[PAGE]
UNITED STATES
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 July 31, 1998
Commission File Number 1-4925
HARCOURT GENERAL, INC.
(Exact of 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 02467
(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 September 9, 1998, the number of outstanding shares of each of the
issuer's classes of common stock was:
Class Outstanding Shares
Common Stock, $1 Par Value 50,989,392
Class B Stock, $1 Par Value 20,021,006
<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
I N D E X
Part I. Financial Information Page Number
Item 1. Condensed Consolidated Balance Sheets as of
July 31, 1998 and October 31, 1997 1
Condensed Consolidated Statements of Operations for
the Nine and Three Months Ended
July 31, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended July 31, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit 27.1 14
<PAGE>
[PAGE]
<TABLE>
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
(In thousands) July 31, October 31,
1998 1997
----------- -----------
Assets
<S> <C> <C>
Current assets:
Cash and equivalents $ 70,847 $ 82,644
Undivided interests in NMG Credit
Card Master Trust 165,906 128,341
Accounts receivable, net 507,427 397,675
Inventories 734,266 676,357
Deferred income taxes 120,546 120,546
Other current assets 76,141 79,353
---------- ----------
Total current assets 1,675,133 1,484,916
Property and equipment, net 616,796 593,892
Other assets:
Prepublication costs, net 227,861 201,953
Intangible assets, net 1,283,047 1,299,227
Other 205,155 201,405
---------- ----------
Total other assets 1,716,063 1,702,585
---------- ----------
Total assets $4,007,992 $3,781,393
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable and current maturities of
long-term liabilities $ 79,221 $ 14,439
Accounts payable 362,039 346,386
Taxes payable 90,310 19,433
Other current liabilities 622,597 613,011
---------- ----------
Total current liabilities 1,154,167 993,269
Long-term liabilities:
Notes and debentures 1,272,150 1,289,889
Other long-term liabilities 292,719 274,840
---------- ----------
Total long-term liabilities 1,564,869 1,564,729
Deferred income taxes 143,435 143,435
Minority interest 262,485 234,422
Shareholders' equity:
Preferred stock 925 1,125
Common stock 71,008 70,755
Paid-in capital 745,365 744,932
Cumulative translation adjustments (12,912) (7,113)
Unrealized investment gains, net 3,643 -
Retained earnings 75,007 35,839
---------- ----------
Total shareholders' equity 883,036 845,538
---------- ----------
Total liabilities and shareholders' equity $4,007,992 $3,781,393
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1<PAGE>
[PAGE]
<TABLE>
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
(In thousands except for
per share amounts) Nine Months Three Months
Ended July 31, Ended July 31,
----------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $3,099,059 $2,700,371 $1,161,670 $1,051,646
Costs applicable to revenues 1,678,568 1,565,710 559,441 546,059
Selling, general and
administrative expenses 1,121,990 989,381 370,530 426,512
Purchased in-process research
and development - 174,000 - 174,000
Corporate expenses 26,434 26,928 9,224 7,988
---------- ---------- ---------- ---------
Operating earnings (loss) 272,067 (55,648) 222,475 (102,913)
Investment income 3,984 26,285 623 4,910
Interest expense (80,338) (66,239) (26,268) (24,486)
---------- ---------- ---------- ---------
Earnings (loss) before
income taxes and minority
interest 195,713 (95,602) 196,830 (122,489)
Income tax expense (74,371) (27,647) (74,795) (18,505)
---------- ---------- ---------- ---------
Earnings (loss) before
minority interest 121,342 (123,249) 122,035 (140,994)
Minority interest in earnings
of subsidiaries, net of
income taxes (42,238) - (11,235) -
---------- ---------- ---------- ---------
Net earnings (loss) $ 79,104 ($123,249) $110,800 ($140,994)
========== ========== ========== =========
Weighted average number of
common and common equivalent
shares outstanding:
Basic 70,843 70,832 70,912 70,747
========== ========== ========== =========
Diluted 72,132 70,832 72,142 70,747
========== ========== ========== =========
Earnings (loss) per common
share:
Basic $ 1.11 ($ 1.75) $ 1.56 ($2.00)
========== ========== ========== =========
Diluted $ 1.10 ($ 1.75) $ 1.54 ($2.00)
========== ========== ========== =========
Dividends per share:
Common Stock $ .57 $ .54 $ .19 $ .18
========== ========== ========== =========
Class B Stock $ .513 $ .486 $ .171 $ .162
========== ========== ========== =========
Series A Stock $ .6495 $ .6165 $ .2165 $ .2055
========== ========== ========== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2<PAGE>
[PAGE]
<TABLE>
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(In thousands)
Nine Months
Ended July 31,
---------------------
1998 1997
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss) $ 79,104 ($123,249)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 219,934 250,674
Minority interest 42,238 -
Purchased in-process research and
development - 174,000
Other items (6,012) 9,533
Changes in current assets and liabilities:
Accounts receivable (106,589) (84,394)
Inventories (51,586) (58,087)
Other current assets 6,028 18,069
Accounts payable and other current liabilities 53,419 44,931
Taxes payable 68,645 (57,232)
--------- --------
Net cash provided by operating activities 305,181 174,245
--------- --------
Cash flows from investing activities:
Capital expenditures (190,245) (128,694)
Purchases of available-for-sale securities - (408,304)
Sales of available-for-sale securities - 325,767
Maturities of available-for-sale securities - 324,591
Purchases of held-to-maturity securities (513,362) (457,784)
Maturities of held-to-maturity securities 475,797 421,121
Acquisition of NEC, net of cash acquired - (839,620)
Acquisition of Chef's Catalog (31,000) -
Acquisition of Steck-Vaughn minority interest (40,512) -
Other acquisitions and investing activities (29,223) (6,751)
--------- --------
Net cash used for investing activities (328,545) (769,674)
--------- --------
Cash flows from financing activities:
Proceeds from borrowings 55,000 516,950
Repayment of debt (3,557) (329,500)
Repurchase of Common Stock - (20,139)
Cash dividends paid (39,936) (37,844)
Other equity transactions 60 165
--------- --------
Net cash provided by financing
activities 11,567 129,632
--------- --------
Cash and equivalents:
Decrease during the period (11,797) (465,797)
Beginning balance 82,644 532,862
--------- --------
Ending balance $ 70,847 $ 67,065
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3<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 net 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 was paid in February 1998. The transaction
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>
Nine Months Ended Three Months Ended
---------------------- ---------------------
July 31, July 31, July 31, July 31,
(in thousands) 1998 1997 1998 1997
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Earnings (loss) $ 79,104 ($123,249) $110,800 ($140,994)
Less: dividends on Series
A Cumulative Convertible
Stock (673) (701) (205) (232)
Earnings (loss) for -------- --------- ------- ---------
computation of basic EPS 78,431 ( 123,950) 110,595 ( 141,226)
Add: dividends on assumed
conversion of Series A
Cumulative Convertible
Stock 673 - 205 -
-------- --------- -------- ---------
Earnings (loss) for
computation of diluted
EPS $ 79,104 ($123,950) $100,800 ($141,226)
======== ========= ======== =========
</TABLE>
4<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
3. Earnings per share (continued)
<CAPTION>
Nine Months Ended Three Months Ended
--------------------- ---------------------
July 31, July 31, July 31, July 31,
(in thousands) 1998 1997 1998 1997
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Shares for computation of
basic EPS 70,843 70,832 70,912 70,747
Add: assumed conversion of
Series A Cumulative
Convertible Stock 1,178 - 1,113 -
Add: effect of assumed
option exercises 111 - 117 -
--------- ---------- -------- --------
Shares for computation
of diluted EPS 72,132 70,832 72,142 70,747
========= ========== ======== ========
</TABLE>
In the nine months and three months ended July 31, 1998, all outstanding
options to purchase shares of common stock were included in the computation
of diluted EPS. Options to purchase 493,754 shares of common stock and the
assumed conversion of 1,130,000 shares of Series A Cumulative Convertible
Stock were not included in the computation of diluted EPS because of the
net loss in the three and nine months ended July 31, 1997.
4. Acquisitions
------------
In May 1998, the Company signed a definitive merger agreement to acquire
Mosby, Inc. from Times Mirror for approximately $415 million in cash.
Mosby is a publisher of books and periodicals in professional health
sciences, including nursing, allied health and medicine. Completion of the
transaction is subject to normal terms and conditions, including approval
under the Hart-Scott-Rodino Antitrust Improvements Act. After the closing,
Mosby will become part of the Company's Worldwide Scientific, Technical and
Medical Group.
In July 1998, the Company signed a definitive merger agreement to acquire
Gartner Learning, the technology-based IT training operation of Gartner
Group, Inc. On August 31, 1998, the transaction was completed, and Gartner
Learning was merged with the operations of NETg, a subsidiary of the
Company, which provides self-paced, multimedia training courseware for IT
professionals. The acquisition will be accounted for under the purchase
method of accounting. Under the terms of the agreement, Gartner Group
received an eight percent interest in the combined company, which will be
known as NETg, as part of the consideration for the acquisition.
In the third quarter of fiscal 1998, the Company completed its final
purchase price allocation for its June 1997 acquisition of National
Education Corporation (NEC). The final purchase price allocation resulted
in a net reduction of goodwill and other current liabilities from the
amounts initially recorded.
5. NMG debt offering
-----------------
In May 1998, NMG issued $250 million of senior notes and debentures to the
public, comprised of $125 million 6.65% senior notes due 2008 and $125
million 7.125% senior debentures due 2028. NMG used the proceeds of this
debt offering to repay borrowings outstanding on its revolving credit
agreement.
5<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Recent accounting developments
------------------------------
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 132, "Employers' Disclosures about
Pensions and other Postretirement Benefits" (SFAS 132). Upon adoption in
fiscal 1999, the Company will provide the additional disclosures required
by SFAS 132.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", which will require recognition of all
derivatives as either assets or liabilities on the balance sheet at fair
value. The Company is currently evaluating the effect of implementing SFAS
133, which will be effective for fiscal 2000.
6<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
<TABLE>
The following table presents revenues and operating earnings (loss) by
business segment.
<CAPTION>
Nine Months Three Months
Ended July 31, Ended July 31,
------------------------ ----------------------
(In thousands) 1998 1997 1998 1997
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Publishing and
educational services $1,262,441 $ 987,789 $ 613,938 $ 545,114
Specialty retailing 1,836,618 1,712,582 547,732 506,532
---------- ---------- ---------- ----------
Total revenues $3,099,059 $2,700,371 $1,161,670 $1,051,646
========== ========== ========== ==========
Operating earnings:
Publishing and
educational services $ 121,879 $ 87,703 $ 183,478 $ 138,123
Purchased in-process
research and development
and other charges - (277,227) - (277,227)
---------- ---------- ---------- ----------
Total publishing and
educational services 121,879 (189,524) 183,478 (139,104)
Specialty retailing 176,622 160,804 48,222 44,180
Corporate expenses (26,434) (26,928) (9,225) (7,989)
Total operating ---------- ---------- ---------- ----------
earnings (loss) $ 272,067 ($55,648) $222,475 ($102,913)
========== ========== ========== ==========
</TABLE>
Nine Months Ended July 31, 1998 Compared To Nine Months Ended July 31, 1997
Publishing and Educational Services
-----------------------------------
Revenues from the Harcourt Brace publishing and educational services
businesses increased $274.7 million, or 27.8%, compared to the same period
last year, primarily as a result of revenues generated by the NEC entities
acquired in June 1997 and by Churchill Livingstone acquired in September
1997. The Education Group's revenues rose 15.8% to $470.6 million,
reflecting primarily the addition of the Steck-Vaughn supplemental
educational publishing business and higher secondary and college publishing
sales. Revenues of the Lifelong Learning and Assessment Group increased to
$439.5 million from $269.3 million in the first nine months of fiscal 1997.
The increase in this group's revenues resulted from the newly-acquired
operations of ICS Learning Systems and NETg and to a lesser extent from
higher scoring and test administration revenues. 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 12.9% in the first nine months of
fiscal 1998 to $352.3 million, primarily due to the acquisition of
Churchill Livingstone in September 1997.
The publishing and educational services businesses generated operating
earnings of $121.9 million in the first nine months of fiscal 1998,
increasing by $311.4 million from an operating loss of $189.5 million in
the first nine months of fiscal 1997. The 1997 period included $277.2
million of purchased in-process research and development and other charges
incurred concurrently with the acquisition of NEC. The Education Group's
operating earnings increased primarily as a result of higher revenues and
lower amortization costs in its elementary, secondary and college
businesses as well as higher profits at Steck-Vaughn.
Operating earnings of the Lifelong Learning and Assessment Group increased
significantly in comparison to the same period in the prior year both as a
result of strong sales by its professional education and testing and
assessment businesses, as well as the inclusion of the operations of ICS
7<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Publishing and Educational Services (continued)
- -----------------------------------
and NETg for the full nine months in the 1998 period, offset in part by
higher amortization costs. Worldwide STM Group earnings decreased slightly
in the 1998 period primarily as a result of weaker performance by the
international businesses, principally due to economic conditions in Asia.
Specialty Retailing
- -------------------
Specialty retailing results are reported with a lag of one quarter.
Accordingly, the operating results of The Neiman Marcus Group, Inc. (NMG) for
the thirty-nine weeks ended May 2, 1998 are consolidated with the Company's
operating results for the nine months ended July 31, 1998.
Revenues in the thirty-nine weeks ended May 2, 1998 increased 7.2% to $1.84
billion from $1.71 billion in the thirty-nine weeks ended May 3, 1997.
Comparable sales for the period increased 6.2%. Neiman Marcus Stores and
Bergdorf Goodman revenues rose in the first thirty-nine weeks of fiscal 1998,
reflecting comparable sales increases of 7.2% and 9.8%, respectively.
Revenues at NM Direct increased in comparison to the prior year period as a
comparable revenue decline was more than offset by sales from Chef's Catalog,
a direct marketer of gourmet cookware and high-end kitchenware, which was
acquired by NMG in January 1998.
Operating earnings increased 9.8% to $176.6 million from $160.8 million in the
prior period primarily as a result of the higher sales volume combined with
proportionately lower buying and occupancy costs, as well as higher markups at
both Neiman Marcus Stores and Bergdorf Goodman. The increase in operating
earnings was offset in part by higher selling and catalogue circulation costs
at NM Direct.
Investment Income
- -----------------
Investment income decreased to $4.0 million compared to $26.3 million in the
same nine month period in 1997. The Company liquidated its investment
portfolio in June 1997 to partially fund the acquisition of NEC.
Interest Expense
- ----------------
Interest expense increased to $80.3 million from $66.2 million in the same
period last year. The increase in interest expense is primarily due to the
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 interest expense in the first nine months of
fiscal 1998 includes a lower amount of interest incurred by NMG in comparison
to the 1997 period, 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 $42.2 million in the first nine months 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. In the
first nine months of fiscal 1997, the Company recorded 100% of the earnings of
NMG to the extent that the Company had previously absorbed losses of NMG
applicable to the minority interest. The Company fully recovered previously
absorbed losses in the fourth quarter of 1997.
8<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended July 31, 1998 Compared to Three Months Ended July 31, 1997
Publishing and Educational Services
- -----------------------------------
Revenues from the Harcourt Brace publishing and educational services
businesses increased by $68.8 million, or 12.6%, to $613.9 million compared to
the same period last year, primarily as a result of revenues generated by the
NEC entities acquired in June 1997. The Education Group revenues rose 3.1% to
$305.2 million, primarily reflecting the addition of the Steck-Vaughn
supplemental educational publishing business and higher secondary and college
publishing sales. Revenues of the Lifelong Learning and Assessment Group
increased to $175.3 million from $131.1 million in the same period last year.
The increase in this group's revenues resulted from the operations of ICS
Learning Systems and NETg acquired in June 1997 and from substantially higher
sales of professional education and testing and assessment businesses. The
Worldwide Scientific, Technical and Medical (STM) Group revenues increased
13.2% to $133.5 million, primarily due to the acquisition of Churchill
Livingstone in September 1997 and increased sales at Academic Press.
The publishing and educational services businesses generated operating
earnings of $183.5 million in the third quarter of fiscal 1998, an increase of
$322.6 million compared to a loss of $139.1 million in the fiscal 1997 third
quarter. The 1997 period included $277.2 million of purchased in-process
research and development and other charges incurred concurrently with the
acquisition of NEC. The Education Group's operating earnings increased
primarily as a result of strong sales of its secondary and college products,
as well as from higher sales and lower amortization costs at Steck-Vaughn.
The operating earnings of the Lifelong Learning and Assessment Group rose
substantially in comparison to the 1997 period primarily as a result of lower
amortization costs and improved performance in its professional education
business as well as ICS and NETg for the quarter. Worldwide STM Group
operating earnings declined in the 1998 quarter primarily as a result of
higher provisions taken in the quarter for returns and bad debts in its
international operations.
Specialty Retailing
- -------------------
Results of NMG are reported with a lag of one quarter. Accordingly, NMG's
operating results for its quarter ended May 2, 1998 are consolidated with the
Company's operating results for the quarter ended July 31, 1998.
Revenues in the thirteen weeks ended May 2, 1998 increased 8.1% to $547.7
million over revenues in the thirteen weeks ended May 3, 1997. Comparable
sales for the period increased 5.6%. Higher comparable sales at Neiman Marcus
Stores and Bergdorf Goodman in the thirteen weeks ended May 2, 1998
contributed to the increase in revenues over the same period in fiscal 1997.
NM Direct also contributed to the increase, as sales generated from the
recently acquired Chef's Catalog more than offset a comparable sales decrease
in the fiscal 1998 period.
Operating earnings increased 9.1% to $48.2 million in the thirteen week period
ended May 2, 1998 compared to $44.2 million in the same period in 1997. This
increase was primarily due to higher sales and higher markups at Neiman Marcus
Stores and Bergdorf Goodman. The increase in operating earnings was offset in
part by higher catalogue circulation costs, and to a lesser extent, pre-
opening expenses associated with the Neiman Marcus store under construction in
Hawaii.
9<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment Income
- -----------------
Investment income decreased $4.3 million to $.6 million compared with the same
period last year, due primarily to a lower average portfolio balance resulting
from the use of approximately $554 million in cash and short-term investments
to partially fund the acquisition of NEC.
Interest Expense
- ----------------
Interest expense increased 7.3% to $26.3 million compared to $24.5 million in
last year's third quarter. The increase is primarily due to interest incurred
on fixed-rate debt issued by the Company in August 1997, the proceeds of which
were used to partially fund the acquisitions of NEC and Churchill Livingstone.
Minority Interest
- -----------------
The Company recorded a minority interest in the earnings of its specialty
retailing operations of $11.2 million in the third quarter of 1998. The
Company began recognizing the minority interest in NMG (currently 47%) in its
statement of operations in the fourth quarter of 1997.
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 statement of cash flows.
Cash provided by operating activities for the nine months ended July 31, 1998
was $305.2 million. The publishing and educational services business segments
provided $188.4 million of cash from operations while NMG's operations
provided $116.8 million. The cash provided by the publishing and educational
services businesses was sufficient to fund their working capital expenditure
requirements as well as the Company's dividend requirements. NMG used cash
provided by operations and borrowings under its revolving credit agreement to
fund working capital and capital expenditures. The primary items affecting
the Company's working capital were an increase in accounts receivable ($106.6
million), an increase in merchandise inventories ($51.6 million), offset in
part by an increase in accounts payable and accrued liabilities ($53.4
million) and an increase in taxes payable ($68.6 million).
Cash flows used by investing activities were $328.5 million for the nine
months ended July 31, 1998. The Company's investing activities included
capital expenditures totaling $190.2 million. Publishing and educational
services capital expenditures in the nine month period ended July 31, 1998
totaled $132.5 million and were related principally to expenditures for
prepublication costs. Capital expenditures in the publishing and educational
service businesses are expected to approximate $180.0 million in fiscal 1998.
Specialty retailing capital expenditures in the 1998 period totaled $57.7
million and were primarily related to the construction of a new Neiman Marcus
store in Hawaii, which will open in September 1998, and existing store
renovations. Capital expenditures for NMG in fiscal 1998 were $81.2 million.
Financing activities reflect short term borrowings by the Company of $58.4
million, incremental borrowings by NMG of $10.6 million under its revolving
credit agreement, as well as the repayment and termination of Steck-Vaughn's
revolving credit agreement in the amount of $14.0 million.
At July 31, 1998, the Company had $705.0 million available under its $750.0
million revolving credit facility with 18 banks. The agreement expires in
July 2002. NMG had $350.0 million available at May 2, 1998 under its $650.0
million revolving credit facility, which expires in October 2002.
10<PAGE>
[PAGE]
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
-------------------------------
In May 1998, NMG issued $250 million of senior notes and debentures, the
proceeds of which were used to repay borrowings under its revolving credit
facility.
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, and the acquisition of
Mosby, Inc.
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
efficiently process information necessary to support ongoing operations 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 systems development
plans. The Company has initiated communications with its significant
suppliers and customers to determine the extent to which the Company's
interface systems and operations are vulnerable to failure of those parties to
rectify their own year 2000 issues. There can be no assurance that the
systems of other companies on which the Company's systems rely will be
converted on a timely basis and will not have an adverse effect on the
Company's operations.
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 NMG's relationships with
designers and other resources. For more information, see NMG's filings with
the Securities and Exchange Commission.
11<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 July 31, 1998.
12<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.
HARCOURT GENERAL, INC.
Date: September 11, 1998 /s/ John R. Cook
John R. Cook
Senior Vice President and
Chief Financial Officer
Date: September 11, 1998 /s/ Catherine N. Janowski
Catherine N. Janowski
Vice President and Controller
13<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> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 70,847
<SECURITIES> 165,906
<RECEIVABLES> 537,838
<ALLOWANCES> 30,411
<INVENTORY> 734,266
<CURRENT-ASSETS> 1,675,133
<PP&E> 1,080,322
<DEPRECIATION> 463,526
<TOTAL-ASSETS> 4,007,992
<CURRENT-LIABILITIES> 1,154,167
<BONDS> 1,272,150
0
925
<COMMON> 71,008
<OTHER-SE> 811,103
<TOTAL-LIABILITY-AND-EQUITY> 4,007,992
<SALES> 3,099,059
<TOTAL-REVENUES> 3,099,059
<CGS> 1,678,568
<TOTAL-COSTS> 2,826,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 88,043
<INTEREST-EXPENSE> 80,338
<INCOME-PRETAX> 195,713
<INCOME-TAX> 74,371
<INCOME-CONTINUING> 79,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,104
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.10
</TABLE>
