10-Q 1 b38664hge10-q.txt HARCOURT GENERAL INC. 1 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, 2001 ----------------------------------------------------------- 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 6, 2001, 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 55,181,587 Class B Stock, $1.00 Par Value 18,110,840 2 HARCOURT GENERAL, INC. INDEX

3 HARCOURT GENERAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)

See Notes to Condensed Consolidated Financial Statements. 1 4 HARCOURT GENERAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands except for per share amounts)

See Notes to Condensed Consolidated Financial Statements. 2 5 HARCOURT GENERAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)

See Notes to Condensed Consolidated Financial Statements. 3 6 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 include the accounts of Harcourt General, Inc. (the Company or Harcourt General) and its majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated. Harcourt General is a leading global multiple-media publisher and service provider for the educational, assessment, training and professional information markets. 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. PENDING SALE OF THE COMPANY On October 27, 2000, the Company announced that it had entered into an agreement and plan of merger with U.S. affiliates of Reed Elsevier plc, a London-based worldwide publisher ("Reed"), to sell the Company for $59.00 per common share and $77.29 per share of Series A Cumulative Convertible Stock in cash. The agreement provides for a cash tender offer, (on the condition that the number of shares tendered represent at least a majority in voting power (on a fully diluted basis) of the outstanding common stock), and following completion of the tender offer, a second-step merger in which the remaining shares of the Company will be exchanged for the same cash consideration. Reed has entered into an agreement with The Thomson Corporation ("Thomson") pursuant to which it has agreed to sell portions of the Company's business to Thomson immediately after consummation of the merger. Completion of the transaction is subject to clearance of the tender offer and the Thomson transaction under applicable antitrust laws, as well as other customary closing conditions. 3. 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 earnings per share (EPS) are as follows:

4 7 HARCOURT GENERAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. LOSS PER SHARE (CONTINUED) The shares for the computation of both basic and diluted loss per share are 72,847,000 and 71,186,000 shares for the three months ended January 31, 2001 and 2000, respectively. Options to purchase 3,251,914 and 3,397,514 shares of common stock and the assumed conversion of 706,000 and 813,000 shares of Series A Cumulative Convertible Stock were not included in the computation of diluted loss per share because of the net losses in the first quarter of fiscal 2001 and 2000, respectively. 4. COMPREHENSIVE LOSS Total comprehensive loss amounted to $41.3 million and $39.6 million for the three months ended January 31, 2001 and 2000, respectively. Comprehensive loss differs from net loss primarily due to unrealized gains or losses on the Company's investment in The Neiman Marcus Group, Inc. 5. 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. The Company's senior management evaluates the performance of the Company's assets on a consolidated basis. Therefore, separate financial information for the Company's assets on a segment basis is not presented. The following tables set forth the information for the Company's reportable segments for the three months ended January 31: (In thousands)

5 8 HARCOURT GENERAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. ACQUISITION LIABILITIES The roll-forward of the acquisition reserves since October 31, 2000 is as follows:

7. SETTLEMENT OF EQUITY SWAP AGREEMENT 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 $50.0 million were used to partially finance the repayment of the Company's 9.5% subordinate 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. During the first quarter of fiscal 2001, the Company elected to settle the agreement in cash, and received $23.6 million based on the price of the Company's stock at the settlement dates. The common stock issued and the related equity swap were accounted for together as an equity instrument. At settlement, the fair value of the equity swap was recorded as an adjustment to paid-in capital. 8. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING In the first quarter in fiscal 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, which amended certain provisions of SFAS No. 133 to clarify four areas causing difficulties in implementation. The adoption of these standards did not have a material effect on the Company's consolidated financial position or results of operations. 6 9 HARCOURT GENERAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 2001 COMPARED TO THREE MONTHS ENDED JANUARY 31, 2000 The following table illustrates revenues and operating earnings (loss) by business segment for the three months ended January 31:

EDUCATION GROUP Revenues from the Education Group increased $4.8 million, or 9.8%, in the first three months of fiscal 2001. The increase was primarily attributable to higher K-12 science and social studies program sales. The Education Group incurred an operating loss of $65.8 million in the first quarter of fiscal 2001, increasing by $7.3 million from a loss of $58.6 million in the first three months of fiscal 2000. The larger loss was primarily as a result of higher selling, marketing and sampling expenses by the Company's K-12 publishers. HIGHER EDUCATION GROUP Revenues from the Higher Education Group decreased $6.8 million or 8.0% to $77.2 million in the first three months of fiscal 2001 from $83.9 million in the first three months of fiscal 2000. The decrease was primarily due to lower sales of college product and, to a lesser extent, the sale of the professional publishing business in fiscal 2000. Operating earnings from the Higher Education Group decreased $1.4 million, or 15.6%, in the first quarter of fiscal 2001. The decrease resulted primarily from the lower sales of college product, offset in part by improved profitability at Harcourt Learning Direct, the Group's distance learning business. 7 10 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 15.6% to $117.6 million in the first quarter of fiscal 2001 from $101.8 million in the prior year. The increase was primarily attributable to higher scoring and consulting revenues at The Psychological Corporation, the Group's testing and assessment business. The Corporate and Professional Services Group incurred an operating loss of $6.0 million, increasing by $4.7 million from a loss of $1.3 million in the prior year period. The increased loss was primarily due to higher product development, selling and marketing expenses at NETg, the Group's technology-based training business. WORLDWIDE SCIENTIFIC, TECHNICAL AND MEDICAL (STM) GROUP Revenues from the Worldwide STM Group decreased 5.8% to $158.0 million in the first quarter of fiscal 2001 from $167.8 million in the prior year. The decrease was primarily due to lower journal and book sales at Harcourt Health Sciences. The lower journal revenues resulted from the discontinuance of a medical journal in fiscal 2000 and lower book sales due to a switch in distribution from wholesalers to direct retail channels. Operating earnings from the Worldwide STM Group decreased $0.9 million, or 4.2%, in the first quarter of fiscal 2001. The decrease was primarily due to lower revenues at Harcourt Health Sciences, offset by savings from the discontinued medical journal, as well as lower shipping expenses. CORPORATE EXPENSES Corporate expenses increased $4.2 million, or 74.6%, to $9.9 million in the first three months of fiscal 2001. The increase reflects professional fees incurred relative to the anticipated sale of the Company. INVESTMENT AND OTHER INCOME Investment and other income decreased $7.4 million to $1.1 million in the first quarter of fiscal 2001. Investment and other income in the first quarter of 2000 included a $7.6 million gain from the sale of securities. INTEREST EXPENSE Interest expense decreased $2.0 million, or 7.8%, in the first quarter of fiscal 2001. The decrease was due to both a lower effective interest rate and lower average outstanding borrowings. LIQUIDITY AND CAPITAL RESOURCES The following discussion analyzes liquidity and capital resources by operating, investing and financing activities as presented in the Company's condensed consolidated statements of cash flows. Cash provided by operating activities for the quarter ended January 31, 2001 was $103.4 million compared to $167.5 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 decrease of $145.0 million in accounts receivable. 8 11 HARCOURT GENERAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Cash flows used for investing activities were $53.0 million for the quarter ended January 31, 2001 and consisted primarily of expenditures for prepublication costs. Capital expenditures are expected to approximate $265 million in fiscal 2001. During the quarter, the Company settled its equity swap agreement for a total of $23.6 million in cash, based on the price of the Company's common stock at settlement dates. At January 31, 2001, the Company had $455.0 million available under its $750.0 million revolving credit agreement, which expires in July 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. On October 27, 2000, the Company announced that it had entered into an agreement and plan of merger with U.S. affiliates of Reed Elsevier plc, a London-based worldwide publisher ("Reed"), to sell the Company for $59.00 per common share and $77.29 per share of Series A Cumulative Convertible Stock in cash. The agreement provides for a cash tender offer, (on the condition that the number of shares tendered represent at least a majority in voting power (on a fully diluted basis) of the outstanding common stock), and following completion of the tender offer, a second-step merger in which the remaining shares of the Company will be exchanged for the same cash consideration. Reed has entered into an agreement with The Thomson Corporation ("Thomson") pursuant to which it has agreed to sell portions of the Company's business to Thomson immediately after consummation of the merger. Completion of the transaction is subject to clearance of the tender offer and the Thomson transaction under applicable antitrust laws, as well as other customary closing conditions. 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. 9 12 PART II Item 6. Exhibits and Reports on Form 8-K. (a) EXHIBITS. None. (b) REPORTS ON FORM 8-K. On November 15, 2000 the Company filed a report on Form 8-K announcing the signing of an Agreement and Plan of Merger with Reed Elsevier Inc. ("Reed Elsevier") and REH Mergersub Inc. ("Purchaser") and related matters. On November 20, 2000 the Company filed a report on Form 8-K to report that (i) the Antitrust Division of the Department of Justice ("DOJ") had extended the waiting period applicable to the purchase of Company stock in order to request additional information relevant to Purchaser's tender offer, and (ii) the Company, The Thomson Corporation ("Thomson") and Reed Elsevier had each filed a notification and report form with the DOJ and the Federal Trade Commission with respect to the transaction contemplated by the Sale and Purchase Agreement between Thomson and Reed Elsevier. 10 13 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 16, 2001 /s/ John R. Cook ----------------------------------- John R. Cook Senior Vice President and Chief Financial Officer Date: March 16, 2001 /s/ Catherine N. Janowski ----------------------------------- Catherine N. Janowski Vice President and Controller 11

HARCOURT GENERAL INC 10-Q