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, 1999
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 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 March 8, 1999, the number of outstanding shares of each of the issuer's
classes of common stock was:
Class Shares Outstanding
Common Stock, $1.00 Par Value 51,092,026
Class B Stock, $1.00 Par Value 20,020,521
<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, 1999 and October 31, l998 1
Condensed Consolidated Statements of Operations
for the Three Months Ended January 31, 1999 and l998 2
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended January 31, l999
and l998 3
Notes to Condensed Consolidated Financial
Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit 27.1 13
<PAGE>
<TABLE>
<CAPTION>
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands) January 31, October 31,
1999 l998
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 81,868 $ 115,200
Undivided interests in NMG Credit
Card Master Trust 180,504 138,867
Accounts receivable, net 361,451 479,569
Inventories 862,443 706,586
Deferred income taxes 114,794 114,794
Other current assets 86,727 94,024
----------- -----------
Total current assets 1,687,787 1,649,040
Property and equipment, net 658,793 645,213
Other assets:
Prepublication costs, net 255,712 252,831
Goodwill, net 1,604,352 1,614,369
Other intangible assets, net 174,904 183,431
Other 106,839 104,215
----------- -----------
Total other assets 2,141,807 2,154,846
----------- -----------
Total assets $4,488,387 $4,449,099
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable and current maturities
of long-term liabilities $ 7,179 $ 10,013
Accounts payable 413,827 392,417
Taxes payable 9,196 20,928
Other current liabilities 764,866 701,212
----------- -----------
Total current liabilities 1,195,068 1,124,570
Long-term liabilities:
Notes and debentures 1,723,962 1,729,459
Other long-term liabilities 261,951 258,621
Deferred income taxes 118,162 118,162
----------- -----------
Total long-term liabilities 2,104,075 2,106,242
Minority interest 290,309 292,565
Shareholders' equity:
Preferred stock 906 914
Common stock 71,086 71,029
Paid-in capital 746,548 745,679
Accumulated other comprehensive loss (9,591) (15,407)
Retained earnings 89,986 123,507
----------- -----------
Total shareholders' equity 898,935 925,722
----------- -----------
Total liabilities and shareholders' equity $4,488,387 $4,449,099
=========== ==========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
1 <PAGE>
<TABLE>
<CAPTION>
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except for per share amounts)
For the three months
ended January 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues $974,750 $900,624
Costs applicable to revenues 528,913 502,544
Selling, general and administrative
expenses 419,217 362,616
Corporate expenses 8,956 8,880
--------- --------
Operating earnings 17,664 26,584
Investment income 877 1,416
Interest expense (32,604) (26,651)
--------- --------
Earnings (loss) before income taxes
and minority interest (14,063) 1,349
Income tax benefit (expense) 5,344 (513)
--------- --------
Earnings (loss) before
minority interest (8,719) 836
Minority interest in net earnings of
subsidiaries (10,784) (15,282)
--------- --------
Net loss ($19,503) ($14,446)
--------- --------
Weighted average number of common and
common equivalent shares outstanding:
Basic 71,060 70,786
========= =========
Diluted 71,060 70,786
========= =========
Loss per common share:
Basic ($ .28) ($ .21)
========= =========
Diluted ($ .28) ($ .21)
========= =========
Dividends per share:
Common Stock $ .20 $ .19
========= =========
Class B Stock $ .18 $ .171
========= =========
Series A Stock $ .2275 $ .2165
========= =========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
2 <PAGE>
<TABLE>
<CAPTION>
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) For the three months
ended January 31,
----------------------
1999 1998
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($19,503) ($ 14,446)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 79,046 71,012
Minority interest 10,784 15,282
Other items 2,080 172
Changes in current assets and liabilities:
Accounts receivable 118,118 62,543
Inventories (155,857) (108,931)
Other current assets 7,297 6,087
Accounts payable and current liabilities 70,600 110,260
-------- ---------
Net cash provided by operating activities 112,565 141,979
-------- ---------
Cash flows from investing activities:
Capital expenditures (71,149) (52,632)
Purchases of held-to-maturity securities (160,652) (164,817)
Maturities of held-to-maturity securities 119,015 115,890
Other investing activities (15,356) -
-------- ---------
Net cash used for investing activities (128,142) (101,559)
-------- ---------
Cash flows from financing activities:
Proceeds from (repayments of) revolving
credit facility borrowings (5,000) 48,656
Repayment of debt (477) (463)
Cash dividends paid (14,018) (13,313)
Other equity transactions 1,740 (2,144)
-------- ---------
Net cash provided by (used for)
financing activities (17,755) 32,736
-------- ---------
Cash and equivalents
Increase (decrease) during the period (33,332) 73,156
Beginning balance 115,200 82,644
-------- ---------
Ending balance $ 81,868 $ 155,800
======== =========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
3 <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 54% of the common stock of NMG. The Company does not
include in its earnings that portion of NMG earnings (currently 46%)
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. Loss per share
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings per Share," the net loss and the number of weighted
average shares used in computing basic and diluted loss per share are as
presented in the table below.
Options to purchase 1,050,086 and 739,807 shares of common stock and the
assumed conversion of 906,000 and 1,122,000 shares of Series A Cumulative
Convertible Stock were not included in the computation of diluted loss
per share because of the net loss in the first quarter of fiscal 1999 and
1998, respectively.
<TABLE>
<CAPTION>
Three Months Ended
------------------------
January 31, January 31,
(In thousands) 1999 1998
---------- ----------
<S> <C> <C>
Net loss ($19,503) ($ 14,446)
Less: dividends on Series A
Cumulative Convertible Stock (206) (243)
--------- ---------
Net loss for computation of basic
and diluted loss per share ($19,709) ($ 14,689)
========= ==========
</TABLE>
4<PAGE>
HARCOURT GENERAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Loss per share (continued)
The shares for the computation of basic and diluted loss per share are
71,060,000 and 70,786,000 shares for the three months ended January 31,
1999 and 1998, respectively.
3. NMG stock repurchase
During the first thirteen weeks of NMG's fiscal 1999, NMG repurchased
827,000 shares at an average price of $18.57 per share, and 512,900
shares were remaining under this program.
4. NMG acquisitions
On November 2, 1998, NMG acquired a 51 percent interest in Gurwitch
Bristow Products for approximately $6.7 million in cash. Gurwitch
Bristow Products manufactures and markets Laura Mercier cosmetic lines.
On February 1, 1999, NMG acquired a 56 percent interest in Kate Spade
LLC for approximately $33.6 million in cash. Kate Spade LLC is a
manufacturer and marketer of high-end fabric and leather handbags and
accessories.
5. Comprehensive loss
As of November 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130)
and has reclassified certain amounts to conform to the requirements of
SFAS 130. The adoption of SFAS 130 had no impact on the Company's net
loss or shareholders' equity. Total comprehensive loss amounted to $13.7
million and $16.8 million for the three months ended January 31, 1999 and
1998, respectively. Comprehensive loss differs from net loss primarily
due to foreign currency translation adjustments and unrealized gains or
losses on the Company's available-for-sale securities.
5 <PAGE>
<TABLE>
<CAPTION>
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended January 31, 1999 Compared to Three Months January 31, 1998
The following table presents revenues and operating earnings (loss) by business segment for the three
months ended January 31.
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
Revenues:
Publishing and
educational services $387,637 $320,125
Specialty retailing 587,113 580,499
-------- --------
Total revenues $974,750 $900,624
======== ========
Operating earnings (loss):
Publishing and
educational services ($23,560) ($27,567)
Specialty retailing 50,180 63,031
Corporate expenses (8,956) (8,880)
-------- --------
Total operating
earnings $17,664 $26,584
======== ========
</TABLE>
Publishing and Educational Services
Revenues from the Harcourt Brace publishing and educational services
businesses increased $67.5 million, or 21.1%, compared to the same period last
year, primarily as a result of revenues generated by Mosby, Inc., acquired in
October 1998. The Education Group's revenues fell 5.3% to $88.1 million,
primarily due to lower revenues at the Steck-Vaughn supplemental publishing
business. Revenues of the Lifelong Learning & Assessment Group increased
14.6% to $139.8 million in the first three months of fiscal 1999 from $122.0
million in the first three months of fiscal 1998. The increase in this
group's revenues resulted primarily from higher sales at NETg and Drake Beam
Morin, and to a lesser extent from the higher sales of testing and assessment
products. The Worldwide Scientific, Technical and Medical (STM) Group's
revenues increased 52.0% in the first three months of fiscal 1999 to $159.7
million, primarily due to the acquisition of Mosby in October 1998.
The publishing and educational services businesses incurred an operating loss
of $23.6 million in the first quarter of fiscal 1999, decreasing by $4.0
million from a loss of $27.6 million in the first three months of fiscal 1998.
The Education Group's loss increased primarily due to lower revenues at Steck-
Vaughn and higher plate costs in its elementary school business. The loss at
the Lifelong Learning & Assessment Group decreased primarily due to lower
amortization of intangible assets associated with the acquisition of ICS and
NETg and higher sales at DBM and NETg. These losses were offset in part by a
significant increase in the Worldwide STM Group's earnings, primarily as a
result of incremental earnings from Mosby, acquired in October 1998, and
higher sales at Academic Press.
6<PAGE>
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 thirteen weeks ended October 31, 1998 are consolidated with the operating
results of the Company for the three months ended January 31, 1999.
Revenues in the thirteen weeks ended October 31, 1998 increased $6.6 million
or 1.1% over revenues in the thirteen weeks ended November 1, l997. The
increase in revenues was primarily attributable to sales from Chef's Catalog,
acquired in January 1998, and the new Neiman Marcus store in Hawaii. Total
comparable sales decreased 2.3%. Comparable sales decreased 1.7% at Neiman
Marcus Stores, 7.4% at Bergdorf Goodman and 1.1% at NM Direct.
Operating earnings decreased 20.4% to $50.2 million primarily as a result of
the lower comparable sales and, to a lesser extent, to lower margins on sales
by Chef's Catalog and higher markdowns at Bergdorf Goodman.
Interest Expense
Interest expense increased to $32.6 million from $26.7 million in the same
period last year. The increase in interest expense is primarily due to
interest on borrowings under the Company's revolving credit facility to fund
the Mosby acquisition. The interest expense in the first three months of
fiscal 1999 includes a higher amount of interest incurred by NMG in comparison
to the 1998 period, resulting from both a higher effective interest rate and
higher average borrowings by NMG.
Minority interest
The Company recorded minority interest in net earnings of its subsidiaries of
$10.8 million in the first three months of fiscal 1999 compared to $15.3
million in fiscal 1998. In the first three months of fiscal 1999, minority
interest includes $11.5 million relating to the minority interest in net
earnings of its specialty retailing business, offset in part by minority
interest in net losses of various publishing and educational services
businesses. In the first three months of fiscal 1998, the entire $15.3
million consisted of minority interest in net earnings of its specialty
retailing business.
7<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 three months ended January 31,
1999 was $112.6 million. The publishing and educational services businesses
provided $182.4 million of cash from operations while NMG's operations used
$69.8 million. The cash provided by the publishing and educational services
businesses was sufficient to fund their working capital and capital
expenditure requirements as well as the Company's dividend requirements. NMG
used cash provided by borrowings under its own revolving credit facility to
fund working capital for the holiday season and capital expenditures. The
primary items affecting working capital were a decrease in accounts receivable
of $118.1 million, an increase in inventories of $155.9 million, and an
increase in accounts payable and current liabilities of $70.6 million.
Cash flows used by investing activities were $128.1 million for the three
months ended January 31, 1999. The Company's investing activities included
capital expenditures totaling $71.1 million. Publishing and educational
services capital expenditures in the three month period ended January 31, 1999
totaled $40.6 million and were related principally to expenditures for
prepublication costs. Capital expenditures in the publishing and educational
services businesses are expected to approximate $230.0 million in fiscal 1999.
Specialty retailing capital expenditures in the 1999 period totaled $30.5
million. NMG purchased a building adjacent to its Neiman Marcus store in
Union Square in San Francisco for a future expansion of this store.
Speciality retailing capital expenditures also include existing store
renovations and completion of construction of the new Neiman Marcus store in
Honolulu, Hawaii. Capital expenditures for NMG in fiscal 1999 are expected to
approximate $110.0 million.
During the first thirteen weeks of NMG's fiscal 1999, NMG repurchased 827,000
shares at an average price of $18.57 per share. In November 1998, NMG
acquired a 51 percent interest in Gurwitch Bristow Products for approximately
$6.7 million in cash. In February 1999, NMG acquired a 56 percent interest in
Kate Spade LLC for approximately $33.6 million in cash. The acquisitions were
funded primarily through borrowings under NMG's revolving credit facility.
At January 31, 1999, the Company had $405.0 available under its $750.0 million
revolving credit facility which expires in July 2002. NMG had $490.0 million
available at October 31, 1998 under its $650.0 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.
8<PAGE>
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year 2000
The Company has substantially completed its assessment of its hardware and
software systems, including the embedded systems in the Company's buildings,
property and equipment, and is implementing plans to ensure that the
operations of such systems will not be adversely affected by the Year 2000
date change.
The Company is presently in the process of renovating non-compliant systems
and implementing converted and replaced systems for substantially all of its
non-compliant hardware and software systems. The Company estimates that its
efforts to make these systems Year 2000 compliant are approximately 60%
complete, with substantial completion of the Year 2000 project currently
anticipated for July 1999.
The Company has established an ongoing program to communicate with its
significant suppliers and vendors to determine the extent to which the
Company's systems and operations are vulnerable to those third parties'
failure to rectify their own Year 2000 issues. Based on responses to the
Company's inquiries, the Company is in the process of identifying those
suppliers and vendors most at risk for failing to achieve Year 2000 compliance
on a timely basis and is monitoring their continuing progress. The Company is
not presently aware of any significant exposure arising from potential third
party failures. However, there can be no assurance that the systems of other
companies on which the Company's systems or operations rely will be timely
converted or that any failure of such parties to achieve Year 2000 compliance
would not have an adverse effect on the Company's results of operations.
The Company has engaged both internal and external resources to assess,
reprogram, test and implement its systems for Year 2000 compliance. Based on
management's current estimates, the costs of Year 2000 remediation, including
system renovation, modifications and enhancements, which have been and will be
expensed as incurred, have not been and are not expected to be material to the
results of operations or the financial position of the Company. Additionally,
such expenditures have not adversely affected the Company's ability to
continue its investment in new technology in connection with it ongoing
systems development plans.
Management presently believes the Company's most reasonably likely worst case
Year 2000 scenario could arise from a business interruption caused by
governmental agencies, utility companies, telecommunication service companies,
shipping companies or other service providers outside the Company's control.
There can be no assurance that such providers will not suffer business
interruption caused by a Year 2000 issue. Such an interruption could have a
material adverse effect on the Company's results of operations.
The Company is in the process of developing a contingency plan for continuing
operations in the event of Year 2000 failures, and the current target for
completing that plan is June 1999.
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
9<PAGE>
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements (continued)
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; failure of the Company or third parties to be
Year 2000 compliant; 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; failure of the Company
or third parties to be Year 2000 compliant; 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 the Company's filings with the
Securities and Exchange Commission.
10<PAGE>
HARCOURT GENERAL, INC.
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, 1999.
12<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: March 11, 1999 S/John R. Cook
John R. Cook
Senior Vice President and
Chief Financial Officer
Date: March 11, 1999 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> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 81,868
<SECURITIES> 180,504
<RECEIVABLES> 399,864
<ALLOWANCES> 38,413
<INVENTORY> 862,443
<CURRENT-ASSETS> 1,687,787
<PP&E> 1,191,349
<DEPRECIATION> 532,556
<TOTAL-ASSETS> 4,488,387
<CURRENT-LIABILITIES> 1,195,068
<BONDS> 1,723,962
0
906
<COMMON> 71,086
<OTHER-SE> 826,943
<TOTAL-LIABILITY-AND-EQUITY> 4,488,387
<SALES> 974,750
<TOTAL-REVENUES> 974,750
<CGS> 528,913
<TOTAL-COSTS> 957,086
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24,796
<INTEREST-EXPENSE> 32,604
<INCOME-PRETAX> (14,063)
<INCOME-TAX> (5,344)
<INCOME-CONTINUING> (19,503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,503)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
