-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N2Eb4HdmvcqOojgF8Je+EYQz8COlVCxJlKf585kG+PVRTZd6OyCu190yApk1noXQ lzfCPlt/PO65JmzDAj8XzA== 0000040493-99-000002.txt : 19990129 0000040493-99-000002.hdr.sgml : 19990129 ACCESSION NUMBER: 0000040493-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARCOURT GENERAL INC CENTRAL INDEX KEY: 0000040493 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 041619609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04925 FILM NUMBER: 99515603 BUSINESS ADDRESS: STREET 1: 27 BOYLSTON ST / BOX 1000 CITY: CHESTNUT HILL STATE: MA ZIP: 02167 BUSINESS PHONE: 6172328200 MAIL ADDRESS: STREET 1: 27 BOYLSTON ST STREET 2: BOX 1000 CITY: CHESTNUT HILL STATE: MA ZIP: 02167 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL CINEMA CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MID WEST DRIVE IN THEATRES INC DATE OF NAME CHANGE: 19660907 10-K 1 HARCOURT GENERAL, INC. FORM 10K 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] 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. 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 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. 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 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 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 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 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:
Owned Subject to Owned Ground Lease Leased Total 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
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 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 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 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 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 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 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 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 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 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 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
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 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.
F-2 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. 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. *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 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. 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. EX-10.6 2 DEFERRED COMP PLAN FOR NON-EMPLOYEE DIRECTORS 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- 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- 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 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- 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- circumstances arising as a result of events beyond the control of the Participant. -4- 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- 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- $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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- HARCOURT GENERAL, INC. By: /s/ Eric P.Geller Eric P. Geller, Senior Vice President, General Counsel and Secretary -18- EX-10.8(B) 3 SPLIT DOLLAR LIFE INS. AMENDMENT 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 EX-10.12(B) 4 CREDIT AGREEMENT AMENDMENT 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." (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: _________________ 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: _________________ 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: __________________ EX-13.1 5 ANNUAL REPORT 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:
Years ended October 31 (in thousands) 1998 1997 1996 =============================================================================================== Revenues 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 ========== ========== ========== ===============================================================================================
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] [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] [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] [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] [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] [BEGIN PAGE 28] CONSOLIDATED BALANCE SHEETS
October 31 (in thousands) 1998 1997 ============================================================================================== ASSETS CURRENT ASSETS 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.
[END PAGE 28] [BEGIN PAGE 29] CONSOLIDATED BALANCE SHEETS
October 31 (in thousands) 1998 1997 =============================================================================================== LIABILITIES CURRENT LIABILITIES 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.
[END PAGE 29] [BEGIN PAGE 30] CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended October 31 (in thousands except for per share amounts) 1998 1997 1996 =============================================================================================== 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.
[END PAGE 30] [BEGIN PAGE 31] CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended October 31 (in thousands) 1998 1997 1996 =============================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES 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.
[END PAGE 31] [BEGIN PAGE 32] CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Cumulative Common Series A Paid-in Translation and Retained (in thousands) Stocks Stock Capital Other Adjustments Earnings ============================================================================================================ 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.
[END PAGE 32] [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] [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] [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
Years ended October 31 (in thousands) 1998 1997 1996 =============================================================================================== REVENUES 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 =========== ========== ========== ===============================================================================================
[END PAGE 35] [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 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] [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:
Year ended Year ended (in thousands, except per share amounts) October 31, 1998 October 31, 1997 ============================================================================================== Revenues $4,454,559 $4,127,453 Net earnings (loss) $ 107,501 $ (12,521) Diluted earnings (loss) per share $ 1.49 $ (.18) ==============================================================================================
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:
October 31 (in thousands) 1998 1997 =============================================================================================== 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 ========== ========== ===============================================================================================
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] [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 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:
(in thousands) 1998 1997 ================================================================================================ 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 ======== ======== ================================================================================================
[END PAGE 38] [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:
(in thousands) Interest Rate Maturity 1998 1997 =============================================================================================== Harcourt General 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 ===============================================================================================
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 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] [BEGIN PAGE 40] The aggregate maturities of notes and debentures are as follows:
Harcourt (in thousands) General NMG Total =============================================================================================== 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 ===============================================================================================
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:
(in thousands, except per share amounts) 1998 1997 1996 =============================================================================================== 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 ================================================================================================
[END PAGE 40] [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:
1998 1997 1996 =============================================================================================== 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% ===============================================================================================
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:
1998 1997 1996 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price =============================================================================================== 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 ========= ========= ========= ========= ========= ========= ===============================================================================================
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:
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 - ------------------------------------------------------------------- ------------------------------------- $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 =================================================================== ===================================== ============================================================================================================
[END PAGE 41] [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:
1998 1997 1996 Years ended October 31 (in thousands) Amount % Amount % Amount % =============================================================================================== 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 ============= ============= ============== ===============================================================================================
Income tax expense was as follows:
Years ended October 31 (in thousands) 1998 1997 1996 =============================================================================================== CURRENT 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 ======== ========= ======== ===============================================================================================
Significant components of the net deferred tax liabilities stated on a gross basis were as follows:
October 31 (in thousands) 1998 1997 =============================================================================================== GROSS DEFERRED TAX ASSETS: 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 ======== ======== ===============================================================================================
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] [BEGIN PAGE 43] NOTE 11. INVESTMENT INCOME Investment income consisted of the following:
Years ended October 31 (in thousands) 1998 1997 1996 =============================================================================================== Interest income $ 4,880 $ 24,746 $ 16,794 Dividend income - 4,238 10,535 -------- -------- -------- Total investment income $ 4,880 $ 28,984 $ 27,329 ======== ======== ======== ===============================================================================================
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:
Years ended October 31 (in thousands) 1998 1997 1996 =============================================================================================== Minimum rent $ 88,300 $ 83,500 $ 75,800 Rent based on revenues 13,300 11,600 10,700 -------- -------- -------- $101,600 $ 95,100 $ 86,500 ======== ======== ======== ===============================================================================================
Assuming renewal options are not exercised, the future minimum rental payments will be as follows:
Harcourt (in thousands) General NMG Total =============================================================================================== 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 ===============================================================================================
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] [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:
Years ended October 31 (in millions) 1998 1997 1996 =============================================================================================== 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 ====== ====== ====== ===============================================================================================
The following table sets forth the plans' funded status and amounts recognized in the consolidated balance sheets at October 31:
1998 1997 Funded Unfunded Funded Unfunded (in millions) Plans Plans Plans Plans =============================================================================================== 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) ====== ====== ====== ====== ===============================================================================================
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:
(in millions) 1998 1997 =============================================================================================== 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 ===== ===== ===============================================================================================
[END PAGE 44] [BEGIN PAGE 45] The postretirement health care benefit cost was as follows:
Years ended October 31 (in millions) 1998 1997 1996 =============================================================================================== 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 ===== ===== ===== ===============================================================================================
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:
Years ended October 31 (in thousands) 1998 1997 1996 ================================================================================================================= 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 ======== ======== ======== =================================================================================================================
[END PAGE 45] [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)
1998 (in millions except for per share data)Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year ================================================================================================ 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 ================================================================================================
1997 (in millions except for per share data)Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year ================================================================================================ 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 ================================================================================================
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] [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] [BEGIN PAGE 48] FIVE YEAR SUMMARY (UNAUDITED)
(in thousands except for per share amounts) 1998 1997 1996 1995 1994 ========================================================================================================== REVENUES 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 ========== ========== ========== ========== ========== ===========================================================================================================
[END PAGE 48] [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.
=============================================================================================== Common Stock 1998 1997 Quarter High Low High Low - ----------------------------------------------------------------------------------------------- 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 ===============================================================================================
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] EX-21.1 6 SUBSIDIARIES 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 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 - 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 - EX-23.1 7 CONSENT OF DELOITTE & TOUCHE LLP 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 EX-27.1 8 FINANCIAL DATA STATEMENT
5 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. 1000 YEAR OCT-31-1998 OCT-31-1998 115,200 138,867 521,623 42,054 706,586 1,649,040 1,155,702 510,489 4,449,099 1,124,570 1,729,459 0 914 71,029 853,779 4,449,099 4,235,254 4,235,254 2,233,627 3,824,370 0 93,435 108,298 307,466 116,837 141,616 0 0 0 141,616 1.99 1.96
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