Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Harcourt General, Inc. 23 95K
2: EX-10.2 1997 Incentive Plan 6 32K
3: EX-11.1 Computation of Shares Outstanding 2± 10K
4: EX-13.1 1997 Annual Report 26 163K
5: EX-21.1 Subsidiaries of the Company 3 14K
6: EX-23.1 Consent of Deloitte & Touche LLP 1 6K
7: EX-27.1 Financial Data Schedule 2± 8K
EX-13.1 — 1997 Annual Report
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1997 ANNUAL REPORT 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SEGMENT OPERATING RESULTS
The following table presents revenues and operating earnings by business
segment:
[Enlarge/Download Table]
Years ended October 31 (in thousands) 1997 1996 1995
--------------------------------------------------------------------------------------------
Revenues
Publishing - Harcourt Brace operations $1,250,983 $1,092,631 $1,017,637
Publishing - NEC operations 125,275 -- --
---------- ---------- ----------
Total Publishing 1,376,258 1,092,631 1,017,637
Specialty retailing 2,209,891 2,075,003 1,888,249
Professional services 105,490 122,285 128,850
---------- ---------- ----------
Total revenues $3,691,639 $3,289,919 $3,034,736
========== ========== ==========
Operating earnings (loss)
Publishing - Harcourt Brace operations $ 223,114 $ 196,997 $ 177,531
Publishing - NEC operations (108,380)* -- --
Purchased in-process research and
development and other charges (253,727) -- --
---------- ---------- ----------
Total Publishing (138,993) 196,997 177,531
Specialty retailing 194,714 172,354 161,698
Professional services (1,816) 9,753 13,062
Professional services other charges (23,500) -- --
---------- ---------- ----------
Total Professional services (25,316) 9,753 13,062
Corporate expenses (36,101) (34,382) (34,395)
---------- ---------- ----------
TOTAL OPERATING EARNINGS (LOSS) $ (5,696) $ 344,722 $ 317,896
========== ========== ==========
*Includes amortization of acquired intangible assets and goodwill of
approximately $94.6 million and $9.5 million, respectively.
Operating Results 1997 vs. 1996
PUBLISHING
Publishing revenues increased 26.0% to $1.38 billion in 1997 from $1.09 billion
in 1996. Revenues of the NEC operations, included in publishing revenues from
the date of acquisition in June 1997, comprised approximately $125.3 million of
the increase. The Company's educational publishing group contributed
significantly to the increase, as revenues of this group increased approximately
$106.7 million from the prior year. Elementary publishing revenues rose
approximately 28.0% primarily as a result of higher adoption sales of social
studies titles in Texas and reading titles in California. Revenues from
secondary school publishing and testing and scoring services also contributed to
the increase in the educational publishing group's revenues. The Company's
international publishing group's revenues rose in comparison to the prior year
primarily as a result of the acquisition in the first quarter of 1997 of Doyma
Libros, a Spanish language medical and health sciences publisher and the
acquisition of international distribution rights for Mosby-Year Book health
sciences publications. Revenues at the Company's scientific, technical, medical
and professional publishing (STMP) group increased moderately in comparison to
the prior year due primarily to higher journal sales at Academic Press.
The publishing segment incurred an operating loss of $139.0 million in 1997
compared to operating earnings of $197.0 million in the same period last year
primarily due to charges associated with the acquisition of NEC. In connection
with the acquisition of NEC, the Company recorded a charge of approximately
$195.5 million consisting primarily of the value of purchased in-process
research and development. The results of operations for the NEC businesses are
included in the publishing segment from the date of acquisition and include
amortization of acquired intangible assets and goodwill of approximately $104.1
million in aggregate. Also during the third quarter of 1997, the publishing
business recognized charges of approximately $58.2 million related to the
realignment, reorganization and consolidation of its existing businesses. These
charges consisted primarily of costs to consolidate facilities and the
impairment of certain existing assets. Including the effect of these charges,
operating earnings at the educational publishing group increased in comparison
to the prior year primarily as a result of the increased revenues in the
elementary and high school publishing businesses, offset in part by higher plate
amortization and sample costs. International publishing operating earnings
increased modestly, primarily due to higher revenues, while operating earnings
for the STMP publishing group were essentially flat in comparison to the prior
year.
24 HARCOURT GENERAL
SPECIALTY RETAILING
Specialty retailing revenues in 1997 increased 6.5% to $2.21 billion from $2.08
billion in 1996. The increase was primarily attributable to comparable sales
growth of 5.3% at Neiman Marcus Stores, and to new Neiman Marcus stores opened
in King of Prussia, Pennsylvania in February 1996 and Paramus, New Jersey in
August 1996. Comparable sales increases at Bergdorf Goodman and NM Direct were
2.1% and 2.9%, respectively. Fiscal 1996 included 53 weeks, while fiscal 1997
consisted of 52 weeks. The 53rd week is not included in comparable sales.
Operating earnings from specialty retailing increased 13.0% to $194.7
million in 1997 from $172.4 million in 1996. The increase resulted primarily
from higher revenues, and to a lesser extent, improved gross margins across all
divisions. Gross margins were approximately 31.9% in 1997 compared to 31.7% in
1996, the higher percentage resulting primarily from lower markdowns during the
calendar 1996 holiday season. Selling, general and administrative expenses
increased primarily due to higher selling costs and new store openings. The
Company utilizes the last-in, first-out (LIFO) method of accounting for valuing
its inventories, which provides a better matching of revenues with expenses than
the first-in, first-out (FIFO) method which is used by some specialty retail
companies. The most important factors contributing to differences between the
LIFO and FIFO methods include the rate of inflation, inventory levels and
markdowns. As a result of these factors, operating earnings were $1.5 million
lower in 1997 and $.7 million higher in 1996 than they would have been using the
FIFO method.
PROFESSIONAL SERVICES
Professional services revenues decreased 13.7% to $105.5 million in 1997
from $122.3 million in 1996. The decrease was a result of lower volume as well
as reduced prices for outplacement services, reflecting a continuing competitive
marketplace and reduced demand for outplacement services.
The professional services segment had an operating loss of $25.3 million in
1997 compared with operating earnings of $9.8 million in 1996. The loss in 1997
includes other charges of $23.5 million recorded in the third quarter as well as
the effect of lower revenues. The other charges consist primarily of severance,
consolidation of facilities and impairment of certain assets.
CORPORATE EXPENSES
Corporate expenses increased 5.0% to $36.1 million in 1997 compared to $34.4
million in 1996, primarily due to higher compensation expense recorded in
connection with the resignation of the Company's former chief executive officer
in fiscal 1997.
INVESTMENT INCOME
Investment income increased $1.7 million to $29.0 million in 1997 from $27.3
million in the previous year. The increase is primarily due to a higher average
portfolio balance during the first seven months of the year that resulted from
the cash proceeds received in October 1996 from NMG's sale of its common stock
to the public and its subsequent repurchase of its redeemable preferred stocks
held by Harcourt General. The Company's investment portfolio was liquidated in
June 1997 in order to partially fund the acquisition of NEC.
INTEREST EXPENSE
Interest expense increased 13.8% to $94.3 million in 1997 from $82.9 million in
1996. The increase resulted primarily from interest incurred on the fixed rate
debt issued by the Company in August 1997 and, to a lesser extent, from
borrowings under the Company's revolving credit agreement, the proceeds of which
were used to partially fund the acquisition of NEC. Interest expense recorded by
NMG decreased as higher average borrowings were offset by a lower effective
interest rate which resulted from the repayment at maturity of NMG's fixed rate
senior notes with borrowings under its revolving credit agreement.
MINORITY INTEREST
The Company recorded minority interest of $5.9 million in 1997 representing the
portion of earnings attributable to the minority shareholders of NMG. In fiscal
1998, the Company expects to record 47% (based on its current ownership of 53%)
of NMG's net earnings as minority interest.
1997 ANNUAL REPORT 25
OPERATING RESULTS 1996 VS. 1995
PUBLISHING
Publishing revenues increased 7.4% to $1.09 billion in 1996 from $1.02 billion
in 1995. The Company's educational publishing group and its scientific,
technical, medical and professional (STMP) publishing group both contributed
significantly to the revenue increase. A substantial portion of the educational
publishing group's revenue increase resulted from higher testing program
revenues, primarily due to the acquisition of Assessment Systems, Inc. in the
third quarter of 1995. The educational group revenues were also increased by
strong testing program and secondary publishing revenues, offset in part by an
anticipated decline in elementary program revenues resulting from fewer adoption
opportunities in comparison to 1995. STMP revenue growth reflected both
increased book and journal sales at W.B. Saunders as well as revenue increases
due to the acquisition of International Medical News Group (IMNG), a medical
newspaper publisher, in the first quarter of 1996.
Publishing operating earnings increased 11.0% to $197.0 million in 1996
from $177.5 million in 1995. STMP operating earnings, specifically at W.B.
Saunders and Academic Press, were significantly higher than those of the prior
year due to higher sales volume of W.B. Saunders books, W.B. Saunders and
Academic Press journals, and lower operating expenses as a percentage of
revenues. Operating earnings at Holt, Rinehart and Winston and Harcourt Brace
College were also higher than in 1995, although aggregate earnings for the
educational publishing group decreased slightly in comparison to the prior year
primarily as a result of the decline in elementary program revenues and higher
administrative and fulfillment expenses.
SPECIALTY RETAILING
Specialty retailing revenues in 1996 increased 9.9% to $2.08 billion from $1.89
billion in 1995. The revenue growth was primarily attributable to a 5.4%
increase in comparable sales and, to a lesser extent, the opening of two new
Neiman Marcus stores during the year. Strong sales were achieved across most
major merchandise categories and geographic regions. Additionally, fiscal 1996
included 53 weeks, while fiscal 1995 consisted of 52 weeks. The 53rd week is not
included in comparable sales.
Operating earnings from specialty retailing increased 6.6% to $172.4
million from $161.7 million in 1995. The increase is attributable to higher
sales volume, partially offset by the full year impact of NMG's credit card
receivables securitization. Gross margins were approximately 31.7% in 1996
compared to 32.4% in 1995, the lower percentage resulting primarily from higher
markdowns during the calendar 1995 holiday season. Selling, general and
administrative expenses increased primarily due to new store openings, higher
selling costs and lower finance charge income. The Company utilizes the last-in,
first-out (LIFO) method of accounting for valuing its inventories, which
provides a better matching of revenues with expenses than the first-in,
first-out (FIFO) method which is used by some specialty retail companies. The
most important factors contributing to differences between the LIFO and FIFO
methods include the rate of inflation, inventory levels and markdowns. As a
result of these factors, operating earnings were $.7 million higher in 1996 and
$10.4 million higher in 1995 than they would have been using the FIFO method.
Operating earnings at NM Direct improved significantly in comparison to 1995,
due to increased revenues and lower paper and postage expenses.
The securitization of NMG's credit card receivables, which was completed in
March 1995, had the effect of reducing finance charge income by $19.0 million in
1996 and $7.1 million in 1995. Interest expense was also reduced, as the
proceeds from the securitization were used to repay outstanding debt.
PROFESSIONAL SERVICES
Professional services revenues decreased 5.1% to $122.3 million from $128.9
million in 1995. The decrease was a result of lower volume in both group and
individual outplacement programs, reflecting fewer outplacement opportunities
and increased competition.
Operating earnings for the professional services segment decreased 25.3% to
$9.8 million from $13.1 million in 1995. The decrease was primarily due to the
revenue shortfall in comparison to the prior year.
CORPORATE EXPENSES
Corporate expenses remained essentially unchanged in 1996 at $34.4 million.
INVESTMENT INCOME
Investment income decreased 31.6% to $27.3 million in 1996 from $39.9 million in
1995. The decrease was primarily due to a lower average short-term investment
portfolio balance resulting primarily from the Company's stock repurchase
program and acquisitions of NMG common stock and publishing businesses made
during the year.
INTEREST EXPENSE
Interest expense decreased 6.6% to $82.9 million in 1996 from $88.7 million in
1995. The decrease was primarily due to lower debt levels at NMG resulting from
the use of proceeds from NMG's credit card securitization in March 1995 to pay
down outstanding debt.
26 HARCOURT GENERAL
LIQUIDITY AND CAPITAL RESOURCES
The following discussion analyzes liquidity and capital resources by operating,
investing and financing activities as presented in the Company's consolidated
statements of cash flows.
Cash provided by operating activities in 1997 was $248.7 million compared
to $253.5 million in 1996. In 1997 the publishing and professional services
segments provided approximately $139.5 million of such cash and NMG provided
$109.2 million. The cash provided by the Company's operations was sufficient to
fund working capital, capital expenditures and dividend requirements. NMG uses
its cash and revolving credit agreement to fund its own expenditures.
The most significant changes in working capital were increases in accounts
receivable of $50.3 million and inventories of $19.1 million, as well as a
decrease of $21.1 million in accounts payable and other current liabilities.
Accounts receivable increased primarily due to higher sales by the educational
publishing group while the increase in inventories was primarily related to the
specialty retail segment. The decrease in accounts payable and other current
liabilities reflects higher income tax payments in 1997, offset in part by
higher trade accounts payable associated with increased sales volume.
The Company paid approximately $854.4 million to acquire NEC in June 1997.
The purchase price was initially funded with cash and equivalents and short-term
investments, in addition to $300 million in borrowings under the Company's
revolving credit agreement. The Company's capital expenditures totaled $195.0
million in 1997. Publishing capital expenditures were approximately $135.0
million and related principally to expenditures for prepublication costs. The
Company expects capital expenditures in the publishing business to approximate
$180.0 million in fiscal 1998. Specialty retailing capital expenditures of $53.0
million in 1997 were primarily related to existing store renovations and are
expected to approximate $100.0 million in fiscal 1998, which will be for both
renovations and new store construction. Other investing activities include the
acquisition of Churchill Livingstone in September 1997 for approximately $92.5
million.
In October 1996, NMG sold 8.0 million shares of its common stock to the
public at $35.00 per share. The proceeds of approximately $268.8 million were
used, together with an additional 3.9 million shares of NMG common stock valued
at $135.0 million and bank borrowings of $20.0 million, to repurchase all of
NMG's outstanding preferred stock from the Company. The Company will no longer
receive the annual dividends of approximately $27.1 million from such preferred
stocks.
In August 1997, the Company issued $500.0 million in senior notes and
debentures to the public. The Company used the proceeds from its borrowings
primarily to repay borrowings under its revolving credit agreement used to fund
the acquisition of NEC, and to fund the acquisition of Churchill Livingstone.
NMG borrowed $113.5 million under its revolving credit agreement and uncommitted
lines, the proceeds of which were used to fund working capital requirements and
to repay $132.0 million of senior notes at maturity. In June 1997, the Company
repaid $125 million of its senior debt at maturity and repaid $46 million of
outstanding borrowings on NEC's line of credit. Financing activities also
include the payment of $51.1 million in dividends and the purchase of
approximately .4 million shares of the Company's Common Stock for $20.1 million
on the open market at an average price of $45.56 per share.
At October 31, 1997, the Company's consolidated long-term liabilities
totaled $1.56 billion. That amount included $369.7 million of NMG obligations,
which are not guaranteed by Harcourt General.
In September 1997 the Company signed a definitive merger agreement to
acquire the balance of issued and outstanding shares of Steck-Vaughn Publishing
Corporation for $14.75 per share, or approximately $41 million in aggregate.
The Company believes its cash on hand, cash generated from operations and
its current and future debt capacity will be sufficient to fund its planned
capital growth, operating and dividend requirements.
IMPACT OF INFLATION
The Company's financial statements are prepared on a historical cost basis under
generally accepted accounting principles. The Company uses the last-in,
first-out method of accounting for substantially all of its inventories; thus,
the cost of goods sold approximates current cost.
The Company adjusts selling prices to maintain profit levels and will
continue to do so as competitive conditions permit. In general, management
believes that the impact of inflation or of changing prices is not material to
the financial position or results of operations of its business segments.
YEAR 2000
The Company has evaluated the effect of the year 2000 problem on its computer
systems and is implementing a plan to resolve the potential risks. The costs of
the modifications and enhancements, which will be expensed as incurred, are not
expected to be material to the financial position of the Company. Additionally,
the Company continues to invest in new technology in connection with its ongoing
systems development initiatives.
1997 ANNUAL REPORT 27
SEASONALITY
The Company's businesses are seasonal in nature. More than one-half of the
Company's annual operating earnings are historically generated in the third
quarter of its fiscal year, since that quarter includes the important
educational publishing selling season.
Conversely, second quarter operating earnings have historically been
minimal during a period when publishing revenues are at their lowest level, and
that business segment typically reports operating losses. Those losses partially
offset retail earnings, which have historically been strong in the Company's
second quarter due to NMG's holiday selling season.
DIVIDENDS
The Company has a long-standing practice of returning a portion of its earnings
and cash flow to shareholders through the payment of cash dividends. In
September 1997, the Board of Directors voted to increase the quarterly cash
dividend on the Common Stock to 19 cents per share. The Board also increased the
quarterly cash dividend on the Series A Stock to 21.65 cents per share and on
the Class B Stock to 17.10 cents per share.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). Under the new standard, which must be adopted for periods ending after
December 15, 1997, the Company will be required to change the method used to
compute earnings per share and to restate prior periods presented. A dual
presentation of basic and diluted earnings per share will be required. The basic
earnings per share calculation, which will replace primary earnings per share,
will exclude the dilutive impact of stock options and other common share
equivalents. The diluted earnings per share calculation, which will replace
fully diluted earnings per share, will include common share equivalents. The
adoption of SFAS 128 will not have a material impact on reported earnings per
share for the three years ended October 31, 1997.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure," which must be
adopted for periods ending after December 15, 1997. The Statement makes
disclosure requirements regarding capital structure applicable to all entities.
The Statement contains no provisions which will materially change disclosure
requirements for the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income"(SFAS 130). The Statement, which must
be adopted for periods beginning after December 15, 1997, establishes standards
for reporting and display of comprehensive income and its components in
consolidated financial statements. The effect of adopting SFAS 130 is not
expected to be material to the Company's financial position or results of
operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), which must be adopted for periods beginning after December 15, 1997.
Under the new standard, companies will be required to report certain information
about operating segments in consolidated financial statements. Operating
segments will be determined based on the method that management uses to organize
its businesses for making operating decisions and assessing performance. The
standard also requires that companies report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. The Company is currently evaluating the additional disclosures
required in implementing SFAS 131.
FORWARD-LOOKING STATEMENTS
Statements in this report referring to the expected future plans and performance
of the Company are forward-looking statements. Actual future results may differ
materially from such statements. Factors that could affect future performance in
the Company's publishing and educational services businesses include, but are
not limited to: the Company's ability to develop and market its products and
services; the relative success of the products and services offered by
competitors; integration of acquired businesses; the seasonal and cyclical
nature of the markets for the Company's products and services; changes in
economic conditions; changes in public funding for the Company's educational
products and services; and changes in purchasing patterns in the Company's
markets. Important factors that could affect future performance in the Company's
specialty retailing businesses include, but are not limited to: changes in
economic conditions or consumer confidence, changes in consumer preferences or
fashion trends; delays in anticipated store openings; adverse weather
conditions, particularly during peak selling seasons; changes in demographic or
retail environments; competitive influences; significant increases in paper,
printing and postage costs, and changes in the Company's relationships with
designers and other resources. For more information, see the Company's filings
with the Securities and Exchange Commission.
28 HARCOURT GENERAL
CONSOLIDATED BALANCE SHEETS
[Download Table]
October 31 (in thousands) 1997 1996
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash and equivalents $ 82,644 $ 532,862
Short-term investments -- 242,054
Undivided interests in NMG Credit Card Master Trust 128,341 114,392
Accounts receivable, net 397,675 294,718
Inventories 676,357 592,141
Deferred income taxes 120,546 77,491
Other current assets 79,353 79,607
---------- ----------
TOTAL CURRENT ASSETS 1,484,916 1,933,265
---------- ----------
Property and equipment
Land, buildings and improvements 538,762 503,050
Fixtures and equipment 476,642 416,152
---------- ----------
1,015,404 919,202
Less accumulated depreciation and amortization (421,512) (344,276)
---------- ----------
TOTAL PROPERTY AND EQUIPMENT, NET 593,892 574,926
---------- ----------
Other assets
Prepublication costs, net 201,953 209,519
Intangible assets, net 1,299,227 456,494
Other 201,405 152,034
---------- ----------
TOTAL OTHER ASSETS 1,702,585 818,047
---------- ----------
TOTAL ASSETS $3,781,393 $3,326,238
========== ==========
See Notes to Consolidated Financial Statements.
1997 ANNUAL REPORT 29
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
October 31 (in thousands) 1997 1996
-------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Notes payable and current maturities of long-term liabilities $ 14,439 $ 163,717
Accounts payable 346,386 315,108
Taxes payable 19,433 77,548
Other current liabilities 613,011 391,974
---------- ----------
TOTAL CURRENT LIABILITIES 993,269 948,347
---------- ----------
Long-term liabilities
Notes and debentures 1,289,889 714,282
Other long-term liabilities 274,840 224,792
---------- ----------
TOTAL LONG-TERM LIABILITIES 1,564,729 939,074
---------- ----------
Deferred income taxes 143,435 187,632
Commitments and contingencies
Minority interest 234,422 217,653
Shareholders' Equity
Preferred stock
Series A Cumulative Convertible - $1 par value
Issued and outstanding - 1,125 and 1,152 shares 1,125 1,152
Common stocks
Class B Stock - $1 par value
Issued and outstanding - 20,022 and 20,051 shares 20,022 20,051
Common Stock - $1 par value
Issued and outstanding - 50,733 and 51,068 shares 50,733 51,068
Paid-in capital 744,932 743,947
Cumulative translation adjustments (7,113) (4,493)
Retained earnings 35,839 221,807
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 845,538 1,033,532
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,781,393 $3,326,238
========== ==========
See Notes to Consolidated Financial Statements.
30 HARCOURT GENERAL
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
Years ended October 31 (in thousands except for per share amounts) 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
Revenues $3,691,639 $3,289,919 $3,034,736
Costs applicable to revenues 2,092,956 1,906,974 1,765,090
Selling, general and administrative expenses 1,394,278 1,003,841 917,355
Purchased in-process research and development expense 174,000 -- --
Corporate expenses 36,101 34,382 34,395
---------- ---------- ----------
Operating earnings (loss) (5,696) 344,722 317,896
Investment income 28,984 27,329 39,945
Interest expense (94,319) (82,882) (88,735)
---------- ---------- ----------
Earnings (loss) from continuing operations
before income taxes and minority interest (71,031) 289,169 269,106
Income tax expense (38,239) (98,318) (91,496)
---------- ---------- ----------
Earnings (loss) from continuing operations
before minority interest (109,270) 190,851 177,610
Minority interest in earnings of subsidiaries, net of income taxes (5,852) -- --
---------- ---------- ----------
Earnings (loss) from continuing operations (115,122) 190,851 177,610
Loss from discontinued operations, net -- -- (11,727)
---------- ---------- ----------
NET EARNINGS (LOSS) $ (115,122) $ 190,851 $ 165,883
========== ========== ==========
Amounts per share of common stock
Earnings (loss) from continuing operations $ (1.64) $ 2.62 $ 2.31
Loss from discontinued operations -- -- (.15)
---------- ---------- ----------
NET EARNINGS (LOSS) $ (1.64) $ 2.62 $ 2.16
========== ========== ==========
See Notes to Consolidated Financial Statements.
1997 ANNUAL REPORT 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Years ended October 31 (in thousands) 1997 1996 1995
-------------------------------------------------------------------------------------------------
Cash flows from operating activities
Earnings (loss) from continuing operations $(115,122) $ 190,851 $ 177,610
Adjustments to reconcile earnings (loss) from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 343,213 180,395 175,737
Minority interest 5,852 -- --
Purchased in-process research and development 174,000 -- --
Deferred income taxes (71,275) (9,174) 13,152
Other (11,376) (401) 4,183
Changes in assets and liabilities:
Accounts receivable (50,290) (26,396) 2,202
Inventories (19,149) (96,332) (54,376)
Other current assets 13,968 (23,654) 4,302
Accounts payable and other current liabilities (21,118) 38,209 25,974
--------- --------- ---------
248,703 253,498 348,784
Discontinued operating activities -- -- (3,410)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 248,703 253,498 345,374
--------- --------- ---------
Cash flows from investing activities
Capital expenditures (195,039) (242,655) (220,053)
Purchases of available-for-sale investments (408,304) (280,939) (382,612)
Sales of available-for-sale investments 325,767 -- --
Maturities of available-for-sale investments 324,591 281,958 139,539
Purchases of NMG common stock -- (22,841) --
Purchases of held-to-maturity securities (461,791) (502,604) (210,995)
Maturities of held-to-maturity securities 447,842 492,673 170,534
Acquisition of NEC, net of cash acquired (839,620) -- --
Other acquisitions (98,648) (20,648) (42,490)
Other investing activities (1,436) (12,888) 1,441
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (906,638) (307,944) (544,636)
--------- --------- ---------
Cash flows from financing activities
Proceeds from borrowings 586,728 109,917 17,065
Repayment of debt (306,000) (41,571) (247,431)
Proceeds from NMG public offering -- 268,800 --
Repurchase of Common Stock (20,139) (67,150) (224,827)
Proceeds from receivables securitization -- -- 245,965
Dividends paid (51,149) (48,693) (47,730)
Other financing activities (1,723) 2,255 311
--------- --------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 207,717 223,558 (256,647)
--------- --------- ---------
Cash and equivalents
Increase (decrease) during the year (450,218) 169,112 (455,909)
Beginning balance 532,862 363,750 819,659
--------- --------- ---------
ENDING BALANCE $ 82,644 $ 532,862 $ 363,750
========= ========= =========
Supplemental schedule of cash flow information
Cash payments for:
Interest $ 88,321 $ 82,185 $ 86,991
Income taxes $ 183,851 $ 104,845 $ 75,222
See Notes to Consolidated Financial Statements.
32 HARCOURT GENERAL
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
[Enlarge/Download Table]
Cumulative
Common Series A Paid-in Translation Retained
(in thousands) Stocks Stock Capital Adjustments Earnings
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 1, 1994 $77,887 $1,453 $726,505 $(4,710) $ 246,220
Net earnings -- -- -- -- 165,883
Cash dividends paid -- -- -- -- (47,730)
Conversion of Series A Stock 243 (243) -- -- --
Repurchase of Common Stock (5,539) -- -- -- (219,288)
Translation adjustments -- -- -- (456) --
Other equity transactions, net 108 -- 780 -- --
-------- ------ -------- ------- ---------
BALANCE AT OCTOBER 31, 1995 72,699 1,210 727,285 (5,166) 145,085
Net earnings -- -- -- -- 190,851
Cash dividends paid -- -- -- -- (48,693)
Conversion of Series A Stock 58 (58) -- -- --
Repurchase of Common Stock (1,714) -- -- -- (65,436)
Translation adjustments -- -- -- 673 --
NMG issuance of common stock -- -- 15,153 -- --
Other equity transactions, net 76 -- 1,509 -- --
-------- ------ -------- ------- ---------
BALANCE AT OCTOBER 31, 1996 71,119 1,152 743,947 (4,493) 221,807
Net loss -- -- -- -- (115,122)
Cash dividends paid -- -- -- -- (51,149)
Conversion of Series A Stock 29 (27) (2) -- --
Repurchase of Common Stock (442) -- -- -- (19,697)
Translation adjustments -- -- -- (2,620) --
Other equity transactions, net 49 -- 987 -- --
-------- ------ -------- ------- ---------
BALANCE AT OCTOBER 31, 1997 $ 70,755 $1,125 $744,932 $(7,113) $ 35,839
======== ====== ======== ======= =========
See Notes to Consolidated Financial Statements.
1997 ANNUAL REPORT 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Harcourt General,
Inc. (the Company or Harcourt General) and its majority-owned subsidiaries. The
consolidated financial statements of The Neiman Marcus Group, Inc. (NMG) are
consolidated with a lag of one fiscal quarter, and the minority shareholders'
interest in NMG is reflected as minority interest. NMG's fiscal year ends on the
Saturday closest to July 31. In fiscal 1996, the reporting period included 53
weeks as compared to 52 weeks in each of fiscal years 1997 and 1995. All
significant intercompany accounts and transactions have been eliminated.
CASH AND EQUIVALENTS
Cash and equivalents consist of cash and liquid debt instruments such as
commercial paper and certificates of deposit with maturities of three months or
less from the date of purchase. Cash and equivalents are stated at cost plus
accrued interest, which approximates fair value. The Company's practice is to
invest cash with financial institutions that have acceptable credit ratings and
to limit the amount of credit exposure to any one financial institution.
SHORT-TERM INVESTMENTS
Short-term investments with maturities greater than three months, which consist
of commercial paper, certificates of deposit, corporate debt securities and U.S.
Government and agency securities, are carried at cost plus accrued interest,
which approximates fair value. All such investments are classified as
available-for-sale. Short-term investments have risk profiles similar to cash
equivalent investments.
The duration of short-term investments is generally one year or less.
Therefore, the Company is not subject to significant interest rate risk which
would cause fair value to materially diverge from carrying value. Gross realized
and unrealized gains and losses in the periods presented were not material. At
October 31, 1996, the carrying values of short-term investments consisted of
corporate debt securities ($144.7 million), U.S. government and agency
securities ($73.9 million), certificates of deposit ($21.1 million), and
commercial paper ($2.3 million). In May 1997, all of the Company's short-term
investments were sold to partially fund the acquisition of National Education
Corporation, resulting in a loss of $.4 million.
UNDIVIDED INTERESTS IN NMG CREDIT CARD MASTER TRUST
In March 1995, NMG sold all of its Neiman Marcus credit card receivables through
a subsidiary to The Neiman Marcus Group Credit Card Master Trust (the "Trust")
in exchange for cash and certificates representing undivided interests in such
receivables. The Company segregates its undivided interests in the Trust from
its accounts receivable on the consolidated balance sheets. The undivided
interests in the Trust include the interests retained by NMG's subsidiary, which
are represented by a Class C Certificate ($54.0 million) and a Seller's
Certificate (the excess of the total receivables transferred to the Trust over
the portion represented by certificates sold to investors and the Class C
Certificate). The undivided interests in the Trust represent securities which
the Company intends to hold to maturity in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Due to the short-term revolving nature of the
credit card portfolio, the carrying value of the Company's undivided interests
in the Trust approximates fair value.
ACCOUNTS RECEIVABLE
Certain publications are sold to customers with a right of return. Revenues are
recorded net of a provision for future returns. Returned goods included in
inventory are valued at estimated realizable value not exceeding cost.
Accounts receivable are reported net of allowances for book returns of
$65.9 million in 1997 and $53.2 million in 1996 and for doubtful accounts of
$32.0 million in 1997 and $15.1 million in 1996.
INVENTORIES
Inventories, consisting primarily of finished goods, are stated at the lower of
cost or market. Substantially all domestic publishing inventories are valued
using the last-in, first-out (LIFO) method. Substantially all retail inventories
are valued using the retail method on a LIFO basis. If the first-in, first-out
(FIFO) method of inventory valuation had been used to value inventories, the
inventories would have been $15.0 million and $13.5 million higher than reported
at October 31, 1997 and October 31, 1996, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided using straight-line or accelerated methods over the estimated useful
lives of the related assets or over the terms of the related leases, if shorter.
When property and equipment are retired or have been fully depreciated, the cost
and the related accumulated depreciation are eliminated from the respective
accounts. Gains or losses arising from the dispositions are reported as income
or expense.
PREPUBLICATION COSTS
Prepublication costs are amortized using the sum-of-the-years'-digits method
over the estimated useful lives of the publications, ranging from three to five
years.
34 HARCOURT GENERAL
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill. Amortization of goodwill is
provided using the straight-line method over its estimated useful life, ranging
from 10 to 40 years. Acquired intangible assets consist of course libraries,
customer leads and contracts, and existing technology, and are amortized using
accelerated methods over estimated useful lives, ranging from one to five years.
Trademarks are amortized over 40 years using the straight-line method.
LONG-LIVED ASSETS
In 1996 the Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and determined that no impairment loss need be recognized. Upon
occurrence of an event or a change in circumstances, the Company compares the
carrying value of its long-lived assets against projected undiscounted cash
flows to determine any impairment and to evaluate the reasonableness of the
depreciation or amortization periods.
DERIVATIVES
The Company uses treasury lock agreements (a derivative) as a means of managing
interest-rate risk associated with current debt or anticipated debt
transactions. The differentials to be received or paid under these contracts
designated as hedges are deferred and amortized to interest expense over the
remaining life of the associated debt. Derivative financial instruments are not
held for trading purposes.
INCOME TAXES
Income taxes are calculated in accordance with Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires
the asset and liability method of accounting for income taxes.
REVENUE RECOGNITION
The Company recognizes publishing revenues principally upon shipment of
products, net of a provision for returns based on sales. Subscription revenues
are generally collected in advance. These revenues are deferred and recognized
pro-rata upon fulfillment. Contract revenues are recognized as services are
provided. Revenues from retail sales are recognized at point-of-sale or upon
shipment.
RECEIVABLES AND FINANCE CHARGE INCOME
NMG's credit operations generate finance charge income which is recognized as
income when earned and is recorded as a reduction of selling, general and
administrative expenses. Finance charge income amounted to $47.0 million in
1997, $47.7 million in 1996 and $55.9 million in 1995. The securitization of
NMG's credit card receivables, which was completed in March 1995, had the effect
of reducing finance charge income by $19.0 million in 1997 and 1996, and by $7.1
million in 1995. See Note 16.
Credit risk with respect to trade receivables is limited due to the large
number of customers to whom the Company extends credit. Collateral is not
required as a condition of extending credit, but credit evaluation of customers'
financial position is performed. The Company maintains reserves for estimated
credit losses.
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125). The effect of adopting SFAS 125 was
not material to the Company's financial position or results of operations.
PRE-OPENING EXPENSES
Costs associated with the opening of new stores are expensed as incurred.
ADVERTISING AND CATALOGUE COSTS
Direct response advertising relates primarily to the production and distribution
of the Company's retail catalogues and is amortized over the estimated useful
life of the catalogue, which is generally less than one year. All other
advertising costs are expensed in the period incurred. Advertising expenses were
$168.1 million, $137.8 million and $138.8 million in 1997, 1996 and 1995,
respectively. Direct response advertising amounts included in other current
assets in the consolidated balance sheets at October 31, 1997 and October 31,
1996 were $6.9 and $6.0 million, respectively.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common share is based upon the weighted average number of common
and, when dilutive, common equivalent shares outstanding during the year.
Weighted average shares outstanding amounted to 70.8 million shares in 1997,
72.8 million shares in 1996 and 76.8 million shares in 1995. Weighted average
shares outstanding in 1997 do not include common stock equivalents because the
effect would not be dilutive.
Earnings per common and common equivalent share, assuming full dilution,
have not been presented because the dilutive effect is not material.
1997 ANNUAL REPORT 35
ISSUANCES OF A SUBSIDIARY'S STOCK
Upon issuances of shares of a subsidiary's stock, the Company's policy is to
record the difference between its carrying value per share of the subsidiary's
stock and the offering price per share of the subsidiary's stock, net of
estimated taxes, as an adjustment to paid-in capital.
SIGNIFICANT ESTIMATES
In the process of preparing its consolidated financial statements, the Company
estimates the appropriate carrying values of certain assets and liabilities
which are not readily apparent from other sources. Management bases its
estimates on historical experience and on various assumptions which are believed
to be reasonable under the circumstances. The primary estimates underlying the
Company's consolidated financial statements include allowances for returns,
doubtful accounts, valuation of inventories and prepublication costs, and
accruals for self-insurance, pension and postretirement benefits. Actual results
could differ from these estimates.
CHANGES IN PRESENTATION
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
adoption of SFAS 128 will not have a material impact on earnings per share for
the three years ended October 31,1997.
In 1997, the FASB issued Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure" (SFAS 129) and No. 130,
"Reporting Comprehensive Income" (SFAS 130). SFAS 129 contains no change in the
Company's disclosure requirements, and SFAS 130 is not expected to be material
to the Company's financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131,"Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). The Company is currently evaluating the effect of implementing SFAS
131.
note 2. DESCRIPTION OF CONTINUING OPERATIONS
PUBLISHING
Harcourt Brace & Company (Harcourt Brace) publishes textbooks and other
materials for elementary and secondary schools and colleges, as well as
scientific, technical, medical and professional books and journals, fiction,
non-fiction, and children's books. Harcourt Brace also publishes and scores
tests that measure individual aptitude and competency and conducts bar
examination and accounting accreditation review courses.
National Education Corporation, which was acquired in 1997, is a provider
of distance education in vocational, academic and professional studies, a
developer of interactive media-based learning products and a publisher of
supplemental education materials.
SPECIALTY RETAILING
NMG operates three specialty retail businesses: Neiman Marcus Stores, NM Direct
and Bergdorf Goodman. Neiman Marcus Stores operates 30 stores in 16 states and
the District of Columbia; Bergdorf Goodman operates two stores in New York City;
and NM Direct operates NMG's direct marketing business, providing both apparel
and home items through its various direct marketing catalogues.
PROFESSIONAL SERVICES
Drake Beam Morin provides human resources management consulting services such as
career transition, outplacement and other consulting services to organizations
and individuals worldwide.
36 HARCOURT GENERAL
ADDITIONAL FINANCIAL INFORMATION
[Download Table]
Years ended October 31 (in thousands) 1997 1996 1995
----------------------------------------------------------------------------------
Revenues
Publishing $1,376,258 $1,092,631 $1,017,637
Specialty retailing 2,209,891 2,075,003 1,888,249
Professional services 105,490 122,285 128,850
---------- ---------- ----------
TOTAL REVENUES $3,691,639 $3,289,919 $3,034,736
========== ========== ==========
Operating earnings (loss)
Publishing $ (138,993) $ 196,997 $ 177,531
Specialty retailing 194,714 172,354 161,698
Professional services (25,316) 9,753 13,062
Corporate expenses (36,101) (34,382) (34,395)
---------- ---------- ----------
TOTAL OPERATING EARNINGS (LOSS) $ (5,696) $ 344,722 $ 317,896
========== ========== ==========
Identifiable assets
Publishing $2,108,753 $1,033,951 $ 922,629
Specialty retailing 1,373,682 1,342,202 1,191,085
Professional services 40,984 51,162 58,810
Corporate 257,974 898,923 711,812
---------- ---------- ----------
TOTAL IDENTIFIABLE ASSETS $3,781,393 $3,326,238 $2,884,336
========== ========== ==========
Capital expenditures
Publishing $ 135,045 $ 151,977 $ 122,669
Specialty retailing 53,037 85,736 93,514
Professional services 5,745 4,457 3,799
Corporate 1,212 485 71
---------- ---------- ----------
TOTAL CAPITAL EXPENDITURES $ 195,039 $ 242,655 $ 220,053
========== ========== ==========
Depreciation and amortization
Publishing $ 267,809 $ 113,379 $ 120,331
Specialty retailing 61,695 60,381 49,087
Professional services 11,362 4,564 4,412
Corporate 2,347 2,071 1,907
---------- ---------- ----------
TOTAL DEPRECIATION AND AMORTIZATION $ 343,213 $ 180,395 $ 175,737
========== ========== ==========
note 3. ACQUISITION OF NEC
In June 1997, the Company completed the acquisition of National Education
Corporation (NEC) for a cash purchase price of approximately $854.4 million. NEC
is a global provider of print and multimedia-based products and services for the
education and training marketplace, and a provider of distance education in
vocational, academic and professional studies.
The NEC acquisition has been accounted for by the purchase method of
accounting and, accordingly, the results of operations of NEC for the period
from June 5, 1997 are included in the accompanying consolidated financial
statements. Assets acquired and liabilities assumed have been recorded at their
estimated fair values, and are subject to adjustment when additional information
concerning asset and liability valuations is finalized. NEC's accounting
policies have been conformed with those of the Company with respect to revenue
recognition of certain subscription contracts and deferred expenses.
Based on an independent appraisal, approximately $174 million of the
purchase price was allocated to purchased in-process research and development.
Accordingly, the Company recorded a non-recurring charge for this purchased
in-process research and development at the date of acquisition.
The excess of cost over the estimated fair value of net assets acquired was
allocated to goodwill. A total of $730.6 million was allocated to goodwill, of
which $302.1 million will be amortized on a straight-line basis over 25 years.
The remaining goodwill will be amortized on a straight-line basis over 40 years.
1997 ANNUAL REPORT 37
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on November 1,
1995 and excludes the write-off of purchased in-process research and development
of $174 million:
[Enlarge/Download Table]
Year ended Year ended
(in thousands, except per share amounts) October 31, 1997 October 31, 1996
---------------------------------------------------------------------------------------
Revenues $3,876,966 $3,578,720
Net earnings $ 85,506 $ 80,987
Earnings per share $ 1.18 $ 1.11
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
The NEC acquisition was initially funded with $300 million of borrowings
under the Company's revolving credit agreement and cash and short-term
investments of approximately $554 million. The borrowings under the revolving
credit agreement were subsequently funded with long-term senior debt.
Through NEC, the Company acquired approximately 82% of the issued and
outstanding shares of Steck-Vaughn Publishing Corporation (Steck-Vaughn). In
September 1997, the Company signed a definitive merger agreement to acquire the
balance of the issued and outstanding shares of Steck-Vaughn for $14.75 per
share, or approximately $41 million in aggregate. The transaction will be
consummated in fiscal 1998, and therefore the consolidated financial statements
included herein do not give effect to the acquisition of such shares, which will
result in an increase in goodwill of approximately $30 million.
note 4. OTHER CHARGES
In connection with the acquisition of NEC and the integration of the NEC
businesses into the Company, the Company recorded a charge of $81.7 million in
fiscal 1997, which is included in costs applicable to revenues ($24.6 million)
and selling, general and administrative expenses ($57.1 million). The charge
reflects costs the Company has incurred in connection with the realignment,
consolidation and reorganization of its existing businesses, and includes $23.5
million related to Drake Beam Morin. These costs consist primarily of severance
and related employee benefit obligations, consolidation of facilities and
impairment of certain existing assets. At October 31, 1997, $29.0 million of
these costs is included in other current liabilities.
note 5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
[Download Table]
October 31 (in thousands) 1997 1996
--------------------------------------------------------------------------------
Goodwill $1,303,634 $482,217
Acquired intangible assets 108,400 --
Trademarks 73,000 73,000
Other 30,186 28,819
---------- --------
TOTAL 1,515,220 584,036
Accumulated amortization (215,993) (127,542)
---------- --------
TOTAL $1,299,227 $456,494
========== ========
As of October 31, 1997 and 1996 goodwill consists of approximately $919.9
million and $400.5 million, respectively, amortized over 40 years and $383.7
million and $81.7 million, respectively, amortized over 25 years or less.
Acquired intangible assets consist of course libraries, customer leads and
contracts, and existing technology. These assets are amortized using accelerated
methods over estimated lives of one to five years. Amortization expense was
$88.1 million in 1997, $17.9 million in 1996 and $17.2 million in 1995.
In the periods presented, the Company has acquired several publishing
related companies. The results of operations from these acquired entities are
reflected in the Company's statements of operations from the date of
acquisition. Cash paid for acquisitions amounted to approximately $938.3 million
in 1997, including NEC and Churchill Livingstone, $20.6 million in 1996 and
$42.5 million in 1995. In 1996, the Company also purchased approximately 1.1
million shares of NMG common stock in the open market for approximately $22.8
million.
38 HARCOURT GENERAL
note 6. THE NEIMAN MARCUS GROUP, INC.
In October 1996, NMG completed a public offering of 8.0 million shares of its
common stock at a price of $35.00 per share. The net proceeds from the offering
($267.3 million) were used by NMG to partially fund the repurchase of all of
NMG's issued and outstanding preferred stocks from the Company. The total
consideration paid by NMG to the Company in connection with the repurchase was
$416.4 million, plus accrued and unpaid dividends through the date of the public
offering. Of the total consideration, $260.0 million in cash was advanced to the
Company during October 1996. In addition to the advance, in November 1996, NMG
paid the Company $27.2 million in cash and 3.9 million shares of its common
stock (valued at $135.0 million at $35.00 per share) and completed the exchange
for all of NMG's issued and outstanding preferred stocks. The impact of NMG's
public offering and the repurchase of its preferred stocks from the Company is
reflected in the 1996 financial statements. The Company presently owns
approximately 53% of the outstanding common stock of NMG, as compared to 59%
prior to the transaction. The NMG public offering resulted in the establishment
of a minority interest liability of $217.7 million, which represents the NMG
minority shareholders' interest in the shareholders' equity of NMG and an
increase of $15.2 million in paid-in capital, which represents the Company's
incremental share of NMG's shareholders' equity, both at October 31, 1996.
The Company recorded 100% of the earnings of NMG to the extent that the
Company had previously absorbed losses of NMG applicable to the minority
interest. In fiscal 1997 the Company fully recovered previously absorbed losses
attributable to the minority shareholders and no longer includes in its earnings
that portion of NMG earnings (currently 47%) attributable to the minority
shareholders.
The cash flows of NMG are only available to the Company through the payment
of dividends. NMG has not paid dividends on its common stock since NMG's third
quarter of fiscal 1995. Additionally, the Company's consolidated long-term
liabilities at October 31, 1997 include $369.7 million of NMG obligations, which
are not guaranteed by Harcourt General.
The Company and NMG are parties to an agreement pursuant to which the
Company provides certain management, accounting, financial, legal, tax and other
corporate services to NMG. The fees for these services are charged at the
Company's cost and are subject to the approval of a committee of directors of
NMG who are not affiliated with the Company. This agreement may be terminated by
either party on 180 days' notice. Charges to NMG were $5.7 million in 1997, $6.9
million in 1996 and $6.5 million in 1995.
Substantially all of the executive officers of the Company serve in similar
capacities with NMG. During the period covered by these consolidated financial
statements, the Company's Chairman and one of its Presidents and Co-Chief
Operating Officers served as directors of NMG.
note 7. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
[Download Table]
October 31 (in thousands) 1997 1996
-----------------------------------------------------------------
Accrued salaries and related charges $122,909 $77,949
Self-insurance reserves 46,651 49,569
Unearned subscription income 73,456 42,290
Accrued real estate and related charges 52,319 26,120
Other 317,676 196,046
-------- --------
TOTAL $613,011 $391,974
======== ========
1997 ANNUAL REPORT 39
note 8. LONG-TERM LIABILITIES
[Enlarge/Download Table]
Long-term liabilities of Harcourt General and NMG at October 31, 1997 and 1996
were as follows:
(in thousands) Interest Rate Maturity 1997 1996
------------------------------------------------------------------------------------------
Harcourt General
Convertible subordinated debentures 6.5% May 2011 $ 54,550 $ --
Revolving credit agreement Variable Apr. 1999 14,000 --
Revolving credit agreement Variable Jul. 2002 -- --
Senior debt 8.25% Jun. 2002 149,493 149,425
Senior debt 6.7% Jul. 2007 149,592 --
Senior debt 8.88% Jun. 2022 148,000 147,982
Senior debt 7.2% Jul. 2027 199,568 --
Senior debt 7.3% Jul. 2097 149,431 --
Subordinated notes 9.38% Jun. 1997 -- 124,938
Subordinated notes 9.50% Mar. 2000 124,938 124,905
Other long-term liabilities Various Various 211,048 158,025
---------- ---------
TOTAL HARCOURT GENERAL 1,200,620 705,275
========== =========
NMG
Revolving credit agreement Variable Apr. 2000 300,000 186,500
Senior notes 9.59% Aug. 1996 -- 52,000
Senior notes 9.24% Dec. 1996 -- 40,000
Senior notes Variable Dec. 1996 -- 40,000
Other long-term liabilities Various Various 78,548 79,016
---------- ---------
TOTAL NMG 378,548 397,516
Less current maturities (14,439) (163,717)
---------- ---------
TOTAL LONG-TERM LIABILITIES $1,564,729 $ 939,074
========== =========
In connection with the acquisition of NEC, the Company unconditionally assumed
all of the obligations of NEC under its 6 1/2% Convertible Subordinated
Debentures due 2011 and the related Indenture dated May 15, 1986, as amended.
The NEC Debentures are subject to a mandatory annual redemption of $2.9 million
in principal and, as a result of the acquisition of NEC by the Company, are
convertible at the option of the holder into $21.00 for every $25.00 in
principal of NEC Debentures.
In July 1997, the Company replaced its existing revolving credit agreement
with a new revolving credit agreement with 18 banks, pursuant to which the
Company may borrow up to $750 million. The new agreement, which expires in July
2002, may be terminated by the Company at any time on three business days'
notice. The rate of interest payable is determined according to the senior debt
rating of the Company and one of four pricing options selected by the Company.
At October 31, 1997, no borrowings were outstanding under the new agreement.
In August 1997, the Company issued $500 million of senior notes and
debentures to the public. The proceeds of the debt offering were used in part to
repay borrowings outstanding under the Company's revolving credit agreement
which had been used to finance the acquisition of NEC. The debt is comprised of
$150 million 6.70% senior notes due 2007, $200 million 7.20% senior debentures
due 2027 and $150 million 7.30% senior debentures due 2097. Interest on the
securities is payable semiannually in arrears beginning February 1, 1998.
In anticipation of the August 1997 debt offering, the Company entered into
several forward interest rate lock agreements which established weighted average
effective interest rates of 6.83% for the 10-year notes, 7.29% for the 30-year
debentures and 7.40% for the 100-year debentures. In August 1997, the Company
paid $20.5 million to settle such agreements, which was deferred and is being
amortized over the terms of the respective debt.
Subsequent to year end, Steck-Vaughn repaid its outstanding borrowings of
$14.0 million and terminated its revolving credit agreement.
Other long-term liabilities of Harcourt General consist primarily of a
liability for postretirement health care benefits and provisions for other
employee benefits.
At August 2, 1997, NMG had a $500 million revolving credit agreement which
was to expire in April 2000. That facility was replaced in October 1997 by a
$650 million revolving credit facility which expires in October 2002. NMG may
terminate this agreement at any time on three business days' notice. The rate of
interest payable (6.02% at August 2, 1997) varies according to one of four
pricing options selected by NMG.
40 HARCOURT GENERAL
In addition to its revolving credit facility, NMG borrows from other banks
on an uncommitted basis. Such borrowings are included in notes payable and
current maturities of long-term liabilities and amounted to $26.5 million at
August 3, 1996. No such borrowings were outstanding at August 2, 1997.
In 1997 NMG repaid $132 million of senior notes upon maturity through
borrowings under its revolving credit agreement.
Other long-term liabilities of NMG consist primarily of certain employee
benefit obligations and a liability for certain scheduled rent increases.
The aggregate maturities of all long-term liabilities are as follows:
[Download Table]
Harcourt
(in thousands) General NMG Total
--------------------------------------------------------
1998 $ 5,600 $ 8,800 $ 14,400
1999 26,800 4,100 30,900
2000 137,400 304,100 441,500
2001 6,500 4,300 10,800
2002 155,800 4,600 160,400
Thereafter 868,500 52,600 921,100
Certain of Harcourt General's and NMG's loan agreements contain, among other
restrictions, provisions limiting the issuance of additional debt and
guarantees.
note 9. SHAREHOLDERS' EQUITY
SERIES A CUMULATIVE CONVERTIBLE STOCK
Each share of Series A Stock is convertible into 1.1 shares of Common Stock and
is entitled to a quarterly dividend equal to the quarterly dividend on each
share of Common Stock multiplied by 1.1, plus $.0075. Each share of Series A
Stock is entitled to a liquidation preference of $5.00 plus any accrued but
unpaid dividends. Liquidation proceeds remaining after the satisfaction of such
preference and the payment of $4.55 per share of Common Stock would be
distributed ratably to the holders of Common Stock and Series A Stock. There
were 10,000,000 authorized shares of Series A Stock at October 31, 1997.
CLASS B STOCK AND COMMON STOCK
The Class B Stock is not transferable except to family members and related
entities but is convertible at any time on a share-for-share basis into Common
Stock. The holders of Class B Stock are entitled to cash dividends which are 10%
lower per share than the cash dividends paid on each share of Common Stock. The
Class B Stock and the Common Stock are each entitled to vote separately as a
class on charter amendments, mergers, consolidations and certain extraordinary
transactions which are required to be approved by shareholders under Delaware
law. Under certain circumstances, the holders of Class B Stock have the right to
cast 10 votes per share for the election of directors. There were 80 million and
200 million shares of Class B Stock and Common Stock authorized for issuance at
October 31, 1997, respectively.
In April 1995, the Company completed a "Dutch Auction" tender offer and
repurchased approximately 5.4 million shares of the Company's Common Stock at
$40.50 per share.
In May 1995, the Company's Board of Directors authorized the purchase of an
additional 2.5 million shares of Common Stock in the open market. Through the
year ended October 31, 1996, the Company repurchased approximately 1.8 million
shares at an average price of approximately $39.12 per share. In December 1996,
the Company's Board of Directors authorized an increase in the open market stock
purchase program to 3.5 million shares of the Company's Common Stock. Through
the year ended October 31, 1997, the Company repurchased approximately 400,000
shares at an average price of approximately $45.56 per share.
COMMON STOCK INCENTIVE PLANS
The Company has established common stock incentive plans allowing for the
granting of stock options, stock appreciation rights (SARs) and stock-based
awards to its employees. The Company applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans. The Company has
adopted the disclosure-only provision of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
Accordingly, no compensation cost has been recognized for its common stock
incentive plans. Had compensation cost for the Company's common stock incentive
plans been determined based on the fair value at the grant dates for awards
under the plans consistent with the method of SFAS 123, the Company's net loss
would have increased by $.4 million and loss per share would remain unchanged.
1997 ANNUAL REPORT 41
The effects on pro forma net income and earnings per share of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on reported net income for future years due to such factors as the
vesting period of the stock options and the potential for issuance of additional
stock options in future years. In addition, the disclosure requirements of SFAS
123 are presently applicable only to options granted subsequent to October 30,
1995.
The Company has adopted the 1997 Incentive Plan (the 1997 Plan) which will
be used for all future grants of equity-based awards to employees. All
outstanding equity-based awards at October 31, 1997 were granted under the
Company's 1988 Stock Incentive Plan. At October 31, 1997, there were 4.0 million
shares of Common Stock available for issuance under the 1997 Plan.
Options outstanding at October 31, 1997 were granted at prices (not less
than 100% of the fair market value on the date of the grant) varying from $15.67
to $48.13. Options generally vest gradually over five years and expire after ten
years. There were 95 employees with options outstanding at October 31, 1997. For
all outstanding options at October 31, 1997, the weighted average exercise price
was $34.08 and the weighted average remaining contractual life was approximately
6.4 years.
The Company has allowed SAR treatment in connection with the exercise of
certain options. Optionees allowed SAR treatment surrender an exercisable option
in exchange for an amount of cash equal to the excess of the market price of the
Common Stock at the time of the surrender over the option exercise price, which
is recorded as expense.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions used
for grants: expected life of seven years, risk-free interest rate of 7.0%,
expected dividend yield of 1.5%, and expected volatility of 22.16% in 1997 and
21.63% in 1996.
A summary of the status of the Company's stock options as of October 31,
1997, 1996, and 1995 and changes during the years ended on those dates is as
follows:
[Enlarge/Download Table]
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------------------------------------
Options outstanding at
beginning of year 447,186 $28.84 543,448 $18.44 755,712 $17.87
Granted 107,350 48.13 80,350 41.88 80,150 33.25
SAR Surrenders (5,917) 32.29 (109,081) 19.68 (197,169) 19.69
Exercised (51,522) 17.55 (61,496) 21.29 (86,643) 16.45
Canceled (4,603) 39.77 (6,035) 31.01 (8,602) 30.77
------------------------------------------------------------------------------------------------
OUTSTANDING AT
END OF YEAR 492,494 $34.08 447,186 $28.84 543,448 $18.44
================================================================================================
OPTIONS EXERCISABLE AT
END OF YEAR 236,151 $26.32 223,182 $22.65 285,860 $21.18
================================================================================================
The weighted-average fair value of options granted in 1997 and 1996 was $17.51
and $15.24, respectively.
The following summarizes information about the Company's stock options as of
October 31, 1997:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
-------------------------------------------------------------------- ------------------------------
Shares Weighted-Average Weighted-Average Shares Weighted-Average
Range of Outstanding Remaining Exercise Outstanding Exercise
Exercise Prices At 10/31/97 Contractual Life Price At 10/31/97 Price
-----------------------------------------------------------------------------------------------------------
$15.67 - $23.39 115,062 2.90 years $19.66 115,062 $19.66
$28.72 - $33.25 193,782 6.20 years 31.84 106,169 31.36
$41.88 - $48.13 183,650 8.70 years 45.48 14,920 41.88
-----------------------------------------------------------------------------------------------------------
$15.67 - $48.13 492,494 6.40 years $34.08 236,151 $26.32
============================================================================================================
42 HARCOURT GENERAL
note 10. INCOME TAXES
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
[Enlarge/Download Table]
1997 1996 1995
Years ended October 31 (in thousands) Amount % Amount % Amount %
------------------------------------------------------------------------------------------------
Statutory tax expense $(24,861) (35) $101,209 35 $94,188 35
State income taxes, net of federal tax effect 7,412 10 5,768 2 5,932 2
Tax credits (107) -- (98) -- (106) --
In-process research and development 60,900 86 -- -- -- --
Dividends received exclusion (1,232) (2) (2,451) (1) (1,893) (1)
Foreign tax rate differentials (113) -- (86) -- (501) --
Other permanent items 7,594 11 3,656 1 3,563 1
Change in valuation allowance (7,066) (10) (6,945) (2) (7,187) (2)
Capital gains, settlements and other (4,288) (6) (2,735) (1) (2,500) (1)
INCOME TAX EXPENSE FROM -------------------------------------------------
CONTINUING OPERATIONS $ 38,239 54 $ 98,318 34 $91,496 34
=================================================
[Download Table]
Income tax expense was as follows:
Years ended October 31 (in thousands) 1997 1996 1995
-----------------------------------------------------------------
Current
Federal $ 98,464 $97,115 $70,696
State 11,050 10,377 8,249
Deferred
Federal (66,008) (7,671) 11,674
State (5,267) (1,503) 877
---------------------------
INCOME TAX EXPENSE $ 38,239 $98,318 $91,496
===========================
Significant components of the net deferred tax liabilities stated on a gross
basis were as follows:
[Download Table]
October 31 (in thousands) 1997 1996
----------------------------------------------------------------------------------
Gross deferred tax assets:
Loss carryforwards $ 67,231 $ --
Credit carryforwards 3,227 --
Accrued liabilities and reserves 147,629 84,702
Employee benefits 39,612 37,190
Postretirement health care benefits 41,083 33,406
Inventories 18,482 22,336
Difference in basis of assets acquired 21,574 28,640
--------- --------
Total gross deferred tax assets 338,838 206,274
Valuation allowance (65,896) (11,406)
--------- --------
NET DEFERRED TAX ASSETS 272,942 194,868
Gross deferred tax liabilities:
Property, equipment, prepublication costs and intangibles 164,821 153,445
Pension and employee benefits accrual 19,067 22,295
Difference in basis of assets acquired 80,041 90,945
Accrued liabilities and reserves 31,902 38,324
--------- --------
Total gross deferred tax liabilities 295,831 305,009
--------- --------
NET DEFERRED TAX LIABILITIES $ 22,889 $110,141
========= ========
1997 ANNUAL REPORT 43
The Company has recorded a valuation allowance for certain deductible temporary
differences for which it is likely, at this time, that the Company will not
receive future tax benefit. Realization of the remaining deferred tax assets is
dependent on generating sufficient future taxable income. Although realization
is not assured, management believes it is more likely than not that the
remaining deferred tax assets will be realized.
At October 31, 1997, the Company had federal net operating loss
carryforwards of approximately $168.3 million expiring at various dates through
2011 related to various subsidiaries which can only be utilized against each
company's respective future taxable income. In addition, the Company had
available $1.3 million of tax credit carryforwards, with no expiration date,
which may be utilized to offset future regular tax liabilities.
note 11. INVESTMENT AND OTHER INCOME
Investment income consisted of the following:
[Download Table]
Years ended October 31 (in thousands) 1997 1996 1995
--------------------------------------------------------------------------------
Interest income $24,746 $16,794 $31,492
Dividend income 4,238 10,535 8,453
------- ------- -------
TOTAL INVESTMENT INCOME $28,984 $27,329 $39,945
======= ======= =======
note 12. DISCONTINUED OPERATIONS
In June 1995, NMG sold its Contempo Casuals subsidiary to The Wet Seal, Inc. for
approximately $1.0 million of Wet Seal Class A Common Stock and $100,000 in
cash. Revenues related to the discontinued Contempo Casuals operations were
$207.2 million in 1995. The net loss from discontinued operations was $11.7
million in 1995.
note 13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company and NMG have long-term operating leases primarily for offices,
distribution centers, retail stores, other facilities and equipment. Leases are
generally for periods of up to 30 years, with renewal options at fixed rentals.
Certain retail leases also provide for additional rentals based on revenues in
excess of predetermined levels.
Rent expense for continuing operations under operating leases for the years
ended October 31 was as follows:
[Download Table]
(in thousands) 1997 1996 1995
----------------------------------------------------------
Minimum rent $83,500 $75,800 $71,900
Rent based on revenues 11,600 10,700 8,400
------- ------- -------
$95,100 $86,500 $80,300
======= ======= =======
Assuming renewal options are not exercised, the future minimum rental payments
will be as follows:
[Download Table]
Harcourt
(in thousands) General NMG Total
--------------------------------------------------------------
1998 $50,100 $ 31,600 $ 81,700
1999 46,300 30,500 76,800
2000 41,000 30,200 71,200
2001 36,900 29,200 66,100
2002 24,000 29,000 53,000
Thereafter 53,200 515,200 568,400
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.
44 HARCOURT GENERAL
Under the Reimbursement and Security Agreement, GCC granted to Harcourt
General a security interest in the stock of its theatre subsidiaries in order to
secure GCC's obligation to indemnify Harcourt General from any losses which
Harcourt General may incur due to its secondary liability on theatre leases
which were transferred to GCC as part of the spinoff. In addition, GCC has
agreed to certain financial covenants designed to protect Harcourt General from
incurring such liabilities. As of October 31, 1997, GCC's aggregate future
rental payments due under such theatre leases amounted to approximately $564.0
million.
The Intercompany Services Agreement provides for the services of Harcourt
General's Chairman and Chief Executive Officer and one of its Presidents and
Co-Chief Operating Officers and such additional corporate services as the
Company and GCC may mutually determine from time to time. The Company's Chairman
and Chief Executive Officer continues to serve as the Chairman and Chief
Executive Officer of GCC, and one of the Company's Presidents and Co-Chief
Operating Officers serves as President and Chief Operating Officer of GCC.
LITIGATION
Both Harcourt General and NMG are involved in various suits and claims in the
ordinary course of business. Management does not believe that the disposition of
such suits and claims will have a material adverse effect on the financial
position or continuing operations of Harcourt General or NMG.
note 14. PENSION PLANS
Harcourt General and NMG each have non-contributory defined benefit pension
plans covering substantially all full-time employees other than union employees.
Harcourt General and NMG also sponsor unfunded supplemental executive retirement
plans which provide certain employees additional pension benefits. Benefits
under these plans are based on employees' years of service and compensation over
defined periods of employment. When funding is required, the policy of Harcourt
General and NMG is to contribute amounts that are deductible for federal income
tax purposes.
Net pension expense was as follows:
[Download Table]
Years ended October 31 (in millions) 1997 1996 1995
-------------------------------------------------------------------------
Service cost - benefits earned $ 13.2 $ 13.1 $ 12.8
Interest cost on projected benefit obligation 15.1 11.7 11.0
Actual return on assets (61.6) (26.3) (20.5)
Net amortization and deferral 47.4 12.9 7.6
------ ------ ------
NET PENSION EXPENSE $ 14.1 $ 11.4 $ 10.9
====== ====== ======
The following table sets forth the plans' funded status and amounts recognized
in the consolidated balance sheets at October 31:
[Enlarge/Download Table]
1997 1996
Funded Unfunded Funded Unfunded
(in millions) Plans Plans Plans Plans
---------------------------------------------------------------------------------------
Vested benefit obligation $142.0 $20.1 $122.5 $ 14.9
====== ===== ====== ======
Accumulated benefit obligation $150.8 $25.0 $130.3 $ 18.4
====== ===== ====== ======
Projected benefit obligation $184.5 $32.5 $159.2 30.4
Plan assets at fair value 250.0 -- 194.0 --
------ ------ ------ ------
Overfunded (underfunded) projected obligation 65.5 (32.5) 34.8 (30.4)
Unrecognized net obligation at transition .7 .6 .4 .8
Unrecognized net loss (gain) (37.5) .1 1.7 1.3
Unrecognized prior service cost (1.5) 3.3 (1.6) 3.5
------ ------ ------ ------
PREPAID (ACCRUED) PENSION COST RECOGNIZED
IN THE CONSOLIDATED BALANCE SHEETS $ 27.2 $(28.5) $ 35.3 $(24.8)
====== ====== ====== ======
Pension expense was computed assuming a discount rate of 7.5% and a long-term
rate of return on plan assets of 9.0% for both Harcourt General and NMG for each
of the years presented. The assumed rate of increases in future compensation
levels for each of the years presented was 6.0% for Harcourt General and 5.0%
for NMG. In connection with the NEC acquisition, the Company assumed
supplemental benefit plan obligations, of which approximately $6.0 million
remained at October 31, 1997.
1997 ANNUAL REPORT 45
In addition to the pension plans, Harcourt General and NMG have defined
contribution plans for certain employees. The savings plan of each company
permits employee contributions and provides for certain matching contributions.
Company contributions to these plans for the years ended October 31, 1997, 1996
and 1995 were approximately $11.1 million, $10.1 million and $9.4 million,
respectively. The Company's employee stock ownership plan is non-contributory.
note 15. POSTRETIREMENT HEALTH CARE BENEFITS
The Company provides health care benefits for retired employees which are funded
as claims are incurred. Retirees and active employees hired prior to March 1,
1989 are eligible for these benefits if they meet certain service and minimum
age requirements.
The actuarial present value of the accumulated postretirement health care
benefit obligation and the amounts recognized in the Company's consolidated
balance sheets as of October 31 were as follows:
[Download Table]
(in millions) 1997 1996
--------------------------------------------------------------------------------
Retirees $32.4 $31.6
Fully eligible active plan participants 7.0 6.9
Other active plan participants 8.0 7.9
----- -----
Accumulated postretirement benefit obligation 47.4 46.4
Unrecognized net gain 31.3 34.6
----- -----
ACCRUED POSTRETIREMENT BENEFIT LIABILITY $78.7 $81.0
===== =====
The postretirement health care benefit cost was as follows:
[Download Table]
Years ended October 31 (in millions) 1997 1996 1995
--------------------------------------------------------------------------------
Service cost $ .4 $ .6 $ .7
Interest cost on accumulated benefit obligation 3.0 4.3 3.8
Net amortization and deferral (2.4) (1.8) (2.1)
----- ----- -----
POSTRETIREMENT BENEFIT COST $ 1.0 $ 3.1 $ 2.4
===== ===== =====
The health care cost trend rate assumed in measuring the accumulated
postretirement benefit obligation in fiscal 1997 was 10.0%, gradually declining
to 5.0% in the year 2002. Measurement of the accumulated postretirement benefit
obligation was based on an assumed 7.5% discount rate in both 1997 and 1996.
An increase of 1% in the health care cost trend rate would increase the
accumulated postretirement obligation as of October 31, 1997 by $4.7 million.
This change would increase the annual expense by $.4 million.
The Company paid $3.3 million in fiscal 1997, $2.9 million during fiscal
1996 and $2.8 million during fiscal 1995 for postretirement health care benefit
claims.
note 16. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as reported
and disclosed in the consolidated financial statements, and as discussed below.
SECURITIZATION OF CREDIT CARD RECEIVABLES
In March 1995, NMG sold all of its Neiman Marcus credit card receivables through
a subsidiary to a trust in exchange for certificates representing undivided
interests in such receivables. Certificates representing undivided interests in
$246.0 million of these receivables were sold to third parties in a public
offering of $225.0 million 7.60% Class A certificates and $21.0 million 7.75%
Class B certificates. NMG used the proceeds from this offering to pay down
existing debt. NMG's subsidiary will retain the remaining undivided interests in
the receivables not represented by the Class A and the Class B certificates. A
portion of that interest is subordinated to the Class A and Class B
certificates. NMG continues to service all receivables for the trust.
In anticipation of the securitization, NMG entered into several forward
interest rate lock agreements which established a weighted average effective
rate of approximately 8.0% on the certificates issued. During March 1995, the
NMG paid $5.4 million to settle all of its interest rate lock agreements.
DEBT
The fair value of Harcourt General's senior debt and subordinated notes was
$1.04 billion and $741.7 million on October 31, 1997 and 1996, respectively, and
was based upon quoted prices and comparable publicly-traded issues.
46 HARCOURT GENERAL
note 17 COMPARATIVE QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
[Enlarge/Download Table]
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 COMMON SHARE $ .20 $ .04 $ (2.00) $ .10 $ (1.64)
==================================================================
Dividends per share
Common Stock $ .18 $ .18 $ .18 $ .19 $ .73
Class B Stock $ .162 $ .162 $ .162 $ .171 $ .657
Series A Stock $.2055 $.2055 $ .2055 $.2165 $ .8330
------------------------------------------------------------------
[Enlarge/Download Table]
1996
(in millions except for per share data) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year
----------------------------------------------------------------------------------------------------------------
REVENUES $698.4 $844.3 $879.2 $868.0 $3,289.9
==================================================================
GROSS PROFIT $280.2 $301.2 $418.8 $382.7 $1,382.9
==================================================================
NET EARNINGS $ 16.7 $ 10.4 $105.2 $ 58.6 $ 190.9
==================================================================
NET EARNINGS PER COMMON SHARE $ .23 $ .14 $ 1.45 $ .81 $ 2.62
==================================================================
Dividends per share
Common Stock $ .17 $ .17 $ .17 $ .18 $ .69
Class B Stock $ .153 $ .153 $ .153 $ .162 $ .621
Series A Stock $.1945 $.1945 $.1945 $.2055 $ .7890
------------------------------------------------------------------
In the fourth quarter, the effect of adjusting the LIFO reserve for merchandise
inventories to actual amounts increased net earnings by $2.7 million in 1997 and
by $3.9 million in 1996.
1997 ANNUAL REPORT 47
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Harcourt General, Inc.
Chestnut Hill, Massachusetts
We have audited the consolidated balance sheets of Harcourt General, Inc. and
its subsidiaries as of October 31, 1997 and 1996 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended October 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Harcourt
General, Inc. and its subsidiaries as of October 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
December 8, 1997
STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Harcourt General, Inc. and its subsidiaries is responsible for
the integrity and objectivity of the financial and operating information
contained in this Annual Report, including the consolidated financial statements
covered by the Independent Auditors' Report. These statements were prepared in
conformity with generally accepted accounting principles and include amounts
that are based on the best estimates and judgments of management.
The Company maintains a system of internal financial controls which
provides management with reasonable assurance that transactions are recorded and
executed in accordance with its authorization, that assets are properly
safeguarded and accounted for, and that records are maintained so as to permit
preparation of financial statements in accordance with generally accepted
accounting principles. This system includes written policies and procedures, an
organizational structure that segregates duties, and a comprehensive program of
periodic audits by the internal auditors. The Company has policies and
guidelines which require employees to maintain a high level of ethical
standards.
In addition, the Audit Committee of the Board of Directors, consisting
solely of outside directors, meets periodically with management, the internal
auditors and the independent auditors to review internal accounting controls,
audit results and accounting principles and practices, and to recommend the
selection of independent auditors to the Board of Directors.
John R. Cook
Senior Vice President and Chief Financial Officer
Catherine N. Janowski
Vice President and Controller
48 HARCOURT GENERAL
[Enlarge/Download Table]
FIVE YEAR SUMMARY (UNAUDITED)
(in thousands except for per share amounts) 1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------------------------------
Revenues
Publishing $1,376,258 $1,092,631 $1,017,637 $ 919,498 $ 944,545
Specialty retail 2,209,891 2,075,003 1,888,249 1,789,461 1,667,825
Professional services 105,490 122,285 128,850 141,818 146,252
----------------------------------------------------------------------
TOTAL $3,691,639 $3,289,919 $3,034,736 $2,850,777 $2,758,622
======================================================================
Operating earnings (loss)
Publishing $ (138,993) $ 196,997 $ 177,531 $ 165,436 $ 142,177
Specialty retail 194,714 172,354 161,698 157,713 134,302
Professional services (25,316) 9,753 13,062 22,072 28,395
Corporate expenses (36,101) (34,382) (34,395) (35,081) (46,932)
----------------------------------------------------------------------
Operating earnings (loss) (5,696) 344,722 317,896 310,140 257,942
Investment income 28,984 27,329 39,945 14,239 14,072
Interest expense (94,319) (82,882) (88,735) (86,219) (84,585)
Other income, net -- -- -- -- 18,303
----------------------------------------------------------------------
Earnings (loss) from continuing operations
before income taxes and minority interest (71,031) 289,169 269,106 238,160 205,732
Income tax expense (38,239) (98,318) (91,496) (90,885) (77,876)
Minority interest in earnings of
subsidiaries, net of taxes (5,852) -- -- -- --
----------------------------------------------------------------------
Earnings (loss) from continuing operations (115,122) 190,851 177,610 147,275 127,856
Discontinued operations, net -- -- (11,727) 30,257 43,477
----------------------------------------------------------------------
Net earnings (loss) $ (115,122) $ 190,851 $ 165,883 $ 177,532 $ 171,333
======================================================================
Depreciation and amortization $ 343,213 $ 180,395 $ 175,737 $ 149,973 $ 154,740
Capital expenditures $ 195,039 $ 242,655 $ 220,053 $ 196,160 $ 159,860
Total assets $3,781,393 $3,326,238 $2,884,336 $3,242,364 $2,805,878
Total long-term liabilities $1,564,729 $ 939,074 $ 999,854 $1,123,341 $1,107,371
Weighted average number of
common and common equivalent
shares outstanding 70,812 72,770 76,764 79,809 79,625
Amounts applicable to
common shareholders
Earnings (loss) from continuing
operations $ (1.64) $ 2.62 $ 2.31 $ 1.84 $ 1.60
Net earnings (loss) applicable to
common shareholders $ (1.64) $ 2.62 $ 2.16 $ 2.22 $ 2.15
Dividends paid on common stock $ .73 $ .69 $ .65 $ .61 $ .57
Dates Referenced Herein and Documents Incorporated by Reference
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