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Previous: FREQUENCY ELECTRONICS INC, 10-Q, EX-27, 2000-09-14 |
Next: HARCOURT GENERAL INC, 10-Q, EX-10.1, 2000-09-14 |
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, 2000
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 September 5, 2000, 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 53,177,367
Class B Stock, $1.00 Par Value 19,970,613
HARCOURT GENERAL, INC.
I N D E X
Part I. Financial Information
Page Number
Item 1. Condensed Consolidated Balance Sheets as of
July 31, 2000 and October 31, 1999
1
Condensed Consolidated Statements of Earnings
for the Three and Nine Months Ended July 31, 2000
and 1999
2
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended July 31, 2000
and 1999
3
Notes to Condensed Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
9-13
Part II. Other Information
Item 6. Exhibits and reports on Form 8-K 1
4
Signatures 15
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3 (a-n)
Exhibit 27.1
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
July 31, October 31,
2000 1999
Assets
Current assets:
Cash and equivalents $ 39,670
$ 24,144
Accounts receivable, net 617,710
473,577
Inventories
244,264 212,771
Deferred income taxes 80,716
80,716
Other current assets 28,633
39,549
Total current assets 1,010,993
; 830,757
Property and equipment, net 125,441 128,804
Other assets:
Prepublication costs, net 356,904
322,346
Investment in The Neiman Marcus Group, Inc. 164,622 119,414
Goodwill, net
1,375,894 1,409,485
Other intangible assets, net 44,640 52,538
Other
76,018 86,761
Total other assets 2,018,078
1,990,544
Total assets $
3,154,512 $ 2,950,105
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable and current maturities of
long-term liabilities $ 27,493 $
6,868
Accounts payable
228,148 203,521
Other current liabilities 506,626
483,168
Total current liabilities 762,267
693,557
Long-term liabilities:
Notes and debentures 1,407,008
1,356,804
Other long-term liabilities 160,053 182,842
Deferred income taxes 55,946
55,946
Total long-term liabilities 1,623,007 1,595,592
Minority interest
- 19,093
Shareholders' equity:
Preferred stock
791 863
Common stock
73,134 71,167
Paid-in capital
368,147 317,037
Accumulated other comprehensive income 21,616 2,269
Retained earnings 305,550
250,527
Total shareholders' equity 769,238
641,863
Total liabilities and shareholders' equity $ 3,154,512 $ 2,950,105
See Notes to Condensed Consolidated Financial Statements.
1
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands except
for per share amounts) Nine Months Three Months
Ended July
31, Ended July 31,
2000
1999 2000 1999
Revenues $ 1,684,402 $1,459,058 $871,182 $ 693,020
Costs applicable to revenues 561,479 473,920 250,182 187,534
Selling, general and
administrative expenses 895,607 829,362 328,767 285,691
Corporate expenses 17,480 16,205 6,473
5,448
Operating earnings 209,836 139,571 285,760 214,347
Investment and other income 25,971 11,969 16,539 7,465
Interest expense (78,593) (79,371) (27,027) (27,322)
Earnings from continuing operations
before income taxes and
minority interest 157,214 72,169 275,272 194,490
Income tax expense (58,169) (25,142) (101,850) (73,050)
Earnings from continuing operations
before minority interest 99,045 47,027 173,422 121,440
Minority interest in net losses
of subsidiaries 885 3,492
70 748
Earnings from continuing operations 99,930 50,519 173,492 122,188
Earnings from discontinued specialty
retail operations, net - 46,899
- 18,305
Net earnings $ 99,930 $ 97,418 $173,492
$140,493
Weighted average number of
common and common equivalent
shares outstanding:
Basic 71,541
71,093 72,653 71,133
Diluted 72,748
72,160 73,786 72,185
2
HARCOURT GENERAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months
Ended July 31,
2000 1999
Cash flows from operating activities:
Net earnings
$ 99,930 $ 97,418
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Discontinued specialty retail operations - (46,899)
Amortization of prepublication costs 111,619 95,196
Depreciation and other amortization 74,549 94,023
Gain on sale of securities (7,644)
(3,021)
Gain on sale of business and other (15,530) (6,812)
Minority interest
(885) (3,492)
Other items
1,887 2,585
Changes in assets and liabilities:
Accounts receivable (148,813)
(46,655)
Inventories
(31,608) (23,590)
Other current assets 2,406
(16,809)
Accounts payable and other current
liabilities
39,022 2,749
Net cash provided by operating activities 124,933 144,693
Cash flows from investing activities:
Capital expenditures (172,749)
(161,316)
Proceeds from sale of securities 12,394 8,271
Proceeds from sale of business 21,000 13,157
Acquisitions and other investing activities (48,992) (34,753)
Net cash used for investing activities (188,347) (174,641)
Cash flows from financing activities:
Proceeds of revolving credit
facilities, net 195,540
35,050
Repayment of debt (125,000)
-
Proceeds from issuance of stock 50,000
-
Cash dividends paid (44,907)
(42,080)
Other equity transactions 3,307
1,573
Net cash provided by (used for) 78,940 (5,457
)
financing activities
Cash and equivalents
Increase (decrease) during the period 15,526 (35,405)
Beginning balance 24,144
58,556
Ending balance $ 39,670
$ 23,151
See Notes to Condensed Consolidated Financial Statements.
3
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 or Harcourt General) 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 include the accounts of Harcourt General and its majority-owned subsidiaries. The Company's consolidated financial statements for the three and nine months ended July 31, 1999 have been restated to reflect the specialty retail operations as a discontinued operation.
Harcourt General is a leading global multiple-media publisher and service provider for the educational, assessment, training and professional information markets. All significant intercompany accounts and transactions are eliminated. Except as indicated,
amounts reflected in the consolidated financial statements or disclosed in the notes to the consolidated financial statements relate to the Company's continuing operations, and prior period amounts have been restated and reclassified to conform with the
current presentation.
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. Earnings per share
Pursuant to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share," the earnings from continuing operations used in computing basic and diluted earnings per share is as presented in the table below:
Add: dividends on assumed
conversion of Series A
Cumulative Convertible
Stock and other 681
610 223 201
Add: effect of equity
swap agreement 1,078 -
1,078 -
Earnings from continuing
operations for
computation of diluted
EPS $99,930
$ 50,519 $173,492 $ 122,188
4
HARCOURT GENERAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Earnings per share (continued)
Nine Months Ended Three
Months Ended
July 31, July 31, July
31, July 31,
2000 199
9 2000 1999
(In Thousands)
Shares for computation of
basic EPS 71,541 71,093 72,653
71,133
Add: assumed conversion of
Series A Cumulative
Convertible Stock 1,072 989 1,050
974
Add: effect of dilutive stock
options and nonvested stock
under common stock
incentive plans 338 78 608
78
Less: effect of
equity swap agreement (203) - (525)
-
Shares for computation of
diluted EPS 72,748 72,160 73,786
72,185
In the three months ended July 31, 2000, all outstanding options to purchase shares of common stock were included in the computation of diluted EPS. In the nine months ended July 31, 2000, options to purchase 745,785 shares of common stock were not included in the computation of diluted EPS because the exercise prices of those options were greater than the average market price of the shares. In the nine months and three months ended July 31,1999, options to purchase 604,600 shares of common stock were not included in the computation of diluted EPS because the exercise prices of those options were greater than the average market price of the shares.
3. Comprehensive income
Total comprehensive income amounted to $119.3 million and $99.9 million for the nine months ended July 31, 2000 and 1999, respectively. Comprehensive income differs from net earnings primarily due to foreign currency translation adjustments and unrealized gains or losses, net of taxes, on the Company's available-for-sale securities, less the reclassification for realized gains or losses included in net earnings.
4. Operating segments
The Company has four reportable segments: Education Group, Higher Education Group, Corporate and Professional Services Group and Worldwide Scientific, Technical and Medical (STM) Group. The Education Group consists of the Company's K-12 and supplemental and trade publishing operations. The Higher Education Group includes college, distance learning and graduate test preparation businesses. The Corporate and Professional Services Group is comprised of testing and related services, career counseling and technology-based IT and human resources training. The Worldwide STM Group includes the Company's scientific, technical and medical publishing businesses and its international publishing and distribution operations. Other includes unallocated corporate items. Interest expense is not allocated to segments.
5
HARCOURT GENERAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Operating segments (continued)
The following tables set forth the information for the Company's reportable segments for the nine months and three months ended July 31:
(In thousands)
Nine Months Ended Three Months Ended
July 31, July 31, July 31, July 31,
2000 1999 2000 1999
REVENUES:
Education Group $ 512,571 $ 369,037
$388,265 $263,296
Higher Education Group 263,834 261,213 128,800
120,365
Corporate and Professional Services Group 382,471 337,439 159,832 129,222
Worldwide STM Group 525,526 491,369
194,285 180,137
Total $1,684,402
$1,459,058 $871,182 $693,020
OPERATING EARNINGS:
Education Group $ 92,867 $ 39,778
$188,103 $125,901
Higher Education Group 33,061 27,744 43,043
38,129
Corporate and Professional Services Group 12,141 18,907 11,652 12,826
Worldwide STM Group 89,247 69,347
49,435 42,939
Other (17,480)
(16,205) (6,473) (5,448)
Total $ 209,836
$ 139,571 $285,760 $214,347
5. Acquisition liabilities
At October 31, 1999, $56.4 million of acquisition liabilities was included in other current liabilities representing facility exit costs of $32.0 million, severance and employee benefit obligations of $8.3 million, unfulfilled contractual obligations of $6.1 million and other obligations of $10.0 million. In the nine months ended July 31, 2000, approximately $11.2 million of payments were charged against these acquisition liabilities. There was no change in estimate during the nine months ended July 31, 2000. At July 31, 2000, $45.2 million of acquisition liabilities is included in other current liabilities consisting primarily of facility exit costs of $29.9 million, severance and employee benefit obligations of $4.8 million, unfulfilled contractual obligations of $6.0 million and other obligations of $4.5 million.
6. Issuance of common stock
On April 20, 2000 the Company issued 1,372,213 shares of common stock at a price of $36.44 per share in a private placement to Salomon Smith Barney Inc., acting as agent for Citibank, N.A. The net proceeds of $50 million were used to partially finance the repayment of the Company's subordinated notes, which matured in March 2000.
Concurrently with the offering, the Company entered into an equity swap agreement with Citibank, N.A. for a notional amount of $50.0 million. This agreement will be settled in either cash or additional shares, solely at the Company's option, based on the price of the Company's stock at the settlement dates. The agreement has a maturity date of October 22, 2000 and provides for earlier settlement in part or in full at the Company's option.
6
HARCOURT GENERAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Issuance of common stock (cont.)
The Company does not hold or issue derivative financial instruments for trading purposes. The Company is exposed to credit loss in the event of nonperformance by Citibank, N.A. on the equity swap; however, nonperformance is considered remote. The common stock issued and the related equity swap are accounted for together as an equity instrument. At settlement, the fair value of the equity swap will be recorded as an adjustment to paid-in capital.
7. Acquisitions
In May 2000, the Company completed the acquisition of the remaining one-third interest in MD Consult, an Internet clinical information source for physicians, for a cash purchase price of approximately $10.0 million. Harcourt General is now the sole owner of MD Consult. The acquisition has been accounted for by the purchase method of accounting. The excess of cost over estimated fair value of net assets acquired of $10.0 million was allocated to goodwill, which is amortized on a straight-line basis over 15 years.
In July 2000, the Company completed the acquisition of the remaining eight percent minority interest in NETg, a technology-based training business for information technology professionals, from the Gartner Group for a cash purchase price of approximately $36.0 million. As a result, Harcourt General is the sole owner of NETg. The acquisition has been accounted for under the purchase method of accounting. The excess of cost over estimated fair value of net assets acquired of $3.2 million was allocated to goodwill, which is amortized on a straight-line basis over 15 years.
8. Sale of Professional Publishing Business
In May 2000, the Company sold its professional publishing business for approximately $21.0 million in cash. The Company recorded a gain of $15.5 million, which is included in investment and other income.
9. Contingencies
In December 1993, the Company spun off its theatre operations to GC Companies, Inc. ("GCC"). Under the Reimbursement and Security Agreement between GCC and the Company, GCC granted to the Company a security interest in the stock of certain of its theatre subsidiaries to secure GCC's obligation to indemnify the Company from any losses which the Company may incur due to its secondary liability for theatre leases which were transferred to GCC as part of the spin-off. In addition, GCC agreed to certain financial covenants under the Reimbursement and Security Agreement. As of July 31, 2000, GCC's aggregate future rental payments due under theatre leases on which the Company is secondarily liable amounted to approximately $355 million.
7
HARCOURT GENERAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Contingencies (cont.)
The Company has waived certain financial covenants contained in the Reimbursement and Security Agreement and certain of GCC's other creditors have waived certain financial covenants contained in their agreements with GCC as of July 31, 2000. The Company believes that if GCC is unable to reach agreement with its creditors on acceptable amendments to such agreements, GCC will not be in compliance on October 31, 2000 with certain financial covenants contained in these agreements. There can be no assurance that GCC, the Company and GCC's creditors will be able to reach agreement on acceptable amendments to their existing agreements, or that GCC will be able to refinance any of its indebtedness or raise additional capital to repay any or all of such indebtedness.
In light of the foregoing, the Company anticipates that GCC may need to actively consider strategic alternatives, including a potential restructuring, recapitalization, bankruptcy reorganization or the sale of certain assets. The Company cannot predict the outcome of GCC's current financial situation, nor can the Company currently estimate its ultimate exposure under the theatre leases for which the Company is secondarily liable. Accordingly, no provision has been recorded in the financial statements. However, based on a number of factors, the Company believes that its ultimate liability will be significantly less than the aggregate future rental payments noted above. In the event GCC were subject to a bankruptcy reorganization, the Company believes the factors that could reduce its ultimate liability would include, but not be limited to, the following: the number of leases that would be rejected by GCC in a bankruptcy reorganization proceeding; the tax deductibility of the Company's payments pursuant to its liability for the leases; the Company's ability to mitigate its exposure under the leases for which it is liable; the Company's potential recovery of a portion of its liability for the leases from GCC; and the extended period of time over which the Company's liability for the lease obligations could be payable.
10. Strategic Alternatives
In June 2000, the Company announced that it has retained Goldman, Sachs & Co. to explore a range of strategic alternatives to enhance shareholder value, including the possible sale of the Company. There can be no assurance that a transaction will be consummated.
8
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table illustrates revenues and operating earnings by business segment for the nine months and three months ended July 31.
(In thousands)
; Nine Months Ended Three Months Ended
July 31, July 31, July 31, July 31,
2000 1999 2000 1999
REVENUES:
Education Group $ 512,571 $ 369,037
$388,265 $263,296
Higher Education Group 263,834 261,213 128,800
120,365
Corporate and Professional Services Group 382,471 337,439 159,832 129,222
Worldwide STM Group 525,526 491,369
194,285 180,137
Total $1,684,402
$1,459,058 $871,182 $693,020
OPERATING EARNINGS:
Education Group $ 92,867 $ 39,778
$188,103 $125,901
Higher Education Group 33,061 27,744 43,043
38,129
Corporate and Professional Services Group 12,141 18,907 11,652 12,826
Worldwide STM Group 89,247 69,347
49,435 42,939
Other (17,480)
(16,205) (6,473) (5,448)
Total $ 209,836
$ 139,571 $285,760 $214,347
Nine Months Ended July 31, 2000 Compared to Nine Months Ended July 31, 1999
Education Group
Revenues from the Education Group increased $143.5 million or 38.9% to $512.6 million in the first nine months of fiscal 2000. The increase was primarily attributable to higher elementary science, social studies and reading program sales, secondary reading program sales and higher sales at Steck-Vaughn, the Group's supplemental educational publishing business.
Operating earnings from the Education Group increased $53.1 million or 133.5% to $92.9 million in the first nine months of fiscal 2000. The increase was primarily due to the higher elementary and secondary program revenues. Operating earnings also increased as a result of lower amortization of intangible assets and lower administrative expenses.
Higher Education Group
Revenues from the Higher Education Group increased $2.6 million or 1.0% to $263.8 million in the first nine months of fiscal 2000. The increase was primarily due to higher sales of college titles, offset in part by the transfer of the Canadian business of Harcourt Learning Direct to the Worldwide STM Group as well as the 1999 sale of the Conviser CPA Review business.
Operating earnings from the Higher Education Group increased $5.3 million or 19.2% to $33.1 million in the first nine months of fiscal 2000. The increase was primarily due to the higher sales in the college business and lower operating expenses at Harcourt Learning Direct.
9
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Corporate and Professional Services Group
Revenues from the Corporate and Professional Services Group increased $45.0 million or 13.3% to $382.5 million in the nine months ended July 31, 2000. The increase was primarily attributable to higher scoring revenues at The Psychological Corporation, the Group's educational and clinical assessment business. To a lesser extent, the higher revenues resulted from increased sales at DBM, the Group's outplacement business.
Operating earnings from the Corporate and Professional Services Group decreased $6.8 million or 35.8% to $12.1 million. The decrease was primarily due to increased course development costs at NETg, as well as higher operating expenses at Harcourt Assessment Systems, Inc. related to expansion initiatives.
Worldwide Scientific, Technical and Medical (STM) Group
Revenues from the Worldwide STM Group increased $34.2 million or 7.0% to $525.5 million in the nine months ended July 31, 2000. The increase was primarily due to higher book sales at Harcourt Health Sciences and higher journal sales at Academic Press, the Group's scientific publisher.
Operating earnings from the Worldwide STM Group increased $19.9 million or 28.7% to $89.2 million in the nine months ended July 31, 2000. The increase was primarily due to the higher revenues at Harcourt Health Sciences, as well as lower general and administrative expenses resulting from the integration of Mosby. Higher journal sales at Academic Press also contributed to the increase.
Investment and other income
Investment and other income increased $14.0 million to $26.0 million in the nine months ended July 31, 2000. The increase resulted primarily from a gain of $15.5 million from the sale of the Company's professional publishing unit and a gain of $7.6 million from the sale of securities in the nine months ended July 31, 2000, as compared to a gain of $6.4 million from the sale of a business and a gain of $3.0 million from the sale of securities in the nine months ended July 31, 1999.
Interest expense
Interest expense decreased $.8 million to $78.6 million in the nine months ended July 31, 2000 primarily due to lower average outstanding borrowings.
Three Months Ended July 31, 2000 Compared to Three Months Ended July 31, 1999
Education Group
Revenues from the Education Group increased $125.0 million or 47.5% to $388.3 million in the three months ended July 31, 2000. The increase was primarily attributable to higher elementary science, social studies and reading program sales, as well as higher secondary reading sales.
Operating earnings from the Education Group increased $62.2 million or 49.4% to $188.1 million in the three months ended July 31, 2000. The increase was primarily due to the higher elementary and secondary program revenues and lower operating expenses at Steck-Vaughn.
10
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three Months Ended July 31, 2000 Compared to Three Months Ended July 31, 1999 (continued)
Higher Education Group
Revenues from the Higher Education Group increased $8.4 million or 7.0% to $128.8 million in the three months ended July 31, 2000. The increase was primarily due to higher sales of college titles, offset in part by the transfer of Harcourt Learning Direct's Canadian business to the Worldwide STM Group and the 1999 sale of the Conviser CPA Review business.
Operating earnings increased $4.9 million or 12.9% to $43.0 million in the three months ended July 31, 2000. The increase resulted primarily from higher revenues in the Group's college publishing business and lower operating expenses at Harcourt Learning Direct.
Corporate and Professional Services Group
Revenues from the Corporate and Professional Services Group increased $30.6 million or 23.7% to $159.8 million in the three months ended July 31, 2000. The increase was primarily attributable to higher scoring revenues at The Psychological Corporation and, to a lesser extent, higher sales at NETg.
Operating earnings at the Corporate and Professional Services Group were $11.7 million compared to $12.8 million in the prior year period. The decrease was primarily due to higher operating expenses at Harcourt Assessment Systems, Inc., as well as increased course development costs at NETg.
Worldwide STM Group
Revenues from the Worldwide STM Group increased $14.1 million or 7.9% to $194.3 million in the three months ended July 31, 2000. The increase was primarily due to higher book sales at Harcourt Health Sciences and higher journal sales at Academic Press.
Operating earnings from the Worldwide STM Group increased $6.5 million or 15.1% to $49.4 million in the three months ended July 31, 2000. The increase was primarily due to higher revenues at Harcourt Health Sciences and Academic Press as well as lower operating expenses at Academic Press.
Investment and other income
Investment and other income increased $9.1 million to $16.5 million in the three months ended July 31, 2000. The gain resulted primarily from a gain of $15.5 million from the sale of the company's professional publishing unit, as compared to a gain of $6.4 million from the sale of a business in the prior year period.
Interest expense
Interest expense decreased $.3 million in the three months ended July 31, 2000 primarily due to a slightly lower effective interest rate.
11
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 nine months ended July 31, 2000 was $124.9 million compared to $144.7 million in the prior year period. The cash provided by the Company's operations and borrowings under its revolving credit facility was sufficient to fund working capital, capital expenditures and the Company's dividend requirements. The most significant item affecting working capital was a seasonal increase of $148.8 million in accounts receivable, reflecting significantly higher revenues.
Cash flows used by investing activities were $188.3 million for the nine months ended July 31, 2000, consisting primarily of expenditures for prepublication costs. Capital expenditures are expected to approximate $240.0 million in fiscal 2000. In the first nine months of fiscal 2000 the Company recorded proceeds from the sale of securities of $12.4 million and proceeds from the sale of a business of $21.0 million.
On April 20, 2000 the Company issued 1,372,213 shares of common stock at a price of $36.44 per share in a private placement to Salomon Smith Barney Inc., acting as agent for Citibank, N.A. The net proceeds of $50 million were used to partially finance the repayment of the Company's subordinated notes, which matured in March 2000. Concurrently with the offering, the Company entered into an equity swap agreement with Citibank, N.A. for a notional amount of $50.0 million. This agreement will be settled in either cash or additional shares, solely at the Company's option, based on the price of the Company's stock at the settlement dates. The agreement has a maturity date of October 22, 2000 and provides for earlier settlement in part or in full at the Company's option.
During the quarter the Company acquired the one-third minority interest of MD Consult for $10.0 million and the remaining 8% minority interest in NETg for $36.0 million. At July 31, 2000, the Company had $205.0 million available under its $750.0 million revolving credit agreement, which expires in July 2002. The Company used this facility as well as proceeds from its equity offering to repay subordinated notes of $125 million that matured in March 2000.
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.
In June 2000, the Company announced that it has retained Goldman, Sachs & Co. to explore a range of strategic alternatives to enhance shareholder value, including the possible sale of the Company. There can be no assurance that a transaction will be consummated.
12
HARCOURT GENERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Contingencies
In December 1993, the Company spun off its theatre operations to GC Companies, Inc. ("GCC"). Under the Reimbursement and Security Agreement between GCC and the Company, GCC granted to the Company a security interest in the stock of certain of its theatre subsidiaries to secure GCC's obligation to indemnify the Company from any losses which the Company may incur due to its secondary liability for theatre leases which were transferred to GCC as part of the spin-off. In addition, GCC agreed to certain financial covenants under the Reimbursement and Security Agreement. As of July 31, 2000, GCC's aggregate future rental payments due under theatre leases on which the Company is secondarily liable amounted to approximately $355 million.
The Company has waived certain financial covenants contained in the Reimbursement and Security Agreement and certain of GCC's other creditors have waived certain financial covenants contained in their agreements with GCC as of July 31, 2000. The Company believes that if GCC is unable to reach agreement with its creditors on acceptable amendments to such agreements, GCC will not be in compliance on October 31, 2000 with certain financial covenants contained in these agreements. There can be no assurance that GCC, the Company and GCC's creditors will be able to reach agreement on acceptable amendments to their existing agreements, or that GCC will be able to refinance any of its indebtedness or raise additional capital to repay any or all of such indebtedness.
In light of the foregoing, the Company anticipates that GCC may need to actively consider strategic alternatives, including a potential restructuring, recapitalization, bankruptcy reorganization or the sale of certain assets. The Company cannot predict the outcome of GCC's current financial situation, nor can the Company currently estimate its ultimate exposure under the theatre leases for which the Company is secondarily liable. Accordingly, no provision has been recorded in the financial statements. However, based on a number of factors, the Company believes that its ultimate liability will be significantly less than the aggregate future rental payments noted above. In the event GCC were subject to a bankruptcy reorganization, the Company believes the factors that could reduce its ultimate liability would include, but not be limited to, the following: the number of leases that would be rejected by GCC in a bankruptcy reorganization proceeding; the tax deductibility of the Company's payments pursuant to its liability for the leases; the Company's ability to mitigate its exposure under the leases for which it is liable; the Company's potential recovery of a portion of its liability for the leases from GCC; and the extended period of time over which the Company's liability for the lease obligations could be payable.
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 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.
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PART II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 1997 Incentive Plan, as amended.
10.2 1988 Stock Incentive Plan, as amended.
10.3(a-n) Termination Protection Agreements between the Company and
Richard A. Smith, Brian J. Knez, Robert A. Smith, John R. Cook,
Eric P. Geller, Kathleen A. Bursley, Peter Farwell, Paul F.
Gibbons, Gerald T. Hughes, Catherine N. Janowski, James P. Levy,
Gail S. Mann, Michael F. Panutich, and Paul J. Robershotte.
27.1 Financial data schedule
(b) Reports on Form 8-K.
On June 19, 2000, the Company filed a report on Form 8-K reporting
that the Company retained Goldman, Sachs & Co. to explore a range
of strategic alternatives to enhance shareholder value, including
the possible sale of the Company.
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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: September 14, 2000
/s/ John R. Cook
John R. Cook
Senior Vice President and
Chief Financial Officer
Date: September 14, 2000
/s/ Catherine N. Janowski
Catherine N. Janowski
Vice President and
Controller
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