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, 1998
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 02467
(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>
The aggregate market value of the Common Stock held by non-affiliates
of the registrant was $2,679,399,191 on January 15, 1999.
There were 51,067,664 shares of Common Stock, 20,020,567 shares of
Class B Stock and 903,572 shares of Series A Cumulative Convertible Stock
outstanding as of January 15, 1999.
Documents Incorporated by Reference
Portions of the Company's 1998 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
12, 1999 are incorporated by reference in Part III of this Report.
<PAGE>
HARCOURT GENERAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
TABLE OF CONTENTS
PART I Page No.
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 7
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 8
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 11
Signatures S-1
<PAGE>
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").
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. In 1997 Harcourt Brace expanded into
non-traditional educational market segments, including supplemental
publishing, information technology ("IT") training, and distance education,
through the acquisition of National Education Corporation ("NEC").
In 1998, the Company integrated the three principal NEC businesses -
ICS Learning Systems ("ICS"), Steck-Vaughn Company ("Steck-Vaughn"), and
National Education Training Group ("NETg") - into Harcourt Brace. In
connection with such integration, the Company has organized its publishing and
educational services businesses into the three operating groups described
below.
Education Group. The Education Group includes the
operations of Harcourt Brace School; Holt, Rinehart and Winston ("HRW");
Harcourt Brace College; Steck-Vaughn; and Harcourt Brace Trade. The Education
Group publishes textbooks and related instructional materials for kindergarten
to grade eight through Harcourt Brace School and for the secondary education
market through HRW. Harcourt Brace College publishes textbooks 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 and
offers English language literacy programs for training workers for whom
English is a second language. Harcourt Brace Trade publishes children's
books, general adult fiction and nonfiction hardcover books, and trade
paperbacks under the Harvest imprint.
Lifelong Learning & Assessment Group. The Lifelong Learning
& Assessment Group includes the operations of NETg, ICS, The Psychological
Corporation, Assessment Systems, Inc. ("ASI"), Harcourt Professional Education
Group and Drake Beam Morin ("DBM").
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
professionals. In July 1998, NETg acquired GartnerLearning, a provider of IT
training solutions.
<PAGE>
ICS's core business is providing direct marketed distance learning
opportunities in vocational, degree and professional self-studies to consumers
worldwide. The Company is in the process of transitioning ICS into a new
organization, Harcourt Learning Direct, which is intended to bring together
three distance learning disciplines: the current ICS career-enhancing
programs; accredited high school programs to be developed with the resources
of Steck-Vaughn and HRW; and accredited distance learning associates,
bachelor's and master's degree programs to be developed with the collaboration
of Harcourt Brace College, NETg and the Company's scientific and medical
publishers. ICS is currently seeking accreditation for its high school
program.
The Psychological Corporation provides tests and related products
and services for educational, psychological, clinical and professional
assessment. ASI develops and administers computer-based 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.
DBM is the one of the world's leading organizational and individual
transition consulting firms. DBM assists organizations and individuals
worldwide in outplacement; career and transition management; and employee
selection and performance evaluation.
Worldwide Scientific, Technical and Medical Group. The
Worldwide Scientific, Technical and Medical ("STM") Group includes the
operations of W.B. Saunders, Churchill Livingstone, Mosby, Academic Press, 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. Churchill Livingstone is Europe's
largest English-language medical publisher. In October 1998, the Company
acquired the professional medical publishing business of Mosby, Inc. for $415
million. Mosby publishes more than 3,000 books and 100 periodicals with
particular strength in the nursing and allied health fields, which complement
the strong medical and clinical textbook publishing program of W.B. Saunders.
Prior to the acquisition of Mosby, Harcourt Brace had, since September 1996,
held the exclusive right to market and sell Mosby publications in most parts
of the world outside the United States. In fiscal 1997, Harcourt Brace
acquired both Doyma Libros (now Harcourt Brace de Espana), a leading Spanish-
language medical publisher, and Churchill Livingstone. In 1998 the Company
created a new organization, Harcourt Health Sciences, within the Worldwide
STM Group to encompass the global medical publishing operations of W. B.
Saunders, Churchill Livingstone and Mosby.
Academic Press publishes scholarly books and journals, in print and
electronic media, in the life, physical, social and computer sciences.
Harcourt Brace Publishers International is responsible for international
distribution of Harcourt Brace's English language products and the publication
of adaptations, translations, and indigenous materials worldwide.
2<PAGE>
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 54% 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, 1998,
NMG filed an Annual Report on Form 10-K with respect to its fiscal year ended
August 1, 1998. 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 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, 1998, Neiman Marcus operated 31
stores in 28 cities. The average size of these Neiman Marcus stores is
143,000 gross square feet and they 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, Paramus, New Jersey in August 1996 and Honolulu, Hawaii in September
1998. Neiman Marcus plans to open new Neiman Marcus stores in Palm Beach,
Florida in 2000, Coral Gables, Florida and Houston, Texas in 2001, and Plano,
Texas and Tampa, Florida in 2002. The Plano store will replace the existing
store located in the Prestonwood Mall in Dallas, and the Houston store will
replace the existing Houston Town & Country store.
Neiman Marcus Stores has opened the first two test stores of its new
retail concept, The Galleries of Neiman Marcus, in Cleveland and Phoenix. The
Galleries is designed to extend the Neiman Marcus brand through smaller format
stores (of approximately 10,000 - 15,000 gross square feet) featuring precious
and designer jewelry, gifts and home accessories. An additional store is
planned for Seattle in 1999.
3<PAGE>
Bergdorf Goodman. 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. The core of Bergdorf Goodman's
offerings includes high-end women's apparel and unique fashion accessories
from leading designers. Bergdorf Goodman also features traditional and
contemporary decorative home accessories, precious and fashion jewelry, gifts,
and gourmet foods. Bergdorf Goodman Men consists of 66,000 gross square feet
and is dedicated to fine men's apparel and accessories. During 1999, NMG
expects to add approximately 15,000 square feet of selling space to the main
Bergdorf Goodman store by adding selling space below the first floor on the
plaza level.
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 quality home furnishings, tabletop,
linens and decorative accessories. 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 Book. NMG
acquired Chef's Catalog, a leading direct marketer of gourmet cookware and
other high-end kitchenware, in January 1998 and has consolidated those
operations into NM Direct.
Competition. The specialty retail industry is highly competitive
and fragmented. 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. In addition, NMG 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 compete for customers on the basis of store
ambience. Neiman Marcus Stores competes with other retailers for real estate
opportunities, principally on the basis of its 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.
C. Certain Additional Information
1. Employees
At October 31, 1998, Harcourt Brace had approximately 12,000
employees worldwide. Approximately 3% of the Harcourt Brace employees are
subject to collective bargaining agreements.
At October 31, 1998, NMG had approximately 15,600 employees, of whom
approximately 1,200 were seasonal employees hired to meet the increased
staffing requirements resulting from the seasonality of the retail apparel
industry. None of the employees of Neiman Marcus Stores or NM Direct are
subject to collective bargaining agreements. Approximately 18% of the
4<PAGE>
Bergdorf Goodman employees are subject to collective bargaining agreements.
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 1998,
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
Operations' section on pages 23 through 27 of the Company's Annual Report to
Stockholders for the fiscal year ended October 31, 1998 (the "1998 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 35 of the 1998 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, 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, 1998, Harcourt Brace operated out of
approximately 5.86 million square feet of office and distribution facilities
throughout the world, consisting of approximately 178,000 square feet of owned
office facilities, 2.83 million square feet of leased office facilities, 1.7
million square feet of owned distribution facilities, and 1.15 million square
feet of leased distribution facilities.
5<PAGE>
The operational headquarters for Neiman Marcus Stores, Bergdorf Goodman and NM
Direct are located in Dallas, New York City and Las Colinas, Texas,
respectively. At October 31, 1998, 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> <C>
Neiman Marcus and
Bergdorf Goodman
Stores ........................ 348,000 2,112,000 2,297,000 4,757,000
Distribution, Support and
Office Facilities, Clearance
Centers, and Chef's
Catalog Stores................. 1,169,000 0 772,000 1,941,000
</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 provide for additional rentals based on sales in excess of
predetermined levels. NMG owns approximately 34 acres of land in Longview,
Texas where its National Service Center, the principal distribution facility
for Neiman Marcus Stores, is located in a 464,000 square foot facility, and
also owns approximately 50 acres of land in Las Colinas, Texas, where its
705,000 square foot NM Direct warehouse and distribution facility is located.
NMG operates seven clearance centers which average 25,000 gross square feet
each. These stores 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.
For additional information about the properties of the Company, see
Item 1 above and the information contained in Note 12 of the Notes to
Consolidated Financial Statements under the heading "Leases" on page 43 of the
1998 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.
6<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The following information contained in the 1998 Annual Report is
incorporated herein:
(i) "Dividends per share" in Note 17 of the Notes to Consolidated
Financial Statements on page 46 of the 1998 Annual Report; and
(ii) "Stock Information" (including the accompanying table and text)
on page 50 of the 1998 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, 1999,
there were 1,645 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 contained in the Company's Proxy
Statement for the 1999 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 1998 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 1998 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 response to this Item is contained in the 1998 Annual Report
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Quantitative and Qualitative Disclosures about
Market Risk" on page 26 and is incorporated herein.
7<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and supplementary data set
forth in Item 14 are incorporated herein.
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
1999 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 - 74
Chairman of the Company and of The Neiman Marcus Group, Inc.; Chief
Executive Officer of the Company and of The Neiman Marcus Group, Inc.
(until December 1998) since January 1997 and prior to December
1991; Chairman, President (until November 1995) and Chief Executive
Officer of GC Companies, Inc.; 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 each President
and Co-Chief Operating Officer and directors of the Company. Mr.
Smith is the uncle of Jeffrey R. Lurie, a director of the Company.
Robert A. Smith - 39
President and Co-Chief Operating Officer of the Company since January
1997; Group Vice President of the Company prior thereto; Chief
Executive Officer of The Neiman Marcus Group, Inc. since December
1998; President and Chief Operating Officer of The Neiman Marcus
Group, Inc. from January 1997 to December 1998; Group Vice President
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
8<PAGE>
Operating Officer and a director of the Company, and the cousin of
Jeffrey R. Lurie, a director of the Company.
Brian J. Knez - 41
President and Co-Chief Operating Officer of the Company since January
1997; President (until November 1998) and Chief Executive Officer of
Harcourt Brace & Company since May 1995; President of the Scientific,
Technical, Medical and Professional Group of Harcourt Brace prior
thereto; 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 - 57
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 - 51
Senior Vice President, General Counsel and Secretary of the Company
and of The Neiman Marcus Group, Inc.
Kathleen A. Bursley - 44
Vice President of the Company since December 1998. Vice
President and General Counsel of Harcourt Brace & Company.
Peter Farwell - 55
Vice President - Corporate Relations of the Company and of The Neiman
Marcus Group, Inc.
Paul F. Gibbons - 47
Vice President and Treasurer of the Company and of The Neiman Marcus
Group, Inc.
Gerald T. Hughes - 42
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 - 38
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. prior thereto.
9<PAGE>
James P. Levy - 58
Vice President of the Company since December 1998. President and
Chief Operating Officer of Harcourt Brace & Company since November
1998; President of Harcourt Brace & Company Education and Lifelong
Learning & Assessment Groups prior thereto.
Michael F. Panutich - 50
Vice President - General Auditor of the Company and of The Neiman
Marcus Group, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is contained in the Proxy Statement for the
1999 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
1999 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
1999 Annual Meeting of Stockholders under the captions "Executive
Compensation" and "Transactions Involving Management" and is incorporated
herein.
10<PAGE>
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 1998 Annual Report to
Shareholders:
Consolidated Balance Sheets - October 31, 1998 and
1997.
Consolidated Statements of Operations for the
fiscal years ended October 31, 1998, 1997, and
1996.
Consolidated Statements of Cash Flows for the
fiscal years ended October 31, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for
the fiscal years ended October 31, 1998, 1997 and
1996.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
14(a)(2) Consolidated Financial Statement Schedules
The document and schedule listed below are filed as part
of this Form 10-K:
Page In
Form 10-K
Independent Auditors' Report on Consolidated Financial
Statement Schedule F-1
Schedule VIII - Valuation and Qualifying Accounts
and Reserves F-2
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.
11<PAGE>
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, 1998.
12<PAGE>
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 27, 1999
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.
Signature Title Date
Principal Executive
Officer:
/s/ Richard A. Smith Chairman and Chief January 27, 1999
Richard A. Smith Executive Officer
Principal Financial
Officer:
/s/ John R. Cook Senior Vice President and January 27, 1999
John R. Cook Chief Financial Officer
Principal Accounting
Officer:
/s/ Catherine N. Janowski Vice President and January 27, 1999
Catherine N. Janowski Controller
S-1 <PAGE>
Directors:
/s/ William F. Connell January 27, 1999
William F. Connell
/s/ Gary L. Countryman January 27, 1999
Gary L. Countryman
/s/ Jack M. Greenberg January 27, 1999
Jack M. Greenberg
/s/ Brian J. Knez January 27, 1999
Brian J. Knez
/s/ Jeffrey R. Lurie January 27, 1999
Jeffrey R. Lurie
/s/ Lynn Morley Martin January 27, 1999
Lynn Morley Martin
/s/ Maurice Segall January 27, 1999
Maurice Segall
S-2<PAGE>
Directors:
/s/ Robert A. Smith January 27, 1999
Robert A. Smith
/s/ Paula Stern January 27, 1999
Paula Stern
/s/ Hugo Uyterhoeven January 27, 1999
Hugo Uyterhoeven
/s/ Clifton R. Wharton, Jr. January 27, 1999
Clifton R. Wharton, Jr.
S-3<PAGE>
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, 1998 and 1997, and
for each of the three years in the period ended October 31, 1998, and have
issued our report thereon dated December 9, 1998. Such consolidated financial
statements and report are included in the Company's 1998 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 9, 1998
F-1 <PAGE>
<TABLE>
<CAPTION>
SCHEDULE VIII
HARCOURT GENERAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
THREE YEARS ENDED OCTOBER 31, 1998
(In thousands)
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
_________________________________________________________________________________________________________
YEAR ENDED OCTOBER 31, 1998
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $32,018 8,695 13,113 (B) 11,773 (C) $42,053
(deducted from accounts receivable)
Allowance for book returns (A) $65,911 84,740 27,930 (B) 107,420 (D) $71,161
(deducted from accounts receivable)
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 0 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)
(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.
</TABLE>
F-2 <PAGE>
EXHIBIT INDEX
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 No. 1 to National
Education Corporation's Registration Statement on
Form S-3, File No. 33-5552.
<PAGE>
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, incorporated herein by
reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended
October 31, 1997.
*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.
<PAGE>
*10.6 Deferred Compensation Plan for Non-Employee
Directors.
*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(a) 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.
*10.8(b) Amendment, dated as of December 15, 1998, to 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.
*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 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.
10.11 Amended and Restated Intercompany Services Agreement
dated as of November 1, 1995, between the Company
and GC Companies, Inc., incorporated herein by
reference to Exhibit 10.11(b) of the Company's
Annual Report on Form 10-K for the fiscal year ended
October 31, 1995.
10.12(a) Credit Agreement dated as of July 18, 1997 among
<PAGE>
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.
10.12(b) Amendment dated January 30, 1998 to 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 Agreement and Plan of Merger, dated as of September
29, 1997, by and among the Company, Steck-Vaughn
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.
<PAGE>
13.1 The following sections of the 1998 Annual Report to
Stockholders ("1998 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 1998 Annual Report.
Consolidated Financial Statements and the Notes
thereto at pages 28 through 46 of the 1998
Annual Report.
Independent Auditors' Report at page 47 of the
1998 Annual Report.
The information appearing under the caption
"Five Year Summary (Unaudited)" on page 48 of
the 1998 Annual Report.
The information appearing under the caption
"Stock Information" (including the accompanying
tables and text) on page 50 of the 1998 Annual
Report.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
<PAGE>
EXHIBIT 10.6
HARCOURT GENERAL, INC.
DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
Effective as of March 13, 1998
HARCOURT GENERAL, INC.
DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
Table of Contents
ARTICLE PAGE
ARTICLE 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . -1-
1.1. Amendment and restatement . . . . . . . . . . . . . . . . . . -1-
1.2. Status of Plan . . . . . . . . . . . . . . . . . . . . . . . -1-
ARTICLE 2Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
2.1. "Account" . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
2.2. "Board" . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
2.3. "Committee" . . . . . . . . . . . . . . . . . . . . . . . . . -2-
2.4. "Common Stock" . . . . . . . . . . . . . . . . . . . . . . . -2-
2.5. "Company" . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
2.6. "Compensation" . . . . . . . . . . . . . . . . . . . . . . . -2-
2.7. "Effective Date" . . . . . . . . . . . . . . . . . . . . . . -2-
2.8. "Market Price" . . . . . . . . . . . . . . . . . . . . . . . -2-
2.9. "Non-Employee Director" . . . . . . . . . . . . . . . . . . . -3-
2.10. "Participant" . . . . . . . . . . . . . . . . . . . . . . . . -3-
2.11. "Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . -3-
2.12. "Plan Year" . . . . . . . . . . . . . . . . . . . . . . . . . -3-
2.13. "Prior Plan" . . . . . . . . . . . . . . . . . . . . . . . . -3-
2.14. "Replacement Value" . . . . . . . . . . . . . . . . . . . . . -3-
2.15. "Three-Month Period of Service" . . . . . . . . . . . . . . . -3-
2.16. "Unforeseen Emergency" . . . . . . . . . . . . . . . . . . . -3-
ARTICLE 3Participation . . . . . . . . . . . . . . . . . . . . . . . . . -4-
3.1. Commencement of participation . . . . . . . . . . . . . . . . -4-
3.2. Continuation of participation . . . . . . . . . . . . . . . . -4-
ARTICLE 4Elective Deferrals . . . . . . . . . . . . . . . . . . . . . . . -4-
4.1. Elective deferrals. . . . . . . . . . . . . . . . . . . . . . -4-
4.2. Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . -5-
4.3. Investment equivalent alternatives . . . . . . . . . . . . . -5-
4.4. Time of payment. . . . . . . . . . . . . . . . . . . . . . . -7-
4.5. Form of payment . . . . . . . . . . . . . . . . . . . . . . . -7-
4.6. Death prior to payment . . . . . . . . . . . . . . . . . . . -8-
ARTICLE 5Discontinuation of Retirement Income Benefits; Non-Elective
Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
5.1. Termination of retirement income benefits . . . . . . . . . . -8-
5.2. Crediting of Replacement Values. . . . . . . . . . . . . . . -9-
5.3. Use of Accounts for Non-Elective Deferrals. . . . . . . . . . -9-
5.4. Crediting of Common Stock equivalent units. . . . . . . . . . -10-
5.5. Modification of form or time of payment. . . . . . . . . . . -10-
-i-<PAGE>
ARTICLE 6Administration . . . . . . . . . . . . . . . . . . . . . . . . . -11-
6.1. Plan administration and interpretation . . . . . . . . . . . -11-
6.2. Powers, duties, procedures, etc. . . . . . . . . . . . . . . -11-
6.3. Information . . . . . . . . . . . . . . . . . . . . . . . . . -11-
ARTICLE 7Amendment and Termination . . . . . . . . . . . . . . . . . . . -12-
7.1. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . -12-
7.2. Termination of Plan . . . . . . . . . . . . . . . . . . . . . -12-
7.3. Existing rights. . . . . . . . . . . . . . . . . . . . . . . -12-
ARTICLE 8Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . -13-
8.1. No funding . . . . . . . . . . . . . . . . . . . . . . . . . -13-
8.2. Grantor trust . . . . . . . . . . . . . . . . . . . . . . . . -13-
8.3. Nonassignability . . . . . . . . . . . . . . . . . . . . . . -13-
8.4. Limitation of Participants' rights . . . . . . . . . . . . . -14-
8.5. Participants bound . . . . . . . . . . . . . . . . . . . . . -14-
8.6. Receipt and release . . . . . . . . . . . . . . . . . . . . . -14-
8.7. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
8.8. Unforeseen Emergency . . . . . . . . . . . . . . . . . . . . -14-
8.9. Governing law . . . . . . . . . . . . . . . . . . . . . . . . -15-
8.10. Headings and subheadings . . . . . . . . . . . . . . . . . . -15-
-ii-<PAGE>
HARCOURT GENERAL, INC.
DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
ARTICLE 1
Introduction
1.1. Amendment and restatement. The Company originally adopted the
General Cinema Corporation Deferred Compensation Plan for Non-Employee
Directors, effective April 20, 1990, to provide a means by which members of
the Board who are not employees of the Company may elect to defer receipt of
designated amounts of Compensation earned in that capacity. The Company
amended and restated that Plan to make certain clarifications, to provide an
additional benefit in the form of retirement income to Non-Employee Directors
who satisfied the requirements for such benefits as set forth therein and,
coincident with the change in the name of the Company, to rename such Plan the
"Harcourt General, Inc. Deferred Compensation and Retirement Income Plan for
Non-Employee Directors," effective as of January 1, 1993, except that the
amendment and restatement of Article 4 was made effective as of May 1, 1991.
The Company hereby further amends and restates such amended and restated Plan,
effective as of March 13, 1998, to terminate the provisions of Article 5
thereof, to provide for non-elective deferred compensation as set forth in new
Article 5, and to rename such Plan the "Harcourt General, Inc. Deferred
Compensation Plan for Non-Employee Directors."
1.2. Status of Plan. The Plan is intended neither to be a qualified
plan within the meaning of & 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), nor to constitute a "pension benefit plan" or a "welfare
benefit plan" subject to the requirements of the Employee Retirement Income
<PAGE>
Security Act of 1974. The Plan shall be administered and interpreted to the
extent possible in a manner consistent with that intent.
ARTICLE 2
Definitions
Whenever used herein, the following terms have the meanings set forth
below, unless a different meaning is clearly required by the context:
2.1. "Account" means, for each Participant, the account maintained for
his or her benefit under Section 4.2, 5.3 or 5.4.
2.2. "Board" means the Board of Directors of the Company.
2.3. "Committee" means the Compensation Committee of the Board.
2.4. "Common Stock" means the Common Stock, $1.00 par value, of the
Company.
2.5. "Company" means Harcourt General, Inc., formerly General Cinema
Corporation, a Delaware corporation, and any successor to all or substantially
all of the Company's assets or business which assumes the obligations of the
Company.
2.6. "Compensation" means the amount of retainer payable for service on
the Board, plus any fees payable for attendance at or participation in a
meeting, for service as Chair or Vice Chair of the Board, or for service on or
as a chair of any committee of the Board, determined without reduction for any
elective deferrals under Article 4. Notwithstanding the foregoing,
Compensation does not include the Replacement Value of a Participant's
retirement income benefits or any Common Stock equivalent units credited
pursuant to Section 5.4, which amounts are not subject to the elective
deferral provisions of Section 4.1.
2.7. "Effective Date" means March 13, 1998.
-2-<PAGE>
2.8. "Market Price" means, as of any date, the mean of the highest and
lowest sales prices of the Common Stock on such date (or, if no trading shall
have occurred on such date, on the next previous date on which trading shall
have occurred), as reported on the New York Stock Exchange Composite Tape.
2.9. "Non-Employee Director" means a member of the Board who is not an
officer or employee of the Company or any of its subsidiaries.
2.10. "Participant" means any Non-Employee Director who participates in
the Plan as set forth in Article 3.
2.11. "Plan" means the Harcourt General, Inc. Deferred Compensation
Plan for Non-Employee Directors as set forth herein and all subsequent
amendments hereto.
2.12. "Plan Year" means the calendar year.
2.13. "Prior Plan" means the Harcourt General, Inc. Deferred
Compensation and Retirement Income Plan for Non-Employee Directors referred to
in Section 1.1.
2.14. "Replacement Value", as it relates to the retirement income
benefits of a Participant, means the number of Common Stock equivalent units
calculated in accordance with the provisions of Section 5.2.
2.15. "Three-Month Period of Service" means a 3-month period of service
as a Non-Employee Director, including periods of service before the Effective
Date of the Plan.
2.16. "Unforeseen Emergency" means a severe financial hardship to a
Participant resulting from illness or accident of the Participant or of a
dependent (as defined in & 152(a) of the Code) of the Participant, loss of
property due to casualty, or other similar extraordinary and unforeseeable
-3-<PAGE>
circumstances arising as a result of events beyond the control of the
Participant.
-4-<PAGE>
ARTICLE 3
Participation
3.1. Commencement of participation. Each Non-Employee Director who was
a Participant in the Prior Plan shall be a Participant in this Plan, and each
person who becomes a Non-Employee Director after the Effective Date shall
become a Participant in this Plan upon the day on which he or she becomes a
Non-Employee Director.
3.2. Continuation of participation. An individual who has become a
Participant in the Plan shall continue to be a Participant so long as he or
she remains a Non-Employee Director, and so long thereafter as any amount is
payable to him or her in accordance with Article 4
or 5.
ARTICLE 4
Elective Deferrals
4.1. Elective deferrals. An individual who is a Non-Employee Director
on any November 1 may elect to defer all or a specified portion of his or her
Compensation for services to be performed on or after that date by filing a
written election with the Committee before such November 1. An individual who
has been nominated or elected to serve as a Non-Employee Director, and who was
not a Non-Employee Director immediately prior to such nomination or election,
may elect before or within thirty (30) days after becoming a Non-Employee
Director to defer all or a specified portion of his or her Compensation for
services to be performed after such deferral election.
Each deferral election under this Section 4.1 shall be made on a form
approved or prescribed by the Committee and shall also specify the time and
form of distribution of the amounts deferred and the investment equivalent
-5-<PAGE>
alternative described in Section 4.3 to be applied to such amounts. An
election to defer Compensation and to specify the time and form of
distribution may be revoked or modified, effective for amounts earned on and
after any November 1, by an election filed before that November 1, but may not
otherwise be revoked or modified except as provided in Section 8.8 in the
event of an Unforeseen Emergency.
4.2. Accounts. The Committee shall maintain a bookkeeping account (the
"Account") for each Participant reflecting elective deferrals made for the
Participant's benefit under Section 4.1, or under the Prior Plan or under the
General Cinema Corporation Deferred Compensation Plan for Non-Employee
Directors referred to in Section 1.1, and the value of such elective deferrals
determined in accordance with Section 4.3, together with any adjustments
hereunder. Elective deferrals shall be credited to the Account as of the day
such amounts become payable to the Participant. As of each February 15th, the
Committee shall provide the Participant with a statement of his or her Account
as of the end of the preceding Plan Year.
4.3. Investment equivalent alternatives. When a Participant elects to
make elective deferrals in accordance with Section 4.1, he or she shall also
elect whether the value of such elective deferrals shall be determined under
the cash-based option or the stock-based option described below.
(a) Cash-based option:
Under the cash-based option, elective deferrals shall accrue
interest, to be compounded at the end of each fiscal quarter of
the Company, at a rate equal to the average of the top rates paid
by major New York banks on primary new issues of three-month
negotiable certificates of deposit (usually on amounts of
-6-<PAGE>
$1,000,000 or more) as quoted in the Wall Street Journal on the
last business day of the fiscal quarter.
(b) Stock-based option:
Under the stock-based option, elective deferrals will be
converted hypothetically into Common Stock equivalent units. The
number of such units shall be determined by dividing the amount of
elective deferrals in each fiscal quarter by the average of the
Market Prices of the Common Stock during the last five (5) trading
days of such fiscal quarter. Units will be calculated to the
nearest thousandth. On each dividend payment date, if any, for
the Common Stock, dividend equivalents in the form of additional
units representing Common Stock will be credited to the
Participant's Account equal to (i) the per-share cash dividend
divided by the Market Price of Common Stock on the dividend
payment date, multiplied by (ii) the number of such units
reflected in such Account on the day before the dividend payment
date.
At the end of the period of deferral elected by the
Participant, the Common Stock equivalent units will be valued for
payment by multiplying the applicable number of units by the
average of the Market Prices of the Common Stock during the last
ten (10) trading days before the date on which the value of the
elective deferrals is to be paid or begin to be paid.
If the outstanding shares of Common Stock are increased,
decreased or exchanged for a different number or kind of shares or
other securities, or if additional shares or new or different
-7-<PAGE>
shares or other securities are distributed with respect to such
shares of Common Stock or other securities through merger,
consolidation, sale of all or substantially all the property of
the Company, reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split or other
distribution with respect to such shares of Common Stock or other
securities, appropriate adjustments will be made by the Company in
the number of Common Stock equivalent units credited to a
Participant's Account.
4.4. Time of payment. When a Participant elects to make elective
deferrals in accordance with Section 4.1, the Participant shall also elect
whether the value of the elective deferrals shall be paid, or begin to be
paid, (a) at a specified date at least twenty-four months in the future (which
date shall be the last day of a fiscal quarter) or (b) upon termination of his
or her service as a member of the Board. If alternative (a) under this
Section 4.4 is elected, payment will be made or will commence on the date
specified. If alternative (b) under this Section 4.4 is elected, payment will
be made or will commence at the end of the fiscal quarter in which the
Participant's service as a member of the Board terminates. The foregoing
election shall be made on a form approved or prescribed by the Committee.
Payment of a Participant's Account shall be made in accordance with the
Participant's elections under this Section 4.4 and Section 4.5. Each
Participant's Account shall be reduced by the amount of any payment made to or
on behalf of the Participant (including interest paid with respect to such
payment) as of the date such payment is made.
-8-<PAGE>
4.5. Form of payment. When a Participant elects to make elective
deferrals in accordance with Section 4.1, the Participant shall also elect
whether the value of such elective deferrals shall be paid in (a) a lump sum,
or (b) a specified number of annual installments (not to exceed 10). Each
installment (other than the first) shall accrue interest from the date of the
first installment to the date on which such installment is paid, compounded
quarterly at a rate equal to the average of the top rates paid by major New
York banks on primary new issues of three-month negotiable certificates of
deposit (usually on amounts of $1,000,000 or more) as quoted in the Wall
Street Journal on the last business day of the fiscal quarter. The foregoing
election shall be made on a form approved or prescribed by the Committee.
4.6. Death prior to payment. In the event that a Participant dies
prior to complete distribution of his or her Account, the balance of his or
her Account shall be paid in a single lump sum to the beneficiary or
beneficiaries designated by the Participant. If no such beneficiary has been
designated or if no designated beneficiary survives the Participant, the
balance of such Account shall be paid to the Participant's estate. Payment of
such amount shall be made within sixty (60) days from the date of receipt by
the office of the Secretary of the Company of notice of the Participant's
death. Such designation or designations of beneficiary must be in writing,
dated and signed by the Participant, and no such designation shall require
Company consent. No beneficiary designation shall be deemed effective unless
the same is on file in the office of the Secretary of the Company prior to the
death of the Participant. The Company may rely in all cases on the
genuineness, accuracy and date of any such beneficiary designation and shall
be fully protected in making payment in accordance therewith. Any beneficiary
-9-<PAGE>
designation filed in the office of the Secretary of the Company prior to the
death of the Participant shall be deemed to have revoked all earlier
designations, and no beneficiary designation filed after the date of a
Participant's death shall be deemed effective.
ARTICLE 5
Discontinuation of Retirement Income Benefits; Non-Elective Deferrals
5.1. Termination of retirement income benefits. As of the Effective
Date, the provisions of Article 5 of the Prior Plan shall be terminated,
provided that any former Non-Employee Director who was a Participant in the
Prior Plan, and who on the Effective Date is receiving retirement income
benefits pursuant to Article 5 thereof, shall continue to receive such
benefits in accordance with said Article 5, and the provisions of this Article
5 shall not apply to such former Non-Employee Director.
5.2. Crediting of Replacement Values. The Replacement Value of the
retirement benefits accrued through the Effective Date for the benefit of each
Participant in the Prior Plan, whether vested or unvested, shall be credited
to the Account of such Participant in the manner provided in this Article 5.
For this purpose, the Replacement Value of each Non-Employee Director's
accrued retirement benefits shall take the form of a number of Common Stock
equivalent units equal to the product of (a) the number of Three-Month Periods
of Service completed by such Non-Employee Director prior to the Effective Date
and (b) 50.
5.3. Use of Accounts for Non-Elective Deferrals. Each Participant's
Account shall be credited with the Replacement Value of his or her accrued
retirement income benefits, calculated as provided in Section 5.2, the value
of which shall be determined under the stock-based option described in Section
-10-<PAGE>
4.3(b). For this purpose, for each Participant in the Prior Plan who has not
elected to defer Compensation pursuant to Section 4.1 thereof, an Account
shall be established. The Replacement Value for each Participant shall
remain in the Participant's Account, and the value thereof shall be determined
under the stock-based option, until termination of the Participant's service
as a member of the Board. Payment of any amount credited to each
Participant's Account pursuant to Section 5.2 or Section 5.4 will be made or
will commence at the end of the fiscal quarter in which the Participant's
service as a member of the Board terminates. At the Participant's election,
made within 120 days of the Effective Date, on a form approved or prescribed
by the Committee, such amount shall be paid in a lump sum or in annual
installments (not to exceed 10), and, if the latter, installments (other than
the first) shall accrue interest as described in Section 4.5.
5.4 Crediting of Common Stock equivalent units. It is contemplated
that Board compensation after the Effective Date may, in the Board's sole
discretion, include credits to the Accounts of Participants consisting of
Common Stock equivalent units, and that the value thereof shall be determined
under the stock-based option described in Section 4.3(b). For this purpose,
for each Participant who has not elected to defer Compensation pursuant to
Section 4.1 and who was not a Participant in the Prior Plan, an Account shall
be established. Any amounts so credited shall remain in each Participant's
Account until termination of his or her service as a member of the Board, and
payment from such Account shall be made in the time and manner prescribed by
Section 5.3. In the event that a Participant dies prior to the complete
distribution of the amounts credited to his or her Account pursuant to this
-11-<PAGE>
Article 5, the balance of such amounts shall be paid in the manner prescribed
and to the persons specified in Section 4.6.
5.5 Modification of form or time of payment. Each election under
Section 5.3 as to form of payment may be modified, effective for any amounts
credited under Section 5.4 for service on or after any November 1, by an
election filed before that November 1. Moreover, a majority of the
disinterested members of the Committee may, at their discretion, at the
request or with the consent of a Participant, change the form (or, in the case
of elective deferrals, the time) of payment elected by such Participant with
respect to amounts previously credited to his or her Account pursuant to
Article 4 or this Article 5, provided that (a) the revised form of payment be
one of the forms permitted by Sections 4.5 and 5.3, and (b) no such change
shall be effective unless made at least 24 months prior to the date such
amounts would otherwise have been paid.
-12-<PAGE>
ARTICLE 6
Administration
6.1. Plan administration and interpretation. The Plan shall be
administered by the Committee which may appoint persons to assist in the
administration of the Plan. The Committee shall have complete control and
authority to determine the rights and benefits and all claims, demands and
actions arising out of the provisions of the Plan of any Participant or other
person having or claiming to have any interest under the Plan. The Committee
shall have the exclusive power to interpret the Plan and to decide all matters
under the Plan. Such interpretation and decision shall be final, conclusive
and binding on all Participants and any person claiming under or through any
Participant, in the absence of clear and convincing evidence that the
Committee acted arbitrarily and capriciously. Any individual serving on the
Committee who is a Participant will not vote or act on any matter relating
solely to himself or herself. When making a determination or calculation, the
Committee shall be entitled to rely on information furnished by a Participant
or the Company.
6.2. Powers, duties, procedures, etc. The Committee shall have such
powers and duties, may adopt such rules and tables, may act in accordance with
such procedures, may appoint such officers or agents, and may delegate such
powers and duties as it deems necessary or advisable for the administration of
the Plan.
6.3. Information. To enable the Committee to perform its functions,
the Company shall supply full and timely information to the Committee on all
matters relating to the service of Participants as members of the Board and
such other pertinent facts as the Committee may require.
-13-<PAGE>
ARTICLE 7
Amendment and Termination
7.1. Amendments. The Board shall have the right to amend the Plan from
time to time, subject to Section 7.3, by an instrument in writing approved by
the Board and executed on the Company's behalf by a duly authorized officer.
7.2. Termination of Plan. The Plan is strictly a voluntary undertaking
on the part of the Company and shall not be deemed to constitute a contract
between the Company and any Participant or a consideration for, or an
inducement or condition of, the performance of services by any Participant as
a member of the Board. The Board reserves the right to terminate the Plan at
any time, subject to Section 7.3, by an instrument in writing approved by the
Board and executed on the Company's behalf by a duly authorized officer. Upon
termination of the Plan, no further benefits shall accrue on behalf of any
individual then a Participant, nor shall any individual not a Participant as
of the date of termination be eligible to become a Participant thereafter.
7.3. Existing rights. No amendment or termination of the Plan shall
reduce:
(a) any benefits payable to (or in respect of) a
Participant who has ceased to be a member of the Board, or
(b) any benefits to which a current Board member would have
been entitled, currently or in the future, in the event his or her
service as a Board member had terminated on the date of such
amendment or termination.
-14-<PAGE>
ARTICLE 8
Miscellaneous
8.1. No funding. Nothing in the Plan will be construed to create a
trust or to obligate the Company or any other person to segregate a fund,
purchase an insurance contract, or in any other way currently to fund the
future payment of any benefits hereunder, nor will anything herein be
construed to give any Participant or any other person rights to any specific
assets of the Company or of any other person. The Plan constitutes a mere
promise by the Company to make benefit payments in the future, and is intended
to be unfunded for tax purposes. Any benefits which become payable hereunder
shall be paid from the general assets of the Company, and the rights of any
Participant or of his or her estate or beneficiary shall be those of an
unsecured general creditor.
8.2. Grantor trust. The Company in its sole discretion may establish a
trust (a "grantor trust") of which it is treated as the owner under Subpart E
of Subchapter J, Chapter 1 of the Code to provide for the payment of benefits
hereunder, subject to the claims of the Company's general creditors in the
event of insolvency, and subject to such other terms and conditions as the
Company may deem necessary or advisable to ensure that benefits are not
includable, by reason of the trust, in the income of trust beneficiaries prior
to their actual distribution.
8.3. Nonassignability. None of the benefits, payments, proceeds or
claims of any Participant shall be subject to any claim of any creditor and,
in particular, the same shall not be subject to attachment or garnishment or
other legal process by any creditor of the Participant or his or her
beneficiary, nor shall any Participant or beneficiary have any right to
-15-<PAGE>
alienate, anticipate, commute, pledge, sell, transfer, encumber or assign any
of the benefits or payments or proceeds which he or she may expect to receive,
contingently or otherwise, under the Plan.
8.4. Limitation of Participants' rights. Participation in the Plan
shall not give any Participant the right to be retained as a member of the
Board or any right or interest in the Plan other than as herein provided.
8.5. Participants bound. Any action with respect to the Plan taken by
the Committee, the Board or the Company or any action authorized by or taken
at the direction of the Committee, the Board or the Company shall be
conclusive upon all Participants entitled to benefits under the Plan.
8.6. Receipt and release. Any payment to any Participant in accordance
with the provisions of the Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Company, the Board and the Committee
under the Plan, and the Committee may require such Participant, as a condition
precedent to such payment, to execute a receipt and release to such effect.
If any Participant is determined by the Committee to be incompetent by reason
of physical or mental disability to give a valid receipt and release, the
Committee may cause the payment or payments becoming due to such person to be
made to another person for his or her benefit without responsibility on the
part of the Committee, the Board or the Company to follow the application of
such funds.
8.7. Notices. All notices and elections to be delivered to the
Committee, the Board or the Company hereunder shall be delivered to the
attention of the Secretary of the Company.
8.8. Unforeseen Emergency. A Participant who has an Unforeseen
Emergency may, with the consent of a majority of the disinterested members of
-16-<PAGE>
the Committee, receive a distribution of that portion of his or her Account
which the Committee determines is necessary to satisfy the emergency need,
including any amounts necessary to pay any federal, state or local income
taxes reasonably anticipated to result from the distribution, but only to the
extent such need is not covered by insurance and cannot reasonably be relieved
by the liquidation of the Participant's assets (to the extent that such
liquidation would not in itself cause a severe financial hardship) or by
cessation of elective deferrals under the Plan. A Participant who has an
Unforeseen Emergency may also cease or reduce future deferrals under the Plan
with the consent of a majority of the disinterested members of the Committee.
A Participant requesting a distribution, or a cessation or reduction of future
deferrals, on account of an Unforeseen Emergency shall apply in writing in a
letter submitted to the Committee and shall provide such information as the
Committee may require.
8.9. Governing law. The Plan shall be construed, administered, and
governed in all respects under and by the laws of the Commonwealth of
Massachusetts. If any provision shall be held by a court of competent
jurisdiction to be invalid or unenforceable, the remaining provisions hereof
shall continue to be fully effective.
8.10. Headings and subheadings. Headings and subheadings in the Plan
are inserted for convenience only and are not to be considered in the
construction of the provisions hereof.
IN WITNESS WHEREOF, Harcourt General, Inc. has caused this Plan to be
executed by its duly authorized officer this 13th day of March, 1998.
-17-<PAGE>
HARCOURT GENERAL, INC.
By: /s/ Eric P.Geller
Eric P. Geller, Senior Vice President,
General Counsel and Secretary
-18-<PAGE>
EXHIBIT 10.8(b)
Amendment to Split Dollar Life Insurance Agreement
This is an Amendment to a Split Dollar Life Insurance Agreement entered
into as of June 21, 1990 (the "1990 Agreement") by and between Harcourt
General, Inc. (the "Corporation") and Jay E. Orlin, as Trustee of the Richard
and Susan Smith 1990 Issue Trust under a Declaration of Trust dated as of
April 3, 1990 (the "Policy Owner").
BACKGROUND
The current Trustees of the Policy Owner are Amy Smith Berylson, Robert
A. Smith, Debra Smith Knez and Mark D. Balk, Esq.
Article 2 of the 1990 Agreement provides, in part, that the Corporation
was obligated to make certain premium payments under the Policy through June
1998, which the Corporation has done.
It is projected that up to four additional premium payments will
be required for the Policy to become self-sustaining.
Accordingly, in consideration of the promises and mutual covenants
expressed herein and in the 1990 Agreement by both of the parties, each party
agrees as follows:
1. Article 2(B) is amended by deleting it in its entirety and
replacing it with the following:
"B. Notwithstanding the provisions of section A of this ARTICLE
2, the Corporation's obligation to make premium payments under the Policy
shall terminate upon the payment by the Corporation of the thirteenth annual
premium due under the Policy or at any such earlier time as the Policy Owner
and the Corporation shall agree upon."
2. Any capitalized terms which are not defined herein shall have the
same meaning as set forth in the 1990 Agreement.
3. Except as set forth in paragraph #1, above, the 1990 Agreement
shall remain in full force and effect.
4. This Amendment may be executed in multiple counterpart copies, and
shall take effect as an instrument executed under seal, to be governed by and
construed under the laws of the Commonwealth of Massachusetts without regard
to conflicts of laws principles.
HARCOURT GENERAL, INC.
(formerly known as
Witness: General Cinema Corporation)
BY
Eric P. Geller
Its Senior Vice President,
General Counsel and Secretary
Witness:
BY
Amy Smith Berylson*
Witness:
BY
Robert A. Smith*
Witness:
BY
Debra Smith Knez*
Witness:
BY
Mark D. Balk*
* As Trustees of THE RICHARD AND SUSAN SMITH 1990 ISSUE TRUST,
under Declaration of Trust dated as of April 3, 1990
<PAGE>
EXHIBIT 10.12(b)
FIRST AMENDMENT TO CREDIT AGREEMENT
AMENDMENT dated as of January 30, 1998 among HARCOURT GENERAL, INC. (the
"Borrower") and the BANKS listed on the signature pages hereof (the "Banks").
W I T N E S S E T H
_ _ _ _ _ _ _ _ _ _
WHEREAS, the Borrower, the Banks, THE CHASE MANHATTAN BANK, as
Syndication Agent, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Documentation
Agent, (the "Documentation Agent"), and BANKBOSTON, N.A., as Administrative
Agent, have heretofore entered into a Credit Agreement dated as of July 18,
1998 (The "Agreement"); and
WHEREAS, the parties hereto desire to amend the Agreement as set forth
below.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions: References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Agreement shall
have the meaning assigned to such term in the Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Agreement shall from and after the date hereof refer to the
Agreement as amended hereby.
SECTION 2. Amendment of the Agreement
(a) Section 1.01 of the Agreement is amended by replacing the
definition of "Debt" with the following:
"DEBT' of any Person means, at any date, without duplication, all
obligations of such Person which would, in accordance with generally accepted
accounting principles, be classified as liabilities (excluding (a) deferred
tax liabilities and (b) all liabilities for employee and director benefits and
other non-contractual liabilities and reserves) of such Person, as of such
date, but in any event including (i) all obligations of such Person as lessee
under Capitalized Leases and (ii) all Debt of others secured by a Lien on any
asset of such Person, whether or not such Debt is assumed by such Person and
excluding all Debt of others Guaranteed by such Person, except to the extent
of the same would be reflected as a liability on a balance sheet of such
person prepared in accordance with generally accepted accounting principles as
of such date; provided that Debt shall include Guarantees of bonds, notes or
other similar obligations of a state, city, town or other governmental agency
or entity which obligations are issued in order to finance property used or to
be used by the Borrower or any Subsidiary."
<PAGE>
(b) Section 5.09 of the Agreement is amended to read as follows:
"SECTION 5.09. Leverage Ratio. The Leverage Ratio will a no time
exceed 475% through and including January 30, 1999, thereafter will at no time
exceed 400%."
SECTION 3. Government Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 4. Counterpart; Effectiveness. This Amendment may be signed in
any number of counterpart, each shall be an original, with the same effect as
if the signatures thereto and herto were upon the same instrument. This
Amendment shall become effective on and as of the date hereof provided that
the Documentation Agent shall have received duly executed counterparts hereof
signed by the Borrower and each of the Required Banks (or, in the case of any
party as to which an executed counerpart shall not have been received, the
Documentation Agent shall have received telegraphic, telex, telecopy or other
written confirmation from such party of execution of a counerpart hereof by
such party).
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
HARCOURT GENERAL, INC. MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
BY: _________________________ By: ________________________
Title: __________________ Title: _________________
THE CHASE MANHATTAN BANK BANKBOSTON, N.A.
BY: _________________________ By: ________________________
Title: __________________ Title: _________________
<PAGE>
BANK OF AMERICA NATIONAL FLEET BANK
TRUST AND SAVINGS ASSOCIATION
BY: _________________________ By: ________________________
Title: __________________ Title: _________________
THE BANK OF NEW YORK CAISSE NATIONALE DE
CREDIT AGRICOLE
BY: _________________________ By: ________________________
Title: __________________ Title: _________________
THE BANK OF NOVA SCOTIA THE DAI-ICHI KANGYO
BANK, LTD.
BY: _________________________ By: ________________________
Title: __________________ Title: _________________
BANK OF TOKYO-MITSUBISHI FIRST UNION NATIONAL BANK
TRUST COMPANY
BY: _________________________ By: ________________________
Title: __________________ Title: _________________
CREDIT LYONNAIS NEW YORK THE FUJI BANK, LTD.
BY: _________________________ By: ________________________
Title: __________________ Title: _________________
<PAGE>
MELLON BANK, N.A. THE SAKURA BANK, LTD.
BY: _________________________ By: ________________________
Title: __________________ Title: _________________
ROYAL BANK OF CANADA THE SANWA BANK, LTD.
BY: _________________________ By: ________________________
Title: __________________ Title: _________________
WACHOVIA BANK, N.A.
BY: _________________________
Title: __________________
<PAGE>
EXHIBIT 13.1
[BEGIN PAGE 23]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATING RESULTS
The following table presents revenues and operating earnings by business:
<TABLE>
<CAPTION>
Years ended October 31 (in thousands)
1998 1997 1996
===============================================================================================
Revenues
<S> <C> <C> <C>
Education $ 714,927 $ 622,062 $ 499,895
Lifelong Learning & Assessment 619,470 408,638 318,420
Worldwide STM 527,510 451,048 396,601
---------- ---------- ----------
Total publishing and educational services 1,861,907 1,481,748 1,214,916
Specialty retailing 2,373,347 2,209,891 2,075,003
---------- ---------- ----------
Total revenues $4,235,254 $3,691,639 $3,289,919
========== ========== ==========
OPERATING EARNINGS (LOSS)
Education $ 125,448 $ 83,234 $ 80,233
Lifelong Learning & Assessment 6,886 (64,562) 43,117
Worldwide STM 100,325 94,246 83,400
Purchased in-process research and
development and other charges - (277,227) -
---------- ---------- ----------
Total publishing and educational services 232,659 (164,309) 206,750
Specialty retailing 213,062 194,714 172,354
Corporate expenses (34,837) (36,101) (34,382)
---------- ---------- ----------
Total operating earnings (loss) $ 410,884 $ (5,696) $ 344,722
========== ========== ==========
===============================================================================================
</TABLE>
OPERATING RESULTS 1998 VS. 1997
Publishing and educational services
Revenues from the Harcourt Brace publishing and educational services
businesses increased $380.2 million, or 25.7%, compared to the same period
last year, primarily as a result of revenues generated by the NEC operations
acquired in June 1997, by Churchill Livingstone acquired in September 1997 and
by higher sales at existing businesses. The Education Group's revenues rose
14.9% to $714.9 million, reflecting primarily the addition of the Steck-Vaughn
supplemental educational publishing business and higher secondary publishing
sales. Revenues of the Lifelong Learning & Assessment Group increased 51.6% to
$619.5 million in fiscal 1998. The increase in this group's revenues resulted
primarily from the inclusion of the revenues of ICS Learning Systems and NETg
for the full fiscal year, higher scoring and test administration revenues and,
to a lesser extent, sales increases of the professional education businesses
and Drake Beam Morin, the Company's professional services and outplacement
business. The Worldwide Scientific, Technical and Medical (STM) Group revenues
increased 17.0% in fiscal 1998 to $527.5 million, primarily due to the
acquisition of Churchill Livingstone in September 1997 and to higher book and
journal subscription revenues at Academic Press, its scientific publishing
company.
The publishing and educational services businesses generated operating
earnings of $232.7 million in fiscal 1998, increasing by $397.0 million from
an operating loss of $164.3 million in fiscal 1997. The 1997 period included
$277.2 million of purchased in-process research and development and other
charges incurred concurrently with the acquisition of NEC. The Education
Group's operating earnings increased primarily as a result of higher revenues,
higher profits and lower amortization costs at Steck-Vaughn. Operating
earnings of the Lifelong Learning & Assessment Group increased significantly
in comparison to the prior year as a result of strong sales by its testing and
assessment and professional education businesses, the inclusion of the
operations of ICS and NETg for the full year of fiscal 1998, and the impact of
lower amortization of intangible assets. Worldwide STM Group earnings
increased in the 1998 period primarily as a result of a full year of results
from Churchill Livingstone and from higher revenues at Academic Press.
Specialty retailing
Specialty retailing results are reported with a lag of one quarter.
Accordingly, the operating results of The Neiman Marcus Group, Inc. (NMG) for
the year ended August 1, 1998 are consolidated with the Company's operating
results for the year ended October 31, 1998.
Revenues in the year ended August 1, 1998 increased 7.4% to $2.37 billion
from $2.21 billion in the year ended August 2, 1997. Comparable sales for the
period increased 6.0%. Neiman Marcus Stores and Bergdorf Goodman revenues rose
in fiscal 1998, reflecting
[END PAGE 23]
<PAGE>
[BEGIN PAGE 24]
comparable sales increases of 7.0% and 8.0%,
respectively. Revenues at NM Direct increased in comparison to the prior year
period as a comparable revenue decline of 2.3% was more than offset by the
inclusion of sales from Chef's Catalog, a direct marketer of gourmet cookware
and high-end kitchenware, which was acquired by NMG in January 1998.
Operating earnings increased 9.4% to $213.1 million from $194.7 million in
the prior period primarily as a result of higher sales volume, particularly
the comparable sales increases at Neiman Marcus Stores and Bergdorf Goodman
and improved gross margins due to proportionately lower buying and occupancy
costs.
Corporate expenses
Corporate expenses decreased $1.3 million or 3.5% to $34.8 million in fiscal
1998 from $36.1 million in fiscal 1997. The decrease is primarily due to the
compensation expense recognized in the prior fiscal year in connection with
the resignation of the Company's former chief executive officer.
Investment income
Investment income decreased $24.1 million to $4.9 million in fiscal 1998,
compared to $29.0 million in fiscal 1997. The Company liquidated its
investment portfolio in June 1997 to partially fund the acquisition of NEC.
Interest expense
Interest expense increased $14.0 million or 14.8% to $108.3 million from $94.3
million in fiscal 1997. The increase in interest expense is primarily due to
the interest incurred on fixed-rate debt issued by the Company in August 1997,
the proceeds from which were used to partially fund the acquisitions of NEC
and Churchill Livingstone. The interest expense in fiscal 1998 includes a
lower amount of interest incurred by NMG in comparison to fiscal 1997,
resulting from both a lower effective interest rate and lower average
borrowings by NMG.
Minority interest
The Company recorded minority interest in net earnings of its subsidiaries of
$49.0 million in fiscal 1998 compared to $5.9 million in fiscal 1997. The
Company began recognizing the minority interest in NMG (currently 46%) in its
statement of operations in the fourth quarter of fiscal 1997. In the first
nine months of fiscal 1997, the Company recorded 100% of the earnings of NMG
to the extent that the Company had previously absorbed losses of NMG
applicable to the minority interest. The Company fully recovered previously
absorbed losses in the fourth quarter of 1997. Minority interest of $49.6
million recognized in 1998 represents a full year of minority interest in net
earnings of its specialty retailing business. Other amounts recognized in 1998
relate to minority interest in net losses of various publishing and
educational services businesses.
OPERATING RESULTS 1997 VS. 1996
Publishing and educational services
Publishing and educational services revenues increased 22.0% to $1.48 billion
in fiscal 1997 from $1.21 billion in fiscal 1996. Revenues of the NEC
operations, included in revenues from the date of acquisition in June 1997,
comprised approximately $125.3 million of the increase. The Company's
Education Group contributed significantly to the increase, with a revenue
increase of approximately $122.2 million from the prior year. Elementary
publishing revenues rose approximately 28.0% primarily as a result of higher
adoption sales of social studies in Texas and reading titles in California.
Revenues from secondary school publishing and the newly acquired Steck-Vaughn
supplemental publishing business also contributed to the increase in the
Education Group's revenues. Revenues from the Lifelong Learning & Assessment
Group increased primarily due to the inclusion of ICS Learning Systems and
NETg for five months in fiscal 1997. Revenues at the Company's Worldwide STM
Group increased from the prior year due primarily to the acquisition in the
first quarter of 1997 of Doyma Libros, a Spanish language medical and health
sciences publishing company and the acquisition of international distribution
rights for Mosby health sciences publications and higher journal sales at
Academic Press.
The publishing and educational services segment incurred an operating loss
of $164.3 million in fiscal 1997 compared to operating earnings of $206.8
million in fiscal 1996 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 from the date of acquisition
and include amortization of acquired intangible assets and goodwill of
approximately $104.1 million. Also during the third quarter of 1997, the
publishing and educational services businesses recognized charges of
approximately $81.7 million related to the realignment, reorganization and
consolidation of its existing businesses. These charges consisted primarily of
costs to consolidate facilities, severance and the impairment of certain
existing assets. Excluding the effect of these charges, operating earnings at
the Education Group increased slightly 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 amortization of plates
and intangible assets. Operating earnings for the Lifelong Learning &
Assessment Group decreased significantly from the prior year, primarily as a
result of amortization of intangible assets related to the NEC acquisition.
Operating earnings for the Worldwide STM Group increased from the prior year,
primarily due to higher revenues.
[END PAGE 24]
<PAGE>
[BEGIN PAGE 25]
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.
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 facility, 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 facility.
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.
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 1998 was $452.1 million compared to
$248.7 million in 1997. In 1998, the publishing and educational services
segment provided $269.5 million of such cash and NMG provided $182.6 million.
Cash provided by the Company's operations and borrowings under its revolving
credit facility were sufficient to fund working capital, capital expenditures,
acquisitions and dividend requirements. NMG uses its own cash and revolving
credit facility to fund its expenditures. The most significant change in
working capital was an increase in accounts receivable of $62.5 million, which
was primarily due to higher sales by the publishing and educational services
segment.
The Company paid approximately $415 million to acquire Mosby, Inc., a
professional health science publisher, in October 1998. The purchase price was
funded with borrowings under the Company's revolving credit facility. The
Company's capital expenditures totaled $275.8 million in 1998. Publishing and
educational services capital expenditures were approximately $193.8 million
and related principally to expenditures for prepublication costs. The Company
expects capital expenditures in the publishing and educational services
businesses to approximate $230.0 million in fiscal 1999. Specialty retailing
capital expenditures of $81.2 million in 1998 related principally to the
construction of a new store in Hawaii and the renovation of existing stores.
In fiscal 1999, specialty retailing capital expenditures are expected to
approximate $120.0 million.
The Company borrowed $475.0 million under its revolving credit facility, the
proceeds from which were used to fund the acquisition of Mosby in October 1998
and to fund working capital requirements. At October 31, 1998, the Company had
$275.0 million available under its $750.0 million revolving credit facility,
which expires in July 2002. In May 1998, NMG issued $250 million of senior
notes and debentures to the public, comprised of $125 million 6.65% senior
notes due 2008 and $125 million 7.125% senior debentures due 2028. The
proceeds of the debt offering were used to repay borrowings outstanding under
NMG's revolving credit facility. At August 1, 1998, NMG had $615.0 million
available under its $650.0 million revolving credit facility, which expires in
October 2002. Financing activities also include the payment of $53.9 million
in dividends.
At October 31, 1998, the Company's consolidated long-term liabilities
totaled $2.11 billion. That amount included $355.7 million of NMG obligations,
which are not guaranteed by Harcourt General.
[END PAGE 25]
<PAGE>
[BEGIN PAGE 26]
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 expenditures, as well as its operating and dividend requirements.
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, 1998 and 1997, the fair value of the Company's fixed-rate
debt was estimated at $1.24 billion and $1.04 billion, respectively, using
quoted market prices and comparable publicly-traded issues. Such fair values
at October 31, 1998 and 1997 exceeded the carrying value by approximately
$15.9 million and $49.8 million, respectively. 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 $70.0 million at
October 31, 1998.
The Company had approximately $510.0 million of variable rate borrowings
outstanding under its revolving credit facilities, which approximated fair
value, at October 31, 1998. A hypothetical 10% adverse change in interest
rates for this variable rate debt would have an approximate $2.9 million
negative effect on the Company's earnings and cash flows.
At October 31, 1998 the carrying value of the put option issued in
connection with the acquisition of GartnerLearning was $20.0 million, which
approximated fair value. Market risk is estimated as the potential change in
market value of the put option resulting from a hypothetical 10% adverse
change in the value of NETg, and would have an approximately $2.8 million
negative effect on the Company's earnings.
Impact of inflation
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 date conversion
The Company has substantially completed its assessment of its hardware and
software systems, including the embedded systems in the Company's buildings,
property and equipment, and is implementing plans to ensure that the
operations of such systems will not be adversely affected by the Year 2000
date change.
The Company is presently in the process of renovating non-compliant systems
and implementing converted and replaced systems for substantially all of its
non-compliant hardware and software systems. The Company estimates that its
efforts to make these systems Year 2000 compliant are approximately 60%
complete, with substantial completion of the Year 2000 project currently
anticipated for June 1999.
The Company has established an ongoing program to communicate with its
significant suppliers and vendors to determine the extent to which the
Company's systems and operations are vulnerable to those third parties'
failure to rectify their own Year 2000 issues. Based on responses to the
Company's inquiries, the Company is in the process of identifying those
suppliers and vendors most at risk for failing to achieve Year 2000 compliance
on a timely basis and is monitoring their continuing progress. The Company is
not presently aware of any significant exposure arising from potential third
party failures. However, there can be no assurance that the systems of other
companies on which the Company's systems or operations rely will be timely
converted or that any failure of such parties to achieve Year 2000 compliance
would not have an adverse effect on the Company's results of operations.
The Company has engaged both internal and external resources to assess,
reprogram, test and implement its systems for Year 2000 compliance. Based on
management's current estimates, the costs of Year 2000 remediation, including
system renovation, modifications and enhancements, which have been and will be
expensed as incurred, have not been and are not expected to be material to the
results of operations or the financial position of the Company. Additionally,
such expenditures have not adversely affected the Company's ability to
continue its investment in new technology in connection with its ongoing
systems development plans.
Management presently believes the Company's most reasonably likely worst
case Year 2000 scenario could arise from a business interruption caused by
governmental agencies, utility companies, telecommunication service companies,
shipping companies or other service providers outside the Company's control.
There can be no assurance that such providers will not suffer business
interruption caused by a Year 2000 issue. Such an interruption could have a
material adverse effect on the Company's results of operations.
The Company is in the process of developing a contingency plan for
continuing operations in the event of Year 2000 failures, and the current
target for completing that plan is June 1999.
Seasonality
The Company's businesses are seasonal in nature. A significant portion 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.
The publishing and educational services businesses typically report
operating losses in the first and second quarters when publishing revenues are
at their lowest level. Those losses are partially offset by retail earnings,
which have historically been strong in the Company's second quarter due to
NMG's holiday selling season.
[END PAGE 26]
<PAGE>
[BEGIN PAGE 27]
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 1998, the Board of Directors voted to increase the quarterly cash
dividend on the Common Stock to 20 cents per share. The Board also increased
the quarterly cash dividend on the Series A Stock to 22.75 cents per share and
on the Class B Stock to 18 cents per share.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive
Income." The adoption of SFAS 130 in fiscal 1999 is not expected to be
material to the consolidated financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company is currently evaluating the
additional disclosures required by SFAS 131, which will be effective for
fiscal 1999.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and other Postretirement Benefits." Upon adoption in fiscal 1999, the
Company will provide the additional disclosures required by SFAS 132.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which will require recognition of all
derivatives as either assets or liabilities on the balance sheet at fair
value. The Company is currently evaluating the effect of implementing SFAS
133, which will be effective for fiscal 2000.
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; failure of the Company or third parties to be Year 2000 compliant;
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; failure of the
Company or third parties to be Year 2000 compliant; 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.
[END PAGE 27]
<PAGE>
[BEGIN PAGE 28]
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31 (in thousands) 1998 1997
==============================================================================================
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and equivalents $ 115,200 $ 82,644
Undivided interests in NMG Credit Card Master Trust 138,867 128,341
Accounts receivable, net 479,569 397,675
Inventories 706,586 676,357
Deferred income taxes 114,794 120,546
Other current assets 94,024 79,353
---------- ----------
Total current assets 1,649,040 1,484,916
---------- ----------
PROPERTY AND EQUIPMENT
Land, buildings and improvements 618,826 564,747
Fixtures and equipment 536,876 450,657
---------- ----------
1,155,702 1,015,404
Less accumulated depreciation and amortization (510,489) (421,512)
---------- ----------
Total property and equipment, net 645,213 593,892
OTHER ASSETS
Prepublication costs, net 252,831 201,953
Goodwill, net 1,614,369 1,130,671
Other intangible assets, net 183,431 213,086
Other 104,215 109,292
---------- ----------
Total other assets 2,154,846 1,655,002
---------- ----------
Total assets $4,449,099 $3,733,810
===============================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
[END PAGE 28]
<PAGE>
[BEGIN PAGE 29]
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31 (in thousands) 1998 1997
===============================================================================================
LIABILITIES
CURRENT LIABILITIES
<S> <C> <C>
Notes payable and current maturities of long-term liabilities $ 10,013 $ 14,439
Accounts payable 392,417 346,386
Taxes payable 20,928 19,433
Other current liabilities 701,212 613,011
---------- ----------
Total current liabilities 1,124,570 993,269
---------- ----------
LONG-TERM LIABILITIES
Notes and debentures 1,729,459 1,289,889
Other long-term liabilities 258,621 227,257
Deferred income taxes 118,162 143,435
---------- ----------
Total long-term liabilities 2,106,242 1,660,581
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 292,565 234,422
SHAREHOLDERS' EQUITY
PREFERRED STOCK
Series A Cumulative Convertible - $l par value
Issued and outstanding - 914 and 1,125 shares 914 1,125
COMMON STOCKS
Class B Stock - $1 par value
Issued and outstanding - 20,021 and 20,022 shares 20,021 20,022
Common Stock - $1 par value
Issued and outstanding - 51,008 and 50,733 shares 51,008 50,733
PAID-IN CAPITAL 745,679 744,932
CUMULATIVE TRANSLATION AND OTHER ADJUSTMENTS (15,407) (7,113)
RETAINED EARNINGS 123,507 35,839
---------- ----------
Total shareholders' equity 925,722 845,538
---------- ----------
Total liabilities and shareholders' equity $4,449,099 $3,733,810
---------- ----------
===============================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
[END PAGE 29]
<PAGE>
[BEGIN PAGE 30]
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended October 31 (in thousands except for per share amounts) 1998 1997 1996
===============================================================================================
<S> <C> <C> <C>
Revenues $4,235,254 $3,691,639 $3,289,919
Costs applicable to revenues 2,233,627 2,092,956 1,906,974
Selling, general and administrative expenses 1,555,906 1,394,278 1,003,841
Purchased in-process research and development expense - 174,000 -
Corporate expenses 34,837 36,101 34,382
---------- ---------- ----------
OPERATING EARNINGS (LOSS) 410,884 (5,696) 344,722
Investment income 4,880 28,984 27,329
Interest expense (108,298) (94,319) (82,882)
---------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 307,466 (71,031) 289,169
Income tax expense (116,837) (38,239) (98,318)
---------- ---------- ----------
EARNINGS (LOSS) BEFORE MINORITY INTEREST 190,629 (109,270) 190,851
Minority interest in net earnings of subsidiaries (49,013) (5,852) -
---------- ---------- ----------
NET EARNINGS (LOSS) $ 141,616 $ (115,122) $ 190,851
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Basic 70,837 70,812 71,277
========== ========== ==========
Diluted
72,141 70,812 72,770
========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 1.99 $ (1.64) $ 2.66
========== ========== ==========
Diluted $ 1.96 $ (1.64) $ 2.62
========== ========== ==========
===============================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
[END PAGE 30]
<PAGE>
[BEGIN PAGE 31]
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended October 31 (in thousands) 1998 1997 1996
===============================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings (loss) $ 141,616 $ (115,122) $ 190,851
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 306,224 343,213 180,395
Minority interest 49,013 5,852 -
Purchased in-process research and development - 174,000 -
Deferred income taxes 39,962 (71,275) (9,174)
Other (2,014) (11,376) (401)
Changes in assets and liabilities:
Accounts receivable (62,503) (50,290) (26,396)
Inventories (13,045) (19,149) (96,332)
Other current assets 8,355 13,968 (23,654)
Accounts payable and other current liabilities (20,097) 36,997 18,765
Taxes payable 4,572 (58,115) 19,444
---------- ---------- ----------
Net cash provided by operating activities 452,083 248,703 253,498
========== ========== ==========
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (275,839) (195,039) (242,655)
Purchases of available-for-sale investments - (408,304) (280,939)
Sales of available-for-sale investments - 325,767 -
Maturities of available-for-sale investments - 324,591 281,958
Purchases of NMG common stock - - (22,841)
Purchases of held-to-maturity securities (636,342) (461,791) (502,604)
Maturities of held-to-maturity securities 625,816 447,842 492,673
Acquisition of NEC, net of cash acquired (40,512) (839,620) -
Acquisition of Mosby, net of cash acquired (413,733) - -
Other acquisitions and investing activities (62,833) (100,084) (33,536)
---------- ---------- ----------
Net cash used for investing activities (803,443) (906,638) (307,944)
========== ========== ==========
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings, net 445,339 586,728 109,917
Repayment of debt (5,949) (306,000) (41,571)
Proceeds from NMG public offering - - 268,800
Repurchase of Common Stock - (20,139) (67,150)
Cash dividends paid (53,948) (51,149) (48,693)
Other financing activities (1,526) (1,723) 2,255
---------- ---------- ----------
Net cash provided by financing activities 383,916 207,717 223,558
========== ========== ==========
CASH AND EQUIVALENTS
Increase (decrease) during the year 32,556 (450,218) 169,112
Beginning balance 82,644 532,862 363,750
---------- ---------- ----------
Ending balance $ 115,200 $ 82,644 $ 532,862
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 105,393 $ 88,321 $ 82,185
Income taxes $ 73,035 $ 183,851 $ 104,845
===============================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
[END PAGE 31]
<PAGE>
[BEGIN PAGE 32]
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Series A Paid-in Translation and Retained
(in thousands) Stocks Stock Capital Other Adjustments Earnings
============================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at November 1, 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
Net earnings - - - - 141,616
Cash dividends paid - - - - (53,948)
Conversion of Series A Stock 232 (211) (21) - -
Translation and other adjustments - - - (8,294) -
Other equity transactions, net 42 - 768 - -
--------- --------- --------- --------- ---------
Balance at October 31, 1998 $ 71,029 $ 914 $ 745,679 $ (15,407) $ 123,507
========= ========= ========= ========= =========
============================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
[END PAGE 32]
<PAGE>
[BEGIN PAGE 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. NMG's
fiscal year ends on the Saturday closest to July 31. In fiscal 1996, NMG's
reporting period included 53 weeks as compared to 52 weeks in each of fiscal
years 1998 and 1997. All significant intercompany accounts and transactions
are 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
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 in fiscal 1997. Short-term investments with maturities
greater than three months, which consisted 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.
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 (SFAS) 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 $71.2
million in 1998 and $65.9 million in 1997 and for doubtful accounts of $42.1
million in 1998 and $32.0 million in 1997.
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 $14.5 million and $15.0
million higher than reported at October 31, 1998 and October 31, 1997,
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. Maintenance and repair costs are charged to
expense as incurred, and renewals and improvements that extend the useful life
of the assets are capitalized.
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.
[END PAGE 33]
<PAGE>
[BEGIN PAGE 34]
Goodwill and other intangible assets
Amortization of goodwill and publishing rights is provided using the
straight-line method over their estimated useful lives, 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 their estimated useful lives, ranging from 30 to
40 years using the straight-line method.
Long-lived assets
Upon occurrence of an event or a change in circumstances which indicates that
the carrying amount of an asset may not be recoverable, 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.
Other long-term liabilities
Other long-term liabilities of Harcourt General consist primarily of a
liability for postretirement health care benefits and provisions for other
employee benefits.
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 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, and 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 $47.8 million in
1998, $47.0 million in 1997 and $47.7 million in 1996. 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 each of 1998,
1997 and 1996. See Note 15.
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 SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." 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 less than one year. All other
advertising costs are expensed in the period incurred. Advertising expenses
were $210.3 million, $173.4 million and $141.5 million in 1998, 1997 and 1996,
respectively. Direct response advertising amounts included in other current
assets in the consolidated balance sheets at October 31, 1998 and October 31,
1997 were $7.6 million and $6.9 million, respectively.
Earnings per common and common equivalent share
In 1998, the Company adopted SFAS 128, "Earnings per Share." All earnings per
share amounts for all periods presented have been restated to conform to the
requirements of SFAS 128.
Issuances of a subsidiary's stock
Upon issuance 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
[END PAGE 34]
<PAGE>
[BEGIN PAGE 35]
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 1997 and 1996 financial
statements to conform to the 1998 presentation.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS 130,
"Reporting Comprehensive Income." The adoption of SFAS 130 in fiscal 1999 is
not expected to be material to the consolidated financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company is currently evaluating the
additional disclosures required by SFAS 131, which will be effective for
fiscal 1999.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and other Postretirement Benefits." Upon adoption in fiscal 1999, the
Company will provide the additional disclosures required by SFAS 132.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which will require recognition of all
derivatives as either assets or liabilities on the balance sheet at fair
value. The Company is currently evaluating the effect of implementing SFAS
133, which will be effective for fiscal 2000.
NOTE 2. DESCRIPTION OF CONTINUING OPERATIONS
Publishing and educational services
Harcourt Brace & Company (Harcourt Brace) has three main operating groups:
Education, Lifelong Learning & Assessment, and Worldwide Scientific, Technical
and Medical (STM). The Education Group consists of the Company's K-12,
supplemental and college education publishing operations and its trade
publisher. The Lifelong Learning & Assessment Group includes testing,
professional education, distance learning, career counseling and
technology-based IT training. The Worldwide STM Group is comprised of the
Company's scientific, technical and medical publishing businesses and its
international publishing and distribution operations.
Specialty retailing
NMG operates three specialty retail businesses: Neiman Marcus Stores, Bergdorf
Goodman and NM Direct. Neiman Marcus Stores operates 31 stores in 17 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
upscale apparel and home furnishings through its various direct
marketing catalogues.
ADDITIONAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Years ended October 31 (in thousands) 1998 1997 1996
===============================================================================================
REVENUES
<S> <C> <C> <C>
Publishing and educational services $ 1,861,907 $1,481,748 $1,214,916
Specialty retailing 2,373,347 2,209,891 2,075,003
----------- ---------- ----------
Total revenues $ 4,235,254 $3,691,639 $3,289,919
=========== ========== ==========
OPERATING EARNINGS (LOSS)
Publishing and educational services $ 232,659 $ (164,309) $ 206,750
Specialty retailing 213,062 194,714 172,354
Corporate expenses (34,837) (36,101) (34,382)
----------- ---------- ----------
Total operating earnings (loss) $ 410,884 $ (5,696) $ 344,722
=========== ========== ==========
IDENTIFIABLE ASSETS
Publishing and educational services $ 2,713,339 $2,149,737 $1,085,113
Specialty retailing 1,521,962 1,373,682 1,342,202
Corporate 213,798 210,391 898,923
----------- ---------- ----------
Total identifiable assets $ 4,449,099 $3,733,810 $3,326,238
=========== ========== ==========
CAPITAL EXPENDITURES
Publishing and educational services $ 193,773 $ 140,790 $ 156,434
Specialty retailing 81,176 53,037 85,736
Corporate 890 1,212 485
----------- ---------- ----------
Total capital expenditures $ 275,839 $ 195,039 $ 242,655
=========== ========== ==========
DEPRECIATION AND AMORTIZATION
Publishing and educational services $ 241,338 $ 279,171 $ 117,943
Specialty retailing 63,056 61,695 60,381
Corporate 1,830 2,347 2,071
----------- ---------- ----------
Total depreciation and amortization $ 306,224 $ 343,213 $ 180,395
=========== ========== ==========
===============================================================================================
</TABLE>
[END PAGE 35]
<PAGE>
[BEGIN PAGE 36]
NOTE 3. ACQUISITIONS
Mosby
On October 9, 1998, the Company completed the acquisition of Mosby, Inc. for
approximately $415 million in cash. Mosby is a publisher of books, periodicals
and electronic products and services in professional health sciences,
including nursing, allied health and medicine, and is included in the
Company's Worldwide STM Group. The purchase price was funded with borrowings
under the Company's revolving credit facility.
The Mosby acquisition has been accounted for under the purchase method of
accounting and, accordingly, the results of operations of Mosby for the period
from October 9, 1998 are included in the accompanying consolidated financial
statements. The $414.6 million excess of cost over the estimated fair value of
net assets acquired was allocated to goodwill which will be amortized on a
straight-line basis over 30 years. Assets acquired and liabilities assumed
have been recorded at their estimated fair values and useful lives, and are
subject to adjustment when additional information concerning asset and
liability valuations is finalized.
The Company is in the process of combining certain activities of Mosby with
those of the Company's Worldwide STM Group and has initially recorded
liabilities of approximately $81.9 million related to the costs to close
certain Mosby facilities, sever certain Mosby employees and other exit
activities. Once the Company has finalized its plan, any change in the
liabilities will result in an adjustment to goodwill.
GartnerLearning
On August 31, 1998, the Company completed the acquisition of GartnerLearning,
the technology-based training operation of Gartner Group. GartnerLearning was
merged with the operations of NETg, a subsidiary of the Company, which
provides self-paced multimedia training courseware for professionals.
The acquisition was accounted for under the purchase method of accounting
and the results of operations of GartnerLearning for the period from August
31, 1998 are included in the accompanying consolidated financial statements.
The purchase price for GartnerLearning consisted of $5.0 million in cash and
eight percent of the newly combined company, known as NETg, valued at
approximately $28.0 million. Additionally, under the terms of the investor
agreement, Gartner Group was granted a put option exercisable at any time
between the fourth and sixth anniversary of the acquisition to require the
Company to purchase the minority interest at the higher of either fair value
or $48.0 million, subject to certain provisions. The Company has a call option
to repurchase Gartner Group's interest in NETg on similar terms. The Company
recorded a liability for the difference between the fair value of eight
percent of NETg and the put option exercise price of $48.0 million. This
liability will be adjusted to reflect changes in the fair value of NETg, with
the offset reported as a gain or loss in the consolidated statement
of operations.
The $65.7 million excess of cost over estimated fair value of net assets
acquired was allocated to goodwill, which will be amortized on a straight-line
basis over 25 years. Assets acquired and liabilities assumed have been
recorded at their estimated fair values. In addition, the Company recorded
approximately $12.7 million of liabilities related to combining the operations
of GartnerLearning with those of NETg. These amounts are subject to adjustment
when additional information concerning asset and liability valuations is
finalized.
National Education Corporation
In June 1997, the Company completed the acquisition of National Education
Corporation (NEC) for a cash purchase price of approximately $854.4 million.
The Company has consolidated the operations of NEC into its publishing and
educational services group.
The NEC acquisition has been accounted for by the purchase method of<PAGE>
accounting and, accordingly, the results of operations of NEC for the period
from June 5, 1997 are included in the accompanying consolidated financial
statements. 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.
Through NEC, the Company acquired approximately 82% of the issued and
outstanding shares of Steck-Vaughn Publishing Corporation (Steck-Vaughn). On
January 30, 1998, the Company completed its acquisition of the minority
interest in Steck-Vaughn for $14.75 per share, or approximately $40.5 million.
The transaction had the effect of increasing goodwill by $29.6 million and
decreasing the Company's minority interest by $10.9 million on the
consolidated balance sheet.
The Company completed its plan to integrate the NEC operations with those of
its existing businesses. Such plan included closing the NEC corporate
headquarters, combining certain operations of Steck-Vaughn with Harcourt
Brace, severing certain employees and closing certain facilities of NEC, and
exiting certain business activities. In the third quarter of fiscal 1998, the
Company recorded its final purchase price allocation of NEC. The final
purchase price allocation resulted in a net reduction of goodwill and other
current liabilities from the amounts initially recorded.
The $735.0 million excess of cost over the estimated fair value of net
assets acquired was allocated to goodwill, of which $283.6 million is
amortized on a straight-line basis over 25 years. The remaining goodwill is
amortized on a straight-line basis over 40 years. In 1998 approximately $38.6
million was charged against acquisition liabilities related to the NEC
acquisition; at October 31, 1998, $52.7 million is included in other
liabilities.
[END PAGE 36]
<PAGE>
[BEGIN PAGE 37]
Other acquisitions
In the periods presented, the Company has acquired several publishing-related
companies and Chef's Catalog. The results of operations from these acquired
entities are reflected in the Company's statements of operations from the date
of acquisition. These acquisitions did not materially impact consolidated
results, and therefore no pro forma information is provided.
Pro forma information
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisitions of NEC, Gartner and Mosby had
taken place as of the beginning of the periods presented, excluding 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, 1998 October 31, 1997
==============================================================================================
<S> <C> <C>
Revenues $4,454,559 $4,127,453
Net earnings (loss) $ 107,501 $ (12,521)
Diluted earnings (loss) per share $ 1.49 $ (.18)
==============================================================================================
</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 acquisitions occurred on the dates
indicated, or which may result in the future.
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. These costs
consist primarily of severance and related employee benefit obligations,
consolidation of facilities and impairment of certain existing assets. At
October 31, 1998, $2.4 million of these costs is included in other current
liabilities.
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
<TABLE>
<CAPTION>
October 31 (in thousands) 1998 1997
===============================================================================================
<S> <C> <C>
Goodwill $1,844,011 $1,301,715
Accumulated amortization (229,642) (171,044)
---------- ----------
Goodwill, net $1,614,369 $1,130,671
========== ==========
Publishing rights $ 249,551 $ 249,551
Acquired intangible assets 36,500 36,500
Trademarks 88,300 73,000
Other 72,638 58,630
---------- ----------
446,989 417,681
Accumulated amortization (263,558) (204,595)
---------- ----------
Other intangibles, net $ 183,431 $ 213,086
========== ==========
===============================================================================================
</TABLE>
As of October 31, 1998, goodwill consists of approximately $923.3 million
amortized over 40 years, $425.1 million over 30 years and $495.6 million over
periods of 25 years or less. As of October 31, 1997, goodwill consists of
approximately $858.7 million amortized over 40 years and $443.0 million over
periods of 25 years or less. Amortization expense was $108.3 million in 1998,
$124.0 million in 1997 and $25.2 million in 1996.
[END PAGE 37]
<PAGE>
[BEGIN PAGE 38]
NOTE 6. THE NEIMAN MARCUS GROUP, INC.
Ownership by Harcourt General
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 $35.0 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 54% of the outstanding
common stock of NMG, as compared to 59% prior to the transaction. The NMG<PAGE>
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 46%) 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, 1998 include $355.7 million of NMG obligations,
which are not guaranteed by the Company.
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 $5.4
million in 1998, $5.7 million in 1997 and $6.9 million in 1996.
Substantially all of the executive officers of the Company serve in similar
capacities with NMG. The Company's Chairman, both of its Presidents and
Co-Chief Operating Officers and its Senior Vice President and Chief Financial
Officer serve as directors of NMG.
Acquisition
On January 5, 1998, NMG acquired Chef's Catalog for approximately $31.0
million in cash. Chef's Catalog is a direct marketer of gourmet cookware and
high-end kitchenware, and its operations have been integrated with NM Direct.
The acquisition has been accounted for by the purchase method of accounting
and, accordingly, the results of operations of Chef's Catalog for the period
from the date of acquisition are included in the accompanying consolidated
financial statements. Intangible assets acquired, consisting primarily of
trademarks, customer lists and goodwill, are amortized on a straight-line
basis over their estimated useful lives.
Stock Repurchase
In NMG's fiscal 1998, NMG repurchased 160,100 shares at an average price of
$29.32 per share. During the first thirteen weeks of NMG's fiscal 1999, NMG
repurchased 827,000 shares at an average price of $18.57 per share, and
512,900 shares were remaining under this program at October 31, 1998.
NOTE 7. OTHER CURRENT LIABILITIES
Other current liabilities at October 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
================================================================================================
<S> <C> <C>
Accrued salaries and related charges $141,148 $122,909
Self-insurance reserves 54,152 46,651
Unearned subscription income 84,357 73,456
Accrued real estate and related charges 68,829 52,319
Other 352,726 317,676
-------- --------
Total $701,212 $613,011
======== ========
================================================================================================
</TABLE>
[END PAGE 38]
<PAGE>
[BEGIN PAGE 39]
NOTE 8. NOTES AND DEBENTURES
Notes and debentures of Harcourt General and NMG at October 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
(in thousands) Interest Rate Maturity 1998 1997
===============================================================================================
Harcourt General
<S> <C> <C> <C> <C>
Convertible subordinated debentures 6.5% May 2011 $ 48,640 $ 54,867
Revolving credit facility Variable Apr. 1999 - 14,000
Revolving credit facility Variable Jul. 2002 475,000 -
Senior debt 8.25% Jun. 2002 149,560 149,493
Senior debt 6.7% Jul. 2007 149,634 149,592
Senior debt 8.88% Jun. 2022 148,018 148,000
Senior debt 7.2% Jul. 2027 199,582 199,568
Senior debt 7.3% Jul. 2097 149,437 149,431
Subordinated notes 9.5% Mar. 2000 124,971 124,938
---------- ----------
Total Harcourt General 1,444,842 989,889
---------- ----------
NMG
Revolving credit facility Variable Oct. 2002 35,000 300,000
Senior notes 6.65% Jun. 2008 124,848 -
Senior debentures 7.125% Jun. 2028 124,769 -
---------- ----------
Total NMG 284,617 300,000
========== ==========
Total long-term notes and debentures $1,729,459 $1,289,889
===============================================================================================
</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.
The Company has a revolving credit facility with 18 banks, pursuant to which
the Company may borrow up to $750 million. The facility, which expires in July
2002, may be terminated by the Company at any time on three business days'
notice. The rate of interest payable (5.6% at October 31, 1998) is determined
according to the senior debt rating of the Company and one of four pricing
options selected by the Company. At October 31, 1998, $475.0 million in
borrowings were outstanding under the facility. The revolving facility
contains covenants which require the Company to maintain certain leverage and
interest coverage ratios.
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 facility
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.
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 is being amortized
over the terms of the respective debt.
NMG has a revolving credit facility with 20 banks, pursuant to which NMG may
borrow up to $650 million. The facility, which expires in October 2002, may be
terminated by NMG at any time on three business days' notice. The rate of<PAGE>
interest payable (5.9% at August 1, 1998) varies according to one of four
pricing options selected by NMG. The revolving credit facility contains
covenants which require the Company to maintain certain leverage and fixed
charge coverage ratios.
In May 1998, NMG issued $250 million of senior notes and debentures to the
public. The proceeds of the debt offering were used to repay borrowings
outstanding on NMG's revolving credit facility. The debt is comprised of $125
million 6.65% senior notes due 2008 and $125 million 7.125% senior debentures
due 2028. Interest on the securities is payable semiannually in arrears
beginning December 1998.
[END PAGE 39]
<PAGE>
[BEGIN PAGE 40]
The aggregate maturities of notes and debentures are as follows:
<TABLE>
<CAPTION>
Harcourt
(in thousands) General NMG Total
===============================================================================================
<S> <C> <C> <C>
1999 $ - $ - $ -
2000 127,500 - 127,500
2001 2,900 - 2,900
2002 627,100 35,000 662,100
2003 2,900 - 2,900
Thereafter 684,500 249,600 934,100
===============================================================================================
</TABLE>
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, 1998.
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, 1998, respectively.
In December 1996, the Company's Board of Directors authorized an open market
purchase program for up to 3.5 million shares of the Company's Common Stock.
The Company may repurchase up to 3.1 million shares under the repurchase
program.
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 the SFAS 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the 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 earnings (loss) and earnings (loss) per share for
the years ended October 31, 1998, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1998 1997 1996
===============================================================================================
<S> <C> <C> <C>
Net earnings (loss):
As reported $141,616 $ (115,122) $190,851
Pro forma $140,670 $ (115,532) $190,689
Basic earnings (loss) per share:
As reported $ 1.99 $ (1.64) $ 2.66
Pro forma $ 1.99 $ (1.64) $ 2.66
Diluted earnings (loss) per share:
As reported $ 1.96 $ (1.64) $ 2.62
Pro forma $ 1.95 $ (1.64) $ 2.62
================================================================================================
</TABLE>
[END PAGE 40]
<PAGE>
[BEGIN PAGE 41]
The effects on pro forma net earnings (loss) and earnings (loss) per share
of expensing the estimated fair value of stock options are not necessarily
representative of the effects on reported net earnings 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.
Options outstanding at October 31, 1998 were granted at prices (not less
than 100% of the fair market value on the date of the grant) varying from
$15.67 to $54.25. Options generally vest gradually over five years and expire
after ten years. There were 169 employees with options outstanding at October
31, 1998. For all outstanding options at October 31, 1998, the weighted
average exercise price was $41.66 and the weighted average remaining
contractual life was approximately 6.8 years. At October 31, 1998, there were
3.7 million shares of Common Stock available for issuance under the plan.
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:
<TABLE>
<CAPTION>
1998 1997 1996
===============================================================================================
<S> <C> <C> <C>
Expected life (years) 7 7 7
Expected dividend yield 1.7% 1.5% 1.5%
Expected volatility 24.24% 22.16% 21.63%
Risk-free interest rate 5.5% 7.0% 7.0%
===============================================================================================
</TABLE>
A summary of the status of the Company's stock options as of October 31, 1998,
1997, and 1996 and changes during the years ending on those dates is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
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 492,494 $ 34.08 447,186 $ 28.84 543,448 $ 18.44
Granted 264,900 54.25 107,350 48.13 80,350 41.88
SAR Surrenders (13,205) 29.24 (5,917) 32.29 (109,081) 19.68
Exercised (14,457) 23.50 (51,522) 17.55 (61,496) 21.29
Canceled (7,180) 45.34 (4,603) 39.77 (6,035) 31.01
--------- --------- --------- --------- --------- ---------
Options outstanding
at end of year 722,552 $ 41.66 492,494 $ 34.08 447,186 $ 28.84
========= ========= ========= ========= ========= =========
Options exercisable
at end of year 287,922 $ 29.58 236,151 $ 26.32 223,182 $ 22.65
========= ========= ========= ========= ========= =========
===============================================================================================
</TABLE>
The weighted-average fair value of options granted in 1998, 1997 and 1996 were
$17.09, $17.51 and $15.24, respectively.
The following table summarizes information about the Company's stock options
as of October 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
============================================================================================================
Range of Shares Weighted-Average Weighted-Average Shares Weighted-Average
Exercise Outstanding Remaining Exercise Outstanding Exercise
Prices At 10/31/98 Contractual Life Price At 10/31/98 Price
- ------------------------------------------------------------------- -------------------------------------
<C> <C> <C> <C> <C> <C>
$15.67 - $23.39 100,198 2.2 years $19.64 100,198 $19.64
$28.72 - $33.25 182,054 5.3 years $31.88 138,534 $31.50
$41.88 - $54.25 440,300 8.6 years $50.72 49,190 $44.43
- ------------------------------------------------------------------- -------------------------------------
$15.67 - $54.25 722,552 6.8 years $41.66 287,922 $29.58
=================================================================== =====================================
============================================================================================================
</TABLE>
[END PAGE 41]
<PAGE>
[BEGIN PAGE 42]
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>
1998 1997 1996
Years ended October 31 (in thousands) Amount % Amount % Amount %
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Statutory tax expense $107,613 35 $ (24,861) (35) $101,209 35
State income taxes, net of federal tax effect 7,084 2 7,412 10 5,768 2
In-process research and development - - 60,900 86 - -
Dividends received exclusion - - (1,232) (2) (2,451) (1)
Other permanent items 13,055 4 7,374 11 3,472 1
Change in valuation allowance (7,010) (2) (7,066) (10) (6,945) (2)
Capital gains, settlements and other (3,905) (1) (4,288) (6) (2,735) (1)
------------- ------------- --------------
Income tax expense $116,837 38 $ 38,239 54 $ 98,318 34
============= ============= ==============
===============================================================================================
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
Years ended October 31 (in thousands) 1998 1997 1996
===============================================================================================
CURRENT
<S> <C> <C> <C>
Federal $ 73,316 $ 98,464 $ 97,115
State 3,559 11,050 10,377
DEFERRED
Federal 37,134 (66,008) (7,671)
State 2,828 (5,267) (1,503)
-------- -------- --------
Income tax expense $116,837 $ 38,239 $ 98,318
======== ========= ========
===============================================================================================
</TABLE>
Significant components of the net deferred tax liabilities stated on a gross
basis were as follows:
<TABLE>
<CAPTION>
October 31 (in thousands) 1998 1997
===============================================================================================
GROSS DEFERRED TAX ASSETS:
<S> <C> <C>
Loss and credit carry forwards $ 71,212 $ 70,458
Accrued liabilities and reserves 119,575 147,629
Employee benefits 41,614 39,612
Postretirement health care benefits 43,036 41,083
Inventories 36,059 18,482
Difference in basis of assets acquired 14,508 21,574
-------- --------
Total gross deferred tax assets 326,004 338,838
Valuation allowance (60,384) (65,896)
-------- --------
Net deferred tax assets 265,620 272,942
GROSS DEFERRED TAX LIABILITIES:
Property, equipment, prepublication costs and intangibles 146,128 164,821
Pension and employee benefits accrual 18,220 19,067
Difference in basis of assets acquired 77,395 80,041
Accrued liabilities and reserves 27,245 31,902
-------- --------
Total gross deferred tax liabilities 268,988 295,831
-------- --------
Net deferred tax liabilities $ 3,368 $ 22,889
======== ========
===============================================================================================
</TABLE>
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, 1998, the Company had federal net operating loss carry
forwards of approximately $162.2 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 carry forwards, with no expiration date,
which may be utilized to offset future regular tax liabilities.
[END PAGE 42]
<PAGE>
[BEGIN PAGE 43]
NOTE 11. INVESTMENT INCOME
Investment income consisted of the following:
<TABLE>
<CAPTION>
Years ended October 31 (in thousands) 1998 1997 1996
===============================================================================================
<S> <C> <C> <C>
Interest income $ 4,880 $ 24,746 $ 16,794
Dividend income - 4,238 10,535
-------- -------- --------
Total investment income $ 4,880 $ 28,984 $ 27,329
======== ======== ========
===============================================================================================
</TABLE>
NOTE 12. 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 under operating leases was as follows:
<TABLE>
<CAPTION>
Years ended October 31 (in thousands) 1998 1997 1996
===============================================================================================
<S> <C> <C> <C>
Minimum rent $ 88,300 $ 83,500 $ 75,800
Rent based on revenues 13,300 11,600 10,700
-------- -------- --------
$101,600 $ 95,100 $ 86,500
======== ======== ========
===============================================================================================
</TABLE>
Assuming renewal options are not exercised, the future minimum rental payments
will be as follows:
<TABLE>
<CAPTION>
Harcourt
(in thousands) General NMG Total
===============================================================================================
<C> <C> <C> <C>
1999 $ 43,300 $ 35,000 $ 78,300
2000 38,100 34,800 72,900
2001 34,400 33,700 68,100
2002 29,600 33,300 62,900
2003 23,300 31,900 55,200
Thereafter 83,000 529,800 612,800
===============================================================================================
</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.
Under the Reimbursement and Security Agreement, GCC granted to Harcourt
General a security interest in the stock of certain 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 losses. As of October 31,
1998, GCC's aggregate future rental payments due under such theatre leases
amounted to approximately $492.3 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 serves 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 operations of Harcourt General or NMG.
[END PAGE 43]
<PAGE>
[BEGIN PAGE 44]
NOTE 13. 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) 1998 1997 1996
===============================================================================================
<S> <C> <C> <C>
Service cost - benefits earned $ 13.6 $ 13.2 $ 13.1
Interest cost on projected benefit obligation 16.8 15.1 11.7
Actual return on assets (26.1) (61.6) (26.3)
Net amortization and deferral of net gains 9.3 47.4 12.9
------ ------ ------
Net pension expense $ 13.6 $ 14.1 $ 11.4
====== ====== ======
===============================================================================================
</TABLE>
The following table sets forth the plans' funded status and amounts recognized
in the consolidated balance sheets at October 31:
<TABLE>
<CAPTION>
1998 1997
Funded Unfunded Funded Unfunded
(in millions) Plans Plans Plans Plans
===============================================================================================
<S> <C> <C> <C> <C>
VESTED BENEFIT OBLIGATION $164.5 $ 28.2 $142.0 $ 20.1
====== ====== ====== ======
ACCUMULATED BENEFIT OBLIGATION $174.8 $ 34.1 $150.8 $ 25.0
------ ------ ------ ------
Projected benefit obligation $227.8 $ 45.7 $184.5 $ 32.5
Plan assets at fair value 270.3 - 250.0 -
------ ------ ------ ------
Overfunded (underfunded) projected obligation 42.5 (45.7) 65.5 (32.5)
Unrecognized net obligation at transition (1.2) - .7 .6
Unrecognized net loss (gain) (21.9) 7.4 (37.5) .1
Unrecognized prior service cost .9 7.1 (1.5) 3.3
------ ------ ------ ------
Prepaid (accrued) pension cost recognized
in the consolidated balance sheets $ 20.3 $(31.2) $ 27.2 $(28.5)
====== ====== ====== ======
===============================================================================================
</TABLE>
A long-term rate of return on plan assets of 9.0% was used for both Harcourt
General and NMG for each of the years presented. The benefit obligations were
measured using a discount rate of 7.0% and 7.5% as of October 31, 1998 and
1997 for both Harcourt General and NMG. 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. The above table does not include the plan
assets and benefit obligations to be transferred from Times Mirror in
connection with the acquisition of Mosby.
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, 1998, 1997 and 1996 were approximately $14.2 million, $11.1
million and $10.1 million, respectively. The Company's employee stock
ownership plan is non-contributory.
NOTE 14. 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) 1998 1997
===============================================================================================
<S> <C> <C>
Retirees $34.6 $32.4
Fully eligible active plan participants 7.3 7.0
Other active plan participants 8.5 8.0
---- ----
Accumulated postretirement benefit obligation 50.4 47.4
Unrecognized net gain 27.0 31.3
---- ----
Accrued postretirement benefit liability $77.4 $78.7
===== =====
===============================================================================================
</TABLE>
[END PAGE 44]
<PAGE>
[BEGIN PAGE 45]
The postretirement health care benefit cost was as follows:
<TABLE>
<CAPTION>
Years ended October 31 (in millions) 1998 1997 1996
===============================================================================================
<S> <C> <C> <C>
Service cost $ .5 $ .4 $ .6
Interest cost on accumulated benefit obligation 3.5 3.0 4.3
Net amortization and deferral (1.7) (2.4) (1.8)
----- ----- -----
Postretirement benefit cost $ 2.3 $ 1.0 $ 3.1
===== ===== =====
===============================================================================================
</TABLE>
The health care cost trend rate assumed in measuring the accumulated
postretirement benefit obligation in fiscal 1998 was 9.0%, gradually declining
to 5.0% in the year 2002. Measurement of the accumulated postretirement
benefit obligation was based on an assumed discount rate of 7.0% and 7.5% in
1998 and 1997, respectively.
An increase of 1% in the health care cost trend rate would increase the
accumulated postretirement obligation as of October 31, 1998 by $4.5 million.
This change would increase the annual expense by $0.4 million.
The Company paid $3.6 million in fiscal 1998, $3.3 million during fiscal 1997
and $2.9 million during fiscal 1996 for postretirement health care benefit
claims.
NOTE 15. 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.
Debt
The fair value of the Company's senior debt and subordinated notes was $1.24
billion and $1.04 billion on October 31, 1998 and 1997, respectively, and was
based upon quoted prices and comparable publicly-traded issues. Such fair
values exceeded carrying value at October 31, 1998 and 1997 by approximately
$15.9 million and $49.8 million, respectively.
NOTE 16. EARNINGS PER SHARE
Pursuant to the provisions of SFAS 128, "Earnings per Share," the net earnings
(loss) and the number of weighted average shares used in computing basic and
diluted earnings per share (EPS) are as follows:
<TABLE>
<CAPTION>
Years ended October 31 (in thousands) 1998 1997 1996
=================================================================================================================
<S> <C> <C> <C>
Net earnings (loss) $141,616 $ (115,122) $190,851
Less: dividends on Series A Cumulative Convertible Stock (881) (944) (924)
-------- -------- --------
Net earnings (loss) for computation of basic EPS 140,735 (116,066) 189,927
Add: dividends on assumed conversion of Series A Cumulative Convertible Stock 881 - 924
-------- -------- --------
Net earnings (loss) for computation of diluted EPS $141,616 $(116,066) $190,851
======== ========== ========
Shares for computation of basic EPS 70,837 70,812 71,277
Add: assumed conversion of Series A Cumulative Convertible Stock 1,182 - 1,292
Add: effect of assumed option exercises 122 - 201
-------- -------- --------
Shares for computation of diluted EPS 72,141 70,812 72,770
======== ======== ========
=================================================================================================================
</TABLE>
[END PAGE 45]
<PAGE>
[BEGIN PAGE 46]
For the year ended October 31, 1998, options to purchase 262,800 shares of
common stock were not included in the computation of diluted EPS because the
exercise price of those options was greater than the average market price of
the common shares. For the year ended October 31, 1997, options to purchase
492,000 shares of common stock and the assumed conversion of 1,125,000 shares
of Series A Cumulative Convertible Stock were not included in the computation
of diluted EPS because of the net loss in the year ended October 31, 1997. For
the year ended October 31, 1996, all options were included in the computation
of diluted EPS because the exercise price of those options was less than the
average market price of the common shares.
NOTE 17. COMPARATIVE QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1998
(in millions except for per share data)Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year
================================================================================================
<S> <C> <C> <C> <C> <C>
Revenues $ 900.6 $1,036.8 $1,161.7 $1,136.2 $4,235.3
Gross profit $ 398.1 $ 420.2 $ 602.2 $ 581.1 $2,001.6
Net earnings (loss) $ (14.4) $ (17.2) $ 110.8 $ 62.4 $ 141.6
Net earnings (loss) per share
Basic $ (.21) $ (.25) $ 1.56 $ .88 $ 1.99
Diluted $ (.21) $ (.25) $ 1.54 $ .87 $ 1.96
Dividends per share
Common Stock $ .19 $ .19 $ .19 $ .20 $ .77
Class B Stock $ .171 $ .171 $ .171 $ .18 $ .693
Series A Stock $ .2165 $ .2165 $ .2165 $ .2275 $ .8770
================================================================================================
</TABLE>
<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 share
Basic $ .20 $ .04 $ (2.00) $ .11 $ (1.64)
Diluted $ .20 $ .04 $ (2.00) $ .11 $ (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>
In the fourth quarter, the effect of adjusting the LIFO reserve for
merchandise inventories to actual amounts increased net earnings by $3.9
million in 1998 and by $2.7 million in 1997.
[END PAGE 46]
<PAGE>
[BEGIN PAGE 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, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended October 31, 1998. 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, 1998 and 1997 and the
results of their operations and their cash flows for each of the three years
in the period ended October 31, 1998 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
December 9, 1998
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 auditing 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
[END PAGE 47]
<PAGE>
[BEGIN PAGE 48]
FIVE YEAR SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands except for per share amounts) 1998 1997 1996 1995 1994
==========================================================================================================
REVENUES
<S> <C> <C> <C> <C> <C>
Publishing $1,861,907 $1,481,748 $1,214,916 $1,146,487 $1,061,316
Specialty retail 2,373,347 2,209,891 2,075,003 1,888,249 1,789,461
---------- ---------- ---------- ---------- ----------
Total $4,235,254 $3,691,639 $3,289,919 $3,034,736 $2,850,777
========== ========== ========== ========== ==========
OPERATING EARNINGS (LOSS)
Publishing $ 232,659 $ (164,309) $ 206,750 $ 190,593 $ 187,508
Specialty retail 213,062 194,714 172,354 161,698 157,713
Corporate expenses (34,837) (36,101) (34,382) (34,395) (35,081)
---------- ---------- ---------- ---------- ----------
OPERATING EARNINGS (LOSS) 410,884 (5,696) 344,722 317,896 310,140
Investment income 4,880 28,984 27,329 39,945 14,239
Interest expense (108,298) (94,319) (82,882) (88,735) (86,219)
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST 307,466 (71,031) 289,169 269,106 238,160
Income tax expense (116,837) (38,239) (98,318) (91,496) (90,885)
Minority interest in earnings of
subsidiaries, net of taxes (49,013) (5,852) - - -
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS 141,616 (115,122) 190,851 177,610 147,275
Discontinued operations, net - - - (11,727) 30,257
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 141,616 $ (115,122) $ 190,851 $ 165,883 $ 177,532
========== ========== ========== ========== ==========
Depreciation and amortization $ 306,224 $ 343,213 $ 180,395 $ 175,737 $ 149,973
Capital expenditures $ 275,839 $ 195,039 $ 242,655 $ 220,053 $ 196,160
Total assets $4,449,099 $3,733,810 $3,326,238 $2,884,336 $3,242,364
Total long-term liabilities $2,106,242 $1,660,581 $1,126,706 $1,198,252 $1,320,005
BASIC AMOUNTS PER SHARE
APPLICABLE TO COMMON SHAREHOLDERS
Continuing operations $ 1.99 $ (1.64) $ 2.66 $ 2.35 $ 1.88
Discontinued operations - - - (0.15) 0.39
---------- ---------- ---------- ---------- ----------
Basic earnings (loss) $ 1.99 $ (1.64) $ 2.66 $ 2.20 $ 2.27
========== ========== ========== ========== ==========
DILUTED AMOUNTS PER SHARE
APPLICABLE TO COMMON SHAREHOLDERS
Continuing operations $ 1.96 $ (1.64) $ 2.62 $ 2.31 $ 1.84
Discontinued operations - - - (0.15) 0.38
---------- ---------- ---------- ---------- ----------
Diluted earnings (loss) $ 1.96 $ (1.64) $ 2.62 $ 2.16 $ 2.22
========== ========== ========== ========== ==========
Dividends paid on common stock $ .77 $ .73 $ .69 $ .65 $ .61
========== ========== ========== ========== ==========
===========================================================================================================
</TABLE>
[END PAGE 48]
<PAGE>
[BEGIN PAGE 50]
SHAREHOLDER INFORMATION
Requests for general information or published financial information can be made
in writing to the Corporate Relations Department, Harcourt General, Inc., 27
Boylston Street,Chestnut Hill, MA 02467. Telephone: (617) 232-8200. To request
printed financial information or leave a message for the Company's Transfer
Agent, individuals may call The Shareholder Line at (800) 225-9194, Extension
2345. News and information about Harcourt General, Inc. is also available on
the Internet's World Wide Web at www.harcourtgeneral.com.
Automatic Dividend Reinvestment and Cash Stock Purchase Plan
The Plan provides shareholders with a convenient way to purchase Common shares
by reinvesting their Common and Series A cash dividends and/or by investing
additional cash amounts. The Company will absorb all brokerage and agency fees
for stock purchased in connection with the Plan. For further information,
please call The Shareholder Line or write to: Harcourt General, Inc., c/o
BankBoston, N.A., Automatic Dividend Reinvestment Plan, Post Office Box 8040,
Boston, MA 02266.
Transfer Agent and Registrar for Common, Series A and Class B Stock
BankBoston, N.A.
c/o EquiServe Limited Partnership
Shareholder Services Division
Post Office Box 8040
Boston, MA 02266-8040
(800) 736-3001
Form 10-K
The Company's Form 10-K as filed with the Securities and Exchange Commission
is available upon written request to the Corporate Relations Department of the
Company.
Annual Meeting
The Annual Meeting of Shareholders will be held on Friday, March 12, 1999 at
10:00 a.m. at BankBoston, N.A., 100 Federal Street, Boston, Massachusetts.
Stock Information
Harcourt General's Common Stock and Series A Cumulative Convertible Stock are
traded on the New York Stock Exchange under the symbols H and HPRA,
respectively. The following table indicates the quarterly price range of the
Common Stock and Series A Stock for the past two fiscal years.
<TABLE>
<CAPTION>
===============================================================================================
Common Stock 1998 1997
Quarter High Low High Low
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $55.38 $50.75 $55.00 $45.00
Second $56.88 $50.88 $49.50 $42.88
Third $61.69 $52.00 $50.13 $45.38
Fourth $56.13 $42.56 $53.00 $46.69
Series A Stock 1998 1997
Quarter High Low High Low
- -----------------------------------------------------------------------------------------------
First $61.00 $55.75 $60.13 $49.63
Second $61.00 $59.00 $52.50 $46.75
Third $67.50 $56.50 $54.75 $49.75
Fourth $61.25 $45.00 $54.50 $50.75
===============================================================================================
</TABLE>
Harcourt General had 7,555 and 7,923 Common shareholders of record at October
31, 1998 and 1997, respectively, and 494 and 546 Series A shareholders of
record at October 31, 1998 and 1997, respectively. Each share of Series A
Stock is convertible into 1.1 shares of Common Stock at any time.
Corporate Address
Harcourt General, Inc.
27 Boylston Street
Chestnut Hill, MA 02467
(617) 232-8200
Harcourt General is an Equal Opportunity Employer.
[END PAGE 50]
<PAGE>
Exhibit 21.1
HARCOURT GENERAL, INC.
Subsidiaries & Affiliates*
JURISDICTION
OF
SUBSIDIARY/AFFILIATE 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.
California College for Health Sciences California
Career Care, Inc. Delaware
Chef's Catalog, Inc. 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 Inc. 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
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 India Pvt. Ltd. India
<PAGE>
HARCOURT GENERAL, INC.
Subsidiaries & Affiliates*
(continued)
JURISDICTION
OF
SUBSIDIARY/AFFILIATE INCORPORATION
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
(Australasia) 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 England
(Overseas) Limited
Intertext Group Limited England
Intext International Sales Corp. Delaware
James Martin Insight, Inc. Illinois
KO Corporation Delaware
Kentucky School of Technology, Inc. Delaware
Laureate Canada Inc. Ontario
Louisiana CPA Review, Inc. Delaware
M-Mash, Inc. Colorado
Miller Comprehensive CPA Review, Inc. Delaware
Morgan Kaufmann Publishers, Incorporated California
Mosby Holdings Corp. Delaware
Mosby, Inc. Missouri
Mosby International Limited United Kingdom
Mosby Italia S.R.L. Italy
Mosby Parent Corp. Delaware
Mosby Publishers Australia Pty Limited Australia
NBD Incorporated Delaware
- 2 -<PAGE>
HARCOURT GENERAL, INC.
Subsidiaries & Affiliates*
(continued)
JURISDICTION
OF
SUBSIDIARY/AFFILIATE INCORPORATION
NETG Applied Learning GmbH Germany
NETG Applied Learning GmbH Austria
NETG Direct, Inc. Delaware
NETG Holding, Inc. Delaware
NETG, 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 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 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
Wolfe Medical Publications Limited United Kingdom
Worth Avenue Leasing Company Florida
* 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.
- 3 -<PAGE>
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 report dated December 9,
1998, appearing in and incorporated by reference in the Annual Report on Form
10-K of Harcourt General, Inc. for the year ended October 31, 1998.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 27, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains a summary of financial information extracted from the
Consolidated Balance Sheet and Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 115,200
<SECURITIES> 138,867
<RECEIVABLES> 521,623
<ALLOWANCES> 42,054
<INVENTORY> 706,586
<CURRENT-ASSETS> 1,649,040
<PP&E> 1,155,702
<DEPRECIATION> 510,489
<TOTAL-ASSETS> 4,449,099
<CURRENT-LIABILITIES> 1,124,570
<BONDS> 1,729,459
0
914
<COMMON> 71,029
<OTHER-SE> 853,779
<TOTAL-LIABILITY-AND-EQUITY> 4,449,099
<SALES> 4,235,254
<TOTAL-REVENUES> 4,235,254
<CGS> 2,233,627
<TOTAL-COSTS> 3,824,370
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 93,435
<INTEREST-EXPENSE> 108,298
<INCOME-PRETAX> 307,466
<INCOME-TAX> 116,837
<INCOME-CONTINUING> 141,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141,616
<EPS-PRIMARY> 1.99
<EPS-DILUTED> 1.96
</TABLE>
