SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended January 31, 1998
Commission File Number 1-4925
HARCOURT GENERAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1619609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27 Boylston Street, Chestnut Hill, MA 02167
(Address of principal executive offices) (Zip Code)
(617) 232-8200
(Registrant's telephone number, including area code)
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
As of March 6, 1998, the number of outstanding shares of each of the issuer's
classes of common stock was:
Class Outstanding Shares
Common Stock, $1.00 Par Value 50,836,177
Class B Stock, $1.00 Par Value 20,021,329
<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
I N D E X
Part I. Financial Information Page Number
Item 1. Condensed Consolidated Balance Sheets as of
January 31, 1998 and October 31, 1997 1
Condensed Consolidated Statements of Operations
for the Three Months Ended January 31, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended January 31, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit 27.1 12
<PAGE>
[PAGE]
<TABLE>
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(In thousands)
(Unaudited)
January 31, October 31,
1998 1997
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 155,800 $ 82,644
Undivided interests in NMG Credit
Card Master Trust 177,268 128,341
Accounts receivable, net 335,132 397,675
Inventories 785,288 676,357
Deferred income taxes 120,546 120,546
Other current assets 73,266 79,353
----------- -----------
Total current assets 1,647,300 1,484,916
----------- -----------
Property and equipment, net 597,679 593,892
Other assets:
Prepublication costs, net 200,897 201,953
Intangible assets, net 1,313,796 1,299,227
Other 195,667 201,405
----------- -----------
Total other assets 1,710,360 1,702,585
----------- -----------
Total assets $ 3,955,339 $ 3,781,393
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable and current maturities of
long-term liabilities $ 76,987 $ 14,439
Accounts payable 364,860 346,386
Taxes payable 20,679 19,433
Other current liabilities 735,674 613,011
----------- -----------
Total current liabilities 1,198,200 993,269
----------- -----------
Long-term liabilities:
Notes and debentures 1,275,064 1,289,889
Other long-term liabilities 284,263 274,840
----------- -----------
Total long-term liabilities 1,559,327 1,564,729
----------- -----------
Deferred income taxes 143,435 143,435
Minority interest 238,787 234,422
Shareholders' equity:
Preferred stock 1,122 1,125
Common stock 70,789 70,755
Paid-in capital 745,077 744,932
Cumulative translation adjustments (9,478) (7,113)
Retained earnings 8,080 35,839
----------- -----------
Total shareholders' equity 815,590 845,538
----------- -----------
Total liabilities and shareholders' equity $ 3,955,339 $ 3,781,393
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
[PAGE]
<TABLE>
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
(In thousands except
for per share amounts) For the three months
ended January 31,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 900,624 $768,698
Costs applicable to revenues 502,544 454,836
Selling, general and administrative expenses 362,616 270,873
Corporate expenses 8,880 10,703
----------- -----------
Operating earnings 26,584 32,286
Investment income 1,416 10,594
Interest expense (26,651) (20,650)
----------- -----------
Earnings before income taxes and
minority interest 1,349 22,230
Income taxes (513) (7,558)
----------- -----------
Earnings before minority interest 836 14,672
Minority interest in earnings of subsidiaries,
net of income taxes (15,282) -
----------- -----------
Net earnings (loss) ($ 14,446) $ 14,672
=========== ===========
Weighted average number of common and common
equivalent shares outstanding
Basic 70,786 71,000
======== ========
Diluted 70,786 72,380
======== ========
Earnings (loss) per common share:
Basic ($ .21) $ .20
======== ========
Diluted ($ .21) $ .20
======== ========
Dividends per share:
Common Stock $ .19 $ .18
======== ========
Class B Stock $ .171 $ .162
======== ========
Series A Stock $.2165 $ .2055
======== ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
[PAGE]
<TABLE>
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(In thousands)
For the three months
ended January 31,
---------------------
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ($ 14,446) $ 14,672
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 71,012 50,912
Minority interest 15,282 -
Other items 172 248
Changes in assets and liabilities:
Accounts receivable 62,543 78,902
Inventories (108,931) (95,079)
Other current assets 6,087 (413)
Accounts payable and current
liabilities 110,260 43,140
----------- -----------
Net cash provided by operating activities 141,979 92,382
----------- -----------
Cash flows from investing activities:
Capital expenditures (52,632) (33,893)
Purchases of available-for-sale investments - (154,547)
Maturities of available-for-sale investments - 97,246
Purchases of held-to-maturity securities (164,817) (147,332)
Maturities of held-to-maturity securities 115,890 104,780
Acquisitions and other investing activities - (11,946)
----------- -----------
Net cash used for investing activities (101,559) (145,692)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings 48,656 148,506
Repayment of debt (463) (52,000)
Cash dividends paid (13,313) (12,629)
Repurchase of Common Stock - (20,139)
Other equity transactions (2,144) 46
----------- -----------
Net cash provided by financing activities 32,736 63,784
----------- -----------
Cash and equivalents
Increase during the period 73,156 10,474
Beginning balance 82,644 532,862
----------- -----------
Ending balance $ 155,800 $ 543,336
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of presentation
The Condensed Consolidated Financial Statements of Harcourt General,
Inc. (the Company) are submitted in response to the requirements of Form
10-Q and should be read in conjunction with the Consolidated Financial
Statements in the Company's Annual Report on Form 10-K. In the opinion
of management, these statements contain all adjustments, consisting only
of normal recurring accruals, necessary for a fair presentation of the
results for the interim periods presented. The consolidated financial
statements of The Neiman Marcus Group, Inc. (NMG) are consolidated with
a lag of one fiscal quarter. NMG is a separate public company which is
listed on the New York Stock Exchange and is subject to the reporting
requirements of the Securities Exchange Act of 1934. The Company owns
approximately 53% of the common stock of NMG. The Company does not
include in its earnings that portion of NMG earnings (currently 47%)
attributable to the minority shareholders.
The Company's businesses are seasonal in nature, and historically the
results of operations for these periods have not been indicative of the
results for the full year.
2. Acquisition of minority interest in Steck-Vaughn Publishing Corporation
On January 30, 1998, the Company completed its acquisition of the
minority interest in Steck-Vaughn Publishing Corporation for $14.75 per
share, or approximately $40.5 million. The consideration due to the
former shareholders of Steck-Vaughn, which was paid in full in February
1998, is included in other current liabilities on the balance sheet at
January 31, 1998. The transaction also had the effect of increasing
goodwill by $29.7 million and decreasing the Company's minority interest
by $10.9 million on its balance sheet.
3. Earnings per share
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share," the net earnings (loss) and the
number of weighted average shares used in computing basic and diluted
earnings per share (EPS) are as follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
(in thousands) January 31, January 31,
1998 1997
----------- -----------
<S> <C> <C>
Net earnings (loss) ($14,446) $ 14,672
Less: dividends on Series A Cumulative
Convertible Stock (243) (236)
----------- -----------
Net earnings (loss) for computation
of basic EPS (14,689) 14,436
Add: dividends on assumed conversion
of Series A Cumulative Convertible Stock - 236
----------- -----------
Net earnings (loss) for computation
of diluted EPS ($14,689) $ 14,672
=========== ===========
(in thousands of shares)
Shares for computation of basic EPS 70,786 71,000
Add: assumed conversion of Series A
Cumulative Convertible Stock - 1,263
Add: effect of assumed option exercises - 117
----------- -----------
Shares for computation of diluted EPS 70,786 72,380
=========== ===========
</TABLE>
Options to purchase 742,107 shares of common stock and the assumed
conversion of 1,122,000 shares of Series A Cumulative Convertible Stock
were not included in the computation of diluted EPS because of the net
loss in the first quarter in 1998.
<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended January 31, 1998 Compared to Three Months Ended January 31,
1997
The following table illustrates revenues and operating earnings (loss) by
business segment for the three months ended January 31.
<TABLE>
<CAPTION>
(In thousands) 1998 1997
Revenues: ----------- ----------
<S> <C> <C>
Publishing and educational services $320,125 $224,595
Specialty retailing 580,499 544,103
----------- ----------
Total revenues $900,624 $768,698
=========== ==========
Operating earnings (loss):
Publishing and educational services ($ 27,567) ($ 19,323)
Specialty retailing 63,031 62,312
Corporate expenses (8,880) (10,703)
----------- ----------
Total operating earnings $ 26,584 $ 32,286
=========== ==========
</TABLE>
Publishing and Educational Services
Revenues from Harcourt Brace publishing and educational services businesses
increased $95.5 million, or 42.5%, compared to the same period last year,
primarily as a result of revenues generated by the NEC entities acquired in
June 1997. The Education and Trade Group revenues rose 37.7% to $93.1
million, reflecting primarily the addition of the Steck-Vaughn supplemental
educational publishing business. Revenues of the Lifelong Learning and
Assessment Group increased to $122.0 million in the first quarter of fiscal
1998 from $62.0 million in the first quarter of fiscal 1997. The increase in
this group's revenues resulted from the newly-acquired operations of ICS
Learning Systems, Inc. and NETg and to a lesser extent from the higher sales
of testing and assessment products. The operations of Drake Beam Morin, the
Company's professional services and outplacement business, are now included in
this group. The Worldwide Scientific, Technical and Medical (STM) Group
revenues increased 10.7% in the first quarter of fiscal 1998 to $105.1
million, primarily due to the acquisition of Churchill Livingstone in
September 1997.
The publishing and educational services business incurred an operating loss of
$27.6 million in the first quarter of fiscal 1998, increasing by $8.3 million
from $19.3 million in the fiscal 1997 quarter. The higher loss resulted
primarily from the incremental amortization of intangible assets associated
with the acquisition of ICS and NETg, which offset higher earnings in the
testing and assessment operations of the Lifelong Learning and Assessment
Group. Worldwide STM earnings also decreased primarily due to higher
amortization costs of intangible and other assets. The Education and Trade
Group's loss decreased due to smaller losses in its elementary school
business, higher earnings in its college business and the addition of
Steck-Vaughn's earnings to the group.
Specialty Retailing
Specialty retailing results are reported with a lag of one quarter. The
operating results of The Neiman Marcus Group, Inc. (NMG) for the quarter
ended November 1, 1997 were consolidated with the operating results of the
Company for the quarter ended January 31, 1998.
<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Specialty Retailing (continued)
Specialty retailing revenues in the thirteen weeks ended November 1, 1997
increased $36.4 million or 6.7% over revenues in the thirteen weeks ended
November 2, 1996. The revenue growth was primarily attributable to an 8.2%
increase in comparable sales at Neiman Marcus Stores. Bergdorf Goodman
revenues rose at both the main store and Bergdorf Goodman Men, resulting in a
comparable sales increase of 13.5%. NM Direct revenues decreased 8.1% in
comparison to the prior year, reflecting weaker demand for NM Direct's
merchandise offerings.
Specialty retailing operating earnings increased to $63.0 million in the first
quarter of fiscal 1998 from $62.3 million in the prior year quarter. The
increase resulted primarily from higher revenues, offset in part by lower
gross margins at Neiman Marcus Stores attributable primarily to a shift in
timing of the fall markdowns taken in the second quarter in fiscal 1997 to the
first quarter in fiscal 1998.
Corporate Expenses
Corporate expenses decreased $1.8 million to $8.9 million in the first quarter
of 1998, compared to $10.7 million in the prior year. The decrease is
primarily due to the compensation expense recognized in the fiscal 1997
quarter in connection with the resignation of the Company's former chief
executive officer.
Investment Income
Investment income decreased to $1.4 million in the first quarter of fiscal
1998 from $10.6 million in the first quarter of the previous year. The
Company liquidated its investment portfolio in June 1997 to partially fund the
acquisition of NEC.
Interest Expense
Interest expense increased to $26.7 million from $20.7 million in the same
period last year. The increase in interest expense is primarily due to
interest incurred on fixed-rate debt issued by the Company in August 1997, the
proceeds from which were used to partially fund the acquisitions of NEC and
Churchill Livingstone. The higher expense in the 1998 quarter includes a
lower amount of interest incurred by NMG in comparison to the 1997 quarter,
resulting from both a lower effective interest rate and lower average
borrowings by NMG.
Minority Interest
The Company recorded minority interest in the earnings of its specialty
retailing operations of $15.3 million in the first quarter of fiscal 1998.
The Company began recognizing the minority interest in NMG (currently 47%) in
its statement of operations in the fourth quarter of fiscal 1997.
<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The following discussion analyzes liquidity and capital resources by
operating, investing and financing activities as presented in the Company's
condensed consolidated statements of cash flows.
Cash provided by operating activities for the quarter ended January 31, 1998
was $142.0 million. The publishing and educational services businesses of
Harcourt Brace provided $135.3 million of cash from operations while the
specialty retailing operations of NMG provided $6.7 million of cash. The cash
provided by the publishing and educational services business segments was
sufficient to fund their working capital, capital expenditures and the
Company's dividend requirements. NMG increased its borrowings under its
revolving credit agreement in order to fund working capital for the holiday
season and capital expenditures.
The most significant items affecting working capital were an increase in
inventories of $108.9 million, which was offset by an increase of $110.3
million in accounts payable and current liabilities and a $62.5 million
decrease in accounts receivable. The increase in inventory was primarily
attributable to NMG's holiday season.
Cash flows used by investing activities were $101.6 million for the quarter
ended January 31, 1998. The Company's investing activities included capital
expenditures totaling $52.6 million. Publishing capital expenditures in the
1998 quarter totaled $33.8 million and were principally related to
expenditures for prepublication costs. Capital expenditures in the publishing
and educational services business are expected to approximate $180.0 million
in fiscal 1998. Specialty retailing capital expenditures in the 1998 quarter
totaled $18.8 million and consisted principally of the construction of a new
Neiman Marcus store in Honolulu's Ala Moana Center, expected to open in
September 1998, and existing store renovations. Capital expenditures for NMG
in fiscal 1998 are expected to approximate $100.0 million.
Financing activities reflect additional borrowings by NMG of $62.7 million under
its revolving credit agreement, as well as Steck-Vaughn's repayment and
termination of its revolving credit agreement for $14.0 million.
At January 31, 1998, the Company had the entire $750.0 million available under
its revolving credit agreement with 18 banks. The agreement expires in July
2002. NMG had $350.0 million available at November 1, 1997 under its $650
million, revolving credit facility, which expires in October 2002.
The Company believes its cash on hand, cash generated from operations and its
current and future debt capacity will be sufficient to fund its planned
capital growth, operating and dividend requirements.
<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year 2000
The Company has evaluated the effect of the year 2000 date on its computer
systems and is implementing plans to ensure its systems and applications will
process in the year 2000 and beyond. The Company is engaging both internal
and external resources to reprogram and test its systems for year 2000
compliance. The Company currently anticipates substantially completing
the year 2000 project in June 1999. Based on management's current estimates,
the costs of system modifications and enhancements, which have been and will
be expensed as incurred, are not expected to be material to the results of
operations or the financial position of the Company. Additionally, the Company
continues to invest in new technology in connection with its ongoing system
development plans.
The Company has initiated formal communications with its significant suppliers
to determine the extent to which the Company's interface systems and
operations are vulnerable to those third parties' failure to rectify their
own year 2000 issues. There can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and
would not have an adverse effect on the Company's systems.
Forward-Looking Statements
Statements in this report referring to the expected future plans and
performance of the Company are forward-looking statements. Actual future
results may differ materially from such statements. Factors that could affect
future performance in the Company's publishing and educational services
businesses include, but are not limited to: the Company's ability to develop
and market its products and services; the relative success of the products and
services offered by competitors; integration of acquired businesses; the
seasonal and cyclical nature of the markets for the Company's products and
services; changes in economic conditions; changes in public funding for the
Company's educational products and services; and changes in purchasing
patterns in the Company's markets.
Important factors that could affect future performance in the Company's
specialty retailing businesses include, but are not limited to: changes in
economic conditions or consumer confidence, changes in consumer preferences or
fashion trends; delays in anticipated store openings; adverse weather
conditions, particularly during peak selling seasons; changes in demographic
or retail environments; competitive influences; significant increases in
paper, printing and postage costs, and changes in the Company's relationships
with designers and other resources. For more information, see the Company's
filings with the Securities and Exchange Commission.
<PAGE>
[PAGE]
PART II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial data schedule
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the
quarter ended January 31, 1998.
<PAGE>
[PAGE]
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HHARCOURT GENERAL, INC.
Date: March 17, 1998 /s/John R. Cook
Senior Vice President and
Chief Financial Officer
Date: March 17, 1998 /s/Catherine N. Janowski
Vice President and
Controller
Principal Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains a summary of financial information extracted from the
Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 155,800
<SECURITIES> 177,268
<RECEIVABLES> 368,910
<ALLOWANCES> 33,778
<INVENTORY> 785,288
<CURRENT-ASSETS> 1,647,300
<PP&E> 1,031,383
<DEPRECIATION> 433,704
<TOTAL-ASSETS> 3,955,339
<CURRENT-LIABILITIES> 1,198,200
<BONDS> 1,275,064
0
1,122
<COMMON> 70,789
<OTHER-SE> 743,679
<TOTAL-LIABILITY-AND-EQUITY> 3,955,339
<SALES> 900,624
<TOTAL-REVENUES> 900,624
<CGS> 502,544
<TOTAL-COSTS> 874,040
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24,316
<INTEREST-EXPENSE> 26,651
<INCOME-PRETAX> 1,349
<INCOME-TAX> 513
<INCOME-CONTINUING> (14,446)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,446)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
