<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended October 31, 1997
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 (IRS Employer
incorporation or organization) Identification No.)
27 Boylston Street, Chestnut Hill, Massachusetts 02167
(Address of principal executive offices) (Zip Code)
Registrant's telephone number and area code: 617-232-8200
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
- -------------------------------- ------------------------
Common Stock, $1.00 par value New York Stock Exchange
Series A Cumulative Convertible New York Stock Exchange
Stock, $1.00 par value
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. [X]
<PAGE> 2
The aggregate market value of the Common Stock held by
non-affiliates of the registrant was $2,670,565,412 on January 15, 1998.
There were 50,765,930 shares of Common Stock, 20,021,600 shares of
Class B Stock and 1,122,063 shares of Series A Cumulative Convertible Stock
outstanding as of January 15, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1997 Annual Report to Stockholders are
incorporated by reference in Parts I, II and IV of this Report. Portions of the
Proxy Statement for the Annual Meeting of Stockholders to be held on March 13,
1998 are incorporated by reference in Part III of this Report.
<PAGE> 3
HARCOURT GENERAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I PAGE NO.
- ------ --------
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 8
PART III
Item 10. Directors and Executive Officers of the Registrant 8
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial
Owners and Management 10
Item 13. Certain Relationships and Related Transactions 10
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 10
Signatures S-1
</TABLE>
<PAGE> 4
PART I
ITEM 1. BUSINESS
The principal businesses of Harcourt General, Inc., a Delaware
corporation formed in 1950 (the "Company"), are publishing and educational
services conducted by Harcourt Brace & Company ("Harcourt Brace"), and specialty
retailing conducted by The Neiman Marcus Group, Inc. ("NMG"). The Company also
has operations in career transition and related professional services.
A. PUBLISHING AND EDUCATIONAL SERVICES.
GENERAL. Harcourt Brace, among the world's largest publishing
companies, publishes books, scholarly journals and related materials in both
print and electronic media for the educational, scientific, technical, medical,
professional and trade markets. As a result of the acquisition by the Company in
June 1997 of National Education Corporation, Harcourt Brace has expanded into
non-traditional educational market segments, including supplemental publishing,
information technology training, and distance education.
ACQUISITION AND INTEGRATION OF NATIONAL EDUCATION CORPORATION. In June
1997 the Company completed the acquisition of National Education Corporation
("NEC") for approximately $854.4 million. The Company currently is in the
process of integrating the three principal NEC businesses - ICS Learning Systems
("ICS"), Steck-Vaughn Company ("Steck- Vaughn"), and National Education Training
Group ("NETg") - into Harcourt Brace in order to maximize the benefits from
relationships and combinations among and between Harcourt Brace's existing
businesses and the acquired NEC businesses. In connection with that integration,
Harcourt Brace has created three new operating groups:
Education and Trade. The Education and Trade group includes
the operations of Harcourt Brace School; Holt, Rinehart and Winston; Harcourt
Brace College; Steck-Vaughn; and Harcourt Brace Trade. Harcourt Brace School
publishes textbooks and related instructional materials for kindergarten through
grade 8. Holt, Rinehart and Winston publishes instructional materials for grades
7 through 12. Harcourt Brace College publishes books and other materials for the
college and university market under the Harcourt Brace, Saunders and Dryden
Press imprints. Steck-Vaughn publishes supplemental educational materials used
in elementary, secondary and adult education. Harcourt Brace Trade publishes
children's books, general adult fiction and nonfiction hardcover books, and
trade paperbacks under the Harvest imprint.
Learning and Assessment. The Learning and Assessment group
includes the operations of NETg, ICS, The Psychological Corporation, Harcourt
Professional Education Group, and Archipelago Productions. NETg develops and
sells self-study information technology and related professional training
products and services which are delivered by CD-ROM, the internet, and corporate
intranets to information technology and human resources professionals and
end-users. ICS provides direct marketed distance learning opportunities in
vocational, degree and professional self-studies to consumers worldwide.
<PAGE> 5
The Psychological Corporation provides tests and related products and services
for educational, psychological, clinical and professional assessment and,
through its subsidiary Assessment Systems, provides computerized tests and
related services for business and professional credentialing and licensing.
Harcourt Professional Education Group conducts review courses under the BAR/BRI
name for individuals preparing for bar examinations, as well as live-lecture and
computer-based review courses for law and accounting examinations, and publishes
print and electronic information resources, including reference guides and
newsletters, for financial, legal and human resources professionals. Archipelago
Productions is a producer of multimedia educational products and is a developer
of distance learning programs.
Worldwide Scientific, Technical and Medical. The Worldwide
Scientific, Technical and Medical group includes the operations of W.B.
Saunders, Academic Press, Churchill Livingstone, and Harcourt Brace Publishers
International. W.B. Saunders publishes books, periodicals and electronic
products in the health sciences, and advertising-based newsletters for health
professionals. Academic Press publishes scholarly books and journals, in print
and electronic media, in the life, physical, social and computer sciences.
Churchill Livingstone is Europe's largest English-language medical publisher.
Harcourt Brace Publishers International is a newly established division,
reflecting the increased commitment by Harcourt Brace to both the international
distribution of its English language products and the publication of
adaptations, translations, and indigenous materials worldwide. In September 1996
Harcourt Brace Publishers International acquired the exclusive right to market
and sell the professional medical publications of Mosby-Year Book in most parts
of the world outside of the United States, and in fiscal 1997 completed the
acquisitions of both Doyma Libros (now Harcourt Brace de Espana), a leading
Spanish-language medical publisher, and Churchill Livingstone.
COMPETITION. Numerous companies compete in all of the markets in which
the Company's publishing and educational services businesses operate. The
Company believes that the principal competitive factors in connection with these
businesses are the breadth, quality, timeliness, and price of products and
services; customer service and support; the ability to acquire intellectual
property rights; editorial, marketing, and distribution capabilities; the
ability to maintain key vendor alliances; the reputation of the Company; and the
Company's financial and management resources.
B. SPECIALTY RETAILING.
The Company owns approximately 53% of the outstanding equity of NMG,
which operates Neiman Marcus Stores, Bergdorf Goodman and NM Direct.
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, as amended (the "Exchange Act"). On October 29, 1997, NMG filed an
Annual Report on Form 10-K with respect to its fiscal year ended August 2, 1997.
Set forth below is a brief description of the businesses of NMG. For further
information with respect to NMG, reference may be made to the NMG Annual Report
<PAGE> 6
on Form 10-K and to subsequent reports and other information filed by NMG from
time to time with the Securities and Exchange Commission.
NEIMAN MARCUS STORES. Neiman Marcus Stores is a high fashion specialty
retailer which offers primarily women's and men's apparel, fashion accessories,
and gifts. As of October 31, 1997, Neiman Marcus operated 30 stores in 27
cities. The average Neiman Marcus store size is 142,000 gross square feet and
the stores range in size from 90,000 gross square feet to 269,000 gross square
feet. Neiman Marcus opened new stores in Short Hills, New Jersey in August 1995,
King of Prussia, Pennsylvania in February 1996 and Paramus, New Jersey in August
1996. A new Neiman Marcus store in Honolulu's Ala Moana Center is currently
under construction and is expected to open in September 1998, and Neiman Marcus
plans to open new stores in Palm Beach, Florida in the fall of 1999, Coral
Gables, Florida in 2000, and Oyster Bay, New York in 2001. Neiman Marcus also
plans to open a new store in Plano, Texas in 2001 which will replace the
existing Prestonwood store near Dallas, and a new store at the Memorial City
Mall in Houston which will replace the existing Town & Country store in Houston.
BERGDORF GOODMAN. The core of Bergdorf Goodman's offerings includes
high end women's and men's apparel and unique fashion accessories from leading
designers. Bergdorf Goodman also features traditional and contemporary
decorative home accessories, precious jewelry, gifts and gourmet foods. NMG
operates two Bergdorf Goodman stores in Manhattan at 58th Street and Fifth
Avenue. The main Bergdorf Goodman store consists of 250,000 gross square feet
and offers high fashion women's apparel and accessories, home furnishings and
gifts. Bergdorf Goodman Men consists of 66,000 gross square feet and features
high end men's apparel and accessories. Bergdorf Goodman also operates a direct
marketing business.
NM DIRECT. NM Direct operates an upscale direct marketing business,
which primarily offers women's apparel under the Neiman Marcus name and, through
its Horchow catalogue, offers hard goods such as quality home furnishings,
tabletop, linens and decorative accessories to its domestic and international
customers. NM Direct also offers a broad range of more modestly priced items
through its Trifles and Grand Finale lines and annually publishes the world
famous Neiman Marcus Christmas Catalogue. In January 1998, NMG acquired The
Chef's Catalog, Inc., a leading direct marketer of gourmet cookware and other
high-end kitchenware.
COMPETITION. The specialty retail industry is highly competitive and
fragmented, and NMG competes with large specialty retailers, traditional and
better department stores, national apparel chains, designer boutiques,
individual specialty apparel stores and direct marketing firms. NMG competes for
customers principally on the basis of quality, assortment and presentation of
merchandise, customer service, sales and marketing programs and value, and it
competes for quality merchandise and assortment principally based on
relationships with designer resources and purchasing power. NMG's apparel
business is especially dependent upon its relationship with these designer
resources. Neiman Marcus Stores and Bergdorf Goodman also compete for customers
on the basis of store ambience, and for real estate opportunities principally on
the basis of their ability to attract customers. NM Direct competes principally
on the basis of quality, assortment and presentation of merchandise, customer
service, price and speed of delivery.
<PAGE> 7
C. PROFESSIONAL SERVICES.
The Company believes that its career transition business, Drake Beam
Morin, Inc. ("DBM"), is the world's leading organizational and individual
transition consulting firm. DBM assists organizations and individuals worldwide
in outplacement; career and transition management; and employee selection and
performance evaluation. The Company believes that the principal competitive
factors for DBM are quality of service, including the ability to respond
promptly to clients' needs for services, and price. The Company expects that its
DBM operations will become part of the Harcourt Brace Learning and Assessment
group during fiscal 1998.
D. DISCONTINUED OPERATIONS.
On June 30, 1995, NMG sold its Contempo Casuals subsidiary to The Wet
Seal, Inc. for approximately 250,000 shares of Wet Seal Class A Common Stock and
$100,000 in cash.
E. CERTAIN ADDITIONAL INFORMATION.
1. EMPLOYEES
<TABLE>
<CAPTION>
Number of Percentage of Employees
Number of Employees Who Covered by Collective
Employees Are Part-time Bargaining Agreements
--------- ------------- ---------------------
<S> <C> <C> <C>
Harcourt Brace
& Company
(including NEC) 6,000 200 4%
The Neiman
Marcus Group 12,000 1,400 1%
Drake Beam Morin 400 10 None
Corporate 100 None None
</TABLE>
The figures in the above table are approximate as of October 31,
1997. The Company believes that its relations with its employees are generally
good.
2. CAPITAL EXPENDITURES; SEASONALITY; LIQUIDITY; CAPITAL RESOURCES
For a review of the Company's financial results for fiscal 1997,
including information on capital expenditures, seasonality, liquidity, capital
resources and other financial information, reference is made to the
"Management's Discussion and Analysis of Financial Condition and Results of
<PAGE> 8
Operations" section on pages 23 through 27 of the Company's Annual Report to
Stockholders for the fiscal year ended October 31, 1997 (the "1997 Annual
Report"), which information is incorporated herein.
3. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information set forth under the heading "Additional Financial
Information" in Note 2 of the Notes to Consolidated Financial Statements on page
36 of the 1997 Annual Report is incorporated herein.
4. EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the heading "Executive Officers" in
Item 10 below is incorporated herein.
ITEM 2. PROPERTIES
The Company's corporate headquarters, as well as the corporate
headquarters for NMG and DBM, are located in leased facilities in Chestnut Hill,
Massachusetts, a suburb of Boston.
The operational headquarters for Harcourt Brace are located in Orlando,
Florida. At October 31, 1997, Harcourt Brace operated out of approximately 4.8
million square feet of office and distribution facilities throughout the world,
consisting of approximately 136,000 square feet of owned office facilities, 2.7
million square feet of leased office facilities, 1.3 million square feet of
owned distribution facilities, and 687,000 square feet of leased distribution
facilities.
NMG's operating divisions are headquartered in leased or owned
facilities in Dallas (Neiman Marcus Stores), New York City (Bergdorf Goodman),
and Irving, Texas (NM Direct). At October 31, 1997, the approximate square
footage used in NMG's operations was as follows:
<TABLE>
<CAPTION>
Owned
Subject to
Owned Ground Lease Leased Total
----- ------------ ------ -----
<S> <C> <C> <C> <C>
Stores ................... 348,000 1,934,000 2,298,000 4,580,000
Distribution, support
and office facilities and
clearance centers .. 1,154,000 0 591,000 1,745,000
</TABLE>
Leases for Neiman Marcus stores, including renewal options, range from
30 to 99 years. The lease on the Bergdorf Goodman main store expires in 2050 and
the lease on the Bergdorf Goodman Men's store expires in 2010, with two 10-year
renewal options. Leases are generally at fixed rentals, and a majority of leases
<PAGE> 9
provide for additional rentals based on sales in excess of predetermined levels.
NMG owns approximately 50 acres of land in Las Colinas, Texas, where its NM
Direct operations are located in a 690,000 square foot facility, and
approximately 34 acres of land in Longview, Texas where its National Service
Center is located in a 464,000 square foot facility. NMG operates five small
clearance centers which provide an outlet for the sale of marked down
merchandise from Neiman Marcus Stores, Bergdorf Goodman and NM Direct. These
facilities and clearance centers are included in the table above.
At October 31, 1997, DBM conducted its business from 63 leased offices
in 30 states and 23 leased offices in six other countries, and maintained a
network of licensed service providers in 26 other countries.
For additional information about the properties of the Company, see
Item 1 above and the information contained in Note 13 of the Notes to
Consolidated Financial Statements under the heading "Leases" on page 43 of the
1997 Annual Report, which is incorporated herein.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various suits and claims incidental to the
ordinary course of its business. The Company does not believe that the
disposition of any such suits or claims will have a material adverse effect on
the financial position or continuing operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The following information contained in the 1997 Annual Report is
incorporated herein:
(i) "Dividends per share" in Note 17 of the Notes to Consolidated
Financial Statements on page 46 of the 1997 Annual Report; and
(ii) "Stock Information" (including the accompanying table and text)
on page 50 of the 1997 Annual Report. In addition to the information
set forth therein with respect to the Company's Common Stock and Series
A Cumulative Convertible Stock, the Company's Class B Stock is subject
to significant restrictions on transfer and is not listed or traded on
any exchange or in any market. As of January 15, 1998, there were 1,673
record holders of Class B Stock. For further information with respect
to the Class B Stock, including the ownership by the family of Richard
A. Smith (the Chairman and Chief Executive Officer of the Company)
of 99.8% of the Class B stock, reference is made to the information
<PAGE> 10
contained in the Company's Proxy Statement for the 1998 Annual Meeting
of Stockholders under the heading "Stock Ownership of Certain
Beneficial Owners and Management."
ITEM 6. SELECTED FINANCIAL DATA
The response to this Item is contained in the 1997 Annual Report under
the caption "Five Year Summary (Unaudited)" on page 48 and is incorporated
herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The response to this Item is contained in the 1997 Annual Report under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 23 through 27 and is incorporated herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The market risk inherent in the Company's financial instruments and
position represents the potential loss arising from adverse changes in interest
rates. The Company does not enter into financial instruments for trading
purposes.
At October 31, 1997, the fair value of the Company's fixed-rate debt
was estimated at $1.02 billion using quoted market prices and comparable
publicly-traded issues. Such fair value exceeded the carrying value at October
31, 1997 by approximately $47.2 million. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 10% adverse change
in interest rates, and amounted to approximately $58.6 million at October 31,
1997.
Subsidiaries of the Company had approximately $314.0 million of
variable rate borrowings outstanding under revolving credit agreements, which
approximated fair value, at October 31, 1997. A hypothetical 10% adverse change
in interest rates for this variable rate debt would have an approximate $1.9
million negative effect on the Company's earnings and cash flows.
For additional information about the Company's financial instruments,
see Notes 1, 8 and 16 of the Notes to Consolidated Financial Statements,
beginning, respectively, on pages 33, 39, and 45 of the 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and supplementary data set forth
in Item 14 are incorporated herein.
<PAGE> 11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS
The response to this Item regarding the directors of the Company and
compliance with Section 16(a) of the Securities Exchange Act of 1934 by the
Company's officers and directors is contained in the Proxy Statement for the
1998 Annual Meeting of Stockholders under the captions "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" and is
incorporated herein.
B. EXECUTIVE OFFICERS
Below is the name, age and principal occupations for the last five
years of each current executive officer of the Company. All such persons have
been elected to serve until the next annual election of officers and their
successors are elected or until their earlier resignation or removal.
Richard A. Smith - 73
Chairman of the Company and of The Neiman Marcus Group, Inc.; Chief
Executive Officer of the Company and of The Neiman Marcus Group, Inc.
since January 15, 1997 and prior to December 1991; Chairman, President
(until November 1, 1995) and Chief Executive Officer of GC Companies,
Inc. since December 1993; Director of The Neiman Marcus Group, Inc. and
GC Companies, Inc. Mr. Smith is the father of Robert A. Smith and the
father-in-law of Brian J. Knez, who are Presidents and Co-Chief
Operating Officers and directors of the Company. Mr. Smith is the uncle
of Jeffrey R. Lurie, a director of the Company.
Robert A. Smith - 38
President and Co-Chief Operating Officer of the Company and President
and Chief Operating Officer of The Neiman Marcus Group, Inc. since
January 15, 1997; Group Vice President of the Company and of The Neiman
Marcus Group, Inc. prior thereto; President and Chief Operating Officer
of GC Companies, Inc. since November 1995. Director of The Neiman
Marcus Group, Inc. Mr. Smith is the son of Richard A. Smith, Chairman
and Chief Executive Officer of the Company, the brother-in-law of Brian
J. Knez, who is also President and Co-Chief Operating Officer and a
director of the Company, and the cousin of Jeffrey R. Lurie, a director
of the Company.
<PAGE> 12
Brian J. Knez - 40
President and Co-Chief Operating Officer of the Company since January
15, 1997; President and Chief Executive Officer of Harcourt Brace &
Company since May 1995; President of the Scientific, Technical, Medical
and Professional Group of Harcourt Brace from 1993 to May 1995; Group
Vice President of the Scientific, Technical and Medical Group of
Harcourt Brace from 1991 to 1993; Director of The Neiman Marcus Group,
Inc. and Open Market, Inc. Mr. Knez is the son-in-law of Richard A.
Smith, Chairman and Chief Executive Officer of the Company, and the
brother-in-law of Robert A. Smith, who is also President and Co-Chief
Operating Officer and a director of the Company.
John R. Cook - 56
Senior Vice President and Chief Financial Officer of the Company and of
The Neiman Marcus Group, Inc.; Director of The Neiman Marcus Group,
Inc.
Eric P. Geller - 50
Senior Vice President, General Counsel and Secretary of the Company and
of The Neiman Marcus Group, Inc.
Peter Farwell - 54
Vice President - Corporate Relations of the Company and of The Neiman
Marcus Group, Inc.
Paul F. Gibbons - 46
Vice President and Treasurer of the Company and of The Neiman Marcus
Group, Inc.
Gerald T. Hughes - 41
Vice President-Human Resources of the Company and of The Neiman Marcus
Group, Inc. since June 1994; Associate General Counsel of the Company
and of The Neiman Marcus Group, Inc. with responsibility for labor and
employment matters prior thereto.
Catherine N. Janowski - 37
Vice President and Controller of the Company and of The Neiman Marcus
Group, Inc. since November 1997. Director, Corporate Accounting of the
Company and of The Neiman Marcus Group, Inc. from August 1993 until
November 1997. Manager, Corporate Accounting and International
Financial Analysis of Ocean Spray Cranberries, Inc. prior thereto.
Michael F. Panutich - 49
Vice President - General Auditor of the Company and of The Neiman
Marcus Group, Inc. since June 1993; Vice President - Accounting of the
Company and of The Neiman Marcus Group, Inc. prior thereto.
<PAGE> 13
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is contained in the Proxy Statement for the
1998 Annual Meeting of Stockholders under the captions "Directors'
Compensation", "Executive Compensation" and "Transactions Involving Management"
and is incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The response to this Item is contained in the Proxy Statement for the
1998 Annual Meeting of Stockholders under the caption "Stock Ownership of
Certain Beneficial Owners and Management" and is incorporated herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is contained in the Proxy Statement for the
1998 Annual Meeting of Stockholders under the captions "Executive Compensation"
and "Transactions Involving Management" and is incorporated herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
14(a)(1) FINANCIAL STATEMENTS
The documents listed below are incorporated herein by reference
to the Company's 1997 Annual Report to Shareholders:
Consolidated Balance Sheets - October 31, 1997 and 1996.
Consolidated Statements of Operations for the fiscal years
ended October 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the fiscal years
ended October 31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the
fiscal years ended October 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
<PAGE> 14
14(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The document and schedule listed below are filed as part of this
Form 10-K:
<TABLE>
<CAPTION>
Page In
Form 10-K
---------
<S> <C>
Independent Auditors' Report on Consolidated Financial
Statement Schedule F-1
Schedule VIII - Valuation and Qualifying Accounts
and Reserves F-2
</TABLE>
All other schedules for which provision is made in the applicable
regulations of the Securities and Exchange Commission have been omitted because
the information is disclosed in the Consolidated Financial Statements or because
such schedules are not required or are not applicable.
14(a)(3) EXHIBITS
The exhibits filed as part of this Annual Report are listed in the
Exhibit Index immediately preceding the exhibits. The Company has identified
with an asterisk in the Exhibit Index each management contract and compensation
plan filed as an exhibit to this Form 10-K in response to Item 14(c) of Form
10-K.
14(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the quarter ended
October 31, 1997.
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HARCOURT GENERAL, INC.
By: S/ RICHARD A. SMITH
------------------------------
Richard A. Smith, Chairman
and Chief Executive Officer
Dated: January 28, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the following capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE
OFFICER:
S/RICHARD A. SMITH Chairman and Chief January 28, 1998
- ------------------------------ Executive Officer
Richard A. Smith
PRINCIPAL FINANCIAL
OFFICER:
S/JOHN R. COOK Senior Vice President and January 28, 1998
- --------------------------- Chief Financial Officer
John R. Cook
PRINCIPAL ACCOUNTING
OFFICER:
S/CATHERINE N. JANOWSKI Vice President and January 28, 1998
- --------------------------- Controller
Catherine N. Janowski
</TABLE>
S-1
<PAGE> 16
<TABLE>
<CAPTION>
DIRECTORS:
----------
<S> <C>
S/WILLIAM F. CONNELL January 28, 1998
- ---------------------------
William F. Connell
January , 1998
- ---------------------------
Gary L. Countryman
S/JACK M. GREENBERG January 28, 1998
- ---------------------------
Jack M. Greenberg
S/BRIAN J. KNEZ January 28, 1998
- ---------------------------
Brian J. Knez
S/JEFFREY R. LURIE January 28, 1998
- ---------------------------
Jeffrey R. Lurie
S/LYNN MORLEY MARTIN January 14, 1998
- ---------------------------
Lynn Morley Martin
S/MAURICE SEGALL January 28, 1998
- ---------------------------
Maurice Segall
S/ROBERT A. SMITH January 28, 1998
- ---------------------------
Robert A. Smith
S/PAULA STERN January 14, 1998
- ---------------------------
Paula Stern
S/HUGO UYTERHOEVEN January 21, 1998
- ---------------------------
Hugo Uyterhoeven
S/CLIFTON R. WHARTON, JR. January 28, 1998
- ---------------------------
Clifton R. Wharton, Jr.
</TABLE>
S-2
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Harcourt General, Inc.
Chestnut Hill, Massachusetts
We have audited the consolidated financial statements of Harcourt General, Inc.
and its subsidiaries (the "Company") as of October 31, 1997 and 1996, and for
each of the three years in the period ended October 31, 1997, and have issued
our report thereon dated December 8, 1997. Such consolidated financial
statements and report are included in the Company's 1997 Annual Report to
Shareholders and are incorporated herein by reference. Our audits also included
the consolidated financial statement schedule of the Company listed in Item
14(a)(2). The consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 8, 1997
F-1
<PAGE> 18
SCHEDULE VIII
HARCOURT GENERAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
THREE YEARS ENDED OCTOBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-----------------------
Charged
Balance at Charged to to Other
Beginning Costs and Accounts- Deductions- Balance at
Description of Period Expenses Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1997
Allowance for doubtful accounts $15,132 13,485 13,775(B) 10,374(C) $32,018
(deducted from accounts receivable)
Allowance for book returns (A) $53,189 102,175 3,915(B) 93,368(D) $65,911
(deducted from accounts receivable)
YEAR ENDED OCTOBER 31, 1996
Allowance for doubtful accounts $17,897 5,405 - 8,170(C) $15,132
(deducted from accounts receivable)
Allowance for book returns (A) $49,403 94,182 (94) 90,302(D) $53,189
(deducted from accounts receivable)
YEAR ENDED OCTOBER 31, 1995
Allowance for doubtful accounts $13,492 8,829 - 4,424(C) $17,897
(deducted from accounts receivable)
Allowance for book returns (A) $49,091 82,548 437 82,673(D) $49,403
(deducted from accounts receivable)
</TABLE>
(A) Reflects gross allowance netted against accounts receivable. Reserves for
returns to inventory and recovery of royalties payable are netted
directly against those balances and are not material.
(B) Reflects additions to the allowance from acquisitions during the year.
(C) Write-off of uncollectible accounts net of recoveries.
(D) Books actually returned during the year.
F-2
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
3.1 Restated Certificate of Incorporation of the Company,
incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 30, 1997.
3.2 By-Laws of the Company, as amended, incorporated
herein by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1991.
4.1 Indenture, dated as of May 1, 1987, between the Company
and Manufacturers Hanover Trust Company, as Trustee and
Terms Agreement, dated March 16, 1988, among the Company,
The First Boston Corporation and Salomon Brothers Inc relating
to the Company's 9 1/2% Subordinated Notes due 2000,
incorporated herein by reference to Exhibit 1 to the Company's
Report on Form 8-K, dated March 16, 1988.
4.2 Indenture dated as of April 23, 1992 between the
Company and Bankers Trust Company, as Trustee, relating
to the Company's 8 1/4% Senior Notes Due 2002 and the
Company's 8 7/8% Senior Debentures Due 2022,
incorporated herein by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-3,
File No. 33-46148.
4.3 First Supplemental Indenture dated as of August 5, 1997
between the Company and Bankers Trust Company, as
Trustee, relating to the Company's 6.70% Senior
Notes Due 2007, the Company's 7.20% Senior Debentures
Due 2027, and the Company's 7.30% Senior Debentures
Due 2097, incorporated herein by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-3,
File No. 333-30621.
4.4 Indenture dated as of May 15, 1986 between National
Education Corporation and Continental Illinois National
Bank and Trust Company of Chicago, as Trustee,
incorporated herein by reference to Exhibit 4.2 to Amendment
</TABLE>
<PAGE> 20
<TABLE>
<S> <C>
No. 1 to National Education Corporation's Registration
Statement on Form S-3, File No. 33-5552.
4.5 Tripartite Agreement dated as of June 1, 1990 among National
Education Corporation, IBJ Schroder Bank & Trust Company
and Continental Bank, National Association, as resigning Trustee,
incorporated herein by reference to Exhibit 4 to National
Education Corporation's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1990, File No. 1-6981.
4.6 First Supplemental Indenture dated as of July 21, 1997 among
National Education Corporation, Harcourt General, Inc., and
IBJ Schroder Bank & Trust Company, incorporated herein by
reference to Exhibit 4 the Company's Registration Statement
on Form 8-A, dated July 22, 1997, File No. 1-4925.
4.7 Smith-Lurie/Marks Stockholders' Agreement, dated
December 29, 1986, incorporated herein by reference to
Exhibit 4.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1992.
*10.1 1988 Stock Incentive Plan, incorporated herein by reference
to Exhibit 28.1 to the Company's Registration Statement on
Form S-8, File No. 33-26079.
*10.2 1997 Incentive Plan.
*10.3 1983 Key Executive Stock Purchase Loan Plan, as amended,
incorporated herein by reference to Exhibit 10.4(b) to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1984.
*10.4 Executive Medical Plan, as amended, incorporated herein by
reference to Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1994.
*10.5(a) Supplemental Executive Retirement Plan, incorporated
herein by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1988.
*10.5(b) Amendment to Supplemental Executive Retirement Plan, dated
October 26, 1990, incorporated herein by reference to
Exhibit 10.7(b) to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1990.
</TABLE>
<PAGE> 21
*10.6 Deferred Compensation and Retirement Income Plan for
Non-Employee Directors, incorporated herein by reference
to Exhibit 10.7 to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1993.
*10.7(a) Amended and Restated Deferred Compensation Agreement,
dated August 27, 1990, between the Company and Richard A.
Smith, incorporated herein by reference to Exhibit 10.13
of the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1990.
*10.7(b) Deferred Compensation Agreement dated as of December 15,
1994, between the Company and Richard A. Smith,
incorporated herein by reference to Exhibit 10.9(b) of the
Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1995.
*10.8 Split Dollar Life Insurance Agreement, dated as of June
21, 1990, by and between the Company and the Richard and
Susan Smith 1990 Issue Trust, under a Declaration of Trust
dated as of April 3, 1990, incorporated herein by
reference to Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1991.
*10.9 Key Employee Deferred Compensation Plan, as amended,
incorporated herein by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1994.
*10.10 Resignation Agreement dated as of December 17, 1996 by and
between the Company and Robert J. Tarr, Jr., incorporated
herein by reference to Exhibit 10.15(c) to the Company's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1996.
10.11 Intercompany Services Agreement, dated as of July 24,
1987, between the Company and NMG, incorporated herein
by reference to Exhibit 10.17(c) to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31,
1987.
10.12 Amended and Restated Intercompany Services Agreement
dated as of November 1, 1995, between the Company and
GC Companies, Inc., incorporated herein by reference to
<PAGE> 22
Exhibit 10.11(b) of the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1995.
10.13 Reimbursement and Security Agreement, dated as of
December 14, 1993, between the Company and GC
Companies, Inc., incorporated herein by reference to
Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1993.
10.14 Credit Agreement dated as of July 18, 1997 among the
Company, the banks listed therein, The Chase Manhattan
Bank, as syndication agent, Morgan Guaranty Trust Company
of New York, as documentation agent, and BankBoston, N.A.,
as administrative agent, incorporated herein by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended July 31, 1997.
10.15 Credit Agreement dated as of October 29, 1997 among
The Neiman Marcus Group, Inc., the banks listed therein,
Bank of America National Trust and Savings Association,
as syndication agent, The Chase Manhattan Bank, as
documentation agent, and Morgan Guaranty Trust Company
of New York, as administrative agent, incorporated herein
by reference to Exhibit 10.1 to The Neiman Marcus Group,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
November 1, 1997, File No. 1-9659.
10.16 Receivables Purchase Agreement dated as of March 1, 1995
between The Neiman Marcus Group, Inc. and Neiman Marcus
Funding Corporation, incorporated herein by reference to
Exhibit 10.1 to Neiman Marcus Group Credit Card Master
Trust's Registration Statement on Form S-3, File No.
33-88098.
10.17 Exchange and Repurchase Agreement, incorporated herein by
reference to Exhibit 10.1 to The Neiman Marcus Group,
Inc.'s Registration Statement on Form S-3, File No.
333-11721.
10.18 Agreement and Plan of Merger among the Company, Nick
Acquisition Corporation and National Education
Corporation, dated as of May 12, 1997, incorporated herein
by reference to Exhibit 11(c)(1) to Amendment No. 3 to the
Company's Schedule 14D-1, dated May 14, 1997, File No.
1-4925.
10.19 Agreement and Plan of Merger, dated as of September
29, 1997, by and among the Company, Steck-Vaughn
<PAGE> 23
<TABLE>
<S> <C>
Publishing Corporation, National Education Corporation,
and SV Acquisition Corporation, incorporated herein by
reference to Appendix A to Exhibit D to Steck-Vaughn
Publishing Corporation's Schedule 13E-3, dated October 6,
1997, File No. 0-21730.
11.1 Computation of Average Number of Shares Outstanding Used
In Determining Primary and Fully Diluted Earnings Per
Share.
13.1 The following sections of the 1997 Annual Report to
Stockholders ("1997 Annual Report") which are expressly
incorporated by reference into this Annual Report on Form
10-K:
Management's Discussion and Analysis of Financial
Condition and Results of Operations at pages 23
through 27 of the 1997 Annual Report.
Consolidated Financial Statements and the Notes
thereto at pages 28 through 46 of the 1997 Annual
Report.
Independent Auditors' Report at page 47 of the 1997
Annual Report.
The information appearing under the caption "Five
Year Summary (Unaudited)" on page 48 of the 1997
Annual Report.
The information appearing under the caption "Stock
Information" (including the accompanying tables and
text) on page 50 of the 1997 Annual Report.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
Exhibit 10.2
HARCOURT GENERAL, INC.
1997 INCENTIVE PLAN
1. DEFINED TERMS
Appendix A, which is incorporated by reference, defines the terms used in
the Plan.
2. IN GENERAL
The Plan has been established to advance the interests of the Company by
giving selected Employees, directors and other persons (including both
individuals and entities) who provide services to the Company or its Affiliates
equity-based or cash incentives through the grant of Awards. No Award may be
granted under the Plan after December 31, 2006, but Awards previously granted
may extend beyond that date.
3. ADMINISTRATION
The Administrator has discretionary authority, subject only to the express
provisions of the Plan, to interpret the Plan; determine eligibility for and
grant Awards; determine, modify or waive the terms and conditions of any Award;
prescribe forms, rules and procedures (which it may modify or waive); and
otherwise do all things necessary to carry out the purposes of the Plan. Once an
Award has been communicated in writing to a Participant, the Administrator may
not, without the Participant's consent, alter the terms of the Award so as to
affect adversely the Participant's rights under the Award, unless the
Administrator expressly reserved the right to do so. In the case of any Award
intended to be eligible for the performance-based compensation exception under
Section 162(m)(4)(C) of the Code, the Committee shall exercise its discretion
consistent with qualifying the Award for such exception.
4. SHARES SUBJECT TO THE PLAN
A. A total of 4,000,000 shares of Stock have been reserved for issuance
under the Plan. The following shares of Stock will also be available for future
grants:
(i) shares remaining under an Award that terminates without having
been exercised in full (in the case of an Award requiring exercise
by a Participant for delivery of Stock);
(ii) shares subject to an Award, where cash is delivered to a
Participant in lieu of such shares;
(iii) shares of Restricted Stock that are forfeited to the Company;
(iv) shares of Stock tendered by a Participant as payment upon
exercise of an Award; and
(v) shares of Stock held back by the Administrator, or tendered by a
Participant, in satisfaction of tax withholding requirements.
Stock delivered under the Plan may be authorized but unissued Stock or
previously issued Stock acquired by the Company and held in treasury. No
fractional shares of Stock will be delivered under the Plan.
B. The maximum number of shares for which Stock Options may be granted to
any person over the life of the Plan shall be 1,500,000. The maximum number of
shares subject to SARs granted to any person over the life of the Plan shall
likewise be 1,500,000. For purposes of the preceding two sentences, the
repricing of a Stock Option or SAR shall be treated as a new grant to the extent
required under Section 162(m) of the Code. The aggregate maximum number of
shares of Stock delivered to any person over the life of the Plan pursuant to
Awards that are not Stock Options or SARs shall also be 1,500,000. Subject to
these limitations, each person eligible to participate in the Plan shall be
eligible in any year to receive Awards covering up to the full number of shares
then available for Awards under the Plan.
5. ELIGIBILITY AND PARTICIPATION
The Administrator will select Participants from among those key Employees,
directors and other individuals or entities providing services to the Company or
its Affiliates who, in the opinion of the Administrator, are in a position to
<PAGE> 2
make a significant contribution to the success of the Company and its
Affiliates. Eligibility for ISOs is further limited to those individuals whose
employment status would qualify them for the tax treatment described in Sections
421 and 422 of the Code.
6. RULES APPLICABLE TO AWARDS
A. ALL AWARDS
(1) PERFORMANCE OBJECTIVES. Where rights under an Award depend in whole or
in part on attainment of performance objectives, actions by the Company that
have an effect, however material, on such performance objectives or on the
likelihood that they will be achieved will not be deemed an amendment or
alteration of the Award unless accomplished by a change in the express terms of
the Award or other action that is without substantial consequence except as it
affects the Award.
(2) ALTERNATIVE SETTLEMENT. The Company retains the right at any time to
extinguish rights under an Award in exchange for payment in cash, Stock (subject
to the limitations of Section 4) or other property on such terms as the
Administrator determines, provided the holder of the Award consents to such
exchange.
(3) TRANSFERABILITY OF AWARDS. Except as the Administrator otherwise
expressly provides, Awards (other than an Award in the form of an outright
transfer of cash or Unrestricted Stock) may not be transferred other than by
will or by the laws of descent and distribution and, during a Participant's
lifetime an Award requiring exercise may be exercised only by the Participant
(or in the event of the Participant's incapacity, the person or persons legally
appointed to act on the Participant's behalf).
(4) VESTING, ETC. The Administrator may determine the time or times at
which an Award will vest (i.e., become free of restrictions) or become
exercisable. Unless the Administrator expressly provides otherwise, an Award
requiring exercise will cease to be exercisable, and all other Awards to the
extent not already fully vested will be forfeited, immediately upon the
cessation (for any reason, including death) of the Participant's employment or
other service relationship with the Company and its Affiliates.
(5) TAXES. The Administrator will make such provision for the withholding
of taxes as it deems necessary. The Administrator may, but need not, hold back
shares from an Award or permit a Participant to tender previously owned shares
in satisfaction of tax withholding requirements.
(6) DIVIDEND EQUIVALENTS, ETC. The Administrator may provide for the
payment of amounts in lieu of dividends or other distributions with respect to
Stock subject to an Award.
(7) RIGHTS LIMITED. Nothing in the Plan shall be construed as giving any
person the right to continued employment or service with the Company or its
Affiliates, nor any rights as a shareholder except as to shares actually issued
under the Plan. The loss of existing or potential profit in Awards will not
constitute an element of damages in the event of termination of employment or
service for any reason, even if the termination is in violation of an obligation
of the Company or Affiliate to the Participant.
(8) SECTION 162(M). In the case of an Award intended to be eligible for
the performance-based compensation exception under Section 162(m)(4)(C) of the
Code, the Plan and such Award shall be construed in a manner consistent with
qualifying the Award for such exception.
B. AWARDS REQUIRING EXERCISE
(1) TIME AND MANNER OF EXERCISE. Unless the Administrator expressly
provides otherwise, (a) an Award requiring exercise by the holder will not be
deemed to have been exercised until the Administrator receives a written notice
of exercise (in form acceptable to the Administrator) signed by the appropriate
person and accompanied by any payment required under the Award; and (b) if the
Award is exercised by any person other than the Participant, the Administrator
may require satisfactory evidence that the person exercising the Award has the
right to do so.
(2) PAYMENT OF EXERCISE PRICE, IF ANY. Where the exercise of an Award is
to be accompanied by payment, the Administrator may determine the required or
permitted forms of payment either at or after the time of the Award, subject to
the following: (a) unless the Administrator expressly provides otherwise, all
<PAGE> 3
payments will be by cash or check acceptable to the Administrator; and (b) where
shares issued under an Award are part of an original issue of shares, the Award
shall require an exercise price equal to at least the par value of such shares.
(3) RELOAD AWARDS. The Administrator may provide that upon the exercise of
an Award through the tender of previously owned shares of Stock, the Participant
or other person exercising the Award will automatically receive a new Award of
like kind covering a number of shares determined by reference to the number of
shares tendered in payment of the exercise price of the first Award.
C. AWARDS NOT REQUIRING EXERCISE
Awards of Restricted Stock and Unrestricted Stock may be made in return for
either (i) services determined by the Administrator to have a value not less
than the par value of the awarded shares, or (ii) cash or other property having
a value not less than the par value of the awarded shares plus such additional
amounts (if any) as the Administrator may determine payable in such combination
of cash, other property (of any kind) or services as the Administrator may
determine.
7. EFFECT OF CERTAIN TRANSACTIONS
A. MERGERS, ETC.
In the event of a consolidation or merger in which the Company is not the
surviving corporation or which results in the acquisition of substantially all
the Company's outstanding Stock by a single person or entity or by a group of
persons and/or entities acting in concert, or in the event of the sale or
transfer of substantially all the Company's assets or a dissolution or
liquidation of the Company (a "covered transaction"), all outstanding Awards
requiring exercise will cease to be exercisable, and all other Awards to the
extent not fully vested (including Awards subject to performance conditions not
yet satisfied or determined) will be forfeited, as of the effective time of the
covered transaction. Prior to such time the Administrator may (but need not)
accelerate the vesting or exercisability of any Award or provide for substitute
or replacement awards from the acquiring entity (if any).
B. CHANGES IN AND DISTRIBUTIONS WITH RESPECT TO THE STOCK
(1) BASIC ANTIDILUTION PROVISIONS. In the event of a stock dividend, stock
split or combination of shares, recapitalization or other change in the
Company's capital structure, the Administrator will make appropriate adjustments
to the maximum number of shares that may be delivered under the Plan under
Section 4.a. and to the maximum share limits described in Section 4.b., and will
also make appropriate adjustments to the number and kind of shares of stock or
securities subject to Awards then outstanding or subsequently granted, any
exercise prices relating to Awards and any other provision of Awards affected by
such change.
(2) CERTAIN OTHER ADJUSTMENTS. The Administrator may also make adjustments
of the type described in paragraph (1) above to take into account distributions
to common stockholders other than stock dividends or normal cash dividends,
mergers, consolidations, acquisitions, dispositions or similar corporate
transactions, or any other event, if the Administrator determines that
adjustments are appropriate to avoid distortion in the operation of the Plan and
to preserve the value of Awards made hereunder; provided, that no such
adjustment shall be made to the maximum share limits described in Section 4.b.,
or otherwise to an Award intended to be eligible for the performance-based
exception under Section 162(m)(4)(C) of the Code, except to the extent
consistent with that exception.
8. CONDITIONS ON DELIVERY OF STOCK
The Company will not be obligated to deliver any shares of Stock pursuant
to the Plan or to remove any restriction from shares previously delivered under
the Plan until: the Company's counsel has approved all legal matters in
connection with the issuance and delivery of such shares; if the outstanding
Stock is at the time listed on any stock exchange or national market system, the
shares to be delivered have been listed or authorized to be listed on such
exchange or system upon official notice of notice of issuance; and all
conditions of the Award have been satisfied or waived. If the sale of Stock has
not been registered under the Securities Act of 1933, as amended, the Company
may require, as a condition to exercise of the Award, such
<PAGE> 4
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of such Act. The Company may require that
certificates evidencing Stock issued under the Plan bear an appropriate legend
reflecting any restriction on transfer applicable to such Stock.
9. AMENDMENT AND TERMINATION
Subject to the last sentence of Section 3, the Administrator may at any
time or times amend the Plan or any outstanding Award for any purpose which may
at the time be permitted by law, or may at any time terminate the Plan as to any
further grants of Awards, provided that (except to the extent expressly required
or permitted by the Plan) no such amendment will, without the approval of the
stockholders of the Company, effectuate a change for which stockholder approval
is required in order for the Plan to continue to qualify under Section 422 of
the Code or for Awards to be eligible for the performance-based exception under
Section 162(m)(4)(C) of the Code.
10. NON-LIMITATION OF THE COMPANY'S RIGHTS
The existence of the Plan or the grant of any Award shall not in any way
affect the Company's right to award a person bonuses or other compensation in
addition to Awards under the Plan.
11. GOVERNING LAW
The Plan shall be construed in accordance with the laws of The Commonwealth
of Massachusetts.
<PAGE> 5
APPENDIX A
DEFINITION OF TERMS
The following terms, when used in the Plan, shall have the meanings and be
subject to the provisions set forth below:
"ADMINISTRATOR": The Committee, if one has been appointed; otherwise the
Board.
"AFFILIATE": Any corporation or other entity owning, directly or
indirectly, 50% or more of the outstanding Stock of the Company, or in which the
Company or any such corporation or other entity owns, directly or indirectly,
50% of the outstanding capital stock (determined by aggregate voting rights) or
other voting interests.
"AWARD": Any of the following:
(i) Options ("Stock Options") entitling the recipient to acquire
shares of Stock upon payment of the exercise price. Each Stock Option
(except as otherwise expressly provided by the Committee consistent with
continued qualification of the Stock Option as a performance-based award
for purposes of Section 162(m) of the Code, or unless the Committee
expressly determines that such Stock Option is not subject to Section
162(m) of the Code or that the Stock Option is not intended to qualify for
the performance-based exception under Section 162(m) of the Code) will have
an exercise price not less than the fair market value of the Stock subject
to the option, determined as of the date of grant, except that an ISO
granted to an Employee described in Section 422(b)(6) of the Code will have
an exercise price not less than 110% of such fair market value. The
Administrator will determine the medium in which the exercise price is to
be paid, the duration of the option, the time or times at which an option
will become exercisable, provisions for continuation (if any) of option
rights following termination of the Participant's employment with the
Company and its Affiliates, and all other terms of the Option. No Stock
Option awarded under the Plan will be an ISO unless the Administrator
expressly provides for ISO treatment.
(ii) Rights ("SARs") entitling the holder upon exercise to receive
cash or Stock, as the Administrator determines, equal to a function
(determined by the Administrator using such factors as it deems
appropriate) of the amount by which the Stock has appreciated in value
since the date of the Award.
(iii) Stock subject to restrictions ("Restricted Stock") under the
Plan requiring that the Stock be redelivered to the Company if specified
conditions are not satisfied. The conditions to be satisfied in connection
with any Award of Restricted Stock, the terms on which such Stock must be
redelivered to the Company, the purchase price of such Stock, and all other
terms shall be determined by the Administrator.
(iv) Stock not subject to any restrictions under the Plan
("Unrestricted Stock").
(v) A promise to deliver Stock or other securities in the future on
such terms and conditions as the Administrator determines.
(vi) Securities (other than Stock Options) that are convertible into
or exchangeable for Stock on such terms and conditions as the Administrator
determines.
(vii) Cash bonuses tied to performance criteria as described at (viii)
below ("Cash Performance Awards").
(viii) Awards described in any of (i) through (vii) above where the
right to exercisability, vesting or full enjoyment of the Award is
conditioned in whole or in part on the satisfaction of specified
performance criteria ("Performance Awards"). The Committee in its
discretion may grant Performance Awards that are intended to qualify for
the performance-based compensation exception under Section 162(m)(4)(C) of
the Code and Performance Awards that are not intended so to qualify. No
more than $3,500,000 may be paid to any individual with respect to any Cash
Performance Award. In applying the limitation of the
<PAGE> 6
preceding sentence: (A) multiple Cash Performance Awards to the same
individual that are determined by reference to performance periods of one
year or less ending with or within the same fiscal year of the Company
shall be subject in the aggregate to one $3,500,000 limit, and (B) multiple
Cash Performance Awards to the same individual that are determined by
reference to one or more multi-year performance periods ending in the same
fiscal year of the Company shall be subject in the aggregate to a separate
limit of $3,500,000. With respect to any Performance Award other than a
Cash Performance Award, Stock Option or SAR, the maximum award opportunity
shall be 1,500,000 shares or their equivalent value in cash, subject to the
limitations of Section 4.b. For the avoidance of doubt, any Performance
Award of a type described in (i) through (vi) above shall be treated for
purposes of this paragraph as a Performance Award that is not a Cash
Performance Award, even if payment is made in cash.
In the case of a Performance Award intended to qualify as
performance-based for the purposes of Section 162(m) of the Code, the
Committee shall in writing preestablish a specific performance goal (based
solely on one or more qualified performance criteria) no later than 90 days
after the commencement of the period of service to which the performance
relates (or at such earlier time as is required to qualify the award as
performance-based under Code Section 162(m)(4)(C)). For purposes of the
Plan, a qualified performance criterion is any of the following: (1)
earnings or earnings per share (whether on a pre-tax, after-tax,
operational or other basis), (2) return on equity, (3) return on assets,
(4) revenues, (5) sales, (6) expenses, (7) one or more operating ratios,
(8) stock price, (9) stockholder return, (10) market share, (11) cash flow,
(12) inventory levels or inventory turn, (13) capital expenditures, (14)
net borrowing, debt leverage levels or credit quality, (15) the
accomplishment of mergers, acquisitions, dispositions, public offerings or
similar extraordinary business transactions or (16) any combination of the
foregoing. The performance goals selected in any case need not be
applicable across the Company, but may be particular to an individual's
function or business unit. Prior to payment of any Performance Award
intended to qualify as performance-based under Section 162(m)(4)(C) of the
Code, the Committee shall certify whether the performance goal has been
attained and such determination shall be final and conclusive. If the
performance goal is not attained, no other Award shall be provided in
substitution of the Performance Award.
(ix) Grants of cash, or loans, made in connection with other Awards in
order to help defray in whole or in part the economic cost (including tax
cost) of the Award to the Participant. The terms of any such grant or loan
shall be determined by the Administrator.
Awards may be combined in the Administrator's discretion.
"BOARD": The Board of Directors of the Company.
"CODE": The U.S. Internal Revenue Code of 1986, as from time to time
amended and in effect.
"COMMITTEE": A committee of the Board comprised solely of two or more
outside directors within the meaning of Section 162(m) of the Code. The
Committee may delegate ministerial tasks to such persons (including Employees)
as it deems appropriate.
"COMPANY": Harcourt General, Inc.
"EMPLOYEE": Any person who is employed by the Company or an Affiliate.
"ISO": A Stock Option intended to be an "incentive stock option" within
the meaning of Section 422 of the Code.
"PARTICIPANT": An Employee, director or other person providing services to
the Company or its Affiliates who is granted an Award under the Plan.
"PLAN": Harcourt General, Inc. 1997 Incentive Plan as from time to time
amended and in effect.
"STOCK": Common Stock of the Company, par value $1.00 per share.
<PAGE> 1
Exhibit 11.1
HARCOURT GENERAL, INC. AND SUBSIDIARIES
OCTOBER 31, 1997
COMPUTATION OF AVERAGE NUMBER OF SHARES OUTSTANDING USED IN DETERMINING
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Earnings (Loss) $(115,122) $190,851 $165,883
Less Preferred Dividends (944) - -
--------- -------- --------
Net Earnings (Loss) for Calculation of
Earnings Per Share $(116,066) $190,851 $165,883
========= ======== ========
PRIMARY
1. Weighted average number of
Common shares outstanding 70,812 71,277 75,006
2. Assumed conversion of Series A
Cumulative Convertible Preferred Stock - 1,292 1,480
3. Assumed exercise of certain stock
options based on average market value
during the year - 201 278
--------- -------- --------
4. Weighted average number of shares used
in primary per share computations 70,812 72,770 76,764
=============================================
FULLY DILUTED (A)
1. Weighted average number of
Common shares outstanding 70,812 71,277 75,006
2. Assumed exercise of Series A
Cumulative Convertible Preferred Stock - 1,292 1,480
3. Assumed exercise of certain stock
options based on market value
at October 31 - 202 291
--------- -------- --------
4. Weighted average number of shares used
in primary per share computations 70,812 72,771 76,777
=============================================
</TABLE>
(A) This calculation is submitted in accordance with Securities Exchange
Act of 1934 Release No. 9083 although not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilution of
less than 3%.
<PAGE> 1
1997 ANNUAL REPORT 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SEGMENT OPERATING RESULTS
The following table presents revenues and operating earnings by business
segment:
<TABLE>
<CAPTION>
Years ended October 31 (in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Publishing - Harcourt Brace operations $1,250,983 $1,092,631 $1,017,637
Publishing - NEC operations 125,275 -- --
---------- ---------- ----------
Total Publishing 1,376,258 1,092,631 1,017,637
Specialty retailing 2,209,891 2,075,003 1,888,249
Professional services 105,490 122,285 128,850
---------- ---------- ----------
Total revenues $3,691,639 $3,289,919 $3,034,736
========== ========== ==========
Operating earnings (loss)
Publishing - Harcourt Brace operations $ 223,114 $ 196,997 $ 177,531
Publishing - NEC operations (108,380)* -- --
Purchased in-process research and
development and other charges (253,727) -- --
---------- ---------- ----------
Total Publishing (138,993) 196,997 177,531
Specialty retailing 194,714 172,354 161,698
Professional services (1,816) 9,753 13,062
Professional services other charges (23,500) -- --
---------- ---------- ----------
Total Professional services (25,316) 9,753 13,062
Corporate expenses (36,101) (34,382) (34,395)
---------- ---------- ----------
TOTAL OPERATING EARNINGS (LOSS) $ (5,696) $ 344,722 $ 317,896
========== ========== ==========
</TABLE>
*Includes amortization of acquired intangible assets and goodwill of
approximately $94.6 million and $9.5 million, respectively.
Operating Results 1997 vs. 1996
PUBLISHING
Publishing revenues increased 26.0% to $1.38 billion in 1997 from $1.09 billion
in 1996. Revenues of the NEC operations, included in publishing revenues from
the date of acquisition in June 1997, comprised approximately $125.3 million of
the increase. The Company's educational publishing group contributed
significantly to the increase, as revenues of this group increased approximately
$106.7 million from the prior year. Elementary publishing revenues rose
approximately 28.0% primarily as a result of higher adoption sales of social
studies titles in Texas and reading titles in California. Revenues from
secondary school publishing and testing and scoring services also contributed to
the increase in the educational publishing group's revenues. The Company's
international publishing group's revenues rose in comparison to the prior year
primarily as a result of the acquisition in the first quarter of 1997 of Doyma
Libros, a Spanish language medical and health sciences publisher and the
acquisition of international distribution rights for Mosby-Year Book health
sciences publications. Revenues at the Company's scientific, technical, medical
and professional publishing (STMP) group increased moderately in comparison to
the prior year due primarily to higher journal sales at Academic Press.
The publishing segment incurred an operating loss of $139.0 million in 1997
compared to operating earnings of $197.0 million in the same period last year
primarily due to charges associated with the acquisition of NEC. In connection
with the acquisition of NEC, the Company recorded a charge of approximately
$195.5 million consisting primarily of the value of purchased in-process
research and development. The results of operations for the NEC businesses are
included in the publishing segment from the date of acquisition and include
amortization of acquired intangible assets and goodwill of approximately $104.1
million in aggregate. Also during the third quarter of 1997, the publishing
business recognized charges of approximately $58.2 million related to the
realignment, reorganization and consolidation of its existing businesses. These
charges consisted primarily of costs to consolidate facilities and the
impairment of certain existing assets. Including the effect of these charges,
operating earnings at the educational publishing group increased in comparison
to the prior year primarily as a result of the increased revenues in the
elementary and high school publishing businesses, offset in part by higher plate
amortization and sample costs. International publishing operating earnings
increased modestly, primarily due to higher revenues, while operating earnings
for the STMP publishing group were essentially flat in comparison to the prior
year.
<PAGE> 2
24 HARCOURT GENERAL
SPECIALTY RETAILING
Specialty retailing revenues in 1997 increased 6.5% to $2.21 billion from $2.08
billion in 1996. The increase was primarily attributable to comparable sales
growth of 5.3% at Neiman Marcus Stores, and to new Neiman Marcus stores opened
in King of Prussia, Pennsylvania in February 1996 and Paramus, New Jersey in
August 1996. Comparable sales increases at Bergdorf Goodman and NM Direct were
2.1% and 2.9%, respectively. Fiscal 1996 included 53 weeks, while fiscal 1997
consisted of 52 weeks. The 53rd week is not included in comparable sales.
Operating earnings from specialty retailing increased 13.0% to $194.7
million in 1997 from $172.4 million in 1996. The increase resulted primarily
from higher revenues, and to a lesser extent, improved gross margins across all
divisions. Gross margins were approximately 31.9% in 1997 compared to 31.7% in
1996, the higher percentage resulting primarily from lower markdowns during the
calendar 1996 holiday season. Selling, general and administrative expenses
increased primarily due to higher selling costs and new store openings. The
Company utilizes the last-in, first-out (LIFO) method of accounting for valuing
its inventories, which provides a better matching of revenues with expenses than
the first-in, first-out (FIFO) method which is used by some specialty retail
companies. The most important factors contributing to differences between the
LIFO and FIFO methods include the rate of inflation, inventory levels and
markdowns. As a result of these factors, operating earnings were $1.5 million
lower in 1997 and $.7 million higher in 1996 than they would have been using the
FIFO method.
PROFESSIONAL SERVICES
Professional services revenues decreased 13.7% to $105.5 million in 1997
from $122.3 million in 1996. The decrease was a result of lower volume as well
as reduced prices for outplacement services, reflecting a continuing competitive
marketplace and reduced demand for outplacement services.
The professional services segment had an operating loss of $25.3 million in
1997 compared with operating earnings of $9.8 million in 1996. The loss in 1997
includes other charges of $23.5 million recorded in the third quarter as well as
the effect of lower revenues. The other charges consist primarily of severance,
consolidation of facilities and impairment of certain assets.
CORPORATE EXPENSES
Corporate expenses increased 5.0% to $36.1 million in 1997 compared to $34.4
million in 1996, primarily due to higher compensation expense recorded in
connection with the resignation of the Company's former chief executive officer
in fiscal 1997.
INVESTMENT INCOME
Investment income increased $1.7 million to $29.0 million in 1997 from $27.3
million in the previous year. The increase is primarily due to a higher average
portfolio balance during the first seven months of the year that resulted from
the cash proceeds received in October 1996 from NMG's sale of its common stock
to the public and its subsequent repurchase of its redeemable preferred stocks
held by Harcourt General. The Company's investment portfolio was liquidated in
June 1997 in order to partially fund the acquisition of NEC.
INTEREST EXPENSE
Interest expense increased 13.8% to $94.3 million in 1997 from $82.9 million in
1996. The increase resulted primarily from interest incurred on the fixed rate
debt issued by the Company in August 1997 and, to a lesser extent, from
borrowings under the Company's revolving credit agreement, the proceeds of which
were used to partially fund the acquisition of NEC. Interest expense recorded by
NMG decreased as higher average borrowings were offset by a lower effective
interest rate which resulted from the repayment at maturity of NMG's fixed rate
senior notes with borrowings under its revolving credit agreement.
MINORITY INTEREST
The Company recorded minority interest of $5.9 million in 1997 representing the
portion of earnings attributable to the minority shareholders of NMG. In fiscal
1998, the Company expects to record 47% (based on its current ownership of 53%)
of NMG's net earnings as minority interest.
<PAGE> 3
1997 ANNUAL REPORT 25
OPERATING RESULTS 1996 VS. 1995
PUBLISHING
Publishing revenues increased 7.4% to $1.09 billion in 1996 from $1.02 billion
in 1995. The Company's educational publishing group and its scientific,
technical, medical and professional (STMP) publishing group both contributed
significantly to the revenue increase. A substantial portion of the educational
publishing group's revenue increase resulted from higher testing program
revenues, primarily due to the acquisition of Assessment Systems, Inc. in the
third quarter of 1995. The educational group revenues were also increased by
strong testing program and secondary publishing revenues, offset in part by an
anticipated decline in elementary program revenues resulting from fewer adoption
opportunities in comparison to 1995. STMP revenue growth reflected both
increased book and journal sales at W.B. Saunders as well as revenue increases
due to the acquisition of International Medical News Group (IMNG), a medical
newspaper publisher, in the first quarter of 1996.
Publishing operating earnings increased 11.0% to $197.0 million in 1996
from $177.5 million in 1995. STMP operating earnings, specifically at W.B.
Saunders and Academic Press, were significantly higher than those of the prior
year due to higher sales volume of W.B. Saunders books, W.B. Saunders and
Academic Press journals, and lower operating expenses as a percentage of
revenues. Operating earnings at Holt, Rinehart and Winston and Harcourt Brace
College were also higher than in 1995, although aggregate earnings for the
educational publishing group decreased slightly in comparison to the prior year
primarily as a result of the decline in elementary program revenues and higher
administrative and fulfillment expenses.
SPECIALTY RETAILING
Specialty retailing revenues in 1996 increased 9.9% to $2.08 billion from $1.89
billion in 1995. The revenue growth was primarily attributable to a 5.4%
increase in comparable sales and, to a lesser extent, the opening of two new
Neiman Marcus stores during the year. Strong sales were achieved across most
major merchandise categories and geographic regions. Additionally, fiscal 1996
included 53 weeks, while fiscal 1995 consisted of 52 weeks. The 53rd week is not
included in comparable sales.
Operating earnings from specialty retailing increased 6.6% to $172.4
million from $161.7 million in 1995. The increase is attributable to higher
sales volume, partially offset by the full year impact of NMG's credit card
receivables securitization. Gross margins were approximately 31.7% in 1996
compared to 32.4% in 1995, the lower percentage resulting primarily from higher
markdowns during the calendar 1995 holiday season. Selling, general and
administrative expenses increased primarily due to new store openings, higher
selling costs and lower finance charge income. The Company utilizes the last-in,
first-out (LIFO) method of accounting for valuing its inventories, which
provides a better matching of revenues with expenses than the first-in,
first-out (FIFO) method which is used by some specialty retail companies. The
most important factors contributing to differences between the LIFO and FIFO
methods include the rate of inflation, inventory levels and markdowns. As a
result of these factors, operating earnings were $.7 million higher in 1996 and
$10.4 million higher in 1995 than they would have been using the FIFO method.
Operating earnings at NM Direct improved significantly in comparison to 1995,
due to increased revenues and lower paper and postage expenses.
The securitization of NMG's credit card receivables, which was completed in
March 1995, had the effect of reducing finance charge income by $19.0 million in
1996 and $7.1 million in 1995. Interest expense was also reduced, as the
proceeds from the securitization were used to repay outstanding debt.
PROFESSIONAL SERVICES
Professional services revenues decreased 5.1% to $122.3 million from $128.9
million in 1995. The decrease was a result of lower volume in both group and
individual outplacement programs, reflecting fewer outplacement opportunities
and increased competition.
Operating earnings for the professional services segment decreased 25.3% to
$9.8 million from $13.1 million in 1995. The decrease was primarily due to the
revenue shortfall in comparison to the prior year.
CORPORATE EXPENSES
Corporate expenses remained essentially unchanged in 1996 at $34.4 million.
INVESTMENT INCOME
Investment income decreased 31.6% to $27.3 million in 1996 from $39.9 million in
1995. The decrease was primarily due to a lower average short-term investment
portfolio balance resulting primarily from the Company's stock repurchase
program and acquisitions of NMG common stock and publishing businesses made
during the year.
INTEREST EXPENSE
Interest expense decreased 6.6% to $82.9 million in 1996 from $88.7 million in
1995. The decrease was primarily due to lower debt levels at NMG resulting from
the use of proceeds from NMG's credit card securitization in March 1995 to pay
down outstanding debt.
<PAGE> 4
26 HARCOURT GENERAL
LIQUIDITY AND CAPITAL RESOURCES
The following discussion analyzes liquidity and capital resources by operating,
investing and financing activities as presented in the Company's consolidated
statements of cash flows.
Cash provided by operating activities in 1997 was $248.7 million compared
to $253.5 million in 1996. In 1997 the publishing and professional services
segments provided approximately $139.5 million of such cash and NMG provided
$109.2 million. The cash provided by the Company's operations was sufficient to
fund working capital, capital expenditures and dividend requirements. NMG uses
its cash and revolving credit agreement to fund its own expenditures.
The most significant changes in working capital were increases in accounts
receivable of $50.3 million and inventories of $19.1 million, as well as a
decrease of $21.1 million in accounts payable and other current liabilities.
Accounts receivable increased primarily due to higher sales by the educational
publishing group while the increase in inventories was primarily related to the
specialty retail segment. The decrease in accounts payable and other current
liabilities reflects higher income tax payments in 1997, offset in part by
higher trade accounts payable associated with increased sales volume.
The Company paid approximately $854.4 million to acquire NEC in June 1997.
The purchase price was initially funded with cash and equivalents and short-term
investments, in addition to $300 million in borrowings under the Company's
revolving credit agreement. The Company's capital expenditures totaled $195.0
million in 1997. Publishing capital expenditures were approximately $135.0
million and related principally to expenditures for prepublication costs. The
Company expects capital expenditures in the publishing business to approximate
$180.0 million in fiscal 1998. Specialty retailing capital expenditures of $53.0
million in 1997 were primarily related to existing store renovations and are
expected to approximate $100.0 million in fiscal 1998, which will be for both
renovations and new store construction. Other investing activities include the
acquisition of Churchill Livingstone in September 1997 for approximately $92.5
million.
In October 1996, NMG sold 8.0 million shares of its common stock to the
public at $35.00 per share. The proceeds of approximately $268.8 million were
used, together with an additional 3.9 million shares of NMG common stock valued
at $135.0 million and bank borrowings of $20.0 million, to repurchase all of
NMG's outstanding preferred stock from the Company. The Company will no longer
receive the annual dividends of approximately $27.1 million from such preferred
stocks.
In August 1997, the Company issued $500.0 million in senior notes and
debentures to the public. The Company used the proceeds from its borrowings
primarily to repay borrowings under its revolving credit agreement used to fund
the acquisition of NEC, and to fund the acquisition of Churchill Livingstone.
NMG borrowed $113.5 million under its revolving credit agreement and uncommitted
lines, the proceeds of which were used to fund working capital requirements and
to repay $132.0 million of senior notes at maturity. In June 1997, the Company
repaid $125 million of its senior debt at maturity and repaid $46 million of
outstanding borrowings on NEC's line of credit. Financing activities also
include the payment of $51.1 million in dividends and the purchase of
approximately .4 million shares of the Company's Common Stock for $20.1 million
on the open market at an average price of $45.56 per share.
At October 31, 1997, the Company's consolidated long-term liabilities
totaled $1.56 billion. That amount included $369.7 million of NMG obligations,
which are not guaranteed by Harcourt General.
In September 1997 the Company signed a definitive merger agreement to
acquire the balance of issued and outstanding shares of Steck-Vaughn Publishing
Corporation for $14.75 per share, or approximately $41 million in aggregate.
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.
IMPACT OF INFLATION
The Company's financial statements are prepared on a historical cost basis under
generally accepted accounting principles. The Company uses the last-in,
first-out method of accounting for substantially all of its inventories; thus,
the cost of goods sold approximates current cost.
The Company adjusts selling prices to maintain profit levels and will
continue to do so as competitive conditions permit. In general, management
believes that the impact of inflation or of changing prices is not material to
the financial position or results of operations of its business segments.
YEAR 2000
The Company has evaluated the effect of the year 2000 problem on its computer
systems and is implementing a plan to resolve the potential risks. The costs of
the modifications and enhancements, which will be expensed as incurred, are not
expected to be material to the financial position of the Company. Additionally,
the Company continues to invest in new technology in connection with its ongoing
systems development initiatives.
<PAGE> 5
1997 ANNUAL REPORT 27
SEASONALITY
The Company's businesses are seasonal in nature. More than one-half of the
Company's annual operating earnings are historically generated in the third
quarter of its fiscal year, since that quarter includes the important
educational publishing selling season.
Conversely, second quarter operating earnings have historically been
minimal during a period when publishing revenues are at their lowest level, and
that business segment typically reports operating losses. Those losses partially
offset retail earnings, which have historically been strong in the Company's
second quarter due to NMG's holiday selling season.
DIVIDENDS
The Company has a long-standing practice of returning a portion of its earnings
and cash flow to shareholders through the payment of cash dividends. In
September 1997, the Board of Directors voted to increase the quarterly cash
dividend on the Common Stock to 19 cents per share. The Board also increased the
quarterly cash dividend on the Series A Stock to 21.65 cents per share and on
the Class B Stock to 17.10 cents per share.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). Under the new standard, which must be adopted for periods ending after
December 15, 1997, the Company will be required to change the method used to
compute earnings per share and to restate prior periods presented. A dual
presentation of basic and diluted earnings per share will be required. The basic
earnings per share calculation, which will replace primary earnings per share,
will exclude the dilutive impact of stock options and other common share
equivalents. The diluted earnings per share calculation, which will replace
fully diluted earnings per share, will include common share equivalents. The
adoption of SFAS 128 will not have a material impact on reported earnings per
share for the three years ended October 31, 1997.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure," which must be
adopted for periods ending after December 15, 1997. The Statement makes
disclosure requirements regarding capital structure applicable to all entities.
The Statement contains no provisions which will materially change disclosure
requirements for the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income"(SFAS 130). The Statement, which must
be adopted for periods beginning after December 15, 1997, establishes standards
for reporting and display of comprehensive income and its components in
consolidated financial statements. The effect of adopting SFAS 130 is not
expected to be material to the Company's financial position or results of
operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), which must be adopted for periods beginning after December 15, 1997.
Under the new standard, companies will be required to report certain information
about operating segments in consolidated financial statements. Operating
segments will be determined based on the method that management uses to organize
its businesses for making operating decisions and assessing performance. The
standard also requires that companies report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. The Company is currently evaluating the additional disclosures
required in implementing SFAS 131.
FORWARD-LOOKING STATEMENTS
Statements in this report referring to the expected future plans and performance
of the Company are forward-looking statements. Actual future results may differ
materially from such statements. Factors that could affect future performance in
the Company's publishing and educational services businesses include, but are
not limited to: the Company's ability to develop and market its products and
services; the relative success of the products and services offered by
competitors; integration of acquired businesses; the seasonal and cyclical
nature of the markets for the Company's products and services; changes in
economic conditions; changes in public funding for the Company's educational
products and services; and changes in purchasing patterns in the Company's
markets. Important factors that could affect future performance in the Company's
specialty retailing businesses include, but are not limited to: changes in
economic conditions or consumer confidence, changes in consumer preferences or
fashion trends; delays in anticipated store openings; adverse weather
conditions, particularly during peak selling seasons; changes in demographic or
retail environments; competitive influences; significant increases in paper,
printing and postage costs, and changes in the Company's relationships with
designers and other resources. For more information, see the Company's filings
with the Securities and Exchange Commission.
<PAGE> 6
28 HARCOURT GENERAL
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31 (in thousands) 1997 1996
- --------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets
Cash and equivalents $ 82,644 $ 532,862
Short-term investments -- 242,054
Undivided interests in NMG Credit Card Master Trust 128,341 114,392
Accounts receivable, net 397,675 294,718
Inventories 676,357 592,141
Deferred income taxes 120,546 77,491
Other current assets 79,353 79,607
---------- ----------
TOTAL CURRENT ASSETS 1,484,916 1,933,265
---------- ----------
Property and equipment
Land, buildings and improvements 538,762 503,050
Fixtures and equipment 476,642 416,152
---------- ----------
1,015,404 919,202
Less accumulated depreciation and amortization (421,512) (344,276)
---------- ----------
TOTAL PROPERTY AND EQUIPMENT, NET 593,892 574,926
---------- ----------
Other assets
Prepublication costs, net 201,953 209,519
Intangible assets, net 1,299,227 456,494
Other 201,405 152,034
---------- ----------
TOTAL OTHER ASSETS 1,702,585 818,047
---------- ----------
TOTAL ASSETS $3,781,393 $3,326,238
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 7
1997 ANNUAL REPORT 29
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31 (in thousands) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Current liabilities
Notes payable and current maturities of long-term liabilities $ 14,439 $ 163,717
Accounts payable 346,386 315,108
Taxes payable 19,433 77,548
Other current liabilities 613,011 391,974
---------- ----------
TOTAL CURRENT LIABILITIES 993,269 948,347
---------- ----------
Long-term liabilities
Notes and debentures 1,289,889 714,282
Other long-term liabilities 274,840 224,792
---------- ----------
TOTAL LONG-TERM LIABILITIES 1,564,729 939,074
---------- ----------
Deferred income taxes 143,435 187,632
Commitments and contingencies
Minority interest 234,422 217,653
Shareholders' Equity
Preferred stock
Series A Cumulative Convertible - $1 par value
Issued and outstanding - 1,125 and 1,152 shares 1,125 1,152
Common stocks
Class B Stock - $1 par value
Issued and outstanding - 20,022 and 20,051 shares 20,022 20,051
Common Stock - $1 par value
Issued and outstanding - 50,733 and 51,068 shares 50,733 51,068
Paid-in capital 744,932 743,947
Cumulative translation adjustments (7,113) (4,493)
Retained earnings 35,839 221,807
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 845,538 1,033,532
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,781,393 $3,326,238
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 8
30 HARCOURT GENERAL
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended October 31 (in thousands except for per share amounts) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $3,691,639 $3,289,919 $3,034,736
Costs applicable to revenues 2,092,956 1,906,974 1,765,090
Selling, general and administrative expenses 1,394,278 1,003,841 917,355
Purchased in-process research and development expense 174,000 -- --
Corporate expenses 36,101 34,382 34,395
---------- ---------- ----------
Operating earnings (loss) (5,696) 344,722 317,896
Investment income 28,984 27,329 39,945
Interest expense (94,319) (82,882) (88,735)
---------- ---------- ----------
Earnings (loss) from continuing operations
before income taxes and minority interest (71,031) 289,169 269,106
Income tax expense (38,239) (98,318) (91,496)
---------- ---------- ----------
Earnings (loss) from continuing operations
before minority interest (109,270) 190,851 177,610
Minority interest in earnings of subsidiaries, net of income taxes (5,852) -- --
---------- ---------- ----------
Earnings (loss) from continuing operations (115,122) 190,851 177,610
Loss from discontinued operations, net -- -- (11,727)
---------- ---------- ----------
NET EARNINGS (LOSS) $ (115,122) $ 190,851 $ 165,883
========== ========== ==========
Amounts per share of common stock
Earnings (loss) from continuing operations $ (1.64) $ 2.62 $ 2.31
Loss from discontinued operations -- -- (.15)
---------- ---------- ----------
NET EARNINGS (LOSS) $ (1.64) $ 2.62 $ 2.16
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 9
1997 ANNUAL REPORT 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended October 31 (in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Earnings (loss) from continuing operations $(115,122) $ 190,851 $ 177,610
Adjustments to reconcile earnings (loss) from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 343,213 180,395 175,737
Minority interest 5,852 -- --
Purchased in-process research and development 174,000 -- --
Deferred income taxes (71,275) (9,174) 13,152
Other (11,376) (401) 4,183
Changes in assets and liabilities:
Accounts receivable (50,290) (26,396) 2,202
Inventories (19,149) (96,332) (54,376)
Other current assets 13,968 (23,654) 4,302
Accounts payable and other current liabilities (21,118) 38,209 25,974
--------- --------- ---------
248,703 253,498 348,784
Discontinued operating activities -- -- (3,410)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 248,703 253,498 345,374
--------- --------- ---------
Cash flows from investing activities
Capital expenditures (195,039) (242,655) (220,053)
Purchases of available-for-sale investments (408,304) (280,939) (382,612)
Sales of available-for-sale investments 325,767 -- --
Maturities of available-for-sale investments 324,591 281,958 139,539
Purchases of NMG common stock -- (22,841) --
Purchases of held-to-maturity securities (461,791) (502,604) (210,995)
Maturities of held-to-maturity securities 447,842 492,673 170,534
Acquisition of NEC, net of cash acquired (839,620) -- --
Other acquisitions (98,648) (20,648) (42,490)
Other investing activities (1,436) (12,888) 1,441
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (906,638) (307,944) (544,636)
--------- --------- ---------
Cash flows from financing activities
Proceeds from borrowings 586,728 109,917 17,065
Repayment of debt (306,000) (41,571) (247,431)
Proceeds from NMG public offering -- 268,800 --
Repurchase of Common Stock (20,139) (67,150) (224,827)
Proceeds from receivables securitization -- -- 245,965
Dividends paid (51,149) (48,693) (47,730)
Other financing activities (1,723) 2,255 311
--------- --------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 207,717 223,558 (256,647)
--------- --------- ---------
Cash and equivalents
Increase (decrease) during the year (450,218) 169,112 (455,909)
Beginning balance 532,862 363,750 819,659
--------- --------- ---------
ENDING BALANCE $ 82,644 $ 532,862 $ 363,750
========= ========= =========
Supplemental schedule of cash flow information
Cash payments for:
Interest $ 88,321 $ 82,185 $ 86,991
Income taxes $ 183,851 $ 104,845 $ 75,222
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 10
32 HARCOURT GENERAL
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Series A Paid-in Translation Retained
(in thousands) Stocks Stock Capital Adjustments Earnings
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT NOVEMBER 1, 1994 $77,887 $1,453 $726,505 $(4,710) $ 246,220
Net earnings -- -- -- -- 165,883
Cash dividends paid -- -- -- -- (47,730)
Conversion of Series A Stock 243 (243) -- -- --
Repurchase of Common Stock (5,539) -- -- -- (219,288)
Translation adjustments -- -- -- (456) --
Other equity transactions, net 108 -- 780 -- --
-------- ------ -------- ------- ---------
BALANCE AT OCTOBER 31, 1995 72,699 1,210 727,285 (5,166) 145,085
Net earnings -- -- -- -- 190,851
Cash dividends paid -- -- -- -- (48,693)
Conversion of Series A Stock 58 (58) -- -- --
Repurchase of Common Stock (1,714) -- -- -- (65,436)
Translation adjustments -- -- -- 673 --
NMG issuance of common stock -- -- 15,153 -- --
Other equity transactions, net 76 -- 1,509 -- --
-------- ------ -------- ------- ---------
BALANCE AT OCTOBER 31, 1996 71,119 1,152 743,947 (4,493) 221,807
Net loss -- -- -- -- (115,122)
Cash dividends paid -- -- -- -- (51,149)
Conversion of Series A Stock 29 (27) (2) -- --
Repurchase of Common Stock (442) -- -- -- (19,697)
Translation adjustments -- -- -- (2,620) --
Other equity transactions, net 49 -- 987 -- --
-------- ------ -------- ------- ---------
BALANCE AT OCTOBER 31, 1997 $ 70,755 $1,125 $744,932 $(7,113) $ 35,839
======== ====== ======== ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 11
1997 ANNUAL REPORT 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Harcourt General,
Inc. (the Company or Harcourt General) and its majority-owned subsidiaries. The
consolidated financial statements of The Neiman Marcus Group, Inc. (NMG) are
consolidated with a lag of one fiscal quarter, and the minority shareholders'
interest in NMG is reflected as minority interest. NMG's fiscal year ends on the
Saturday closest to July 31. In fiscal 1996, the reporting period included 53
weeks as compared to 52 weeks in each of fiscal years 1997 and 1995. All
significant intercompany accounts and transactions have been eliminated.
CASH AND EQUIVALENTS
Cash and equivalents consist of cash and liquid debt instruments such as
commercial paper and certificates of deposit with maturities of three months or
less from the date of purchase. Cash and equivalents are stated at cost plus
accrued interest, which approximates fair value. The Company's practice is to
invest cash with financial institutions that have acceptable credit ratings and
to limit the amount of credit exposure to any one financial institution.
SHORT-TERM INVESTMENTS
Short-term investments with maturities greater than three months, which consist
of commercial paper, certificates of deposit, corporate debt securities and U.S.
Government and agency securities, are carried at cost plus accrued interest,
which approximates fair value. All such investments are classified as
available-for-sale. Short-term investments have risk profiles similar to cash
equivalent investments.
The duration of short-term investments is generally one year or less.
Therefore, the Company is not subject to significant interest rate risk which
would cause fair value to materially diverge from carrying value. Gross realized
and unrealized gains and losses in the periods presented were not material. At
October 31, 1996, the carrying values of short-term investments consisted of
corporate debt securities ($144.7 million), U.S. government and agency
securities ($73.9 million), certificates of deposit ($21.1 million), and
commercial paper ($2.3 million). In May 1997, all of the Company's short-term
investments were sold to partially fund the acquisition of National Education
Corporation, resulting in a loss of $.4 million.
UNDIVIDED INTERESTS IN NMG CREDIT CARD MASTER TRUST
In March 1995, NMG sold all of its Neiman Marcus credit card receivables through
a subsidiary to The Neiman Marcus Group Credit Card Master Trust (the "Trust")
in exchange for cash and certificates representing undivided interests in such
receivables. The Company segregates its undivided interests in the Trust from
its accounts receivable on the consolidated balance sheets. The undivided
interests in the Trust include the interests retained by NMG's subsidiary, which
are represented by a Class C Certificate ($54.0 million) and a Seller's
Certificate (the excess of the total receivables transferred to the Trust over
the portion represented by certificates sold to investors and the Class C
Certificate). The undivided interests in the Trust represent securities which
the Company intends to hold to maturity in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Due to the short-term revolving nature of the
credit card portfolio, the carrying value of the Company's undivided interests
in the Trust approximates fair value.
ACCOUNTS RECEIVABLE
Certain publications are sold to customers with a right of return. Revenues are
recorded net of a provision for future returns. Returned goods included in
inventory are valued at estimated realizable value not exceeding cost.
Accounts receivable are reported net of allowances for book returns of
$65.9 million in 1997 and $53.2 million in 1996 and for doubtful accounts of
$32.0 million in 1997 and $15.1 million in 1996.
INVENTORIES
Inventories, consisting primarily of finished goods, are stated at the lower of
cost or market. Substantially all domestic publishing inventories are valued
using the last-in, first-out (LIFO) method. Substantially all retail inventories
are valued using the retail method on a LIFO basis. If the first-in, first-out
(FIFO) method of inventory valuation had been used to value inventories, the
inventories would have been $15.0 million and $13.5 million higher than reported
at October 31, 1997 and October 31, 1996, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided using straight-line or accelerated methods over the estimated useful
lives of the related assets or over the terms of the related leases, if shorter.
When property and equipment are retired or have been fully depreciated, the cost
and the related accumulated depreciation are eliminated from the respective
accounts. Gains or losses arising from the dispositions are reported as income
or expense.
PREPUBLICATION COSTS
Prepublication costs are amortized using the sum-of-the-years'-digits method
over the estimated useful lives of the publications, ranging from three to five
years.
<PAGE> 12
34 HARCOURT GENERAL
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill. Amortization of goodwill is
provided using the straight-line method over its estimated useful life, ranging
from 10 to 40 years. Acquired intangible assets consist of course libraries,
customer leads and contracts, and existing technology, and are amortized using
accelerated methods over estimated useful lives, ranging from one to five years.
Trademarks are amortized over 40 years using the straight-line method.
LONG-LIVED ASSETS
In 1996 the Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and determined that no impairment loss need be recognized. Upon
occurrence of an event or a change in circumstances, the Company compares the
carrying value of its long-lived assets against projected undiscounted cash
flows to determine any impairment and to evaluate the reasonableness of the
depreciation or amortization periods.
DERIVATIVES
The Company uses treasury lock agreements (a derivative) as a means of managing
interest-rate risk associated with current debt or anticipated debt
transactions. The differentials to be received or paid under these contracts
designated as hedges are deferred and amortized to interest expense over the
remaining life of the associated debt. Derivative financial instruments are not
held for trading purposes.
INCOME TAXES
Income taxes are calculated in accordance with Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires
the asset and liability method of accounting for income taxes.
REVENUE RECOGNITION
The Company recognizes publishing revenues principally upon shipment of
products, net of a provision for returns based on sales. Subscription revenues
are generally collected in advance. These revenues are deferred and recognized
pro-rata upon fulfillment. Contract revenues are recognized as services are
provided. Revenues from retail sales are recognized at point-of-sale or upon
shipment.
RECEIVABLES AND FINANCE CHARGE INCOME
NMG's credit operations generate finance charge income which is recognized as
income when earned and is recorded as a reduction of selling, general and
administrative expenses. Finance charge income amounted to $47.0 million in
1997, $47.7 million in 1996 and $55.9 million in 1995. The securitization of
NMG's credit card receivables, which was completed in March 1995, had the effect
of reducing finance charge income by $19.0 million in 1997 and 1996, and by $7.1
million in 1995. See Note 16.
Credit risk with respect to trade receivables is limited due to the large
number of customers to whom the Company extends credit. Collateral is not
required as a condition of extending credit, but credit evaluation of customers'
financial position is performed. The Company maintains reserves for estimated
credit losses.
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125). The effect of adopting SFAS 125 was
not material to the Company's financial position or results of operations.
PRE-OPENING EXPENSES
Costs associated with the opening of new stores are expensed as incurred.
ADVERTISING AND CATALOGUE COSTS
Direct response advertising relates primarily to the production and distribution
of the Company's retail catalogues and is amortized over the estimated useful
life of the catalogue, which is generally less than one year. All other
advertising costs are expensed in the period incurred. Advertising expenses were
$168.1 million, $137.8 million and $138.8 million in 1997, 1996 and 1995,
respectively. Direct response advertising amounts included in other current
assets in the consolidated balance sheets at October 31, 1997 and October 31,
1996 were $6.9 and $6.0 million, respectively.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common share is based upon the weighted average number of common
and, when dilutive, common equivalent shares outstanding during the year.
Weighted average shares outstanding amounted to 70.8 million shares in 1997,
72.8 million shares in 1996 and 76.8 million shares in 1995. Weighted average
shares outstanding in 1997 do not include common stock equivalents because the
effect would not be dilutive.
Earnings per common and common equivalent share, assuming full dilution,
have not been presented because the dilutive effect is not material.
<PAGE> 13
1997 ANNUAL REPORT 35
ISSUANCES OF A SUBSIDIARY'S STOCK
Upon issuances of shares of a subsidiary's stock, the Company's policy is to
record the difference between its carrying value per share of the subsidiary's
stock and the offering price per share of the subsidiary's stock, net of
estimated taxes, as an adjustment to paid-in capital.
SIGNIFICANT ESTIMATES
In the process of preparing its consolidated financial statements, the Company
estimates the appropriate carrying values of certain assets and liabilities
which are not readily apparent from other sources. Management bases its
estimates on historical experience and on various assumptions which are believed
to be reasonable under the circumstances. The primary estimates underlying the
Company's consolidated financial statements include allowances for returns,
doubtful accounts, valuation of inventories and prepublication costs, and
accruals for self-insurance, pension and postretirement benefits. Actual results
could differ from these estimates.
CHANGES IN PRESENTATION
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
adoption of SFAS 128 will not have a material impact on earnings per share for
the three years ended October 31,1997.
In 1997, the FASB issued Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure" (SFAS 129) and No. 130,
"Reporting Comprehensive Income" (SFAS 130). SFAS 129 contains no change in the
Company's disclosure requirements, and SFAS 130 is not expected to be material
to the Company's financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131,"Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). The Company is currently evaluating the effect of implementing SFAS
131.
note 2. DESCRIPTION OF CONTINUING OPERATIONS
PUBLISHING
Harcourt Brace & Company (Harcourt Brace) publishes textbooks and other
materials for elementary and secondary schools and colleges, as well as
scientific, technical, medical and professional books and journals, fiction,
non-fiction, and children's books. Harcourt Brace also publishes and scores
tests that measure individual aptitude and competency and conducts bar
examination and accounting accreditation review courses.
National Education Corporation, which was acquired in 1997, is a provider
of distance education in vocational, academic and professional studies, a
developer of interactive media-based learning products and a publisher of
supplemental education materials.
SPECIALTY RETAILING
NMG operates three specialty retail businesses: Neiman Marcus Stores, NM Direct
and Bergdorf Goodman. Neiman Marcus Stores operates 30 stores in 16 states and
the District of Columbia; Bergdorf Goodman operates two stores in New York City;
and NM Direct operates NMG's direct marketing business, providing both apparel
and home items through its various direct marketing catalogues.
PROFESSIONAL SERVICES
Drake Beam Morin provides human resources management consulting services such as
career transition, outplacement and other consulting services to organizations
and individuals worldwide.
<PAGE> 14
36 HARCOURT GENERAL
ADDITIONAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years ended October 31 (in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Publishing $1,376,258 $1,092,631 $1,017,637
Specialty retailing 2,209,891 2,075,003 1,888,249
Professional services 105,490 122,285 128,850
---------- ---------- ----------
TOTAL REVENUES $3,691,639 $3,289,919 $3,034,736
========== ========== ==========
Operating earnings (loss)
Publishing $ (138,993) $ 196,997 $ 177,531
Specialty retailing 194,714 172,354 161,698
Professional services (25,316) 9,753 13,062
Corporate expenses (36,101) (34,382) (34,395)
---------- ---------- ----------
TOTAL OPERATING EARNINGS (LOSS) $ (5,696) $ 344,722 $ 317,896
========== ========== ==========
Identifiable assets
Publishing $2,108,753 $1,033,951 $ 922,629
Specialty retailing 1,373,682 1,342,202 1,191,085
Professional services 40,984 51,162 58,810
Corporate 257,974 898,923 711,812
---------- ---------- ----------
TOTAL IDENTIFIABLE ASSETS $3,781,393 $3,326,238 $2,884,336
========== ========== ==========
Capital expenditures
Publishing $ 135,045 $ 151,977 $ 122,669
Specialty retailing 53,037 85,736 93,514
Professional services 5,745 4,457 3,799
Corporate 1,212 485 71
---------- ---------- ----------
TOTAL CAPITAL EXPENDITURES $ 195,039 $ 242,655 $ 220,053
========== ========== ==========
Depreciation and amortization
Publishing $ 267,809 $ 113,379 $ 120,331
Specialty retailing 61,695 60,381 49,087
Professional services 11,362 4,564 4,412
Corporate 2,347 2,071 1,907
---------- ---------- ----------
TOTAL DEPRECIATION AND AMORTIZATION $ 343,213 $ 180,395 $ 175,737
========== ========== ==========
</TABLE>
note 3. ACQUISITION OF NEC
In June 1997, the Company completed the acquisition of National Education
Corporation (NEC) for a cash purchase price of approximately $854.4 million. NEC
is a global provider of print and multimedia-based products and services for the
education and training marketplace, and a provider of distance education in
vocational, academic and professional studies.
The NEC acquisition has been accounted for by the purchase method of
accounting and, accordingly, the results of operations of NEC for the period
from June 5, 1997 are included in the accompanying consolidated financial
statements. Assets acquired and liabilities assumed have been recorded at their
estimated fair values, and are subject to adjustment when additional information
concerning asset and liability valuations is finalized. NEC's accounting
policies have been conformed with those of the Company with respect to revenue
recognition of certain subscription contracts and deferred expenses.
Based on an independent appraisal, approximately $174 million of the
purchase price was allocated to purchased in-process research and development.
Accordingly, the Company recorded a non-recurring charge for this purchased
in-process research and development at the date of acquisition.
The excess of cost over the estimated fair value of net assets acquired was
allocated to goodwill. A total of $730.6 million was allocated to goodwill, of
which $302.1 million will be amortized on a straight-line basis over 25 years.
The remaining goodwill will be amortized on a straight-line basis over 40 years.
<PAGE> 15
1997 ANNUAL REPORT 37
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on November 1,
1995 and excludes the write-off of purchased in-process research and development
of $174 million:
<TABLE>
<CAPTION>
Year ended Year ended
(in thousands, except per share amounts) October 31, 1997 October 31, 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $3,876,966 $3,578,720
Net earnings $ 85,506 $ 80,987
Earnings per share $ 1.18 $ 1.11
</TABLE>
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
The NEC acquisition was initially funded with $300 million of borrowings
under the Company's revolving credit agreement and cash and short-term
investments of approximately $554 million. The borrowings under the revolving
credit agreement were subsequently funded with long-term senior debt.
Through NEC, the Company acquired approximately 82% of the issued and
outstanding shares of Steck-Vaughn Publishing Corporation (Steck-Vaughn). In
September 1997, the Company signed a definitive merger agreement to acquire the
balance of the issued and outstanding shares of Steck-Vaughn for $14.75 per
share, or approximately $41 million in aggregate. The transaction will be
consummated in fiscal 1998, and therefore the consolidated financial statements
included herein do not give effect to the acquisition of such shares, which will
result in an increase in goodwill of approximately $30 million.
note 4. OTHER CHARGES
In connection with the acquisition of NEC and the integration of the NEC
businesses into the Company, the Company recorded a charge of $81.7 million in
fiscal 1997, which is included in costs applicable to revenues ($24.6 million)
and selling, general and administrative expenses ($57.1 million). The charge
reflects costs the Company has incurred in connection with the realignment,
consolidation and reorganization of its existing businesses, and includes $23.5
million related to Drake Beam Morin. These costs consist primarily of severance
and related employee benefit obligations, consolidation of facilities and
impairment of certain existing assets. At October 31, 1997, $29.0 million of
these costs is included in other current liabilities.
note 5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
October 31 (in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $1,303,634 $482,217
Acquired intangible assets 108,400 --
Trademarks 73,000 73,000
Other 30,186 28,819
---------- --------
TOTAL 1,515,220 584,036
Accumulated amortization (215,993) (127,542)
---------- --------
TOTAL $1,299,227 $456,494
========== ========
</TABLE>
As of October 31, 1997 and 1996 goodwill consists of approximately $919.9
million and $400.5 million, respectively, amortized over 40 years and $383.7
million and $81.7 million, respectively, amortized over 25 years or less.
Acquired intangible assets consist of course libraries, customer leads and
contracts, and existing technology. These assets are amortized using accelerated
methods over estimated lives of one to five years. Amortization expense was
$88.1 million in 1997, $17.9 million in 1996 and $17.2 million in 1995.
In the periods presented, the Company has acquired several publishing
related companies. The results of operations from these acquired entities are
reflected in the Company's statements of operations from the date of
acquisition. Cash paid for acquisitions amounted to approximately $938.3 million
in 1997, including NEC and Churchill Livingstone, $20.6 million in 1996 and
$42.5 million in 1995. In 1996, the Company also purchased approximately 1.1
million shares of NMG common stock in the open market for approximately $22.8
million.
<PAGE> 16
38 HARCOURT GENERAL
note 6. THE NEIMAN MARCUS GROUP, INC.
In October 1996, NMG completed a public offering of 8.0 million shares of its
common stock at a price of $35.00 per share. The net proceeds from the offering
($267.3 million) were used by NMG to partially fund the repurchase of all of
NMG's issued and outstanding preferred stocks from the Company. The total
consideration paid by NMG to the Company in connection with the repurchase was
$416.4 million, plus accrued and unpaid dividends through the date of the public
offering. Of the total consideration, $260.0 million in cash was advanced to the
Company during October 1996. In addition to the advance, in November 1996, NMG
paid the Company $27.2 million in cash and 3.9 million shares of its common
stock (valued at $135.0 million at $35.00 per share) and completed the exchange
for all of NMG's issued and outstanding preferred stocks. The impact of NMG's
public offering and the repurchase of its preferred stocks from the Company is
reflected in the 1996 financial statements. The Company presently owns
approximately 53% of the outstanding common stock of NMG, as compared to 59%
prior to the transaction. The NMG public offering resulted in the establishment
of a minority interest liability of $217.7 million, which represents the NMG
minority shareholders' interest in the shareholders' equity of NMG and an
increase of $15.2 million in paid-in capital, which represents the Company's
incremental share of NMG's shareholders' equity, both at October 31, 1996.
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. In fiscal 1997 the Company fully recovered previously absorbed losses
attributable to the minority shareholders and no longer includes in its earnings
that portion of NMG earnings (currently 47%) attributable to the minority
shareholders.
The cash flows of NMG are only available to the Company through the payment
of dividends. NMG has not paid dividends on its common stock since NMG's third
quarter of fiscal 1995. Additionally, the Company's consolidated long-term
liabilities at October 31, 1997 include $369.7 million of NMG obligations, which
are not guaranteed by Harcourt General.
The Company and NMG are parties to an agreement pursuant to which the
Company provides certain management, accounting, financial, legal, tax and other
corporate services to NMG. The fees for these services are charged at the
Company's cost and are subject to the approval of a committee of directors of
NMG who are not affiliated with the Company. This agreement may be terminated by
either party on 180 days' notice. Charges to NMG were $5.7 million in 1997, $6.9
million in 1996 and $6.5 million in 1995.
Substantially all of the executive officers of the Company serve in similar
capacities with NMG. During the period covered by these consolidated financial
statements, the Company's Chairman and one of its Presidents and Co-Chief
Operating Officers served as directors of NMG.
note 7. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
<TABLE>
<CAPTION>
October 31 (in thousands) 1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Accrued salaries and related charges $122,909 $77,949
Self-insurance reserves 46,651 49,569
Unearned subscription income 73,456 42,290
Accrued real estate and related charges 52,319 26,120
Other 317,676 196,046
-------- --------
TOTAL $613,011 $391,974
======== ========
</TABLE>
<PAGE> 17
1997 ANNUAL REPORT 39
note 8. LONG-TERM LIABILITIES
<TABLE>
<CAPTION>
Long-term liabilities of Harcourt General and NMG at October 31, 1997 and 1996
were as follows:
(in thousands) Interest Rate Maturity 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harcourt General
Convertible subordinated debentures 6.5% May 2011 $ 54,550 $ --
Revolving credit agreement Variable Apr. 1999 14,000 --
Revolving credit agreement Variable Jul. 2002 -- --
Senior debt 8.25% Jun. 2002 149,493 149,425
Senior debt 6.7% Jul. 2007 149,592 --
Senior debt 8.88% Jun. 2022 148,000 147,982
Senior debt 7.2% Jul. 2027 199,568 --
Senior debt 7.3% Jul. 2097 149,431 --
Subordinated notes 9.38% Jun. 1997 -- 124,938
Subordinated notes 9.50% Mar. 2000 124,938 124,905
Other long-term liabilities Various Various 211,048 158,025
---------- ---------
TOTAL HARCOURT GENERAL 1,200,620 705,275
========== =========
NMG
Revolving credit agreement Variable Apr. 2000 300,000 186,500
Senior notes 9.59% Aug. 1996 -- 52,000
Senior notes 9.24% Dec. 1996 -- 40,000
Senior notes Variable Dec. 1996 -- 40,000
Other long-term liabilities Various Various 78,548 79,016
---------- ---------
TOTAL NMG 378,548 397,516
Less current maturities (14,439) (163,717)
---------- ---------
TOTAL LONG-TERM LIABILITIES $1,564,729 $ 939,074
========== =========
</TABLE>
In connection with the acquisition of NEC, the Company unconditionally assumed
all of the obligations of NEC under its 6 1/2% Convertible Subordinated
Debentures due 2011 and the related Indenture dated May 15, 1986, as amended.
The NEC Debentures are subject to a mandatory annual redemption of $2.9 million
in principal and, as a result of the acquisition of NEC by the Company, are
convertible at the option of the holder into $21.00 for every $25.00 in
principal of NEC Debentures.
In July 1997, the Company replaced its existing revolving credit agreement
with a new revolving credit agreement with 18 banks, pursuant to which the
Company may borrow up to $750 million. The new agreement, which expires in July
2002, may be terminated by the Company at any time on three business days'
notice. The rate of interest payable is determined according to the senior debt
rating of the Company and one of four pricing options selected by the Company.
At October 31, 1997, no borrowings were outstanding under the new agreement.
In August 1997, the Company issued $500 million of senior notes and
debentures to the public. The proceeds of the debt offering were used in part to
repay borrowings outstanding under the Company's revolving credit agreement
which had been used to finance the acquisition of NEC. The debt is comprised of
$150 million 6.70% senior notes due 2007, $200 million 7.20% senior debentures
due 2027 and $150 million 7.30% senior debentures due 2097. Interest on the
securities is payable semiannually in arrears beginning February 1, 1998.
In anticipation of the August 1997 debt offering, the Company entered into
several forward interest rate lock agreements which established weighted average
effective interest rates of 6.83% for the 10-year notes, 7.29% for the 30-year
debentures and 7.40% for the 100-year debentures. In August 1997, the Company
paid $20.5 million to settle such agreements, which was deferred and is being
amortized over the terms of the respective debt.
Subsequent to year end, Steck-Vaughn repaid its outstanding borrowings of
$14.0 million and terminated its revolving credit agreement.
Other long-term liabilities of Harcourt General consist primarily of a
liability for postretirement health care benefits and provisions for other
employee benefits.
At August 2, 1997, NMG had a $500 million revolving credit agreement which
was to expire in April 2000. That facility was replaced in October 1997 by a
$650 million revolving credit facility which expires in October 2002. NMG may
terminate this agreement at any time on three business days' notice. The rate of
interest payable (6.02% at August 2, 1997) varies according to one of four
pricing options selected by NMG.
<PAGE> 18
40 HARCOURT GENERAL
In addition to its revolving credit facility, NMG borrows from other banks
on an uncommitted basis. Such borrowings are included in notes payable and
current maturities of long-term liabilities and amounted to $26.5 million at
August 3, 1996. No such borrowings were outstanding at August 2, 1997.
In 1997 NMG repaid $132 million of senior notes upon maturity through
borrowings under its revolving credit agreement.
Other long-term liabilities of NMG consist primarily of certain employee
benefit obligations and a liability for certain scheduled rent increases.
The aggregate maturities of all long-term liabilities are as follows:
<TABLE>
<CAPTION>
Harcourt
(in thousands) General NMG Total
- --------------------------------------------------------
<C> <C> <C> <C>
1998 $ 5,600 $ 8,800 $ 14,400
1999 26,800 4,100 30,900
2000 137,400 304,100 441,500
2001 6,500 4,300 10,800
2002 155,800 4,600 160,400
Thereafter 868,500 52,600 921,100
</TABLE>
Certain of Harcourt General's and NMG's loan agreements contain, among other
restrictions, provisions limiting the issuance of additional debt and
guarantees.
note 9. SHAREHOLDERS' EQUITY
SERIES A CUMULATIVE CONVERTIBLE STOCK
Each share of Series A Stock is convertible into 1.1 shares of Common Stock and
is entitled to a quarterly dividend equal to the quarterly dividend on each
share of Common Stock multiplied by 1.1, plus $.0075. Each share of Series A
Stock is entitled to a liquidation preference of $5.00 plus any accrued but
unpaid dividends. Liquidation proceeds remaining after the satisfaction of such
preference and the payment of $4.55 per share of Common Stock would be
distributed ratably to the holders of Common Stock and Series A Stock. There
were 10,000,000 authorized shares of Series A Stock at October 31, 1997.
CLASS B STOCK AND COMMON STOCK
The Class B Stock is not transferable except to family members and related
entities but is convertible at any time on a share-for-share basis into Common
Stock. The holders of Class B Stock are entitled to cash dividends which are 10%
lower per share than the cash dividends paid on each share of Common Stock. The
Class B Stock and the Common Stock are each entitled to vote separately as a
class on charter amendments, mergers, consolidations and certain extraordinary
transactions which are required to be approved by shareholders under Delaware
law. Under certain circumstances, the holders of Class B Stock have the right to
cast 10 votes per share for the election of directors. There were 80 million and
200 million shares of Class B Stock and Common Stock authorized for issuance at
October 31, 1997, respectively.
In April 1995, the Company completed a "Dutch Auction" tender offer and
repurchased approximately 5.4 million shares of the Company's Common Stock at
$40.50 per share.
In May 1995, the Company's Board of Directors authorized the purchase of an
additional 2.5 million shares of Common Stock in the open market. Through the
year ended October 31, 1996, the Company repurchased approximately 1.8 million
shares at an average price of approximately $39.12 per share. In December 1996,
the Company's Board of Directors authorized an increase in the open market stock
purchase program to 3.5 million shares of the Company's Common Stock. Through
the year ended October 31, 1997, the Company repurchased approximately 400,000
shares at an average price of approximately $45.56 per share.
COMMON STOCK INCENTIVE PLANS
The Company has established common stock incentive plans allowing for the
granting of stock options, stock appreciation rights (SARs) and stock-based
awards to its employees. The Company applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans. The Company has
adopted the disclosure-only provision of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
Accordingly, no compensation cost has been recognized for its common stock
incentive plans. Had compensation cost for the Company's common stock incentive
plans been determined based on the fair value at the grant dates for awards
under the plans consistent with the method of SFAS 123, the Company's net loss
would have increased by $.4 million and loss per share would remain unchanged.
<PAGE> 19
1997 ANNUAL REPORT 41
The effects on pro forma net income and earnings per share of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on reported net income for future years due to such factors as the
vesting period of the stock options and the potential for issuance of additional
stock options in future years. In addition, the disclosure requirements of SFAS
123 are presently applicable only to options granted subsequent to October 30,
1995.
The Company has adopted the 1997 Incentive Plan (the 1997 Plan) which will
be used for all future grants of equity-based awards to employees. All
outstanding equity-based awards at October 31, 1997 were granted under the
Company's 1988 Stock Incentive Plan. At October 31, 1997, there were 4.0 million
shares of Common Stock available for issuance under the 1997 Plan.
Options outstanding at October 31, 1997 were granted at prices (not less
than 100% of the fair market value on the date of the grant) varying from $15.67
to $48.13. Options generally vest gradually over five years and expire after ten
years. There were 95 employees with options outstanding at October 31, 1997. For
all outstanding options at October 31, 1997, the weighted average exercise price
was $34.08 and the weighted average remaining contractual life was approximately
6.4 years.
The Company has allowed SAR treatment in connection with the exercise of
certain options. Optionees allowed SAR treatment surrender an exercisable option
in exchange for an amount of cash equal to the excess of the market price of the
Common Stock at the time of the surrender over the option exercise price, which
is recorded as expense.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions used
for grants: expected life of seven years, risk-free interest rate of 7.0%,
expected dividend yield of 1.5%, and expected volatility of 22.16% in 1997 and
21.63% in 1996.
A summary of the status of the Company's stock options as of October 31,
1997, 1996, and 1995 and changes during the years ended on those dates is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 447,186 $28.84 543,448 $18.44 755,712 $17.87
Granted 107,350 48.13 80,350 41.88 80,150 33.25
SAR Surrenders (5,917) 32.29 (109,081) 19.68 (197,169) 19.69
Exercised (51,522) 17.55 (61,496) 21.29 (86,643) 16.45
Canceled (4,603) 39.77 (6,035) 31.01 (8,602) 30.77
- ------------------------------------------------------------------------------------------------
OUTSTANDING AT
END OF YEAR 492,494 $34.08 447,186 $28.84 543,448 $18.44
================================================================================================
OPTIONS EXERCISABLE AT
END OF YEAR 236,151 $26.32 223,182 $22.65 285,860 $21.18
================================================================================================
</TABLE>
The weighted-average fair value of options granted in 1997 and 1996 was $17.51
and $15.24, respectively.
The following summarizes information about the Company's stock options as of
October 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------- ------------------------------
Shares Weighted-Average Weighted-Average Shares Weighted-Average
Range of Outstanding Remaining Exercise Outstanding Exercise
Exercise Prices At 10/31/97 Contractual Life Price At 10/31/97 Price
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$15.67 - $23.39 115,062 2.90 years $19.66 115,062 $19.66
$28.72 - $33.25 193,782 6.20 years 31.84 106,169 31.36
$41.88 - $48.13 183,650 8.70 years 45.48 14,920 41.88
-----------------------------------------------------------------------------------------------------------
$15.67 - $48.13 492,494 6.40 years $34.08 236,151 $26.32
============================================================================================================
</TABLE>
<PAGE> 20
42 HARCOURT GENERAL
note 10. INCOME TAXES
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Years ended October 31 (in thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory tax expense $(24,861) (35) $101,209 35 $94,188 35
State income taxes, net of federal tax effect 7,412 10 5,768 2 5,932 2
Tax credits (107) -- (98) -- (106) --
In-process research and development 60,900 86 -- -- -- --
Dividends received exclusion (1,232) (2) (2,451) (1) (1,893) (1)
Foreign tax rate differentials (113) -- (86) -- (501) --
Other permanent items 7,594 11 3,656 1 3,563 1
Change in valuation allowance (7,066) (10) (6,945) (2) (7,187) (2)
Capital gains, settlements and other (4,288) (6) (2,735) (1) (2,500) (1)
INCOME TAX EXPENSE FROM -------------------------------------------------
CONTINUING OPERATIONS $ 38,239 54 $ 98,318 34 $91,496 34
=================================================
</TABLE>
<TABLE>
<CAPTION>
Income tax expense was as follows:
Years ended October 31 (in thousands) 1997 1996 1995
- -----------------------------------------------------------------
Current
<S> <C> <C> <C>
Federal $ 98,464 $97,115 $70,696
State 11,050 10,377 8,249
Deferred
Federal (66,008) (7,671) 11,674
State (5,267) (1,503) 877
---------------------------
INCOME TAX EXPENSE $ 38,239 $98,318 $91,496
===========================
</TABLE>
Significant components of the net deferred tax liabilities stated on a gross
basis were as follows:
<TABLE>
<CAPTION>
October 31 (in thousands) 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Gross deferred tax assets:
Loss carryforwards $ 67,231 $ --
Credit carryforwards 3,227 --
Accrued liabilities and reserves 147,629 84,702
Employee benefits 39,612 37,190
Postretirement health care benefits 41,083 33,406
Inventories 18,482 22,336
Difference in basis of assets acquired 21,574 28,640
--------- --------
Total gross deferred tax assets 338,838 206,274
Valuation allowance (65,896) (11,406)
--------- --------
NET DEFERRED TAX ASSETS 272,942 194,868
Gross deferred tax liabilities:
Property, equipment, prepublication costs and intangibles 164,821 153,445
Pension and employee benefits accrual 19,067 22,295
Difference in basis of assets acquired 80,041 90,945
Accrued liabilities and reserves 31,902 38,324
--------- --------
Total gross deferred tax liabilities 295,831 305,009
--------- --------
NET DEFERRED TAX LIABILITIES $ 22,889 $110,141
========= ========
</TABLE>
<PAGE> 21
1997 ANNUAL REPORT 43
The Company has recorded a valuation allowance for certain deductible temporary
differences for which it is likely, at this time, that the Company will not
receive future tax benefit. Realization of the remaining deferred tax assets is
dependent on generating sufficient future taxable income. Although realization
is not assured, management believes it is more likely than not that the
remaining deferred tax assets will be realized.
At October 31, 1997, the Company had federal net operating loss
carryforwards of approximately $168.3 million expiring at various dates through
2011 related to various subsidiaries which can only be utilized against each
company's respective future taxable income. In addition, the Company had
available $1.3 million of tax credit carryforwards, with no expiration date,
which may be utilized to offset future regular tax liabilities.
note 11. INVESTMENT AND OTHER INCOME
Investment income consisted of the following:
<TABLE>
<CAPTION>
Years ended October 31 (in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $24,746 $16,794 $31,492
Dividend income 4,238 10,535 8,453
------- ------- -------
TOTAL INVESTMENT INCOME $28,984 $27,329 $39,945
======= ======= =======
</TABLE>
note 12. DISCONTINUED OPERATIONS
In June 1995, NMG sold its Contempo Casuals subsidiary to The Wet Seal, Inc. for
approximately $1.0 million of Wet Seal Class A Common Stock and $100,000 in
cash. Revenues related to the discontinued Contempo Casuals operations were
$207.2 million in 1995. The net loss from discontinued operations was $11.7
million in 1995.
note 13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company and NMG have long-term operating leases primarily for offices,
distribution centers, retail stores, other facilities and equipment. Leases are
generally for periods of up to 30 years, with renewal options at fixed rentals.
Certain retail leases also provide for additional rentals based on revenues in
excess of predetermined levels.
Rent expense for continuing operations under operating leases for the years
ended October 31 was as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Minimum rent $83,500 $75,800 $71,900
Rent based on revenues 11,600 10,700 8,400
------- ------- -------
$95,100 $86,500 $80,300
======= ======= =======
</TABLE>
Assuming renewal options are not exercised, the future minimum rental payments
will be as follows:
<TABLE>
<CAPTION>
Harcourt
(in thousands) General NMG Total
- --------------------------------------------------------------
<S> <C> <C> <C>
1998 $50,100 $ 31,600 $ 81,700
1999 46,300 30,500 76,800
2000 41,000 30,200 71,200
2001 36,900 29,200 66,100
2002 24,000 29,000 53,000
Thereafter 53,200 515,200 568,400
</TABLE>
THEATRE OPERATIONS
In December 1993, the Company completed the spinoff of its theatre operations to
GC Companies, Inc. (GCC), which is listed on the New York Stock Exchange. In
connection with the distribution, GCC and Harcourt General entered into various
agreements which govern their ongoing relationship, including a Reimbursement
and Security Agreement and an Intercompany Services Agreement.
<PAGE> 22
44 HARCOURT GENERAL
Under the Reimbursement and Security Agreement, GCC granted to Harcourt
General a security interest in the stock of its theatre subsidiaries in order to
secure GCC's obligation to indemnify Harcourt General from any losses which
Harcourt General may incur due to its secondary liability on theatre leases
which were transferred to GCC as part of the spinoff. In addition, GCC has
agreed to certain financial covenants designed to protect Harcourt General from
incurring such liabilities. As of October 31, 1997, GCC's aggregate future
rental payments due under such theatre leases amounted to approximately $564.0
million.
The Intercompany Services Agreement provides for the services of Harcourt
General's Chairman and Chief Executive Officer and one of its Presidents and
Co-Chief Operating Officers and such additional corporate services as the
Company and GCC may mutually determine from time to time. The Company's Chairman
and Chief Executive Officer continues to serve as the Chairman and Chief
Executive Officer of GCC, and one of the Company's Presidents and Co-Chief
Operating Officers serves as President and Chief Operating Officer of GCC.
LITIGATION
Both Harcourt General and NMG are involved in various suits and claims in the
ordinary course of business. Management does not believe that the disposition of
such suits and claims will have a material adverse effect on the financial
position or continuing operations of Harcourt General or NMG.
note 14. PENSION PLANS
Harcourt General and NMG each have non-contributory defined benefit pension
plans covering substantially all full-time employees other than union employees.
Harcourt General and NMG also sponsor unfunded supplemental executive retirement
plans which provide certain employees additional pension benefits. Benefits
under these plans are based on employees' years of service and compensation over
defined periods of employment. When funding is required, the policy of Harcourt
General and NMG is to contribute amounts that are deductible for federal income
tax purposes.
Net pension expense was as follows:
<TABLE>
<CAPTION>
Years ended October 31 (in millions) 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned $ 13.2 $ 13.1 $ 12.8
Interest cost on projected benefit obligation 15.1 11.7 11.0
Actual return on assets (61.6) (26.3) (20.5)
Net amortization and deferral 47.4 12.9 7.6
------ ------ ------
NET PENSION EXPENSE $ 14.1 $ 11.4 $ 10.9
====== ====== ======
</TABLE>
The following table sets forth the plans' funded status and amounts recognized
in the consolidated balance sheets at October 31:
<TABLE>
<CAPTION>
1997 1996
Funded Unfunded Funded Unfunded
(in millions) Plans Plans Plans Plans
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Vested benefit obligation $142.0 $20.1 $122.5 $ 14.9
====== ===== ====== ======
Accumulated benefit obligation $150.8 $25.0 $130.3 $ 18.4
====== ===== ====== ======
Projected benefit obligation $184.5 $32.5 $159.2 30.4
Plan assets at fair value 250.0 -- 194.0 --
------ ------ ------ ------
Overfunded (underfunded) projected obligation 65.5 (32.5) 34.8 (30.4)
Unrecognized net obligation at transition .7 .6 .4 .8
Unrecognized net loss (gain) (37.5) .1 1.7 1.3
Unrecognized prior service cost (1.5) 3.3 (1.6) 3.5
------ ------ ------ ------
PREPAID (ACCRUED) PENSION COST RECOGNIZED
IN THE CONSOLIDATED BALANCE SHEETS $ 27.2 $(28.5) $ 35.3 $(24.8)
====== ====== ====== ======
</TABLE>
Pension expense was computed assuming a discount rate of 7.5% and a long-term
rate of return on plan assets of 9.0% for both Harcourt General and NMG for each
of the years presented. The assumed rate of increases in future compensation
levels for each of the years presented was 6.0% for Harcourt General and 5.0%
for NMG. In connection with the NEC acquisition, the Company assumed
supplemental benefit plan obligations, of which approximately $6.0 million
remained at October 31, 1997.
<PAGE> 23
1997 ANNUAL REPORT 45
In addition to the pension plans, Harcourt General and NMG have defined
contribution plans for certain employees. The savings plan of each company
permits employee contributions and provides for certain matching contributions.
Company contributions to these plans for the years ended October 31, 1997, 1996
and 1995 were approximately $11.1 million, $10.1 million and $9.4 million,
respectively. The Company's employee stock ownership plan is non-contributory.
note 15. POSTRETIREMENT HEALTH CARE BENEFITS
The Company provides health care benefits for retired employees which are funded
as claims are incurred. Retirees and active employees hired prior to March 1,
1989 are eligible for these benefits if they meet certain service and minimum
age requirements.
The actuarial present value of the accumulated postretirement health care
benefit obligation and the amounts recognized in the Company's consolidated
balance sheets as of October 31 were as follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Retirees $32.4 $31.6
Fully eligible active plan participants 7.0 6.9
Other active plan participants 8.0 7.9
----- -----
Accumulated postretirement benefit obligation 47.4 46.4
Unrecognized net gain 31.3 34.6
----- -----
ACCRUED POSTRETIREMENT BENEFIT LIABILITY $78.7 $81.0
===== =====
</TABLE>
The postretirement health care benefit cost was as follows:
<TABLE>
<CAPTION>
Years ended October 31 (in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ .4 $ .6 $ .7
Interest cost on accumulated benefit obligation 3.0 4.3 3.8
Net amortization and deferral (2.4) (1.8) (2.1)
----- ----- -----
POSTRETIREMENT BENEFIT COST $ 1.0 $ 3.1 $ 2.4
===== ===== =====
</TABLE>
The health care cost trend rate assumed in measuring the accumulated
postretirement benefit obligation in fiscal 1997 was 10.0%, gradually declining
to 5.0% in the year 2002. Measurement of the accumulated postretirement benefit
obligation was based on an assumed 7.5% discount rate in both 1997 and 1996.
An increase of 1% in the health care cost trend rate would increase the
accumulated postretirement obligation as of October 31, 1997 by $4.7 million.
This change would increase the annual expense by $.4 million.
The Company paid $3.3 million in fiscal 1997, $2.9 million during fiscal
1996 and $2.8 million during fiscal 1995 for postretirement health care benefit
claims.
note 16. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as reported
and disclosed in the consolidated financial statements, and as discussed below.
SECURITIZATION OF CREDIT CARD RECEIVABLES
In March 1995, NMG sold all of its Neiman Marcus credit card receivables through
a subsidiary to a trust in exchange for certificates representing undivided
interests in such receivables. Certificates representing undivided interests in
$246.0 million of these receivables were sold to third parties in a public
offering of $225.0 million 7.60% Class A certificates and $21.0 million 7.75%
Class B certificates. NMG used the proceeds from this offering to pay down
existing debt. NMG's subsidiary will retain the remaining undivided interests in
the receivables not represented by the Class A and the Class B certificates. A
portion of that interest is subordinated to the Class A and Class B
certificates. NMG continues to service all receivables for the trust.
In anticipation of the securitization, NMG entered into several forward
interest rate lock agreements which established a weighted average effective
rate of approximately 8.0% on the certificates issued. During March 1995, the
NMG paid $5.4 million to settle all of its interest rate lock agreements.
DEBT
The fair value of Harcourt General's senior debt and subordinated notes was
$1.04 billion and $741.7 million on October 31, 1997 and 1996, respectively, and
was based upon quoted prices and comparable publicly-traded issues.
<PAGE> 24
46 HARCOURT GENERAL
note 17 COMPARATIVE QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997
(in millions except for per share data) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $768.7 $880.0 $1,051.6 $991.3 $3,691.6
==================================================================
GROSS PROFIT $313.9 $315.2 $ 505.6 $464.0 $1,598.7
==================================================================
NET EARNINGS (LOSS) $ 14.7 $ 3.1 $ (141.0) $ 8.1 $ (115.1)
==================================================================
NET EARNINGS (LOSS)
PER COMMON SHARE $ .20 $ .04 $ (2.00) $ .10 $ (1.64)
==================================================================
Dividends per share
Common Stock $ .18 $ .18 $ .18 $ .19 $ .73
Class B Stock $ .162 $ .162 $ .162 $ .171 $ .657
Series A Stock $.2055 $.2055 $ .2055 $.2165 $ .8330
------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
(in millions except for per share data) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $698.4 $844.3 $879.2 $868.0 $3,289.9
==================================================================
GROSS PROFIT $280.2 $301.2 $418.8 $382.7 $1,382.9
==================================================================
NET EARNINGS $ 16.7 $ 10.4 $105.2 $ 58.6 $ 190.9
==================================================================
NET EARNINGS PER COMMON SHARE $ .23 $ .14 $ 1.45 $ .81 $ 2.62
==================================================================
Dividends per share
Common Stock $ .17 $ .17 $ .17 $ .18 $ .69
Class B Stock $ .153 $ .153 $ .153 $ .162 $ .621
Series A Stock $.1945 $.1945 $.1945 $.2055 $ .7890
------------------------------------------------------------------
</TABLE>
In the fourth quarter, the effect of adjusting the LIFO reserve for merchandise
inventories to actual amounts increased net earnings by $2.7 million in 1997 and
by $3.9 million in 1996.
<PAGE> 25
1997 ANNUAL REPORT 47
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Harcourt General, Inc.
Chestnut Hill, Massachusetts
We have audited the consolidated balance sheets of Harcourt General, Inc. and
its subsidiaries as of October 31, 1997 and 1996 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended October 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Harcourt
General, Inc. and its subsidiaries as of October 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
December 8, 1997
STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Harcourt General, Inc. and its subsidiaries is responsible for
the integrity and objectivity of the financial and operating information
contained in this Annual Report, including the consolidated financial statements
covered by the Independent Auditors' Report. These statements were prepared in
conformity with generally accepted accounting principles and include amounts
that are based on the best estimates and judgments of management.
The Company maintains a system of internal financial controls which
provides management with reasonable assurance that transactions are recorded and
executed in accordance with its authorization, that assets are properly
safeguarded and accounted for, and that records are maintained so as to permit
preparation of financial statements in accordance with generally accepted
accounting principles. This system includes written policies and procedures, an
organizational structure that segregates duties, and a comprehensive program of
periodic audits by the internal auditors. The Company has policies and
guidelines which require employees to maintain a high level of ethical
standards.
In addition, the Audit Committee of the Board of Directors, consisting
solely of outside directors, meets periodically with management, the internal
auditors and the independent auditors to review internal accounting controls,
audit results and accounting principles and practices, and to recommend the
selection of independent auditors to the Board of Directors.
John R. Cook
Senior Vice President and Chief Financial Officer
Catherine N. Janowski
Vice President and Controller
<PAGE> 26
48 HARCOURT GENERAL
<TABLE>
<CAPTION>
FIVE YEAR SUMMARY (UNAUDITED)
(in thousands except for per share amounts) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Publishing $1,376,258 $1,092,631 $1,017,637 $ 919,498 $ 944,545
Specialty retail 2,209,891 2,075,003 1,888,249 1,789,461 1,667,825
Professional services 105,490 122,285 128,850 141,818 146,252
----------------------------------------------------------------------
TOTAL $3,691,639 $3,289,919 $3,034,736 $2,850,777 $2,758,622
======================================================================
Operating earnings (loss)
Publishing $ (138,993) $ 196,997 $ 177,531 $ 165,436 $ 142,177
Specialty retail 194,714 172,354 161,698 157,713 134,302
Professional services (25,316) 9,753 13,062 22,072 28,395
Corporate expenses (36,101) (34,382) (34,395) (35,081) (46,932)
----------------------------------------------------------------------
Operating earnings (loss) (5,696) 344,722 317,896 310,140 257,942
Investment income 28,984 27,329 39,945 14,239 14,072
Interest expense (94,319) (82,882) (88,735) (86,219) (84,585)
Other income, net -- -- -- -- 18,303
----------------------------------------------------------------------
Earnings (loss) from continuing operations
before income taxes and minority interest (71,031) 289,169 269,106 238,160 205,732
Income tax expense (38,239) (98,318) (91,496) (90,885) (77,876)
Minority interest in earnings of
subsidiaries, net of taxes (5,852) -- -- -- --
----------------------------------------------------------------------
Earnings (loss) from continuing operations (115,122) 190,851 177,610 147,275 127,856
Discontinued operations, net -- -- (11,727) 30,257 43,477
----------------------------------------------------------------------
Net earnings (loss) $ (115,122) $ 190,851 $ 165,883 $ 177,532 $ 171,333
======================================================================
Depreciation and amortization $ 343,213 $ 180,395 $ 175,737 $ 149,973 $ 154,740
Capital expenditures $ 195,039 $ 242,655 $ 220,053 $ 196,160 $ 159,860
Total assets $3,781,393 $3,326,238 $2,884,336 $3,242,364 $2,805,878
Total long-term liabilities $1,564,729 $ 939,074 $ 999,854 $1,123,341 $1,107,371
Weighted average number of
common and common equivalent
shares outstanding 70,812 72,770 76,764 79,809 79,625
Amounts applicable to
common shareholders
Earnings (loss) from continuing
operations $ (1.64) $ 2.62 $ 2.31 $ 1.84 $ 1.60
Net earnings (loss) applicable to
common shareholders $ (1.64) $ 2.62 $ 2.16 $ 2.22 $ 2.15
Dividends paid on common stock $ .73 $ .69 $ .65 $ .61 $ .57
</TABLE>
<PAGE> 1
Exhibit 21.1
HARCOURT GENERAL, INC.
Subsidiaries & Affiliates*
ENTITY JURISDICTION OF INCORPORATION
- ------ -----------------------------
A.K.R. Conseil France
A.S.I. (UK) Ltd. United Kingdom
Academic Press Limited England
Alison Licensing, Inc. Delaware
Assessment Systems, Inc. Delaware
Bailliere Tindall Limited England
Bergdorf Goodman, Inc. New York
Bergdorf Graphics, Inc. New York
Broadcasters, Inc. Texas
California College for Health Sciences California
Career Care, Inc. Delaware
Chef's Acquisition Corp. Delaware
DBM Australia Limited Delaware
DBM Career Management (Singapore) Pte Ltd Singapore
DBM France, S.A. France
DBM International, Inc. Delaware
DBM New Zealand Limited New Zealand
DBM Training and Consulting, Inc. Delaware
Deltak Ges.m.b.H Austria
Drake Beam Morin-Canada, Inc. Ontario
Drake Beam Morin, Inc. Delaware
Drake Beam Morin plc England and Wales
Educalivres Group Inc. - Group Educalivres I Quebec
Educatief B.V. Netherlands
Edunetics Corporation Delaware
Edunetics International B.V. Netherlands
Edunetics Limited Israel
Emcor, Inc. Delaware
English Language Institute, Inc. Delaware
Ermine Trading Corporation California
Eurodidakt B.V. Netherlands
Eurodidakt Holding B.V. Netherlands
Executive In Residence, Inc. New York
Foundation for Marine Animal Husbandry, Inc. Florida
GMN, Inc. Delaware
Grune & Stratton Limited England
HG Land Co., Inc. Delaware
<PAGE> 2
HGI Investment Trust Massachusetts
HRW and WBS Canada Corporation, Inc. New York
HRW Distributors, Inc. Delaware
Hammond Pond Investments, Inc. Massachusetts
Harcourt Brace & Company Delaware
Harcourt Brace & Company Asia Pte Ltd Singapore
Harcourt Brace & Company Australia Pty Limited Australia
Harcourt Brace & Company Canada, Ltd. Ontario
Harcourt Brace & Company Hong Kong Limited Hong Kong
Harcourt Brace & Company Limited England
Harcourt Brace & Company New Zealand Pty.
Limited Australia
Harcourt Brace Andina, S.A. Columbia
Harcourt Brace Argentina, S.A. Argentina
Harcourt Brace de Espana, S.A. Spain
Harcourt Brace de Mexico, S.A. de C.V. Mexico
Harcourt Brace de Venezuela, C.A. Venezuela
Harcourt Brace FSC, Inc. US Virgin Islands
Harcourt Brace Japan, Inc. Japan
Harcourt Brace Legal and Professional
Publications, Inc. Delaware
Harcourt Brace Publishers International, Inc. Delaware
Harcourt General Charitable Foundation, Inc. Massachusetts
Harcourt General Services, Inc. Delaware
Holt, Rinehart and Winston Limited England
Human Nature, Inc. Delaware
ICS Acquisition Company Florida
ICS Intangibles Holding Company California
ICS Learning Systems, Inc. Delaware
Innovation Research, Inc. Delaware
International Correspondence Schools Australia
(Australia) Pty Ltd
International Correspondence Schools Canadian,
Limited Canada
International Correspondence Schools, Inc. Pennsylvania
International Correspondence Schools Limited England
International Correspondence Schools New Zealand
(New Zealand) Limited
International Correspondence Schools
(Overseas) Limited England
Intertext Group Limited England
Intext International Sales Corp. Delaware
James Martin Insight, Inc. Illinois
KO Corporation Delaware
Kentucky School of Technology, Inc. Delaware
<PAGE> 3
<TABLE>
<S> <C>
Laureate Canada Inc. Ontario
Louisiana CPA Review, Inc. Delaware
M-Mash, Inc. Colorado
Miller Comprehensive CPA Review, Inc. Delaware
NBD Incorporated Delaware
NETG Applied Learning GmbH Germany
NETG Applied LEARNING GmbH
(Vienna, Austria) Austria
NETG Direct, Inc. Delaware
NETG Holding, Inc. Delaware
NETG Limited United Kingdom
NM Direct de Mexico, S.A. de C.V. Mexico
NM Financial Services, Inc. Delaware
NM Nevada Trust Massachusetts
N.T.I. Nederlands Talen Instituut B.V. Netherlands
National Education Centers, Inc. California
National Education Corporation Delaware
National Education Credit Corporation California
National Education Enterprises, Inc. California
National Education Foreign Sales Corporation U.S. Virgin Islands
National Education International Corp. California
National Education Payroll Corp. California
National Education Training Group, Inc. Nevada
National Learning Systems, Inc. Delaware
Neiman Marcus Funding Corporation Delaware
Neiman Marcus Holdings, Inc. California
Neiman Marcus Special Events, Inc. Delaware
Pastille By Mail, Inc. Delaware
SIFTCO, Inc. Massachusetts
SV Acquisition Corp. Delaware
SV Distribution Company Delaware
Spectrum Interactive Incorporated Delaware
Steck-Vaughn Company Delaware
Steck-Vaughn Publishing Corporation Delaware
T & A D Poyser Limited England
The Neiman Marcus Group, Inc. Delaware
The Psychological Corporation New York
The Psychological Corporation Limited England
The School of Accountancy Limited Scotland
W. B. Saunders Company Limited England
</TABLE>
* Includes The Neiman Marcus Group, Inc. (of which Harcourt General, Inc. is
the majority shareholder), and the direct and indirect subsidiaries of The
Neiman Marcus Group, Inc.
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Harcourt General, Inc. on Form S-3 (Nos. 33-13936, 33-46148, and 333-30621) and
Form S-8 (Nos. 33-26079 and 333-42349) of our reports dated December 8, 1997,
appearing in and incorporated by reference in the Annual Report on Form 10-K of
Harcourt General, Inc. for the year ended October 31, 1997.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 28, 1998
<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> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> $82,644
<SECURITIES> 128,341
<RECEIVABLES> 429,693
<ALLOWANCES> 32,018
<INVENTORY> 676,357
<CURRENT-ASSETS> 1,484,916
<PP&E> 1,015,404
<DEPRECIATION> 421,512
<TOTAL-ASSETS> 3,781,393
<CURRENT-LIABILITIES> 993,269
<BONDS> 1,289,889
0
1,125
<COMMON> 70,755
<OTHER-SE> 773,658
<TOTAL-LIABILITY-AND-EQUITY> 3,781,393
<SALES> 3,691,639
<TOTAL-REVENUES> 3,691,639
<CGS> 2,092,956
<TOTAL-COSTS> 3,697,335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 115,660
<INTEREST-EXPENSE> 94,319
<INCOME-PRETAX> (71,031)
<INCOME-TAX> 38,239
<INCOME-CONTINUING> (115,122)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (115,122)
<EPS-PRIMARY> (1.64)
<EPS-DILUTED> (1.64)
<FN>
Weighted Shares - Primary 70,812
Weighted Shares - Fully 70,812
</FN>
</TABLE>
