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The following is an excerpt from a 10-Q SEC Filing, filed by HOUGHTON MIFFLIN CO on 5/2/2001.
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HOUGHTON MIFFLIN CO - 10-Q - 20010502 - FINANCIAL_STATEMENTS

HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                   March 31,      March 31,     December 31,
                                                                     2001           2000           2000
                                                                     ----           ----           ----
ASSETS

Current assets
   Cash and cash equivalents                                     $    9,274      $    6,530      $   14,947
   Marketable securities and time deposits
      available for sale, at fair value                                 638             638             638

   Accounts receivable                                              120,151         109,550         193,919
      Less: allowance for bad debts and book returns                 24,276          24,905          30,857
                                                                 ----------      ----------      ----------
                                                                     95,875          84,645         163,062

   Notes receivable                                                      --           1,654              --

   Inventories
      Finished goods                                                210,438         177,482         193,136
      Work in process                                                 9,878           5,064           6,585
      Raw materials                                                   8,303           7,203           7,816
                                                                 ----------      ----------      ----------
                                                                    228,619         189,749         207,537

   Deferred and refundable income taxes                              63,368          62,848          33,839
   Prepaid expenses                                                  20,777          15,276           5,234
                                                                 ----------      ----------      ----------
      Total current assets                                          418,551         361,340         425,257

Property, plant, and equipment
   (net of accumulated depreciation and amortization
   of $97,831 at March 31, 2001, $85,478 at March 31, 2000,
   and $93,628 at December 31, 2000)                                 79,871          73,931          78,834

Book plates
   (net of accumulated depreciation and amortization
   of $83,912 at March 31, 2001, $82,297 at March 31, 2000,
   and $105,596 at December 31, 2000)                               144,856         113,954         135,980

Goodwill and other intangible assets, net                           422,021         444,608         430,516

Other assets                                                         54,628          51,081          53,387
                                                                 ----------      ----------      ----------
                                                                 $1,119,927      $1,044,914      $1,123,974
                                                                 ==========      ==========      ==========

See accompanying notes to unaudited condensed consolidated financial statements.

3

HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                                    MARCH 31,      March 31,     December 31,
                                                                                      2001           2000           2000
                                                                                      ----           ----           ----
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
   Accounts payable                                                                $    82,395    $    93,550    $    57,016
   Commercial paper                                                                     97,999        105,195        183,791
   Royalties                                                                            23,768         21,745         53,581
   Salaries, wages, and commissions                                                      6,495          8,337         27,365
   Income taxes payable                                                                     --             --          2,956
   Other                                                                                34,525         28,047         32,387
   Current portion of long-term debt                                                    30,010         50,045         30,057
                                                                                   -----------    -----------    -----------
      Total current liabilities                                                        275,192        306,919        387,153

Long-term debt                                                                         374,478        254,672        224,687
Accrued royalties payable                                                                1,638            982          2,054
Other liabilities                                                                       40,628         34,772         38,735
Accrued postretirement benefits                                                         28,998         29,442         28,791
Deferred income taxes                                                                   28,631         28,301         28,692

Stockholders' equity
   Preferred stock, $1 par value;
      (500,000 shares authorized, none issued)                                              --             --             --
   Common stock, $1 par value;
      (70,000,000 shares authorized; 31,960,826 shares issued at March 31, 2001,
      31,567,584 shares issued at March 31, 2000,
      and 31,861,472 shares issued at December 31, 2000)                                31,961         31,568         31,861
   Capital in excess of par value                                                      141,856        124,446        139,532
   Retained earnings                                                                   387,039        349,129        433,069
                                                                                   -----------    -----------    -----------
                                                                                       560,856        505,143        604,462

   Notes receivable from stock purchase agreements                                     (16,393)       (15,629)       (16,145)
   Unearned compensation related to
      restricted stock                                                                  (1,926)        (2,956)        (2,141)
   Common shares held in treasury, at cost
      (3,085,609 shares at March 31, 2001, 1,170,479
      shares at March 31, 2000, and 3,081,701 shares
      at December 31, 2000)                                                           (112,198)       (41,397)      (112,032)
   Benefits Trust assets, at market                                                    (59,977)       (55,335)       (60,282)
                                                                                   -----------    -----------    -----------
      Total stockholders' equity                                                       370,362        389,826        413,862

                                                                                   -----------    -----------    -----------
                                                                                   $ 1,119,927    $ 1,044,914    $ 1,123,974
                                                                                   ===========    ===========    ===========

See accompanying notes to unaudited condensed consolidated financial statements.

4

HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                    2001            2000
                                                                    ----            ----
Net sales by industry segment:
   K-12 Publishing                                               $  69,846       $  65,794
   College Publishing                                               17,288          15,742
   Other                                                            21,738          20,973
                                                                 ---------       ---------
                                                                   108,872         102,509

Costs and expenses:
   Cost of sales                                                    65,481          65,284
   Selling and administrative                                      104,333          95,974
                                                                 ---------       ---------
                                                                   169,814         161,258

Operating loss                                                     (60,942)        (58,749)

Other income (expense):
   Net interest expense                                             (8,037)         (6,429)
   Equity in losses of equity method investee                       (2,157)             --
                                                                 ---------       ---------
                                                                   (10,194)         (6,429)

                                                                 ---------       ---------
Loss before taxes                                                  (71,136)        (65,178)

Income tax benefit                                                 (28,695)        (25,819)
                                                                 ---------       ---------

Net loss                                                           (42,441)        (39,359)

Retained earnings at beginning of period                         $ 433,069       $ 392,225

Dividends paid                                                      (3,589)         (3,737)
                                                                 ---------       ---------

Retained earnings at end of period                               $ 387,039       $ 349,129
                                                                 =========       =========
Loss per share:
   Net loss per share - basic                                    $   (1.55)      $   (1.37)
                                                                 =========       =========

   Net loss per share - diluted (except when anti-dilutive)      $   (1.55)      $   (1.37)
                                                                 =========       =========

Cash dividends paid per common share                             $    0.13       $    0.13
                                                                 =========       =========

See accompanying notes to unaudited condensed consolidated financial statements.

5

HOUGHTON MIFFLIN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED; IN THOUSANDS)

                                                                              2001            2000
                                                                              ----            ----
CASH FLOWS USED IN OPERATING ACTIVITIES
   Net loss                                                                $ (42,441)      $ (39,359)
   Adjustments to reconcile net loss to net cash
       used in operating activities:
            Equity in losses in equity method investee                         2,157              --
            Depreciation and amortization expense                             18,631          15,662
            Amortization of unearned compensation on restricted stock            291             337

            Changes in operating assets and liabilities:
                     Accounts receivable, net                                 67,187          62,998
                     Inventories                                             (21,082)        (25,521)
                     Accounts payable                                         25,379          37,971
                     Royalties, net                                          (32,177)        (30,185)
                     Deferred and income taxes payable                       (32,546)        (30,309)
                     Salaries, wages, and commissions                        (20,870)        (21,477)
                     Other, net                                               (9,302)        (10,278)
                                                                           ---------       ---------

                     NET CASH USED IN OPERATING ACTIVITIES                   (44,773)        (40,161)

CASH FLOWS USED IN INVESTING ACTIVITIES
   Book plate expenditures                                                   (14,766)        (18,885)
   Acquisition of publishing and technology assets                            (2,072)           (310)
   Property, plant, and equipment expenditures                                (5,367)         (4,764)
   Issuance of notes receivable                                                   --            (472)
                                                                           ---------       ---------

                     NET CASH USED IN INVESTING ACTIVITIES                   (22,205)        (24,431)

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
   Dividends paid on common stock                                             (3,589)         (3,737)
   Issuance (repayment) of commercial paper                                  (85,792)         83,837
   Proceeds from issuance of long-term financing                             148,796              --
   Payment of long-term financing                                                (47)        (20,013)
   Purchase of treasury stock                                                     --          (4,734)
   Exercise of stock options                                                   1,880           3,368
   Other                                                                          57             360
                                                                           ---------       ---------

                     NET CASH PROVIDED BY FINANCING ACTIVITIES                61,305          59,081

Decrease in cash and cash equivalents                                         (5,673)         (5,511)
Cash and cash equivalents at beginning of period                              14,947          12,041
                                                                           ---------       ---------
Cash and cash equivalents at end of period                                 $   9,274       $   6,530
                                                                           =========       =========

Supplementary disclosure of cash flow information:
   Income taxes paid                                                       $   3,833       $   4,454
   Interest paid                                                           $   6,916       $   6,236

See accompanying notes to unaudited condensed consolidated financial statements.

6

HOUGHTON MIFFLIN COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Houghton Mifflin Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles for interim financial information. All adjustments (consisting of normal recurring accruals) that, in the opinion of management, are necessary for the fair presentation of this interim financial information have been included.

Results of interim periods are not necessarily indicative of results to be expected for the year as a whole. The effect of seasonal business fluctuations and the occurrence of many costs and expenses in annual cycles require certain estimations in the determination of interim results.

The information contained in the interim financial statements should be read in conjunction with Houghton Mifflin's latest Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Certain reclassifications have been made to prior period financial statements in order to conform to the presentation used in the 2001 interim financial statements.

(2) ACQUISITIONS AND INVESTMENTS

On May 3, 2000, Houghton Mifflin acquired the net assets of Virtual Learning Technologies, Inc., or VLT, an educational testing company that specializes in on-line assessments. VLT has been integrated into The Riverside Publishing Company. This acquisition was accounted for as a purchase, and the assets acquired, liabilities assumed, and results of operations are included in Houghton Mifflin's consolidated financial statements from the date of the acquisition. Net cash consideration for the acquisition amounted to approximately $14.6 million paid to the former shareholders of VLT. The cost of the acquisition was allocated on the basis of the estimated fair market value of the assets acquired and liabilities assumed, including acquired in-process research and development. A charge for acquired in-process research and development of $1.3 million was recorded as part of the acquisition. Goodwill and other intangible assets of $12.8 million were recorded as part of the acquisition and are being amortized on a straight-line basis over periods ranging from approximately 2 to 7 years. Since this acquisition did not materially affect consolidated results, no pro forma information was provided.

On September 6, 2000, Houghton Mifflin Company, Sylvan Ventures, and Inception Capital launched Classwell Learning Group Inc., or Classwell, a start-up online education company which will provide K-12 teachers with new teaching and learning resources to meet their individual classroom needs and those of their students. Houghton Mifflin committed to invest $7 million of cash, of which $2.3 million was paid in 2000 and $2.1 million in the first quarter of 2001, with the balance of $2.6 million expected to be paid during the remainder of 2001. We also contributed other assets for a fully-diluted ownership interest in Classwell of approximately 32%. Houghton Mifflin accounts for this investment on the equity method and records its share of Classwell's undistributed losses.

7

HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--Continued--

(3) GOODWILL AND INTANGIBLE ASSETS

Goodwill and other intangible assets consist of the following:

                                             March 31,              December 31,
                                       2001           2000              2000
                                    ---------       ---------       ------------
                                                 (in thousands)
Goodwill                            $ 555,416       $ 545,653       $ 554,946
Publishing rights                      24,397          24,634          24,634
Other                                  13,960          11,860          15,330
Less: accumulated amortization       (171,752)       (137,539)       (164,394)
                                    ---------       ---------       ---------
Total                               $ 422,021       $ 444,608       $ 430,516
                                    =========       =========       =========

Houghton Mifflin examines periodically the carrying value of our long-lived assets, certain identifiable intangibles, and goodwill to determine whether there are any impairment losses. We perform an impairment assessment if certain indicators are present, such as a significant decrease in demand for a product related to an asset, a history of operating cash flow losses, or a projection or forecast that demonstrates continuing losses associated with a revenue-producing asset. We use the undiscounted cash flow method to determine if impairment has occurred. If indicators of impairment are present, and we do not expect the estimated undiscounted cash flows to be derived from the related assets to be sufficient to recover the asset's carrying amount, an impairment loss is charged to expense in the period identified based upon the difference between the carrying amount and the discounted cash flows. The rates that would be utilized to discount the net cash flows to net present value would take into account the time value of money and investment risk factors.

As part of our impairment assessment, we have also considered the long-lived assets, identifiable intangibles and goodwill attributable to Computer Adaptive Technologies, Inc., or CAT. We performed the impairment assessment due to CAT's operating cash flow losses. While losses had been forecast, certain aspects of the CAT business have not performed as originally planned. Plans are in place to improve CAT's operating cash flows, which are dependent on CAT's ability to enter into new agreements for testing services and generate the related revenue. Based on these plans at this time, the undiscounted cash flows are expected to recover the assets' carrying amounts.

8

HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--Continued--

(4) LOSS PER SHARE

The table below sets forth the computation of basic and diluted loss per share for the three months ended March 31, 2001 and March 31, 2000 (in thousands, except per share amounts):

                                                          Three months ended
                                                               March 31,
                                                        -----------------------
                                                          2001           2000
                                                        --------       -------
Numerator:
       Net loss                                         $(42,441)      $(39,359)
                                                        ========       ========

Denominator:
     Denominator for basic earnings per share:
        Weighted-average shares outstanding               27,416         28,803

Effect of dilutive securities                                 --             --
                                                        --------       --------

Dilutive potential common shares:
     Denominator for diluted earnings per share:
        Adjusted weighted-average shares outstanding
           and assumed conversions                        27,416         28,803
                                                        ========       ========

Basic loss per share                                    $  (1.55)      $  (1.37)
                                                        ========       ========

Diluted loss per share                                  $  (1.55)      $  (1.37)
                                                        ========       ========

In the first quarter of 2001 and the first quarter of 2000, no dilutive securities were included in the computation of diluted earnings per share because Houghton Mifflin had a net loss, and the effect would have been anti-dilutive.

(5) SEGMENT AND RELATED INFORMATION

Houghton Mifflin has eight divisions with separate management teams and infrastructures that offer different products and services. These divisions have been aggregated in three reportable segments based on the similar nature of their products and services, the nature of the production process, class of customers, and distribution method, as follows:

K-12 Publishing: This segment consists of five divisions: School Division, McDougal Littell Inc., Great Source Education Group, Inc., Sunburst Technology Corporation and The Riverside Publishing Company. This operating segment includes textbooks and instructional materials and services, tests for measuring achievement and aptitude, clinical/special needs testing products, and multimedia instructional programs. The principal markets for these products are elementary and secondary schools.

College Publishing: The College Division is the sole business unit reported in this segment. This operating segment includes textbooks, ancillary products such

9

HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--Continued--

(5) SEGMENT AND RELATED INFORMATION-continued

as workbooks and study guides, technology-based instructional materials, and services for introductory and upper level courses in the post-secondary education market. Products may be in print or electronic form. The principal markets for these products are two- and four-year colleges and universities. These products are also sold to high schools for advanced placement courses and to for-profit, certificate-granting institutions that offer skill-based training and job placement.

Other: This segment consists of the Trade & Reference Division, Computer Adaptive Technologies, or CAT, and unallocated corporate-related items. The Trade & Reference Division publishes fiction and nonfiction for adults and children, dictionaries, and other reference works. The division also licenses book rights to paperback publishers, book clubs, Web sites, and other publishers and electronic businesses in the United States and abroad. Its principal markets are retail stores, including Internet bookstore sites, and wholesalers. It also sells reference materials to schools, colleges, office supply distributors, and businesses. CAT specializes in the development and delivery of computer-based testing solutions. Its principal markets are organizations worldwide.

Houghton Mifflin's geographic area of operation is predominantly the United States. Export sales for locations outside the United States are not significant to Houghton Mifflin's three business segments. Houghton Mifflin does not have any customers that exceed 10% of net sales, and the loss of a single customer, in management's opinion, would not have a material adverse effect on net sales.

Houghton Mifflin evaluates the performance of its operating segments based on the profit and loss from operations before interest income and expense, income taxes, and nonrecurring and extraordinary items.

Summarized financial information concerning Houghton Mifflin's reportable segments is shown in the following tables. The "Other" column includes unallocated corporate-related items, operations which do not meet the quantitative thresholds of Statement of Financial Accounting Standard No. 131, "Disclosures About Segments of an Enterprise and Related Information," nonrecurring items, and as it relates to segment profit or loss, income and expense not allocated to reportable segments,

THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000:

                                          K-12          COLLEGE
                                       PUBLISHING      PUBLISHING        OTHER        CONSOLIDATED
                                       ----------      ----------        -----        ------------
                                                             (in thousands)
2001
Net sales from external customers      $  69,846       $  17,288       $  21,738       $ 108,872
Segment operating loss                   (47,070)        (11,111)         (2,761)        (60,942)

2000
Net sales from external customers         65,794          15,742          20,973         102,509
Segment operating loss                   (42,799)        (11,005)         (4,945)        (58,749)

10

HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--Continued--

(5) SEGMENT AND RELATED INFORMATION-continued

RECONCILIATION OF SEGMENT LOSSES TO THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS:

                                                          March 31,
                                                          ---------
                                                     2001           2000
                                                     ----           ----
                                                       (in thousands)
Total loss from reportable segments               $(60,942)      $(58,749)
Unallocated expense:
  Net interest expense                              (8,037)        (6,429)
  Equity in losses of equity method investee        (2,157)            --
                                                  --------       --------
Loss before taxes                                 $(71,136)      $(65,178)
                                                  ========       ========

(6) SENIOR MANAGEMENT AND DIRECTOR STOCK PURCHASE PLAN

On February 29, 2000, Houghton Mifflin provided financing for the purchase of an aggregate of 281,430 shares of Houghton Mifflin common stock pursuant to the 2000 Senior Management and Director Stock Purchase Plan. The purchases were made at fair market value of $39.813 per share. A note was obtained from the participants and collaterized by the shares of common stock purchased. The loans, which totaled approximately $11.2 million, have an interest rate of 8.0% and are due on February 28, 2005. Houghton Mifflin has full recourse against the borrowers.

(7) RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," or SFAS 133. As amended in June 2000 by Statement of Financial Standards Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," or SFAS 138, it requires companies to recognize all derivatives as either assets or liabilities in the balance sheet and measure such instruments at fair value. Derivatives that are not determined to be hedges must be adjusted to fair value through net income. We do not anticipate holding any derivative instruments in the near future. Accordingly, adoption of SFAS 133, as amended by SFAS 138, did not have a material effect on our consolidated financial statements.

(8) DEBT AND BORROWING AGREEMENTS

In March 2001, Houghton Mifflin issued $150 million of 10-year 7.20% notes through a public offering. The notes mature on March 15, 2011 and were priced at 99.847% to yield an effective annual interest rate of 7.22%. The proceeds were used to repay existing commercial paper debt.

At March 31, 2000, Houghton Mifflin had two interest rate swaps in place, each with a notional amount of $25 million and terminating on December 1, 2000. Interest expense from the interest rate swaps was $13,584 in the first quarter of 2000.

11

HOUGHTON MIFFLIN COMPANY NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --Continued--

(9) TAXES ON INCOME

As part of the normal examination of Houghton Mifflin's federal income tax returns for the fiscal years ended 1992 through 1998, the Internal Revenue Service (IRS) has made inquiries related to our corporate-owned life insurance (COLI) program. The inquiries have principally focused on the deductibility of interest on policy loans associated with Houghton Mifflin's COLI program. Houghton Mifflin is aware that the IRS has challenged other taxpayers' COLI programs and that recent court cases have been decided in favor of the IRS position on such COLI programs, although the cases and the related decisions are being appealed. No adjustments to Houghton Mifflin's taxable income have been proposed by the IRS on this matter. Houghton Mifflin estimates that it is reasonably possible that the IRS may assert that the COLI interest deductions were not deductible. Houghton Mifflin estimates that, should such a claim be asserted by the IRS, the maximum potential exposure for an unfavorable adjustment would be approximately $9 million, including interest through March 31, 2001. Houghton Mifflin would likely contest any such proposed adjustment or assessment relating to the COLI program. However, the outcome of any such assertion, if made, or the success of any such contest cannot be estimated at this time. Houghton Mifflin does not have any provision for the related tax and interest in our consolidated financial statements should the IRS assert such a claim and ultimately be successful.

(10) SUBSEQUENT EVENTS

On April 18, 2001, Houghton Mifflin announced that it will be closing its Morris Plains, New Jersey, facility by August 2001. The work currently being performed at Morris Plains will be relocated to our Boston Office. Approximately 70 employees were offered severance packages. The estimated cost to close the facility, including severance and lease termination costs assuming we cannot sublease the facility, is expected to be approximately $7.5 million. We expect to record this charge principally in the second quarter of 2001.

At its April 25, 2001 meeting, the Board of Directors declared a quarterly dividend of $0.13 per share, payable on May 23, 2001, to shareholders of record on May 9, 2001.

12

BROKERAGE PARTNERS