these non-recurring items, net income for 1996 would have been
$30.9 million, or $2.22 per share, compared to net income of $19.2 million, or
$1.39 per share in 1995, and $33.6 million, or $2.43 per share in 1994.
Net sales in 1996 increased $188.9 million, or 36%, to $717.9 million from
1995 net sales of $529.0 million. The educational publishing segment's net sales
of $636.1 million in 1996 increased by $194.3 million, or 44.0%, from 1995 net
sales of $441.8 million. The most significant factor in the net sales increase
was the addition of Heath publications. The general publishing segment net sales
decreased by $5.4 million, or 6.2%, to $81.8 million from 1995 net sales of
$87.2 million. The decrease in net sales is primarily due to lower frontlist
sales.
Net sales in 1995 increased $45.9 million, or 9.5%, to $529.0 million from
1994 net sales of $483.1 million. The educational publishing segment's net sales
increased by $54.4 million, or 14%, in 1995 from net sales of $387.4 million in
1994. The increase in revenues was primarily due to the increased adoption
opportunities in 1995 and $17.8 million in incremental revenue as a result of
the Heath acquisition. The general publishing segment net sales of $87.2 million
in 1995 decreased $8.4 million, or 8.8%, from 1994 net sales of $95.6 million.
The decrease in net sales for 1995 primarily resulted from the absence of sales
from the former Software Division, lower distribution revenues, lower revenues
from weaker frontlist titles, and additional provisions for book returns.
The Company's operating income for 1996 was $87.4 million, an increase of
$100.5 million from an operating loss of $13.1 million in 1995. Included in
1995's operating results were $56.3 million of special charges. During 1996, the
Company experienced a significant improvement in operating results due to the
increase in net sales and operating efficiencies achieved through the
integration of Heath. Cost of sales declined to 46%
7
of sales in 1996 from 51% in 1995 and selling and administrative, excluding
goodwill amortization of $26.7 million and $10.6 million, declined to 38% from
39% in 1996 and 1995, respectively.
The Company's operating loss for 1995 was $13.1 million compared to
operating income of $53.5 million recorded in 1994. Included in these operating
results were $56.3 million and $6.5 million of special charges for 1995 and
1994, respectively. The decrease in operating results was primarily due to
increased develop-
mental spending, incremental Heath operating losses, and higher distribution
costs.
The 1995 special charges included $49.3 million of charges related to the
integration of the Heath operations and $7.0 million resulting from the decision
to outsource the Company's distribution function. The charges related to Heath
included $32.9 million for inventory and plate adjustments based on strategic
decisions made and actions taken subsequent to the acquisition, $9.3 million for
integration of administrative and sales functions, and $7.1 million for indirect
costs of the acquisition. The distribution-related charges included $3.0 million
for closing costs and the disposal of assets, $2.9 million for severance, and
$1.1 million for consulting and inventory relocation.
The 1994 special charges included $3.5 million for corporate and divisional
staff reductions, $2.0 million for consolidation of Company-owned and leased
facilities, and $1.0 million for disposal of assets.
Net interest expense increased $27.9 million, or 214%, in 1996 mainly due
to a full year of interest on the financing of the Heath acquisition and a full
year of interest on $126.6 million of Stock Appreciation Income-
Linked Securities ("SAILS"). Approximately $22.8 million of the increase related
to the full year of financing for the Heath acquisition, and the balance of the
increase reflected a full year of interest on the SAILS and higher working
capital requirements in 1996. Net interest expense increased $6.5 million in
1995 from $6.5 million reported in 1994 due to the $345 million of commercial
paper and bank financing obtained for the Heath acquisition, the issuance of
SAILS, and a full year of interest on the financing of the McDougal acquisition.
The provision for taxes in 1996 increased $34.5 million over 1995. The
increase is primarily due to higher operating income and a higher effective tax
rate. The effective tax rate increased to 41% in 1996 from 37% in 1995. The
increase reflects the spread of certain fixed non-deductible tax costs over
significantly higher 1996 taxable income. The provision for taxes in 1995
decreased $36.9 million over 1994. The decrease was primarily due to lower
operating income and a lower effective tax rate. The effective tax rate
decreased to 37% in 1995 from 38% in 1994.
Textbooks and Other Educational Materials
The educational publishing segment's net sales of $636.1 million in 1996
were $194.3 million higher than the $441.8 million in 1995, an increase of
44.0%. In elementary and secondary school publishing, the School Division and
McDougal contributed an increase of $118.9 million, reflecting the addition of
Heath publications and new programs. McDougal's language arts programs The
Language of Literature (C) 1997 and The Writer's Craft (C) 1995 led the market
in new business, as did the School Division's reading program Houghton Mifflin
Reading: Invitations to Literacy (C) 1996. Great Source, the supplemental
publishing division created as a result of the Heath acquisition, reported
substantially increased net sales primarily driven by its flagship product
family, Write Source. Riverside reported a sales increase of 4.8% over 1995,
winning a number of large state-wide testing contracts. The College Division
reported net sales of $138.3 million, a 47.3% increase over 1995. The
acquisition of Heath and a strong frontlist contributed to the revenue growth.
The educational publishing segment's net sales of $441.8 million in 1995
were $54.4 million higher than the $387.4 million in 1994, an increase of 14.0%.
In elementary and secondary school publishing, the School Division and McDougal
contributed an increase of $35.8 million, reflecting the increase in adoption
opportunities as well as the expected leverage from a dedicated secondary school
sales force. Net sales of $17.8 million from Heath, acquired on October 31,
1995, also contributed to the increase. Riverside reported a sales increase of
4.7% over 1994. The College Division, in 1995, reported a 2.1% decrease in net
sales from 1994.
Operating income for the educational publishing segment increased $49.6
million, or 77.7%, to $113.4 million in 1996 from the $63.8 million reported in
1995. The resulting operating margin for 1996 increased to 17.8% from 14.4% in
1995. The increase in the operating margin is primarily due to the increase in
net sales and operating efficiencies achieved through the integration of Heath.
As a percent of sales, every category of operating expense except for plate and
goodwill amortization and selling costs decreased from 1995, with the largest
savings from editorial expense. Plate amortization increased, as expected, due
to the development of elementary and secondary school programs to meet the
adoption opportunities over the next three years. The increase in goodwill
amortization expense is due to the acquisition of Heath. In 1996, the sales
force was increased to ensure adequate market exposure of the expanded product
lines due to the acquisition of Heath. In preparation for the greater number of
statewide adoption opportunities in 1997, the Company's sampling expense
increased year over year. Distribution expenses also declined as a percent of
sales with economies of scale offsetting some additional costs incurred to
improve customer service.
8
Operating income for the educational publishing segment decreased $4.4
million in 1995, or 6.5%, to $63.8 million from the $68.2 million reported in
1994. The resulting operating margin for 1995 decreased to 14.4% from 17.6% in
1994. The decrease in the operating margin was primarily due to increased
development spending, the incremental Heath operating losses, and higher
distribution costs. Development spending for School and McDougal increased $15.4
million, or approximately 60%, reflecting the investment in new programs for
adoption opportunities in 1997 through 1999. Programs under development included
Houghton Mifflin Reading: Invitations to Literacy (C) 1996, Houghton Mifflin
Social Studies (C) 1997, and McDougal's The Language of Literature (C) 1997.
Selling and administrative costs increased approximately 9.5%, reflecting the
incremental Heath costs and a full year of McDougal costs, including the
intangible asset amortization. Additionally, outsourcing of distribution at the
Geneva, Illinois, facility posed problems for the Company in 1995. Distribution
costs increased $6.5 million in 1995 and service to the Company's customers was
not acceptable. In February 1996, the Company announced that it was re-assuming
control over the distribution function maintained at its Geneva, Illinois,
facility.
General Publishing
The general publishing segment reported 1996 revenue of $81.8 million, a
6.2% decline from the $87.2 million reported in 1995. The Trade Division's lower
frontlist sales were the principal cause of the decline. In 1995, the Company
reduced the number of titles to be published, which resulted in a smaller list
of new titles in 1996. The Trade Division has implemented changes in its
strategy in 1996, as a result of which some revenue streams will be curtailed,
but new sources will be generated. The new strategy will not contribute
significantly to this segment's results before 1998. Included in the results of
this segment is Houghton Mifflin Interactive, which reported net sales of
approximately $4 million. The general publishing segment's operating loss was
$5.1 million in 1996 compared to an operating loss of $8.5 million in 1995. The
1995 results included a $7.5 million non-cash charge to increase reserves. In
1996, declining revenues, as well as an increase in bad debt expense contributed
to the greater operating loss before one-time charges, year over year.
The general publishing segment's net sales in 1995 decreased $6.6 million,
or 7.0%, to $87.2 million when compared with 1994's net sales from ongoing
operations, adjusted for the sale of the former Software Division. The revenue
decrease was primarily due to a decline in revenue contribution from the adult
book list and lower distribution revenues. The general publishing segment's loss
from ongoing operations was $8.5 million, compared to income of $7.3 million in
1994. There was a $7.5 million non-cash charge to increase reserves for author
advances, inventory obsolescence, and book returns. In addition to these
charges, the division reported an operating loss from its new imprint, Houghton
Mifflin Interactive. Distribution costs increased by $1.6 million for actions
required during the transition to outsourced distribution. That transition is
now complete and the Burlington, Massachusetts, distribution facility formerly
used for general publishing distribution has been sold.
Liquidity and Capital Resources
The Company's principal businesses are seasonal, with approximately 70% of
net sales normally reported in the second and third quarters. The first and
fourth quarters historically have contributed approximately 10% and 20%,
respectively, of the Company's annual net sales. The acquisitions of Heath and
McDougal have not materially changed the seasonal nature of the Company's net
sales.
The revenue seasonality also affects the Company's operating cash flow. A
net cash deficit from all the Company's activities is normally incurred through
the middle of the third quarter. This deficit is funded through the draw-down of
cash and marketable securities, supplemented by short-term borrowings,
principally commercial paper.
Net cash provided by operating activities was $102.7 million, $13.0
million, and $67.3 million in 1996, 1995, and 1994, respectively. In 1996, cash
provided by operating activities increased $89.7 million. Net income, excluding
the gain on the sale of INSO stock and equity transactions of INSO, increased
$29.7 million. Depreciation and amortization expense increased $31.9 million
primarily due to increases in goodwill and plate amortization, as discussed
above. Changes in operating assets and liabilities provided $19.7 million more
of cash flow in 1996 over 1995, primarily due to improved working capital
management.
In 1995, cash provided by operating activities decreased by $54.2 million
from 1994. Net income decreased $35.3 million, excluding the gain on equity
transactions of INSO and the sale of interest in the Software Division. Changes
in operating assets and liabilities required $28.9 million of cash flow in 1995
over 1994, primarily as a result of increases in inventory, deferred taxes, and
royalty advances, offset some-what by an increase in other liabilities.
Management anticipates cash provided by operating activities in 1997 to
increase primarily as a result of growth in earnings and continued emphasis on
working capital management.
Net cash required for investing activities was $66.3 million, $486.3
million, and $130.3 million in 1996, 1995, and 1994, respectively. Book plate
expenditures in 1996 of $62.1 million, an increase of $15.4 million over
9
1995, were incurred for new products to meet the significant adoption
opportunities over the next three years. During 1996, the Company also spent
$15.5 million for publishing assets, a decrease of $437.4 million from 1995.
Included in 1996 was the final settlement for Heath and other products
purchased, while 1995 included the Heath acquisition. In 1996, the Company
received $24.2 million in proceeds, net of tax, from the sale of 770,000 shares
of INSO common stock.
In 1995, net cash required for investing activities, excluding the proceeds
from marketable securities, increased by $371.3 million from 1994. This increase
primarily resulted from the $452.9 million acquisition of Heath.
Total debt decreased approximately $30 million from $570.8 million at the
end of 1995, to $541.0 million as of December 31, 1996. The Company's percentage
of debt to total capitalization (debt plus stockholders' equity) was 66.7% at
the end of 1996 as compared to 71.0% at the end of 1995, primarily as a result
of paying down $30 million outstanding under the five year credit facility using
cash available at year end.
During 1996, commercial paper and a portion of the five year credit
facility were repaid through the issuance of long and medium term notes. The
Company issued $125 million in non-callable unsecured long-term notes and $100
million of non-callable unsecured medium-term notes.
In 1995 and 1994, financing activities contributed $459.6 million and $26.2
million, respectively. The increase in financing sources in 1995 was a result of
the incremental borrowings of $345 million used to finance the Heath acquisition
and the $126.6 million SAILS issuance. Financing activity outflows in 1995 was
$12.0 million less than 1994 due to a reduction in stock repurchases.
In 1996, the Company's average short-term borrowing was $71.0 million, an
increase of $57.4 million from 1995. The increase was primarily due to the
increase in seasonal borrowing needs as a result of the incremental impact of
funding Heath operations for a full year, and due to funds required for book
plate expenditures to meet the significant adoption opportunities over the next
three years. The Company repaid all short-term borrowing requirements by the end
of 1996.
In 1995, the average short-term borrowing of $13.6 million increased by
$4.7 million from 1994. Average short-term borrowings increased in 1995
primarily due to $145 million in commercial paper financing for the Heath
acquisition, the increase in seasonal borrowing needs as a result of including a
full year of operations for McDougal, and the incremental impact of funding
Heath operations for the final two months of 1995.
In August 1995, the Company completed a public offering of 6% Exchangeable
Notes Due in 1999 at a principal amount of $34 per SAILS. At maturity, the
principal amount of each SAILS will be mandatorily exchanged for a number of
shares of INSO common stock, or at the Company's option, cash with an equal
value. The number of shares which could be issued in exchange will be dependent
on INSO's market share price at the time of the redemption. The Company will
record as additional non-cash interest expense, over the life of the SAILS, the
excess of the current INSO stock price over the maximum redemption price at
maturity. The additional non-cash interest expense to be recorded through August
1999, based upon INSO's December 31, 1996 stock price, is $1.0 million. If the
Company chooses to redeem the SAILS with shares of INSO common stock, it would
record a gain representing the excess of the redemption amount over the book
value of the Company's investment in INSO. The Company's ownership percentage of
INSO after this redemption would be substantially less than 20%. The INSO shares
may be sold by the Company, subject to certain restrictions, as market
conditions and events warrant.
The Company currently expects that cash flow from operations for the full
year 1997 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 1997. The periodic use of the short-term debt market, primarily
commercial paper, for seasonal liquidity needs, will continue.
Impact of Inflation and Changing Prices
Although inflation is currently well below that of prior years, which has
benefited recent Company results, particularly in the area of manufacturing
costs, there are offsetting costs. The Company's ability to adjust selling
prices always has 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. If there were to be a weak domestic economy at a time
of low inflation, there could be 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.
In 1994, the Company started to experience higher prices for paper goods
which continued into 1995. However, this trend did not continue in 1996, as the
Company experienced a moderation in prices for paper products.
The most significant Company investments affected by inflation include book
plates, other property, plant, and equipment and inventories. The last-in,
first-out (LIFO) method is used to value substantially all inventory
10
and, therefore, the cost of inventory charged against income approximates
replacement value. The incremental replacement cost expense amounted to $10.9
million in 1996 as compared with $5.2 million in 1995.
The Company's publishing business does not require a high level of
investment in property, plant, and equipment. Such net assets represented 3.5%
of consolidated assets at December 31, 1996. The Company's net investment at the
end of 1996 in capitalized book plates for educational and reference works
represented approximately 8.0% of total assets. The Company continues to commit
funds to new publishing areas through both acquisitions and internal growth.
Management believes that by valuing its inventory using the LIFO method,
continuing to emphasize technological improvements, and quality control, the
Company can continue to moderate the impact of inflation on its operating
results and financial position.
"Safe Harbor" Statement under Private Securities Litigation Reform Act of
1995: Statements in this report that are not historical facts may be
forward-looking statements that are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made by the Company. These factors include, but are not limited to,
(i) the seasonal and cyclical nature of the Company's educational sales; (ii)
variable funding in school systems throughout the nation, which may result in
both cancellation of planned purchases of educational materials and shifts in
timing of purchases; (iii) changes in purchasing patterns in elementary,
secondary, and college markets; (iv) regulatory changes which would affect the
purchase of educational materials and services; (v) strength of the retail
market for general-interest publications and market acceptance of frontlist
titles and new electronic products; and (vi) other factors detailed from time to
time in the Company's filings with the Securities and Exchange Commission.
11
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
------
Management's Responsibility for Financial Statements ................................. 13
Report of Independent Auditors ...................................................... 13
Consolidated Balance Sheets at December 31, 1996 and 1995 ........................... 14
Consolidated Statements of Operations for the three years ended December 31, 1996 ... 16
Consolidated Statements of Cash Flows for the three years ended December 31, 1996 ... 17
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 18
1996
Notes to Consolidated Financial Statements .......................................... 20
Supplementary Data
Summary of Quarterly Results of Operations (unaudited) is presented on page 33.
12
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 the Company'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 the Company'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, the Company has a program of
internal audits and appropriate follow-up by management.
The financial statements have been audited by the Company'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 the Company'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 the Company'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 outside 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.
The Company 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, Chief
and Chief Executive Officer Financial Officer, and Treasurer
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, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a) 2. These
financial statements and schedule are the responsibility of the Company'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 generally accepted auditing
standards. 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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. 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.
/S/ERNST & YOUNG LLP
Boston, Massachusetts
January 27, 1997
13
HOUGHTON MIFFLIN COMPANY
Consolidated Balance Sheets
December 31,
-------------------------------
(In thousands of dollars, except share amounts) 1996 1995
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents .................................... $ 11,534 $ 16,701
Marketable securities and time deposits available-for-sale,
at fair value ............................................. 612 604
Accounts receivable .......................................... 189,978 204,542
Less: allowance for book returns ........................... 25,166 21,698
---------- ----------
164,812 182,844
Inventories ................................................ 138,547 139,927
Deferred income taxes ....................................... 20,551 23,728
Prepaid expenses ............................................. 1,913 7,396
---------- ----------
Total current assets ....................................... 337,969 371,200
Property, plant, and equipment, net ........................... 35,430 32,879
Book plates, less accumulated amortization of $91,628
in 1996 and $70,032 in 1995 ................................. 81,017 90,221
Other Assets
Royalty advances to authors, less allowance of $20,975 in 1996
and $21,848 in 1995 .......................................... 24,761 23,988
Intangible assets, net ....................................... 485,766 474,751
Deferred income taxes ....................................... 12,514 15,688
Other investments and long-term receivables .................. 28,985 37,722
---------- ----------
Total other assets .......................................... 552,026 552,149
---------- ----------
$1,006,442 $1,046,449
========== ==========
See accompanying Notes to Consolidated Financial Statements.
14
HOUGHTON MIFFLIN COMPANY
Consolidated Balance Sheets
December 31,
-----------------------------
(In thousands of dollars, except share amounts) 1996 1995
------------ -----------
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................ $ 57,585 $ 94,556
Commercial paper ................................................ -- 144,612
Royalties ...................................................... 38,154 40,140
Salaries, wages, and commissions .............................. 19,408 18,751
Other ......................................................... 30,783 44,324
Current portion of long-term debt .............................. 40,000 --
--------- ---------
Total current liabilities .................................... 185,930 342,383
Long-term debt ................................................... 500,999 426,148
Accrued royalties payable ....................................... 1,899 2,497
Other liabilities ................................................ 19,666 15,192
Accrued post retirement benefits ................................. 27,655 26,884
Commitments and contingencies (Note 10) ........................
Stockholders' equity:
Preferred stock, $1 par value, 500,000 shares authorized,
none issued ................................................... -- --
Common stock, $1 par value, 70,000,000 shares authorized,
14,780,926 shares issued in 1996 and 14,758,726 shares
issued in 1995 ................................................ 14,781 14,759
Capital in excess of par value ................................. 43,476 29,973
Retained earnings ............................................. 258,779 228,528
--------- ---------
317,036 273,260
Less:
Notes receivable from stock purchase agreements ............... (5,916) (5,821)
Unearned compensation related to restricted stock outstanding . (1,563) (349)
Common shares held in treasury, at cost, 115,390 shares in 1996,
and 273,681 shares in 1995 .................................... (2,448) (5,795)
Benefits trust assets, at market .............................. (36,816) (27,950)
--------- ---------
Total stockholders' equity .................................... 270,293 233,345
--------- ---------
$1,006,442 $1,046,449
========= =========
See accompanying Notes to Consolidated Financial Statements.
15
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Operations
For the Three Years Ended December 31, 1996
(In thousands of dollars, except per share amounts) 1996 1995 1994
----------- ----------- ----------
Net sales ............................................. $717,863 $529,022 $483,076
Costs and expenses ....................................
Cost of sales .......................................... 329,686 271,036 230,674
Selling and administrative ........................... 300,795 214,818 192,425
Special charges ....................................... -- 56,263 6,513
-------- -------- --------
630,481 542,117 429,612
-------- -------- --------
Operating income (loss) ................................. 87,382 (13,095) 53,464
Other income (expense)
Gain on equity transactions of INSO Corporation and
on sale of interest in Software Division ............ -- 13,102 36,212
Gain on sale of INSO Corporation common stock ......... 34,261 -- --
Net interest expense ................................. (40,875) (13,008) (6,509)
Equity in earnings (losses) of INSO Corporation ...... (6,815) 1,557 1,973
-------- -------- --------
(13,429) 1,651 31,676
-------- -------- --------
Income (loss) before taxes and extraordinary item ...... 73,953 (11,444) 85,140
Income tax (benefit) provision ........................ 30,331 (4,201) 32,710
-------- -------- --------
Income (loss) before extraordinary item ............... 43,622 (7,243) 52,430
Extraordinary item, net of taxes
Loss on early extinguishment of debt .................. -- -- (1,239)
-------- -------- --------
Net income (loss) ....................................... $ 43,622 $ (7,243) $ 51,191
======== ======== ========
Per share:
Income (loss) before extraordinary item ............... $ 3.13 $ (0.52) $ 3.79
Loss on early extinguishment of debt .................. -- -- (0.09)
-------- -------- --------
Net income (loss) .................................... $ 3.13 $ (0.52) $ 3.70
======== ======== ========
Average number of common shares outstanding ............ 13,933 13,812 13,822
See accompanying Notes to Consolidated Financial Statements.
16
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Cash Flows
For the Three Years Ended December 31, 1996
(In thousands of dollars) 1996 1995 1994
----------- ------------ ------------
Cash flows provided by (used in) operating activities:
Net income (loss) ............................................. $ 43,622 $ (7,243) $ 51,191
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization expense ........................ 84,335 52,426 44,416
Gain on equity transactions of INSO Corporation and gain on
sale of interest in Software Division ..................... -- (13,102) (36,212)
Equity in (earnings) losses of INSO Corporation ............ 6,815 (1,557) (1,973)
Early extinguishment of debt cost, net of taxes ............ -- -- 1,239
Gain on sale of INSO Corporation stock ..................... (34,261) -- --
Changes in operating assets and liablities:
Accounts receivable, net .................................... 18,031 (4,366) (26,751)
Inventories ................................................ 1,380 (25,388) 17,606
Accounts payable ............................................. (36,969) (5,981) 3,448
Royalties, net ............................................. (3,307) (11,698) 6,705
Deferred and income taxes payable ........................... 25,485 (23,882) 5,949
Other, net ................................................... (2,443) 53,813 1,634
--------- --------- ---------
Net cash provided by operating activities .................. 102,688 13,022 67,252
Cash flows provided by (used in) investing activities:
Book plate expenditures .................................... (62,080) (46,740) (25,242)
Acquisition of publishing assets, net of cash acquired ...... (15,501) (452,888) (130,342)
Property, plant, and equipment expenditures .................. (12,863) (7,538) (8,478)
Proceeds from the sales of INSO Corporation stock ............ 24,186 -- --
Purchase of marketable securities ........................... (8) (4) (16,221)
Sale of marketable securities .............................. -- 16,221 17,114
Sale of building and equipment .............................. -- 4,628 --
Dividend received from INSO Corporation ..................... -- -- 32,860
--------- --------- ---------
Net cash used in investing activities ..................... (66,266) (486,321) (130,309)
Cash flows provided by (used in) financing activities:
Dividends paid on common stock .............................. (13,371) (12,845) (12,026)
Issuance (repayment) of commercial paper ..................... (144,612) 144,612 (24,605)
Proceeds from the issuance of long-term financing ............ 224,785 200,000 99,415
Repayment of long-term financing ........................... (109,955) -- --
Proceeds from the issuance of SAILS ........................ -- 126,643 --
Senior note redemption ....................................... -- -- (26,960)
Purchase of common stock .................................... -- (957) (12,913)
Exercise of stock options .................................... 1,897 2,175 1,442
Other ...................................................... (333) -- 1,834
--------- --------- ---------
Net cash provided by (used in) financing activities ......... (41,589) 459,628 26,187
--------- --------- ---------
Decrease in cash and cash equivalents ........................ (5,167) (13,671) (36,870)
Cash and cash equivalents at beginning of year ............... 16,701 30,372 67,242
--------- --------- ---------
Cash and cash equivalents at end of year ..................... $ 11,534 $ 16,701 $ 30,372
========= ========= =========
Supplementary disclosure of cash flow information:
Income taxes paid .......................................... $ 17,409 $ 18,194 $ 25,819
Interest paid ................................................ $ 38,931 $ 10,941 $ 6,323
See accompanying Notes to Consolidated Financial Statements.
17
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Stockholders' Equity
Common Capital
For the Three Years Ended December 31, 1996 stock in excess Retained
(In thousands of dollars, except share amounts) $1 par value of par value earnings
--------------- --------------- -----------
Balance at January 1, 1994 .................................... $14,759 $30,612 $211,222
Net income ...................................................... -- -- 51,191
Common stock dividends, $0.87 per share ........................ -- -- (12,026)
Stock options exercised ....................................... -- (233) --
Notes receivable from stock purchase agreements ............... -- 443 --
Issuance of restricted stock .................................... -- 73 --
Share repurchases ............................................. -- -- --
Other equity transactions, net ................................. -- 1,133 --
Benefits trust asset remeasurement .............................. -- (2,112) --
Valuation allowance on noncurrent marketable securities ......... -- -- (1,559)
Stock repurchase commitment .................................... -- (7,600) --
-------- ------- --------
Balance at December 31, 1994 .................................... 14,759 22,316 248,828
======== ======= ========
Net loss ...................................................... -- -- (7,243)
Common stock dividends, $0.93 per share ........................ -- -- (12,845)
Stock options exercised ....................................... -- 776 --
Issuance of restricted stock .................................... -- 252 --
Share repurchases ............................................. -- -- --
Executive stock repurchases .................................... -- -- --
Other equity transactions, net ................................. -- 573 --
Benefits trust asset remeasurement .............................. -- (1,544) --
Valuation allowance on noncurrent marketable securities ......... -- -- (212)
Stock repurchase commitment .................................... -- 7,600 --
Amortization of unearned compensation on restricted stock ...... -- -- --
-------- ------- --------
Balance at December 31, 1995 .................................... 14,759 29,973 228,528
======== ======= ========
Net income ...................................................... -- -- 43,622
Common stock dividends, $0.96 per share ........................ -- -- (13,371)
Stock options exercised ....................................... 22 1,249 --
Issuance of restricted stock .................................... -- 1,009 --
Executive stock repurchases .................................... -- -- --
Other equity transactions, net ................................. -- 505 --
Issuance of stock for contribution to the retirement
savings plan ................................................... -- 1,884 --
Benefits trust asset remeasurement .............................. -- 8,856 --
Amortization of unearned compensation on restricted stock ...... -- -- --
-------- ------- --------
Balance at December 31, 1996 .................................... $14,781 $43,476 $258,779
======== ======= ========
See accompanying Notes to Consolidated Financial Statements.
18
Unearned
Notes receivable compensation Treasury stock
from stock related to --------------------------- Benefits
purchase agreements restricted stock Shares Amount trust Total
- --------------------- ------------------- ------------ ------------ ------------ ----------
$ -- $ -- (232,459) $ (1,367) $ (31,144) $224,082
-- -- -- -- -- 51,191
-- -- -- -- -- (12,026)
-- -- 50,203 1,675 -- 1,442
(5,893) -- 138,272 5,450 -- --
-- -- 1,789 14 -- 87
-- -- (318,900) (12,913) -- (12,913)
52 -- 32,410 1,050 (466) 1,769
-- -- -- -- 2,112 --
-- -- -- -- -- (1,559)
-- -- -- -- -- (7,600)
------- ------- ---------- -------- --------- --------
(5,841) -- (328,685) (6,091) (29,498) 244,473
======= ======= ========== ======== ========= ========
-- -- -- -- -- (7,243)
-- -- -- -- -- (12,845)
-- -- 70,698 1,399 -- 2,175
-- (465) 10,766 213 -- --
-- -- (24,000) (957) -- (957)
344 -- (7,742) (403) -- (59)
(324) -- 5,282 44 4 297
-- -- -- -- 1,544 --
-- -- -- -- -- (212)
-- -- -- -- -- 7,600
-- 116 -- -- -- 116
------- ------- ---------- -------- --------- --------
(5,821) (349) (273,681) (5,795) (27,950) 233,345
======= ======= ========== ======== ========= ========
-- -- -- -- -- 43,622
-- -- -- -- -- (13,371)
-- -- 29,544 626 -- 1,897
-- (1,909) 42,414 900 -- --
209 -- -- -- -- 209
(304) -- 12,176 248 (10) 439
- -- -- 74,157 1,573 -- 3,457
-- -- -- -- (8,856) --
-- 695 -- -- -- 695
------- ------- ---------- -------- --------- --------
$(5,916) $(1,563) (115,390) $ (2,448) $ (36,816) $270,293
======= ======= ========== ======== ========= ========
See accompanying Notes to Consolidated Financial Statements.
19
HOUGHTON MIFFLIN COMPANY
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements include the accounts of Houghton
Mifflin Company ("the Com- pany") and its wholly-owned subsidiaries. All
material intercompany accounts and transactions are eliminated in consolidation.
Investment in 20% to 50% owned entities are accounted for on the equity
method. The Company uses the income statement method to account for the issuance
of common stock by a subsidiary or equity investee. Under this method gains and
losses on issuance of stock by a subsidiary or equity investee are recognized in
the income statement.
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
Cash and cash equivalents:
Cash and cash equivalents consist primarily of cash in banks and highly
liquid investment securities that have maturities of three months or less when
purchased. The carrying amount approximates fair value due to the short-term
maturity of these instruments.
Marketable securities and time deposits available-for-sale:
Marketable securities included in current assets consist of instruments
with original maturities of three months or greater. The securities held consist
primarily of tax-exempt municipal certificates, government agency obligations,
and time deposits and are stated at fair value, which approximates cost due to
the short maturity of the instruments. The fair values are estimated based on
quoted market prices.
Marketable securities included in other assets are classified as "Other
investments and long-term receivables" for consolidated financial statement
purposes. These investments, which consist of equity securities, are carried at
market value. Unrealized holding gains and losses are recognized as a reduction
in stockholders' equity. Investments in companies in which the Company has a 20%
to 50% interest are carried at cost and adjusted for the Company's proportionate
share of their undistributed earnings and losses, and for gains and losses
associated with the issuance of additional stock, as discussed above.
Book returns:
A provision for estimated future book returns is made at time of sale, and
consists of the sales value less related inventory value and royalty costs.
Inventories:
Inventory balances at December 31, 1996 and 1995 are as follows:
In thousands 1996 1995
- ------------------------ ------------ -----------
Finished goods ...... $ 124,263 $ 120,120
Work in process ...... 9,162 8,733
Raw materials ......... 5,122 11,074
---------- ----------
$ 138,547 $ 139,927
========== ==========
Inventories are stated at the lower of cost or market (replacement cost for
raw materials, net realizable value for other inventories). The last-in,
first-out (LIFO) method is used to determine the cost of inventory. If the cost
of all inventories had been determined by the first-in, first-out method (FIFO),
which approximates replacement cost, inventory values at December 31, 1996 and
1995, would have been higher by $19.8 million and $23.1 million, respectively.
During 1994, inventory quantities were reduced, excluding the impact of the
McDougal acquisition. These reductions resulted in the liquidation of certain
LIFO layers carried at costs which were lower than the cost of current
purchases. The effect of the reductions was to lower cost of goods sold by $2.4
million and to increase net earnings for 1994 by $1.5 million, or $0.11 per
share.
20
Property, plant, and equipment:
Property, plant, and equipment are carried on the basis of cost.
Depreciation is provided on a straight-line basis over the estimated useful
lives as follows:
Estimated Useful Life
-------------------------------------
Building and building equipment ...... 10 years
Machinery and equipment ............... 3 to 10 years
Leasehold improvements ............... lesser of useful life or lease term
Balances of major classes of assets and allowances for depreciation and
amortization at December 31, 1996 and 1995, are as follows:
In thousands 1996 1995
- ----------------------------------------------------------- ------------ ------------
Land and land improvements .............................. $ 1,976 $ 2,046
Building and building equipment ........................ 20,884 19,169
Machinery and equipment ................................. 54,850 57,444
Leasehold improvements ................................. 10,740 8,079
-------- --------
Total ................................................... 88,450 86,738
Less: allowances for depreciation and amortization ...... (53,020) (53,859)
-------- --------
Property, plant, and equipment, net ..................... $ 35,430 $ 32,879
======== ========
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements that extend the useful life of the assets are
capitalized. Depreciation expense was approximately $7.3 million in 1996; $8.8
million in 1995; and $8.6 million in 1994.
Book plates:
The Company's investment in book plate costs is capitalized and depreciated
on an accelerated basis over three years, except for trade and some reference
publication costs, which are expensed when incurred. Amortization expense was
approximately $50.3 million in 1996; $32.9 million in 1995; and $29.1 million in
1994.
Income taxes:
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Deferred income taxes are recorded to reflect the tax benefit and
consequences of future years differences between the tax bases of assets and
liabilities and their financial reporting amounts.
Intangible assets:
Intangible assets at December 31, 1996 and 1995, consist of the following:
In thousands 1996 1995
- --------------------------------------- ------------ -----------
Goodwill ........................... $510,500 $473,786
Publishing rights .................. 16,787 18,523
Other .............................. 4,000 5,891
-------- --------
Total .............................. 531,287 498,200
Less: accumulated amortization ...... (45,521) (23,449)
-------- --------
Intangibles, net ..................... $ 485,766 $ 474,751
======== ========
Purchased editorial publishing rights are amortized on a straight-line
basis over the estimated economic life of the titles or contracts, but do not
exceed 15 years. The excess of cost over net assets acquired, or goodwill, is
amortized on a straight-line basis over periods ranging from 20 to 25 years.
Amortization expense on intangible assets, principally goodwill, was
approximately $26.7 million in 1996; $10.7 million in 1995; and $6.7 million in
1994.
Impairment evaluation:
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of." SFAS 121 establishes accounting standards
for the evaluation and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill. There was no material effect on the
financial statements from the adoption of SFAS 121 because the Company's prior
impairment recognition practice was generally consistent with SFAS 121. Under
provisions of SFAS 121, impairment is indicated when expected future cash flows
are less than the related assets' carrying value. Accordingly, when indicators
of impairment are present, the Company evaluates the carrying value of the
related asset, including goodwill, in relation to the fair value and the
carrying value of the underlying assets is adjusted if the fair value is lower.
Benefits Trust:
The Trust assets consist primarily of 650,000 shares of the Company's
common stock purchased from the Company's treasury shares at quoted market price
in 1992. The Trust is available to fund certain compensation
21
and benefit plan obligations. The common stock is carried at market value with
changes in share price from prior reporting periods reflected as an adjustment
to capital in excess of par value.
Stock based compensation:
The Company grants stock options for a fixed number of shares to employees
and directors with an exercise price equal to the fair market value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and accordingly recognizes no compensation expense
for the stock option grants. The Company also grants restricted stock awards to
key employees, including officers. For restricted stock awards, the Company
measures compensation cost equal to the fair value of the shares at the date of
grant. Compensation expense for these awards is then recognized over the period
of the restriction by a charge to earnings. In 1996, the Company has adopted the
disclosure-only provision of Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation" (See Note 7).
Earnings per share:
Earnings per share are based on the weighted average number of common
shares deemed outstanding. Shares of common stock held in the Benefits Trust and
common stock equivalents, such as employee stock options, are evaluated for
inclusion in the earnings per share calculation under the treasury stock method
and have had no dilutive effect.
Risks and uncertainties:
Organization:
The Company's business is publishing and it operates primarily in the
domestic market in two industry segments. Based on sales, the Company's largest
segment is textbooks and other educational materials and services for the school
and college markets. The other segment is general publishing in a wide variety
of topics, formats, and media. The principal markets for textbooks and other
educational materials and services are elementary and secondary schools and two-
and four-year colleges. The principal market for trade books and reference works
in the general publishing segment is retail stores.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
significant estimates that affect the financial statements include, but are not
limited to, book returns, recoverability of advances to authors, inventory
valuation and amortization periods, and recoverability of long-term assets such
as book plates, intangibles, and goodwill.
Note 2. Acquisitions
The Company acquired D.C. Heath and Company ("Heath"), a leading publisher
of high school, elementary, and college textbooks, from Raytheon Company
("Raytheon") on October 31, 1995 for approximately $460.6 million, including
additional purchase price amounts paid in 1996. The acquisition was financed
through operating cash and $345.0 million in indebtedness. The acquisition was
accounted for as a purchase and the net assets and results of operations have
been included in the consolidated financial statements since the date of
acquisition. The purchase price has been allocated on the basis of the estimated
fair market value of the assets acquired and the liabilities assumed, and
included revisions to the preliminary allocation based on further analysis. The
cost of purchased editorial rights and the excess of the net assets acquired, or
goodwill, are being amortized on a straight-line basis over a period that
averages twenty years.
During the second quarter of 1996, the Company acquired all of the
outstanding shares of D.C. Heath, Canada, Limited ("Heath Canada") from Raytheon
following receipt of Canadian regulatory approval. ITP Nelson ("ITP"), a
division of Thomson Canada Limited, subsequently acquired the assets of Heath
Canada from the Company and entered into a series of agreements which expanded
an existing exclusive distribution agreement for the school and college markets.
Cash and licensing fees for these arrangements were approximately $5.0 million,
of which approximately $4.7 million has been paid.
In conjunction with the Heath acquisition, certain charges were recorded in
the fourth quarter of 1995 for indirect costs incurred as a result of the
acquisition ($7.1 million), costs related to the integration of the
administrative and sales functions ($9.3 million), and provisions to adjust the
carrying values of certain inventory and book plates based on strategic
decisions made subsequent to the acquisition ($32.9 million). The integration
costs include the costs to consolidate certain administrative and sales
functions of the combined businesses as well as training and other similar
costs. After completion of the transaction, the Company evaluated its publishing
programs and direction and concluded that assets relating to certain overlapping
or duplicative programs should be adjusted based upon the estimated future
revenues of the combined companies.
22
In 1994, the Company acquired McDougal, Littell & Company ("McDougal") for
$130.3 million. The acquisition was accounted for as a purchase.
The following unaudited summary pro forma information combines the
consolidated results of operations as if Heath, Heath Canada, and McDougal had
been acquired as of January 1, 1994. The pro forma financial information is not
necessarily indicative of the operating results that would have occurred had the
Heath, Heath Canada, and McDougal acquisition been consummated as of the assumed
date, nor are they necessarily indicative of future results of operations.
Years ended December 31, 1995 1994
- ---------------------------------------------------- ----------------- ---------
In millions, except per share amounts
Net sales ....................................... $ 705.5 $ 664.9
Net income (loss) before extraordinary item ...... (14.9) 29.8
Net income (loss) ................................. (14.9) 28.6
Net income (loss) per share ..................... $ (1.08) $ 2.06
Note 3. Taxes on Income
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the net deferred tax assets are shown in the following table:
In thousands 1996 1995
- --------------------------------------------- ----------- ----------
Tax asset-related:
Pension and postretirement benefits ...... $ 15,741 $ 16,300
Publishing expense ........................ 14,827 22,840
Allowance for book returns ............... 3,033 1,084
Deferred compensation ..................... 1,883 1,700
Other, net .............................. 1,629 2,936
-------- --------
37,113 44,860
Tax liability-related:
Depreciation expense ..................... (3,248) (4,655)
Deferred income ........................... (800) (789)
-------- --------
(4,048) (5,444)
-------- --------
Net deferred tax asset ..................... $ 33,065 $ 39,416
======== ========
At December 31, 1996, net deferred tax assets represented approximately 3%
of total consolidated assets. The net deferred tax asset balance is stated at
prevailing statutory income tax rates. The Company currently does not anticipate
any change in valuation methodology applied to the determination of net deferred
tax assets.
Significant components of the provision (benefit) for income taxes
attributable to income before taxes and extraordinary items consist of the
following:
In thousands 1996 1995 1994
- ------------------------- ----------- ----------- ----------
Current:
Federal ............... $ 20,573 $ 13,201 $ 23,711
State and other ...... 3,407 2,669 5,719
--------- -------- ---------
Total current ...... 23,980 15,870 29,430
Deferred
Federal ............... 5,154 (16,246) 2,653
State and other ...... 1,197 (3,825) 627
--------- -------- ---------
Total deferred ...... 6,351 (20,071) 3,280
--------- -------- ---------
$ 30,331 $ (4,201) $ 32,710
========= ======== =========
The reconciliation of the income tax rate computed at the U.S. federal
statutory tax rate to reported income tax expense (benefit) attributable to
income before taxes and extraordinary items is as follows:
1996 1995 1994
-------- ---------- ----------
Federal statutory rate ........................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit ...... 4.6 4.6 4.6
Non-deductible goodwill amortization ............ 3.0 (19.8) 2.2
Tax-exempt income .............................. (1.3) 10.2 (0.7)
Non-deductible meals and entertainment ......... 0.9 (4.9) 0.7
Life insurance ................................. (1.0) 5.2 (0.5)
Other .......................................... (0.2) 6.4 (2.9)
------ ------ ------
Effective tax rate .............................. 41.0% 36.7% 38.4%
====== ====== ======
23
As a result of the Stock Appreciation Income-Linked Securities ("SAILS")
transaction, the Company is likely to record a gain on the redemption of these
debt securities. Accordingly, in 1996 and 1995, the Company is providing
deferred taxes on the undistributed earnings of INSO Corporation ("INSO"), the
Company's former wholly-owned Software Division (See Note 11). Accumulated
undistributed earnings of INSO on which taxes have not been provided were
approximately $2.0 million at December 31, 1996 and 1995.
Note 4. Debt and Borrowing Agreements
The Company had $300 million and $400 million in unsecured credit
facilities available at December 31, 1996 and 1995, respectively, which were
supported by commitment fees. Borrowings under the $300 million facility are
outstanding under a five-year revolving commitment which expires in October
2000. The most restrictive provisions of this credit facility are as follows:
1. The Company shall maintain specified net worth levels as defined in the
Credit Agreement.
2. The Company shall maintain a consolidated fixed-charge coverage ratio, as
defined, calculated at the end of each quarter based on the preceding four
quarters. The required ratio levels adjust each quarter through the year
2000.
3. The Company shall maintain a consolidated debt-to-equity ratio, as
defined, calculated at the end of each quarter. The required ratio levels
adjust during each quarter of each year through the year 2000 reflecting
the Company's anticipated seasonal working capital borrowings.
There was $90 million outstanding under this facility at December 31, 1996, at a
weighted average borrowing rate of 5.983%. At December 31, 1995, there was $200
million outstanding under this facility at a weighted average borrowing rate of
6.19%.
In thousands 1996 1995
- ------------------------------------------------------- ------------ -----------
6% Exchangeable Notes, due August 1999, Stock
Appreciation Income-Linked Securities (SAILS) ...... $ 126,643 $ 126,643
7.00% Notes due March 1, 2006, interest payable semi-
annually .......................................... 124,791 --
7.125% Notes due April 1, 2004, interest payable semi-
annually .......................................... 99,565 99,505
Borrowings from financial institutions, unsecured,
under committed 5 year credit facility, due January
10, 2000 .......................................... 90,000 200,000
Commercial paper, with a weighted average interest
rate of 6.17% ....................................... -- 144,612
5.83% Notes due December 1, 1997, interest payable
semi-annually ....................................... 40,000 --
6.07% Notes due December 1, 1998, interest payable
semi-annually ....................................... 40,000 --
6.29% Notes due December 1, 1999, interest payable
semi-annually ....................................... 20,000 --
---------- ----------
540,999 570,760
Less: portion included in current liabilities ...... 40,000 144,612
---------- ----------
Total long-term debt ................................. $ 500,999 $ 426,148
========== ==========
Long-term debt due in each of the next five years is as follows:
Years In thousands
- -------- --------------
1997 $40,000
1998 40,000
1999 146,643
2000 90,000
2001 --
On December 11, 1995, the Company filed a registration statement with the
Securities and Exchange Commission for the offering of $300 million in debt
securities. In March 1996, the Company issued $125 million of non-
callable unsecured notes under this offering. The notes mature on March 1, 2006
and were priced at 99.8 to yield an effective rate of 7.02%. In addition, the
Company issued a total of $100 million of non-callable, unsecured medium term
notes under this offering; $40 million with a coupon of 5.83% maturing on
December 1, 1997; $40 million with a coupon of 6.07% maturing on December 1,
1998; and $20 million with a coupon of 6.29% maturing on December 1, 1999. The
proceeds from these issuances were used to pay down part of the commercial paper
and credit facility which were used as short-term bridge financing for the Heath
acquisition.
On October 31, 1995, $345 million in credit facilities were drawn upon to
fund the purchase of Heath. These borrowings were subsequently paid off with
$200 million in proceeds from a $300 million five-year credit facility and the
issuance of $145 million in commercial paper.
24
In August 1995, the Company completed a public offering of 6% Exchangeable
Notes due in 1999 at a principal amount of $34 per SAILS at issue. Net proceeds
of approximately $126.6 million were used for general corporate purposes,
including the repayment of seasonal borrowings and the partial funding of the
acquisition of Heath (See Note 2). At maturity, the SAILS will be exchangeable
for shares of INSO common stock, or at the Company's option, cash in lieu of
shares. If the SAILS are redeemed with shares of INSO common stock, a gain
representing the excess of the redemption amount over the book value of the
Company's investment in INSO would be recorded. The number of INSO shares that
would be exchanged for the SAILS depends, in part, on the fair market value of
the INSO stock price on the redemption date. If the fair market value is $34 per
share, 3.8 million shares of INSO would be exchanged. As the price of INSO
common stock increases, the Company is obligated to exchange fewer INSO shares
to redeem the SAILS. If the price of INSO common stock is $39.44 or higher at
the redemption date, the Company would redeem the SAILS with 3.3 million shares
of INSO common stock. The Company will record as non-cash interest expense over
the remaining term of the SAILS the excess of the market value of the current
INSO common stock price over the maximum redemption price of $39.44 per INSO
share. The additional non-cash interest expense to be recorded through August
1999, based upon INSO's December 31, 1996 stock price, is $1.0 million.
In April 1994, the Company issued $100 million of 7.125% medium term notes
through a public debt offering. The medium term notes mature on April 1, 2004
and were priced at 99.4 to yield an effective rate of 7.21%. The proceeds from
the issuance were applied to repay the $100 million short-term credit facilities
used as bridge financing in the March 1994 acquisition of McDougal.
In March 1994, the Company completed an early redemptio