-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, XnR/2QW4nn16BBFuitTNGmGoUnt8zQ2X60lwgfhgx93uquLtp65XtWPcjFxPD7xW FoHYnAG9dfn6R55HXsdRdg== 0000040493-94-000004.txt : 19940131 0000040493-94-000004.hdr.sgml : 19940131 ACCESSION NUMBER: 0000040493-94-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19931031 FILED AS OF DATE: 19940128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARCOURT GENERAL INC CENTRAL INDEX KEY: 0000040493 STANDARD INDUSTRIAL CLASSIFICATION: 5311 IRS NUMBER: 041619609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-04925 FILM NUMBER: 94503429 BUSINESS ADDRESS: STREET 1: 27 BOYLSTON ST / BOX 1000 CITY: CHESTNUT HILL STATE: MA ZIP: 02167 BUSINESS PHONE: 6172328200 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL CINEMA CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MID WEST DRIVE IN THEATRES INC DATE OF NAME CHANGE: 19660907 10-K 1 10-K WITH SCHEDULES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended October 31, 1993 Commission File Number 1-4925 HARCOURT GENERAL, INC. (Exact name of registrant as specified in its charter) Delaware 04-1619609 State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 27 Boylston Street, Chestnut Hill, Massachusetts 02167 (Address of principal executive offices) (Zip Code) Registrant's telephone number and area code: 617-232-8200 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered Common Stock, $1.00 par value Series A Cumulative Convertible New York Stock Exchange Stock, $1.00 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,871,664,192 on January 20, 1994. There were 55,912,545 shares of Common Stock, 21,906,566 shares of Class B Stock and 1,503,894 shares of Series A Cumulative Convertible Stock outstanding as of January 20, 1994. ______________________ Documents Incorporated by Reference Portions of the Company's 1993 Annual Report to Stockholders are incorporated by reference in Parts I, II and IV of this Report. Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on March 11, 1994 are incorporated by reference in Part III of this Report. HARCOURT GENERAL, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 1993 TABLE OF CONTENTS PART I Page No. Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security 8 Holders PART II Item 5. Market for the Registrant's Common Equity 9 and Related Stockholder Matters Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 9 Item 9. Changes in and Disagreements with Accountants 10 on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant 10 Item 11. Executive Compensation 12 Item 12. Security Ownership of Certain Beneficial 12 Owners and Management Item 13. Certain Relationships and Related Transactions 12 PART IV Item 14. Exhibits, Financial Statement Schedules 12 and Reports on Form 8-K Signatures 14 PART I Item 1. BUSINESS General The principal businesses of Harcourt General, Inc., a Delaware corporation formed in 1950 (the "Company"), are publishing and specialty retailing. The Company also has significant operations in insurance and professional services, consisting of human resources consulting and outplacement services. During fiscal 1993 and for many years prior thereto, the Company also conducted a significant motion picture exhibition business under the "General Cinema Theatres" name. In December 1993, the Company completed the spinoff of this business to its common shareholders. General Cinema Theatres is now operated by GC Companies, Inc., an independent public company. See "Motion Picture Exhibition" below. A. Publishing General The Company acquired its wholly-owned subsidiary Harcourt Brace & Company ("Harcourt Brace") in a merger accounted for as a pooling of interests in November 1991. Harcourt Brace is among the world's largest publishing houses, publishing books and scholarly journals for the educational, scientific, technical, medical, professional and trade markets. The Company believes that The Psychological Corporation, a subsidiary of Harcourt Brace, is the world's largest for-profit publisher of tests for educational, psychological, clinical and professional assessment. In the professional field, Harcourt Brace conducts the largest bar examination review program in the country under the BAR/BRI name, as well as accountant accreditation review courses. Most of the operations of Harcourt Brace are in the United States, but Harcourt Brace also has international publishing operations in London, Tokyo, Sydney, Toronto and Montreal, as well as an export business headquartered in Orlando, Florida. Educational Publishing. The educational publishing group includes the operations of Harcourt Brace School, Holt, Rinehart and Winston, The Psychological Corporation and Harcourt Brace College. Harcourt Brace School produces textbooks and related instructional materials for the elementary grades. Holt, Rinehart and Winston publishes instructional materials for grades 7 through 12. The Psychological Corporation provides aptitude, diagnostic, achievement and performance tests and related products for educational, psychological, clinical and professional assessment. The college division publishes books for the college and university market under the Harcourt Brace College, Holt College, Saunders College and Dryden Press imprints. Scientific, Technical, Medical and Professional Publishing. The scientific, technical, medical and professional publishing group includes the operations of Academic Press, W.B. Saunders, Harcourt Brace Professional Publishing and [page 2] Harcourt Brace Legal and Professional Publishing. Academic Press publishes scholarly books and journals in the life, physical and social sciences. Its books and journals are sold to universities, libraries, businesses, laboratories and individuals in the United States and abroad. W.B. Saunders publishes books and periodicals in the health sciences, which are sold in the United States and abroad. Harcourt Brace Professional Publishing publishes reference guides and newsletters for certified public accountants. Harcourt Brace Legal and Professional Publishing conducts review courses for individuals preparing for bar examinations, CPA accreditation and graduate school entrance examinations. Trade Publishing. The Harcourt Brace trade division publishes children's books, general adult fiction and nonfiction hardcover books, and trade paperbacks under the Harvest imprint. Competition Numerous companies compete in all of the markets in which the Harcourt Brace businesses operate. The Company believes that the principal competitive factors for its publishing operations are the quality of its publications and customer service. The principal competitive factors in obtaining the publishing rights which are the foundation for the quality of its publications are the reputation of the Company and its financial resources, editorial and marketing skills and distribution capabilities. B. Specialty Retailing General The Company owns approximately 65% of the outstanding equity, on a fully-converted basis, of The Neiman Marcus Group, Inc. ("NMG"), which operates Neiman Marcus, NM Direct, Bergdorf Goodman and Contempo Casuals. NMG is a separate public company which is listed on the New York Stock Exchange and is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). On October 28, 1993, NMG filed an Annual Report on Form 10-K with respect to its fiscal year ended July 31, 1993. Following is a brief description of the businesses of NMG. For further information with respect to NMG, reference may be made to the NMG Annual Report on Form 10-K and to subsequent reports and other information which may be filed by NMG from time to time with the Securities and Exchange Commission (the "Commission"). Neiman Marcus Neiman Marcus is a high fashion, specialty retailer which offers high quality women's and men's apparel, fashion accessories, precious jewelry, decorative [page 3] home accessories, fine china, crystal, silver and epicurean products. In addition, through NM Direct, Neiman Marcus operates a state-of-the-art mail order business, including the catalogues of Neiman Marcus and Horchow. Neiman Marcus expects to complete a major expansion of its NM Direct mail order facility in 1994. As of October 31, 1993, Neiman Marcus operated 27 stores in 24 cities. The average Neiman Marcus store size is 142,000 gross square feet and the stores range in size from 90,000 gross square feet to 269,000 gross square feet. Neiman Marcus has announced that it plans to open four new stores: one in Short Hills, New Jersey, in calendar 1995; one in Paramus, New Jersey and one in King of Prussia, Pennsylvania, both in 1996; and one in Honolulu, Hawaii at a later date. Neiman Marcus also expects to renovate five of its stores in 1994. Bergdorf Goodman Bergdorf Goodman is a high fashion retailer of distinctive high quality women's and men's apparel, fashion accessories, precious jewelry, decorative home accessories, fine china, crystal and silver. It operates two leased stores on Fifth Avenue and 58th Street in New York City. The original store, consisting of 250,000 gross square feet, is dedicated to women's apparel and accessories, home furnishings and gifts. Bergdorf Goodman Men, which opened in August 1990, consists of 66,000 gross square feet and is dedicated to men's apparel and accessories. Bergdorf Goodman also operates an important mail order business through NM Direct. Contempo Casuals Contempo Casuals operates a chain of retail stores which sells contemporary fashion apparel and accessories primarily for young women at generally moderate prices. Almost all apparel sold in Contempo Casuals stores carries the Contempo Casuals label. In fiscal 1993, approximately 55% of Contempo Casuals' merchandise was produced through internal design. As of October 31, 1993, Contempo Casuals operated 290 stores, which average 4,000 gross square feet, in leased facilities located primarily in regional shopping malls in 35 states and Puerto Rico. Contempo Casuals is evaluating a new chain concept under the name Pastille, which offers contemporary women's fashion apparel at a value price and is designed to appeal to a broad group of female consumers between the ages of 25 and 50. As of October 31, 1993, Pastille operated 39 leased stores, which average 4,600 gross square feet. Pastille also operates a mail order business through NM Direct. [page 4] Competition NMG's specialty store operations compete with numerous specialty retail stores and department stores for customers and merchandise. The Company believes that the principal competitive factors for specialty store operations are customer service, quality of merchandise, merchandise assortment, store ambience and price. The NM Direct mail order operations compete in both the retail and direct mail markets with numerous other retail and direct mail operations. The Company believes that the principal competitive factors for the NM Direct mail order operations are customer service, price, merchandise quality and assortment and catalog presentation. C. Insurance General The Company's Insurance operations underwrite and market insurance and annuity products in four distinct areas: farm, general agency, structured settlements and credit. The farm division underwrites and markets life, accident and health insurance policies and annuity contracts through The Harvest Life Insurance Company ("Harvest") and Federal Home Life Insurance Company ("Federal"). The general agency division underwrites and markets life insurance and annuity contracts on an individual basis in all 50 states and the District of Columbia. The structured settlements division underwrites and markets annuity contracts used in structured settlements, which are an alternative to lump sum cash payments in the settlement of personal injury cases. Structured settlements are marketed principally to casualty insurance companies, self-insured corporations and defense attorneys. The credit insurance division underwrites and markets life insurance and accident and health insurance in connection with credit transactions. Policies for the general agency, structured settlements and credit divisions are underwritten by Federal and PHF Life Insurance Company. Credit insurance is also underwritten by Harvest. Competition and Regulation The insurance business is highly competitive. Most life insurance companies sell a full range of life, health and annuity policies which are comparable to those sold by the Company's Insurance operations. The Company believes that the principal competitive factors for its Insurance business are financial strength, reputation, price and customer service. The insurance business is highly regulated. The Company's Insurance operations must maintain their licenses, which are required to be renewed annually, in each state in which they do business. [page 5] D. Professional Services The Company believes that Drake Beam Morin ("DBM") is the world's leading human resources management consulting firm. DBM assists organizations and individuals worldwide in outplacement, employee selection, performance evaluation, career management and transition management. DBM has expanded its services in recent years to include employee training and consulting for organizations in the process of change. During fiscal 1993, DBM had 67 leased offices in the United States and 84 offices in 26 countries around the world. The Company believes that the principal competitive factors for DBM are quality of service (including its ability to promptly respond to clients' needs for services) and price. E. Motion Picture Exhibition On December 15, 1993, the Company completed the spinoff of its motion picture exhibition business (known as "General Cinema Theatres") to the holders of the Company's Common Stock and Class B Stock on December 10, 1993, the record date for the spinoff. As a result of the spinoff, the motion picture exhibition business is now operated by GC Companies, Inc. ("GCC"), an independent public company which is listed on the New York Stock Exchange and is subject to the reporting requirements of the Exchange Act. The Company has no equity ownership in GCC. However, Richard A. Smith, the Chairman of the Board of the Company, serves as the Chairman, President and Chief Executive Officer of GCC, and Robert J. Tarr, Jr., the President and Chief Executive Officer of the Company, serves as a director of GCC. In addition, the Company has certain contractual arrangements with GCC, including an Intercompany Services Agreement and a Reimbursement and Security Agreement. See Note 2 of the Notes to the Consolidated Financial Statements for further information regarding such agreements. For further information with respect to GCC, reference may be made to the Registration Statement on Form 10 filed by GCC with the Commission and to subsequent reports and information which may be filed by GCC from time to time with the Commission. [page 6] F. Certain Additional Information 1. Employees
Percentage of Employees Total Total Number of Each Operating Unit Number of of Part-Time Covered by Collective Employees Employees Bargaining Agreements Harcourt Brace Publishing 4,500 55 Less than 1% The Neiman Marcus Group 18,000 6,400 Less than 1% Insurance 570 4 None Drake Beam Morin 500 4 None Corporate 130 3 None
The figures in the above table are approximate as of October 31, 1993 and exclude the employees of General Cinema Theatres. At October 31, 1993, DBM also utilized the services of approximately 1,200 independent contractors and adjunct employees. The Company believes that its relations with its employees are generally good. 2. Capital Expenditures; Seasonality; Liquidity; Capital Resources For a review of the Company's financial results for fiscal 1993, including information on capital expenditures, seasonality, liquidity, capital resources and other financial information, reference is made to the "Business Review" and "Financial Review" sections on pages 16 through 23 and 25 through 29, respectively, of the Company's Annual Report to Stockholders for the fiscal year ended October 31, 1993 (the "1993 Annual Report"), which is incorporated herein. 3. Financial Information About Industry Segments The information set forth under the heading "Additional Financial Information" in Note 4 of the Notes to the Company's Consolidated Financial Statements on page 37 of the 1993 Annual Report is incorporated herein. [page 7] ITEM 2. PROPERTIES The Company's corporate headquarters, as well as the corporate headquarters for The Neiman Marcus Group, Inc., are located in leased facilities in Chestnut Hill, Massachusetts. The corporate headquarters for Harcourt Brace's publishing operations are located in a leased office in Lake Forest, Illinois. The corporate headquarters for the Company's Insurance operations are located in a leased building in Orlando, Florida. The corporate headquarters for Drake Beam Morin are located in a leased office in New York City. At October 31, 1993, the office, warehouse and other facilities owned or leased by Harcourt Brace and its affiliates (excluding the Insurance operations) were located in 29 states, the District of Columbia, Puerto Rico and five foreign countries. NMG's operating divisions are headquartered in leased or owned facilities in Dallas (Neiman Marcus and NM Direct), New York (Bergdorf Goodman) and Los Angeles (Contempo Casuals). At October 31, 1993, the approximate square footage used in NMG's operations was as follows:
Owned Subject to Owned Ground Lease Leased Total Stores ................... 347,000 1,170,300 3,962,500 5,479,800 Distribution centers and office facilities... 377,000 --- 1,425,100 1,802,100
Leases for Neiman Marcus stores are generally for periods of up to 30 years, with renewal options for substantial periods, and leases for Contempo Casuals stores are generally for 10 years, with no renewal options. The lease on the Bergdorf Goodman main store expires in 2050 and the lease on the Bergdorf Goodman Men's store expires in 2010, with two 10-year renewal options. Leases are generally at fixed rentals, except that certain leases provide for additional rentals based on sales in excess of predetermined levels. NMG also owns approximately 50 acres of land in Las Colinas, Texas where its computer facilities and NM Direct are located. At October 31, 1993, the Company's Insurance operations had leased offices in 15 states and Drake Beam Morin conducted its business from 67 leased offices in the United States and 84 offices in 26 countries around the world. For additional information about the properties of the Company, see Item 1, above and the information contained in Note 12 of the Notes to the Company's Consolidated Financial Statements under the heading "Leases", which is incorporated herein. [page 8] ITEM 3. LEGAL PROCEEDINGS Harcourt Brace and five of its former officers and directors are defendants in a class action pending before the United States District Court for the Southern District of New York entitled In re Harcourt Brace Jovanovich, Inc. Securities Litigation. This action consolidates various actions filed between February 28, 1990 and April 25, 1990. The allegations in this case relate to conduct that occurred prior to the acquisition of Harcourt Brace by the Company. The purported class comprises purchasers of Harcourt Brace's common stock from March 30, 1989 through November 28, 1989 who allege that the defendants knew or were reckless in not knowing, among other things, that Harcourt Brace would not be able to bear the burden of the debt it incurred as a result of its 1987 recapitalization and its 1988 refinancing plan, and that it could not meet these obligations out of cash flow from operations without the sale of substantial assets. The complaint further alleges that Harcourt Brace's public filings and reports to shareholders were false and misleading and failed to make required disclosures concerning these and related matters in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that, as a result, members of the class purchased Harcourt Brace common stock at allegedly artificially inflated prices during the class period. The complaint seeks damages, as well as costs and expenses of the action, including attorneys' and experts' fees. In March 1992, a new case, Nivram Corp. v. Harcourt Brace Jovanovich, Inc., et al., was commenced in the United States District Court for the Southern District of New York on behalf of a purported class of purchasers of Harcourt Brace's 12% Exchangeable Preferred Stock against Harcourt Brace and the same former officers and directors. The allegations in this case also relate to conduct that occurred prior to the acquisition of Harcourt Brace by the Company. The Nivram complaint contains virtually identical allegations and demands as those contained in the case described in the previous paragraph. In December 1993, the Court denied the Company's motion to dismiss the Nivram case. Thus, Nivram will be consolidated with the original action described above. The Company does not believe that the disposition of the foregoing litigation or of any other litigation pending against the Company or any of its subsidiaries will have a material adverse effect on the continuing operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. [page 9] PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following information contained in the 1993 Annual Report is incorporated herein: (i) the last paragraph of Note 8 of the Notes to the Company's Consolidated Financial Statements on page 42 of the 1993 Annual Report relating to restrictions on the Company's ability to pay dividends; (ii) "Dividends per share" in Note 14 of the Notes to the Company's Consolidated Financial Statements on page 47 of the 1993 Annual Report; and (iii) "Stock Information" on page 51 of the 1993 Annual Report. In addition to the information set forth therein with respect to the Company's Common Stock and Series A Cumulative Convertible Stock, the Company's Class B Stock is subject to significant restrictions on transfer and is not listed or traded on any exchange or in any market. As of January 20, 1994, there were 2,323 record holders of Class B Stock. For further information with respect to the Class B Stock, including the ownership of 99.8% of the Class B Stock by the family of Richard A. Smith (the Chairman of the Board of Directors of the Company), reference is made to the information contained in the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders under the heading "Stock Ownership of Certain Beneficial Owners and Management." ITEM 6. SELECTED FINANCIAL DATA The response to this Item is contained in the 1993 Annual Report under the caption "Five Year Summary" on page 49 and is incorporated herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The response to this Item is contained in the 1993 Annual Report under the captions "Business Review" on pages 16 through 23 and "Financial Review" on pages 25 through 29 and is incorporated herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and supplementary data set forth in [page 10] Item 14 are incorporated herein. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A. Directors The response to this Item regarding the directors of the Company is contained in the Proxy Statement for the 1994 Annual Meeting of Stockholders under the caption "Election of Directors" and is incorporated herein. B. Executive Officers Below is the name, age and principal occupations for the last five years of each current executive officer of the Company. All such persons have been elected to serve until the next annual election of officers and their successors are elected or until their earlier resignation or removal. Richard A. Smith - 69 Chairman of the Board of Directors of the Company and of The Neiman Marcus Group, Inc.; Chief Executive Officer of the Company and of The Neiman Marcus Group, Inc. until November 25, 1991; Chairman of the Board, President and Chief Executive Officer of GC Companies, Inc. since December 1993. Mr. Smith is the father of Robert A. Smith, a director and officer of the Company, and the father-in-law of Brian J. Knez, an officer of the Company. Robert J. Tarr, Jr. - 50 President, Chief Executive Officer (since November 25, 1991), Chief Operating Officer and Director of the Company and of The Neiman Marcus Group, Inc.; Director of GC Companies, Inc. John R. Cook - 52 Senior Vice President and Chief Financial Officer of the Company and of The Neiman Marcus Group, Inc. since September 1992; Senior Vice President - Finance and Administration and Chief Financial Officer of NACCO Industries from 1988 through August 1992. [page 11] Eric P. Geller - 46 Senior Vice President and General Counsel of the Company and of The Neiman Marcus Group, Inc. since May 1992; Vice President and Associate General Counsel of the Company and of The Neiman Marcus Group, Inc. prior thereto; Secretary of the Company since December 1991 and of The Neiman Marcus Group, Inc. since January 1992. Paul F. Gibbons - 42 Vice President and Treasurer of the Company and of The Neiman Marcus Group, Inc. since August 1992; Vice President - Taxation of the Company and of The Neiman Marcus Group, Inc. prior thereto. Brian J. Knez - 36 Group Vice President of the Company since November 1991; Assistant to the President of the Company from 1989 to November 1991; Assistant to the President of the former Beverage Division of the Company prior thereto. Mr. Knez is the son-in-law of Richard A. Smith, Chairman of the Board of Directors of the Company, and the brother-in-law of Robert A. Smith, a director and officer of the Company. Richard T. Morgan - 56 President and Chief Executive Officer of Harcourt Brace & Company since June 1992; President and Chief Executive Officer of Macmillan/McGraw-Hill School Publishing Company from 1989 through April 1992; President and Chief Executive Officer of Scott, Foresman & Company prior thereto. Stephen C. Richards - 38 Vice President and Controller of the Company and of The Neiman Marcus Group, Inc. since June 1993; Partner, Deloitte & Touche from June 1990 to May 1993; Senior Manager, Deloitte & Touche prior thereto. Craig B. Sawin - 37 Vice President - Planning and Analysis of the Company and of The Neiman Marcus Group, Inc. since 1990; Director of Planning and Analysis and Director of Administration of the Company and The Neiman Marcus Group, Inc. prior thereto. Robert A. Smith - 34 Group Vice President of the Company since December 1991 and of The Neiman Marcus Group, Inc. since January 1992; Director of the Company since March 1989; Vice President - Corporate Development of the Company from December 1988 to December 1991. Mr. Smith is the son of Richard A. Smith, Chairman of the Board of Directors of the Company, and the brother-in-law of Brian J. Knez, an officer of the Company. [page 12] ITEM 11. EXECUTIVE COMPENSATION The response to this Item is contained in the Proxy Statement for the 1994 Annual Meeting of Stockholders under the captions "Meetings and Committees of the Board of Directors," "Executive Compensation" and "Transactions Involving Management and Others" and is incorporated herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this Item is contained in the Proxy Statement for the 1994 Annual Meeting of Stockholders under the caption "Stock Ownership of Certain Beneficial Owners and Management" and is incorporated herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this Item is contained in the Proxy Statement for the 1994 Annual Meeting of Stockholders under the captions "Executive Compensation" and "Transactions Involving Management and Others" and is incorporated herein. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 14(a)(1)Financial Statements The documents listed below are incorporated herein by reference to the Company's 1993 Annual Report to Shareholders and are incorporated herein by reference to Item 8 hereof: Consolidated Balance Sheets - October 31, 1993 and 1992. Consolidated Statements of Operations for the fiscal years ended October 31, 1993, 1992 and 1991. Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1993, 1992 and 1991. Consolidated Statements of Shareholders' Equity for the fiscal years ended October 31, 1993, 1992 and 1991. Notes to Consolidated Financial Statements. Independent Auditors' Report. [page 13] 14(a)(2) Consolidated Financial Statement Schedules The documents and schedules listed below are filed as part of this Form 10-K: Page In Form 10-K Independent Auditors' Report on Consolidated Financial Statement Schedules F-1 Schedule II - Accounts Receivable from Related Parties and Underwriters, Promoters and Employees Other Than Related Parties F-2 Schedule VIII - Valuation and Qualifying Accounts and Reserves F-3 Schedule IX - Short-Term Borrowings F-4 Schedule X - Supplemental Income Statement Information F-5 Insurance Schedules: Schedule I - Summary of Investments-Other Than Investments In Affiliates F-6 Schedule VI - Reinsurance F-7 All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted because the information is disclosed in the Consolidated Financial Statements or because such schedules are not required or are not applicable. 14(a)(3) Exhibits The exhibits filed as part of this Annual Report are listed in the Exhibit Index immediately preceding the exhibits. The Registrant has identified with an asterisk in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Form 10-K in response to Item 14(c) of Form 10-K. 14(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended October 31, 1993. [page 14] SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARCOURT GENERAL, INC. By: s/Robert J. Tarr, Jr. Robert J. Tarr, Jr., President, Chief Executive Officer and Chief Operating Officer Dated: January 27, 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the following capacities and on the dates indicated. Signature Title Date Principal Executive Officer: s/Robert J. Tarr, Jr. President, Chief Executive January 27, 1994 Robert J. Tarr, Jr. Officer, Chief Operating Officer and Director Principal Financial Officer: s/John R. Cook Senior Vice President and January 27, 1994 John R. Cook Chief Financial Officer Principal Accounting Officer: s/Stephen C. Richards Vice President and January 11, 1994 Stephen C. Richards Controller [PAGE 15] Directors: s/William F. Connell January 13, 1994 William F. Connell s/Jack M. Greenberg January 27, 1994 Jack M. Greenberg s/Herbert W. Jarvis January 27, 1994 Herbert W. Jarvis s/Lynn Morley Martin January 27, 1994 Lynn Morley Martin s/Maurice Segall January 27, 1994 Maurice Segall s/Richard A. Smith January 27, 1994 Richard A. Smith s/Robert A. Smith January 27, 1994 Robert A. Smith s/Paula Stern January 27, 1994 Paula Stern s/Sidney Stoneman January 10, 1994 Sidney Stoneman s/Hugo Uyterhoeven January 10, 1994 Hugo Uyterhoeven [Page F-1] INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Harcourt General, Inc. Chestnut Hill, Massachusetts We have audited the consolidated financial statements of Harcourt General, Inc. and its subsidiaries (the Company) as of October 31, 1993 and l992 and for each of the three years in the period ended October 31, l993, and have issued our report thereon dated December 16, l993. Such consolidated financial statements and report are included in the Company's 1993 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of Harcourt General, Inc. and its subsidiaries, listed in Item 14(a)(2). These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE Boston, Massachusetts December 16, l993 [page F-2] SCHEDULE II HARCOURT GENERAL, INC. AND SUBSIDIARIES ACCOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES THREE YEARS ENDED OCTOBER 31, 1993 (In thousands)
COLUMN A COLUMN B COLUMN C Balance at Beginning Name of Debtor of Period Additions YEAR ENDED OCTOBER 31, 1993 Peter Farwell (A) $ 150 $ - Eric P. Geller (A) 113 132 Robert J. Tarr, Jr. (A) 794 886 J. Atwood Ives (B) 288 - Robert J. Tarr, Jr. (C) - 1,019 Robert J. Tarr, Jr. (D) 1,000 - Richard A. Smith (E) 1,312 426 James P. Levy (F) - 200 YEAR ENDED OCTOBER 31, 1992 Samuel Frankenheim (A) $ 130 $ - Eric P. Geller (A) 113 - J. Atwood Ives (A) 450 - Mayer Rabinovitz (A) 23 - Robert J. Tarr, Jr. (A) 859 - Peter Farwell (A) - 150 J. Atwood Ives (B) 288 - Robert J. Tarr, Jr. (D) - 1,000 Richard A. Smith (E) 883 429 Robert Painter (G) 150 - YEAR ENDED OCTOBER 31, 1991 Samuel Frankenheim (A) $ 222 $ 539 Eric P. Geller (A) 96 17 J. Atwood Ives (A) 771 - Mayer Rabinovitz (A) 101 56 Robert J. Tarr, Jr.(A) 797 418 A. Anthony Trauber (A) 162 - J. Atwood Ives (B) 292 - Richard A. Smith (E) 436 447 Robert Painter (G) - 150' TABLE CONTINUED COLUMN D COLUMN E Deductions Balance at End of Period Amounts Amounts Written Not Name of Debtor of Collected Off Current Current YEAR ENDED OCTOBER 31, 1993 Peter Farwell (A) $ - $ - $ - $ 150 Eric P. Geller (A) - - - 245 Robert J. Tarr, Jr.(A) 467 - - 1,213 J. Atwood Ives (B) - - - 288 Robert J. Tarr, Jr.(C) 127 - 255 637 Robert J. Tarr, Jr.(D) 250 - - 750 Richard A. Smith (E) - - - 1,738 James P. Levy (F) 200 - 40 160 YEAR ENDED OCTOBER 31, 1992 Samuel Frankenheim (A) $130 $ - $ - $ - Eric P. Geller (A) - - - 113 J. Atwood Ives (A) 450 - - - Mayer Rabinovitz (A) - - 23 - Robert J. Tarr, Jr.(A) 65 - - 794 Peter Farwell (A) - - - 150 J. Atwood Ives (B) - - - 288 Robert J. Tarr, Jr.(D) - - - 1,000 Richard A. Smith (E) - - - 1,312 Robert Painter (G) 150 - - - YEAR ENDED OCTOBER 31, 1991 Samuel Frankenheim (A) $631 $ - $130 $ - Eric P. Geller (A) - - - 113 J. Atwood Ives (A) 321 - 450 - Mayer Rabinovitz (A) 134 - - 23 Robert J. Tarr, Jr.(A) 356 - - 859 A. Anthony Trauber (A) 162 - - - J. Atwood Ives (B) 4 - 288 - Richard A. Smith (E) - - - 883 Robert Painter (G) - - 150 - (A) Loans represent notes receivable due under the Company's 1975 Key Executive Stock Purchase Loan Plan or the Company's 1983 Key Executive Stock Purchase Loan Plan; interest is payable quarterly at a rate, based upon a formula, which ranged from 2.81% to 6.00% at October 31, 1993; principal is due at employment termination subject to certain stipulations provided in said plans. (B) Loan represents notes receivable permitted under November 19, 1974 employment agreement; quarterly interest payable at 5% per annum; principal due December 1, 1996. (C) Loan represents a note receivable permitted under a supplement to the November 25, 1991 employment agreement. The loan is non-interest bearing and is due in 16 quarterly installments commencing June 15, 1993. The loan is secured by the Company's right to offset any amounts payable by the Company to Mr. Tarr. (D) Loan represents a note receivable permitted under the November 25, 1991 employment agreement; annual interest payable at 5%, principal due and payable in full twelve months after the end of the term of the employment agreement. The loan is secured by a mortgage on real property. (E) As approved by the Board of Directors, the Company has agreed to make advances of a portion of the premiums payable on a split dollar life insurance policy purchased by a trust on the joint lives of Mr. and Mrs. Richard A. Smith. The Company is entitled to reimbursement of the amounts advanced, without interest, upon the first to occur of (a) the death of the survivor of Mr. and Mrs. Smith or (b) the surrender of the policy. These advances are secured by a collateral assignment of the policy to the Company. (F) Loan represents a note receivable due under a promissory note dated September 13, 1993. If employment does not terminate, the loan will be forgiven in five equal and annual increments through September 13, 1998 and bears no interest. If employment terminates, the note will be forgiven, due in 30 days or due in 12 months depending on the circumstances. The loan is secured by a mortgage on real property. (G) Loan with interest payable monthly at 8% per annum; paid in full in December 1991.
[page F-3] SCHEDULE VIII HARCOURT GENERAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES THREE YEARS ENDED OCTOBER 31, 1993 (In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions Charged to Balance at Charged to Other Balance at Beginning Costs and Accounts- Deductions- End Description of Period Expenses Describe Describe of Period YEAR ENDED OCTOBER 31, 1993 Allowance for doubtful accounts $12,781 $23,616 - $16,034 (A) $20,363 (deducted from accounts receivable) Allowance for book returns $45,576 $79,345 - $75,191 (B) $49,730 (deducted from accounts receivable) YEAR ENDED OCTOBER 31, 1992 Allowance for doubtful accounts $12,062 $16,612 - $15,893 (A) $12,781 (deducted from accounts receivable) Allowance for book returns $42,880 $69,912 - $67,216 (B) $45,576 (deducted from accounts receivable) YEAR ENDED OCTOBER 31, 1991 Allowance for doubtful accounts $11,342 $16,192 $2,383 (C) $17,855 (A) $12,062 deducted from accounts receivable) Allowance for book returns $37,099 $62,401 $ 766 (C) $57,386 (B) $42,880 (deducted from accounts receivable) (A) Write-off of uncollectible accounts net of recoveries. (B) Books actually returned during the year. (C) Adjustment to conform Harcourt Brace's fiscal year to October 31.
[page F-4] SCHEDULE IX HARCOURT GENERAL, INC. AND SUBSIDIARIES SHORT-TERM BORROWINGS THREE YEARS ENDED OCTOBER 31, 1993 (In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Maximum Average Weighted Weighted Amount Amount Average Balance at Average Outstanding Outstanding Interest Rate Category of Aggregate End of Interest During the During the During the Short-term Borrowings Period Rate Period(A) Period(A) Period(B) Year ended October 31, 1993 Payable to Banks(C)(D) $27,200 3.47% $41,500 $11,500 3.38% Year ended October 31, 1992 Payable to Banks(C) $6,500 3.30% $74,000 $22,042 5.48% Year ended October 31, 1991 Payable to Banks(C) $9,000 6.09% $124,000 $71,992 7.55% (A) Based on amounts outstanding at month-end. (B) Based on daily averages. (C) Interest and principal are payable in full at the due date. (D) Represents amounts payable by The Neiman Marcus Group, Inc.
[page F-5] SCHEDULE X HARCOURT GENERAL, INC. AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION(A) THREE YEARS ENDED OCTOBER 31, 1993 (In thousands)
Column A Column B Charged to Costs and Expenses Item 1993 1992 1991 Depreciation and amortization of intangible assets, preopening costs and similar deferrals $42,277 $39,348 $42,456 Royalties 63,416 60,428 58,051 Advertising costs 58,823 47,463 41,955 (A) From continuing operations.
[page F-6] SCHEDULE I HARCOURT GENERAL, INC. AND SUBSIDIARIES HARCOURT GENERAL INSURANCE COMPANIES SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES OCTOBER 31, l993 (In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D Amount at which shown in Type of investment Cost Value the balance sheet Fixed Maturity Securities: Bonds: United States Government and government agencies and authorities $ 533,587 $ 555,949 $ 533,587 States, municipalities and political subdivisions 242,391 252,313 242,391 Foreign governments 78,518 86,161 78,518 Public utilities 267,695 302,328 267,695 All other corporate bonds 1,543,187 1,719,099 1,543,187 Total Fixed Maturity Securities $2,665,378 $2,915,850 $2,665,378 Equity Securities: Public Utilities 971 964 964 Industrial, miscellaneous and all others 189 70 70 Total Equity Securities 1,160 1,034 1,034 Mortgage Loans on Real Estate 8,994 8,994 Real Estate(A) 16,945 16,945 Policy Loans 25,330 25,330 Other Long-term Investments 1,200 1,200 Short-term Investments 107,044 107,044 Total Other Investments 159,513 159,513 Total Investments $2,826,051 $2,825,925 (A) Includes a $15,000 reserve for other than temporary market losses in real estate holdings which were acquired in satisfaction of debt.
[page F-7] SCHEDULE VI HARCOURT GENERAL, INC. AND SUBSIDIARIES HARCOURT GENERAL INSURANCE COMPANIES REINSURANCE THREE YEARS ENDED OCTOBER 31, 1993 (Dollar amounts in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Percentage Ceded to Assumed of Amount Gross Other from Other Net Assumed to Amount Companies Companies Amount Net YEAR ENDED OCTOBER 31, 1993 Life Insurance in Force $8,021,484 $1,614,987 $ 1,479 $6,407,976 0.02% Premiums Life Insurance $ 133,088 $ 14,867 $ - $ 118,221 0.00% Accident and health insurance 182,118 29,021 - 153,097 0.00% Total premiums $ 315,206 $ 43,888 $ - $ 271,318 0.00% YEAR ENDED OCTOBER 31, 1992 Life Insurance in Force $8,163,878 $1,366,179 $ - $6,797,699 0.00% Premiums Life Insurance $ 88,705 $ 19,244 $ 1 $ 69,462 0.00% Accident and health insurance 200,883 28,635 - 172,248 0.00% Total premiums $ 289,588 $ 47,879 $ 1 $ 241,710 0.00% YEAR ENDED OCTOBER 31, 1991 Life Insurance in Force $8,616,716 $1,128,142 $ - $7,488,574 0.00% Premiums Life Insurance $ 108,876 $ 11,311 $ 375 $ 97,940 0.38% Accident and health insurance 184,459 18,350 1 166,110 0.00% Total premiums $ 293,335 $ 29,661 $ 376 $ 264,050 0.14%
EXHIBIT INDEX Page No. 3.1 Restated Certificate of Incorporation of the Company, as amended. 3.2 By-Laws of the Company, as amended, incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991. 4.1 Indenture, dated as of May 1, 1987, between the Company and Manufacturers Hanover Trust Company, as Trustee and (a) Terms Agreement, dated June 23, 1987, among the Company, The First Boston Corporation and Salomon Brothers Inc relating to the Company's 9 3/8% Subordinated Notes due 1997, incorporated herein by reference to Exhibit 4.3 to the Company's Report on Form 8-K, dated June 23, 1987, and to Exhibit 4.3 to the Company's Registration Statement on Form S-3, File No. 33-13936, and (b) Terms Agreement, dated March 16, 1988, among the Company, The First Boston Corporation and Salomon Brothers Inc relating to the Company's 9 1/2% Subordinated Notes due 2000, incorporated herein by reference to Exhibit 1 to the Company's Report on Form 8-K, dated March 16, 1988. 4.2 Indenture, dated as of April 23, 1992, between the Company and Bankers Trust Company, as Trustee, relating to the 8 1/4% Senior Notes Due 2002 and the 8 7/8% Senior Debentures Due 2022, incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, File No. 33-46148. 4.3 Smith-Lurie/Marks Stockholders' Agreement, dated December 29, 1986, as supplemented January 8, 1988, December 5, 1988, April 29, 1989 and December 5, 1990, incorporated herein by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992. *10.1 Executive Incentive Bonus Plan, as amended, incorporated herein by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1986. *10.2 1981 Stock Option Plan, as amended and restated, incorpor- ated herein by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1987. *10.3 1988 Stock Incentive Plan, incorporated herein by reference to Exhibit 28.1 to the Company's Registration Statement on Form S-8, File No. 33-26079. *10.4(a) 1975 Key Executive Stock Purchase Loan Plan, as amended, incorporated herein by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1982. *10.4(b) 1983 Key Executive Stock Purchase Loan Plan, as amended, incorporated herein by reference to Exhibit 10.4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1984. *10.5 Executive Medical Plan, as amended, incorporated herein by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991. *10.6(a) Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1988. *10.6(b) Amendment to Supplemental Executive Retirement Plan, dated October 26, 1990, incorporated herein by reference to Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1990. *10.7 Deferred Compensation and Retirement Income Plan for Non-Employee Directors. *10.8 Deferred Compensation Agreement between the Company and Herbert W. Jarvis, a director, incorporated herein by reference to Exhibit 10.12(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1981. *10.9 Amended and Restated Deferred Compensation Agreement, dated August 27, 1990, between the Company and Richard A. Smith, incorporated herein by reference to Exhibit 10.13 the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1990. 10.10 Intercompany Services Agreement, dated as of July 24, 1987, between the Company and NMG, incorporated herein by reference to Exhibit 10.17(c) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1987. 10.11 Intercompany Services Agreement, dated as of December 14, 1993, between the Company and GC Companies, Inc. 10.12 Reimbursement and Security Agreement, dated as of December 14, 1993, between the Company and GC Companies, Inc. 10.13 Split Dollar Life Insurance Agreement, dated as of June 21, 1990, by and between the Company and the Richard and Susan Smith 1990 Issue Trust, under a Declaration of Trust dated as of April 3, 1990, incorporated herein by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991. *10.14 Key Employee Deferred Compensation Plan, incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991. *10.15(a) Employment Agreement, dated as of November 15, 1991, by and between the Company and Robert J. Tarr, Jr., incorporated herein by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991. *10.15(b) Supplemental Agreement, dated as of December 17, 1992, by and between the Company and Robert J. Tarr, Jr., incorporated herein by reference to Exhibit 10.16(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992. 11.1 Computation of Average Number of Shares Outstanding Used In Determining Primary and Fully Diluted Earnings Per Share. 13.1 1993 Annual Report to Stockholders (which is not deemed to be filed except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K). 21.1 Subsidiaries of the Company. 23.1 Consent of Deloitte & Touche. __________________________ * Exhibits filed pursuant to Item 14(c) of Form 10-K. EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1 COMPOSITE COPY MARCH 15, 1993 RESTATED CERTIFICATE OF INCORPORATION OF HARCOURT GENERAL, INC. (AS AMENDED THROUGH MARCH 15, 1993) (ORIGINALLY INCORPORATED UNDER THE NAME MID-WEST DRIVE-IN THEATRES, INC. ON NOVEMBER 1, 1950) FIRST: The name of the corporation is HARCOURT GENERAL, INC. SECOND: Its registered office in the State of Delaware is located at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name and address of its registered agent is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. THIRD: The nature of the business, or objects or purposes to be transacted, promoted or carried on are: To own, operate, and manage hotels or motels; to purchase and acquire land, buildings, leases, contracts, options, corporate shares, trust certificates and any and all other property, rights or interests in hotel or motel enterprises, to buy, sell, lease and deal in hotel or motel furnishings, equipment and supplies of every kind. To own, operate and manage places of amusement, including motion pictures, theatrical productions, vaudeville exhibitions, bowling alleys, sports arenas, skating rinks, and all other athletic and recreational facilities for public exhibition or participation, and other enterprises incidental thereto; to purchase and acquire land, buildings, leases, contracts, options, corporate shares, trust certificates and any and all other property, rights or interests in amusement enterprises or activities in connection therewith; to buy, sell, lease and deal in apparatus, furnishings, equipment and supplies of every kind used or useful in amusement enterprises, and contracts for every variety of entertainment, and to construct and erect buildings or other structures of any and every kind required or incidental to the purposes of this corporation; to borrow money and contract indebtedness for all proper corporate purposes, to issue bonds, notes and other evidences of indebtedness therefor, to secure the same by franchises, rights, property, assets and goodwill of this corporation; and to assume or guarantee and secure in like manner the leases, contracts or other obligations and the payment of any dividends on any stock or shares and the principal or interest on any bonds, notes or other evidences of indebtedness of any person, firm, association, trust or other corporation, and to lend money to or advance money in behalf of any person, firm, association, trust or other corporation, in which this corporation has an interest. To lend money, to advance money in behalf of, or invest in the stock, bonds, notes, debentures or other securities of any person, firm, association, trust or corporation engaged in the business of acquiring, building, equipping or operating restaurants, particularly, but without limitation, curb service restaurants so called, or engage in the business of acquiring real estate or interests in real estate upon which restaurants are to be constructed. To engage in the business of buying, preparing and selling foods and beverages of all kinds and to operate restaurants, liquor lounges, snack bars or refreshment stands in conjunction with, or as an incident to, any of the other enterprises in which the corporation may be engaged. 1 To purchase, lease or otherwise acquire, own, hold, use, develop, improve and otherwise deal in and with, and sell, convey, mortgage, lease, exchange, transfer and otherwise dispose of real estate and any interests in real estate. To lend money, to advance money on behalf of, or invest in the stocks, bonds, notes, debentures, securities or obligations of any person, firm, association, trust or corporation engaged in an enterprise organized for any of the purposes hereinbefore enumerated in this Article Third. To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, whether or not similar or related or incidental to or useful or advantageous in or in connection with any of the purposes or enterprises hereinbefore enumerated in this Article Third. FOURTH: The total number of shares of capital stock of all classes which this corporation shall have authority to issue shall be 180,000,000 shares, to wit: (a) 100,000,000 shares of Common Stock with a par value of $1.00 per share, (b) 40,000,000 shares of Class B Stock with a par value of $1.00 per share and (c) 40,000,000 shares of Preferred Stock with a par value of $1.00 per share. (Modified by amendment November 25, 1991.) The powers, preferences and the relative, participating, optional and other rights and the qualifications, limitations and restrictions thereof, of each class of stock, and the express grant of authority to the Board of Directors to fix by resolution the designations and the powers, preferences and rights of each share of Preferred Stock and the qualifications, limitations and restrictions thereof which are not fixed by this Restated Certificate of Incorporation, are as follows: A. COMMON STOCK AND CLASS B STOCK I. Dividends, etc. Subject to the rights of the holders of Preferred Stock, and subject to any other provisions of this Restated Certificate of Incorporation, as amended from time to time, holders of Common Stock and Class B Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the corporation as may be declared thereon by the Board of Directors from time to time out of assets or funds of the corporation legally available therefor, provided that in the case of cash dividends, if at any time a cash dividend is paid on the Common Stock, a cash dividend will also be paid on the Class B Stock in an amount per share of Class B Stock equal to 90% of the amount of the cash dividend paid on each share of the Common Stock (rounded down, if necessary, to the nearest one-hundredth of a cent), and provided, further, that in the case of dividends or other distributions payable in stock of the corporation other than Preferred Stock, including distributions pursuant to stock splits or divisions of stock of the corporation other than Preferred Stock, including distributions pursuant to stock splits or divisions of stock of the corporation other than Preferred Stock, which occur after the initial issuance of shares of Class B Stock by the corporation, only shares of Common Stock shall be distributed with respect to Common Stock and only shares of Class B Stock in an amount per share equal to the amount per share paid with respect to the Common Stock shall be distributed with respect to Class B Stock, and that, in the case of any combination or reclassification of the Common Stock, the shares of Class B Stock shall also be combined or reclassified so that the number of shares of Class B Stock outstanding immediately following such combination or reclassification shall bear the same relationship to the number of shares outstanding immediately prior to such combination or reclassification as the number of shares of Common Stock outstanding immediately following such combination or reclassification bears to the number of shares of Common Stock outstanding immediately prior to such combination or reclassification. II. Voting. (a) At every meeting of the stockholders every holder of Common Stock shall be entitled to one (1) vote in person or by proxy for each share of Common Stock standing in his name on the transfer books of the corporation and every holder of Class B Stock shall be entitled to one (1) vote in person or by proxy for each share of Class B Stock standing in his name on the transfer books of the corporation, except that each holder of Class B Stock shall be entitled to ten (10) votes per share on the election of any directors at any stockholders' meeting if more than 20% of the shares of Common Stock outstanding on the record date for such meeting are beneficially owned by, or if more 2 than 20% of the total voting power attributable to the shares of the Common Stock outstanding on the record date for such meeting are voted either directly or by proxy for a person or persons other than those nominated by the Board of Directors by, a person or group of persons acting in concert (unless such person or group is also the beneficial owner of a majority of the shares of Class B Stock on such record date). (Added by amendment March 14, 1986.) (b) The provisions of this Restated Certificate of Incorporation shall not be modified, revised, altered or amended, repealed or rescinded in whole or in part, without the affirmative vote of the holders of a majority of the shares of the Common Stock and of a voting majority of the shares of the Class B stock, each voting separately as a class. (c) The corporation may not effect or consummate: (1) any merger or consolidation of the corporation with or into any other corporation; (2) any sale, lease, exchange or other disposition of all or substantially all of the assets of the corporation to or with any other person; or (3) any dissolution of the corporation; unless and until such transaction is authorized by the vote, if any, required by Article Eighth of this Restated Certificate of Incorporation and by Delaware law; and unless and until such transaction is authorized by a majority of the voting power of the shares of Common Stock and of Class B Stock entitled to vote, each voting separately as a class, but the foregoing shall not apply to any merger or other transaction described in the preceding subparagraphs (1) and (2) if the other party to the merger or other transaction is a Subsidiary of the corporation. For purposes of this paragraph (c) a 'Subsidiary' is any corporation more than 50% of the voting securities of which are owned directly or indirectly by the corporation; and a 'person' is any individual, partnership, corporation or entity. (d) Following the initial issuance of shares of Class B Stock, the corporation may not effect the issuance of any additional shares of Class B Stock (except in connection with stock splits and stock dividends) unless and until such issuance is authorized by the holders of a majority of the voting power of the shares of Common Stock and of Class B Stock entitled to vote, each voting separately as a class. (e) Every reference in this Restated Certificate of Incorporation to a majority or other proportion of shares of stock shall refer to such majority or other proportion of the votes of such shares of stock. (f) Except as may be otherwise required by law or by this Article Fourth, the holders of Common Stock and Class B Stock shall vote together as a single class, subject to any voting rights which may be granted to holders of Preferred Stock. III. Transfer. (a) No person holding shares of Class B Stock of record (hereinafter called a 'Class B Holder') may transfer, and the corporation shall not register the transfer of, such shares of Class B Stock, whether by sale, assignment, gift, bequest, appointment or otherwise, except to a Permitted Transferee. A Permitted Transferee shall mean, with respect to each person from time to time shown as the record holder of shares of Class B Stock: (i) In the case of a Class B Holder who is a natural person; (A) The spouse of such Class B Holder, any lineal descendant of a grandparent of such Class B Holder, and any spouse of such lineal descendant (which lineal descendants, their spouses, the Class B Holder, and his or her spouse are herein collectively referred to as 'Class B Holder's Family Members'); 3 (B) The trustee of a trust (including a voting trust) principally for the benefit of such Class B Holder and/or one or more of his or her Permitted Transferees described in each subclause of this clause (i) other than this subclause (B), provided that such trust may also grant a general or special power of appointment to one or more of such Class B Holder's Family Members and may permit trust assets to be used to pay taxes, legacies and other obligations of the trust or of the estates of one or more of such Class B Holder's Family Members payable by reason of the death of any such Family Members; (C) Any organization contributions to which are deductible for federal income, estate or gift tax purposes of any split-interest trust described in Section 4947 of the Internal Revenue Code, as it may from time to time be amended (hereinafter called a 'Charitable Organization'); (D) A corporation a majority of the beneficial ownership of outstanding capital stock of which entitled to vote for the election of directors is owned by, or a partnership a majority of the beneficial ownership of the partnership interests of which entitled to participate in the management of the partnership are held by, the Class B Holder or his or her Permitted Transferees determined under this clause (i), provided that if by reason of any change in the ownership of such stock or partnership interests, such corporation or partnership would no longer qualify as a Permitted Transferee, all shares of Class B Stock then held by such corporation or partnership shall, upon the election of the corporation given by written notice to such corporation or partnership, without further act on anyone's part, be converted into shares of Common Stock effective upon the date of the giving of such notice, and stock certificates formerly representing such shares of Class B Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock; and (E) The estate of such Class B Holder. (ii) In the case of a Class B Holder holding the shares of Class B Stock in question as trustee pursuant to a trust (other than a Charitable Organization or a trust described in clause (iii) below), 'Permitted Transferee' means (A) any person transferring Class B Stock to such trust and (B) any Permitted Transferee of any such transferor determined pursuant to clause (i) above. (iii) In the case of a Class B Holder holding the shares of Class B Stock in question as trustee pursuant to a trust (other than a Charitable Organization) which was irrevocable on the record date (hereinafter in this Section III called the 'Record Date') for determining the persons to whom the Class B Stock is first issued by the corporation, 'Permitted Transferee' means (A) any person to whom or for whose benefit principal may be distributed either during or at the end of the term of such trust whether by power of appointment or otherwise and (B) any Permitted Transferee of any such person determined pursuant to clause (i) above. (iv) In the case of a Class B Holder which is a Charitable Organization holding record and beneficial ownership of the shares of Class B Stock in question, 'Permitted Transferee' means any Class B Holder. (v) In the case of a Class B Holder which is a corporation or partnership (other than a Charitable Organization) acquiring record and beneficial ownership of the shares of Class B Stock in question upon its initial issuance by the corporation, 'Permitted Transferee' means (A) any partner of such partnership, or stockholder of such corporation, on the Record Date, (B) any person transferring such shares of Class B Stock to such corporation or partnership, and (C) any Permitted Transferee of any such person, partner, or stockholder referred to in subclauses (A) and (B) of this clause (v), determined under clause (i) above. (vi) In the case of a Class B Holder which is a corporation or partnership (other than a Charitable Organization or a corporation or partnership described in clause (v) above) holding record and beneficial ownership of the shares of Class B Stock in question, 'Permitted Transferee' 4 means (A) any person transferring such shares of Class B Stock to such corporation or partnership and (B) any Permitted Transferee of any such transferor determined under clause (i) above. (vii) In the case of a Class B Holder which is the estate of a deceased Class B Holder, or which is the estate of a bankrupt or insolvent Class B Holder, which holds record and beneficial ownership of the shares of Class B Stock in question, 'Permitted Transferee' means a Permitted Transferee of such deceased, bankrupt or insolvent Class B Holder as determined pursuant to clause (i), (ii), (iii), (iv), (v) or (vi) above, as the case may be. (b) Notwithstanding anything to the contrary set forth herein, any Class B Holder may pledge such Holder's shares of Class B Stock to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such shares shall not be transferred to or registered in the name of the pledgee and shall remain subject to the provisions of this Section III. In the event of foreclosure or other similar action by the pledgee, such pledged shares of Class B Stock may only be transferred to a Permitted Transferee of the pledgor or converted into shares of Common Stock, as the pledgee may elect. (c) For purposes of this Section III: (i) The relationship of any person that is derived by or through legal adoption shall be considered a natural one. (ii) Each joint owner of shares of Class B Stock shall be considered a 'Class B Holder' of such shares. (iii) A minor for whom shares of Class B Stock are held pursuant to a Uniform Gifts to Minors Act or similar law shall be considered a Class B Holder of such shares. (iv) Unless otherwise specified, the term 'person' means both natural persons and legal entities. (v) Without derogating from the election conferred upon the corporation pursuant to subclause (D) of clause (i) above, each reference to a corporation shall include any successor corporation resulting from merger or consolidation; and each reference to a partnership shall include any successor partnership resulting from the death or withdrawal of a partner. (d) Any transfer of shares of Class B Stock not permitted hereunder shall result in the conversion of the transferee's shares of Class B Stock into shares of Common Stock, effective the date on which certificates representing such shares are presented for transfer on the books of the corporation. The corporation may, in connection with preparing a list of stockholders entitled to vote at any meeting of stockholders, or as a condition to the transfer or the registration of shares of Class B Stock on the corporation's books, require the furnishing of such affidavits or other proof as it deems necessary to establish that any person is the beneficial owner of shares of Class B Stock or is a Permitted Transferee. (e) At any time when the number of outstanding shares of Class B Stock as reflected on the stock transfer books of the corporation falls below 12 1/2% of the aggregate number of the issued and outstanding shares of the Common Stock, Class B Stock and Series A Stock of the corporation, or the Board of Directors and the holders of a majority of the outstanding shares of Class B Stock approve the conversion of all of the Class B Stock into Common Stock, then, immediately upon the occurrence of either such event the outstanding shares of Class B Stock shall be converted into shares of Common Stock. In the event of such a conversion, certificates formerly representing outstanding shares of Class B Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock. (f) Shares of Class B Stock shall be registered in the names of the beneficial owners thereof and not in 'street' or 'nominee' name. For this purpose, a 'beneficial owner' of any shares of Class B Stock shall mean a person who, or an entity which, possesses the power, either singly or jointly, to 5 direct the voting or disposition of such shares. The corporation shall note on the certificates for shares of Class B Stock the restrictions on transfer and registration of transfer imposed by this Section III. IV. Conversion Rights. (a) Subject to the terms and conditions of this Section IV, each share of Class B Stock shall be convertible at any time or from time to time, at the option of the respective holder thereof, at the office of any transfer agent for Class B Stock, and at such other place or places, if any, as the Board of Directors may designate, or, if the Board of Directors shall fail so to designate, at the principal office of the corporation (attention of the Secretary of the corporation), into one (1) fully paid and nonassessable share of Common Stock. Upon conversion, the corporation shall make no payment or adjustment on account of dividends accrued or in arrears on Class B Stock surrendered for conversion or on account of any dividends on the Common Stock issuable on such conversion. Before any holder of Class B Stock shall be entitled to convert the same into Common Stock, he shall surrender the certificate or certificates for such Class B Stock at the office of said transfer agent (or other place as provided above), which certificate or certificates, if the corporation shall so request, shall be duly endorsed to the corporation or in blank or accompanied by proper instruments of transfer to the corporation or in blank (such endorsements or instruments of transfer to be in form satisfactory to the corporation), and shall give written notice to the corporation at said office that he elects so to convert said Class B Stock in accordance with the terms of this Section IV, and shall state in writing therein the name or names in which he wishes the certificate or certificates for Common Stock to be issued. Every such notice of election to convert shall constitute a contract between the holder of such Class B Stock and the corporation, whereby the holder of such Class B Stock shall be deemed to subscribe for the amount of Common Stock which he shall be entitled to receive upon such conversion, and, in satisfaction of such subscription, to deposit the Class B Stock to be converted and to release the corporation from all liability thereunder, and thereby the corporation shall be deemed to agree that the surrender of the certificate or certificates therefor and the extinguishment of liability thereon shall constitute full payment of such subscription for Common Stock to be issued upon such conversion. The corporation will as soon as practicable after such deposit of a certificate or certificates for Class B Stock, accompanied by the written notice and the statement above prescribed, issue and deliver at the office of said transfer agent (or other place as provided above) to the person for whose account such Class B Stock was so surrendered, or to his nominee or nominees, a certificate or certificates for the number of full shares of Common Stock to which he shall be entitled as aforesaid. Subject to the provisions of subsection (c) of this Section IV, such conversion shall be deemed to have been made as of the date of such surrender of the Class B Stock to be converted; and the person or persons entitled to receive the Common Stock issuable upon conversion of such Class B Stock shall be treated for all purposes as the record holder or holders of such Common Stock on such date. (b) The issuance of certificates for shares of Common Stock upon conversion of shares of Class B Stock shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares of Class B Stock converted, the person or persons requesting the issuance thereof shall pay to the corporation the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the corporation that such tax has been paid. (c) The corporation shall not be required to convert Class B Stock, and no surrender of Class B Stock shall be effective for that purpose, while the stock transfer books of the corporation are closed for any purpose; but the surrender of Class B Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books, as if the conversion had been made on the date such Class B Stock was surrendered. (d) The corporation covenants that it will at all times reserve and keep available, solely for the purpose of issue upon conversion of the outstanding shares of Class B Stock, such number of shares of Common Stock as shall be issuable upon the conversion of all such outstanding shares, provided that nothing contained herein shall be construed to preclude the corporation from satisfying its obligations 6 in respect of the conversion of the outstanding shares of Class B Stock by delivery of shares of Common Stock which are held in the treasury of the corporation. The corporation covenants that if any shares of Common Stock, required to be reserved for purposes of conversion hereunder, require registration with or approval of any governmental authority under any federal or state law before such shares of Common Stock may be issued upon conversion, the corporation will use its best efforts to cause such shares to be duly registered or approved, as the case may be. The corporation will endeavor to list the shares of Common Stock required to be delivered upon conversion prior to such delivery upon each national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery. The corporation covenants that all shares of Common Stock which shall be issued upon conversion of the shares of Class B Stock, will, upon issue, be fully paid and nonassessable and not entitled to any preemptive rights. V. Liquidation Rights. In the event of any dissolution, liquidation or winding up of the affairs of the corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the corporation, the holders of each series of Preferred Stock shall be entitled to receive, out of the net assets of the corporation, an amount for each share equal to the amount fixed and determined by the Board of Directors in any resolution or resolutions providing for the issuance of any particular series of Preferred Stock, plus an amount equal to all dividends accrued and unpaid on shares of such series to the date fixed for distribution, and no more, before any of the assets of the corporation shall be distributed or paid over to the holders of Common Stock. After payment in full of said amounts to the holders of Preferred Stock of all series other than the corporation's Series A Cumulative Convertible stock, $1.00 par value (hereinafter the 'Series A Stock'), and after payment of the full amount provided for the holders of Series A Stock in accordance with the first sentence of Section B.3. of this Article Fourth, the remaining assets and funds of the corporation shall be divided among and paid ratably to the holders of Common Stock (including those persons who shall become holders of Common Stock by reason of converting their shares of Class B Stock) in a manner not inconsistent with the provisions of Section B.3. of this Article Fourth regarding the rights of the holders of Series A Stock in any such liquidation, dissolution or winding up. If, upon such dissolution, liquidation or winding up, the assets of the corporation distributable as aforesaid among the holders of Preferred Stock of all series shall be insufficient to permit full payment to them of said preferential amounts, then such assets shall be distributed among such holders, first in the order of their respective preferences, and second, as to such holders who are next entitled to such assets and who rank equally with regard to such assets, ratably in proportion to the respective total amounts which they shall be entitled to receive as provided in this Section V. A merger or consolidation of the corporation with or into any other corporation or a sale or conveyance of all or any part of the assets of the corporation (which shall not in fact result in the liquidation of the corporation and the distribution of assets to stockholders) shall not be deemed to be a voluntary or involuntary liquidation or dissolution or winding up of the corporation within the meaning of this Section V. B. PREFERRED STOCK. The Board of Directors is hereby authorized from time to time to provide by resolution for the issuance of shares of Preferred Stock in one or more series not exceeding the aggregate number of shares of Preferred Stock authorized by this Restated Certificate of Incorporation, as amended from time to time; and to determine with respect to each such series the voting powers, if any (which voting powers if granted may be full or limited), designations, preferences and relative, participating, optional or other special rights and the qualifications, limitations or restrictions appertaining thereto, including without limiting the generality of the foregoing, the voting rights appertaining to shares of Preferred Stock of any series (which may be one vote per share or a fraction of a vote per share, and which may be applicable generally or only upon the happening and continuance of stated events or conditions), the rate of dividend to which holders of Preferred Stock of any series may be entitled (which may be cumulative or noncumulative), the rights of holders of Preferred Stock of any series in the event of liquidation, dissolution or winding up of the affairs of the corporation, and the rights (if any) of holders of Preferred Stock of any series to convert or exchange such shares of Preferred Stock of such 7 series for shares of any other class of capital stock (including the determination of the price or prices or the rate or rates applicable to such rights to convert or exchange and the adjustment thereof, the time or times during which the right to convert or exchange shall be applicable and the time or times during which a particular price or rate shall be applicable). Before the corporation shall issue any shares of Preferred Stock of any series, a certificate setting forth a copy of the resolution or resolutions of the Board of Directors, fixing the voting powers, designations, preferences, the relative, participating, optional or other rights, if any, and the qualifications, limitations and restrictions, if any, appertaining to the shares of Preferred Stock of such series, and the number of shares of Preferred Stock of such series authorized by the Board of Directors to be issued shall be made under seal of the corporation and signed by the president or vice president and by the secretary or an assistant secretary of the corporation and acknowledged by such president or vice president as provided by the laws of the State of Delaware and shall be filed and a copy thereof recorded in the manner prescribed by the laws of the State of Delaware. The powers, preferences and the relative, participating, optional and other rights, and the qualifications, limitations and restrictions thereof of the series of Preferred Stock of the corporation designated Series A Stock are as follows: 1. Designation and Number of Shares. The distinctive serial designation of the series shall be Series A Cumulative Convertible Stock, $1.00 par value. The number of shares of Series A Stock which the corporation is authorized to issue is initially established at 10,000,000, which number of shares may be increased (if, and to the extent that, the Restated Certificate of Incorporation shall be further amended to increase the authorized number of shares of Preferred Stock) or decreased (but not below the number of shares of Series A Stock then outstanding) from time to time by the Board of Directors of the corporation. 2. Dividends. (a) Subject to full dividends accrued on the outstanding shares of any Preferred Stock ranking senior to the Series A Stock in respect of the payment of dividends for all past dividend periods and for the then current dividend period having been paid or declared and set apart for payment, holders of the Series A Stock shall be entitled to receive, but only when and as declared by the Board of Directors out of funds legally available for the declaration and payment of dividends, cumulative dividends as fixed by the provisions of this paragraph, and no more, payable in cash quarterly on October 29, 1982 and thereafter on the last day of January, April, July and October in each year, to holders of record of the Series A Stock on the respective dates fixed in advance for this purpose by the Board of Directors prior to the payment of each such dividend. The quarterly dividend to be paid on each share of Series A Stock shall be the sum of (x) $.03 (adjusted, if necessary, in accordance with Section 2(f) and (y) the product of (i) the amount of the dividend or dividends (including special dividends, if any) paid or to be paid in cash on each share of Common Stock during the quarter ending on the date on which the Series A Stock dividend is payable, and (ii) the conversion rate (as defined in Section 4 below). (b) Such dividends shall accrue and be cumulative as follows: as to shares issued prior to the record date for the first dividend payment, from the date of issuance; as to shares issued during the period commencing immediately after the record date for a dividend and terminating at the close of business on the payment date for such dividend, from such dividend payment date; and otherwise, from the quarterly payment date next preceding the date of issue of such shares. (c) Accumulations of dividends accrued on any shares of the Series A Stock shall not bear interest. (d) No dividend (other than a dividend in Common Stock, in Class B Stock or in any other class of stock of the corporation ranking junior to the Series A Stock in respect of the payment of dividends) shall be declared or paid or set aside for payment, nor shall any other distribution be declared or made upon the Common Stock, upon the Class B Stock or upon any other stock ranking junior to the Series 8 A Stock in respect of the payment of dividends, nor shall any Common Stock, Class B Stock or any other class of stock of the corporation ranking junior to the Series A Stock in respect of the payment of dividends be redeemed, purchased or otherwise acquired for any consideration by the corporation or by any corporation more than fifty percent of the voting securities of which are owned, directly or indirectly, by the corporation, while any of the Series A Stock is outstanding, unless, in each case, all dividends accrued on all outstanding shares of the Series A Stock for all past dividend periods shall have been paid or declared and set apart for payment. (e) As used in this certificate, accrued dividends shall mean the sum of amounts in respect of shares of Series A Stock then outstanding which, as to each share, shall be an amount computed from the date from which dividends on such share become cumulative to the date with reference to which the expression is used, irrespective of whether such amount or any part thereof shall have been declared as dividends or there shall have existed any funds legally available for the declaration or payment thereof, less the aggregate of all dividends paid on such share. (f) If the corporation shall declare a dividend on its Common Stock in shares of its Common Stock, the Board of Directors may in its discretion, and in lieu of any adjustment in the conversion rate (as defined in Section 4 below), declare a dividend on the Series A Stock in shares of its Series A Stock and provide for the issuance of said shares in accordance with this Article Fourth such that the number of shares of Series A Stock distributed on each share of Series A Stock then outstanding shall equal the number of shares of Common Stock distributed on each share of Common Stock then outstanding. In the event a dividend payable in Series A Stock is declared pursuant to this paragraph (f), the amount of $.03 set forth in clause (x) of Section 2(a), or such other amount as shall have resulted from any previous adjustments made in accordance with this paragraph (f), shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Series A Stock outstanding on the record date for such dividend and the denominator of which shall be the sum of the number of shares of Series A Stock outstanding on the record date for such dividend and the number of shares of Series A Stock payable thereon pursuant to the declaration of such dividend. In such event, the amount of $20 set forth in the first and third sentences of Section 3, or such other amount as shall have resulted from any previous adjustments made in accordance with this paragraph (f), shall be adjusted by multiplying such amount by the same fraction used in accordance with the immediately preceding sentence. 3. Liquidation Rights. In the event of any liquidation, dissolution or winding up (whether voluntary or involuntary) of the corporation, holders of the Series A Stock shall be entitled to be paid in cash from the net assets of the corporation available for distribution (after the prior claims of the holders of any Preferred Stock ranking senior to the Series A Stock shall have been satisfied) the sum of $20 per share (adjusted, if necessary, in accordance with Section 2(f)) plus dividends accrued on each share to the date fixed for payment thereof, before any amount shall be paid to holders of the Common Stock. If the net assets of the corporation available for distribution are insufficient to allow payment in full to be made to the holders of the Series A Stock as provided in the immediately foregoing sentence, the holders of the Series A Stock shall be paid, ratably, in proportion to the full distributive amounts to which they are respectively entitled. If the net assets of the corporation available for distribution are sufficient to allow payment in full to be made to the holders of the Series A Stock as provided in the first sentence of this Section 3, the holders of the Common Stock shall be entitled to be paid in cash out of the net assets, if any, remaining for distribution a sum per share equal to the amount obtained by dividing $20 (adjusted, if necessary, in accordance with Section 2(f)) by the conversion rate (as defined in Section 4, below), or, if such remaining net assets are insufficient to allow payment of such amount per share, then that amount per share derived by dividing the total amount of such remaining net assets by the number of shares of Common Stock then outstanding. After giving effect to the distributive amounts payable to holders of the Series A Stock and of the Common Stock as aforesaid, all such holders shall be entitled to share ratably in the net assets, if any, remaining for distribution, each share 9 of Common Stock being valued as one share, and each share of Series A Stock being valued as the number of shares equal to the product of one share and the conversion rate (as defined in Section 4, below), for this purpose. Neither the purchase or redemption by the corporation of stock of any class, in any manner permitted by law, nor the consolidation or merger of the corporation with or into any other corporation or corporations, nor the sale or transfer by the corporation of all or any part of its properties or assets, shall be deemed to be a liquidation, dissolution or winding up of the corporation for the purposes of this Section 3. No holder of Series A Stock shall be entitled to receive any amounts with respect thereto upon any liquidation, dissolution or winding up of the corporation other than the amounts provided for in this Section 3. 4. Conversion Rights. (a) Conversion Rate and Procedures. (i) Subject to the terms and conditions of this Section 4, the shares of Series A Stock shall be convertible at any time or from time to time, at the option of the respective holders thereof, at the office of any transfer agent for Series A Stock, and at such other place or places, if any, as the Board of Directors may designate, or, if the Board of Directors shall fail so to designate, at the principal office of the corporation (attention of the Secretary of the corporation), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100th of a share) of Common Stock at the rate of one share of Common Stock for each one share of Series A Stock surrendered for conversion, subject to the adjustments hereinafter specified. The term 'conversion rate' as used herein shall mean, as of any time, the number of shares or fraction of shares of Common Stock into which one full share of Series A Stock shall be entitled to be converted. Upon conversion, the corporation shall make no payment or adjustment on account of dividends accrued or in arrears on Series A Stock surrendered for conversion or on account of any dividends on the Common Stock issuable on such conversion. Before any holder of Series A Stock shall be entitled to convert the same into Common Stock, he shall surrender the certificate or certificates for such Series A Stock at the office of said transfer agent (or other place as provided above), which certificate or certificates, if the corporation shall so request, shall be duly endorsed to the corporation or in blank or accompanied by proper instruments of transfer to the corporation or in blank (such endorsements or instruments of transfer to be in form satisfactory to the corporation), and shall give written notice to the corporation at said office that he elects so to convert said Series A Stock in accordance with the terms of this Section 4, and shall state in writing therein the name or names in which he wishes the certificate or certificates for Common Stock to be issued. Every such notice of election to convert shall constitute a contract between the holder of such Series A Stock and the corporation, whereby the holder of such Series A Stock shall be deemed to subscribe for the amount of Common Stock which he shall be entitled to receive upon such conversion, and, in satisfaction of such subscription, to deposit the Series A Stock to be converted and to release the corporation from all liability thereunder, and thereby the corporation shall be deemed to agree that the surrender of the certificate or certificates therefor and the extinguishment of liability thereon, shall constitute full payment of such subscription for Common Stock to be issued upon such conversion. The corporation will as soon as practicable after such deposit of a certificate or certificates for Series A Stock, accompanied by the written notice and the statement above prescribed, issue and deliver at the office of said transfer agent (or other place as provided above) to the person for whose account such Series A Stock was so surrendered, or to his nominee or nominees, a certificate or certificates for the number of full shares of Common Stock to which he shall be entitled as aforesaid, and if the certificate or certificates surrendered evidence a greater number of shares than the number of shares to be converted, one or more certificates evidencing the shares of Series A Stock not to be converted, and together with a cash adjustment of any fraction of a share as hereinafter stated, if not evenly convertible. Subject to the provisions of paragraph (ii) of this Section 4(a), such conversion shall be deemed to have been made as of the date of such surrender of the Series A Stock to be converted; and the person or persons 10 entitled to receive the Common Stock issuable upon conversion of such Series A Stock shall be treated for all purposes as the record holder or holders of such Common Stock on such date. (ii) The corporation shall not be required to convert Series A Stock, and no surrender of Series A Stock shall be effective for that purpose, while the stock transfer books of the corporation are closed for any purpose; but the surrender of Series A Stock for conversion during any period while such books are so closed shall, subject to the provisions of paragraph (iii) of this subsection 4(a), become effective for conversion immediately upon the reopening of such books, as if the conversion had been made on the date such Series A Stock was surrendered, and at the conversion rate in effect at the date of such surrender. (iii) The right of each holder of Series A Stock to convert shall be limited as follows: (A) For purposes of this paragraph (iii), the term 'Conversion Year' shall mean each twelve-month period commencing March 1 (except that the initial period commencing October 29, 1982 and ending February 28, 1983 shall also be deemed to be a 'Conversion Year'), the term 'Proration Period' shall mean the first fifteen days of the Conversion Year, and the term 'Conversion Limit' shall be a number equal to ten percent of the total number of shares of Series A Stock which shall have been issued by the corporation as of the beginning of the relevant Conversion Year. The total number of shares which shall have been issued by the corporation as of the beginning of any Conversion Year, for purposes of calculating the Conversion Limit for such Conversion Year in accordance with the immediately preceding sentence, shall mean the aggregate number of shares of Series A Stock issued by the corporation, without reduction for shares reacquired by the corporation through conversion, purchase or otherwise (whether or not any such reacquired shares shall have been cancelled); provided, however, that reacquired shares which are reissued by the corporation shall not again be counted for the purpose of determining the total number of shares issued by the corporation hereunder. (B) Shares of Series A Stock surrendered for conversion during any Proration Period shall not be converted during such Proration Period, but, subject to the following limitation, shall be converted promptly after the expiration of such Proration Period. If, during such Proration Period, the number of shares of Series A Stock surrendered for conversion shall exceed the Conversion Limit, conversions shall be made on a pro rata basis, each holder having surrendered shares being deemed to have surrendered that percentage of such shares which is equal to the ratio of the Conversion Limit to the total number of shares of Series A Stock actually surrendered for conversion during such Proration Period. (C) During the period of a Conversion Year following the Proration Period of such Conversion Year, shares of Series A Stock surrendered for conversion shall not be converted if, prior to the date of such surrender (but during such Conversion Year), a number of shares of Series A Stock equal to or greater than the Conversion Limit has been surrendered for conversion. (D) If, on any day during the period of a Conversion Year following the Proration Period of such Conversion Year, the number of shares of Series A Stock surrendered, when taken together with the number of such shares previously surrendered for conversion during such Conversion Year, exceeds the Conversion Limit (the Conversion Limit as to such Conversion Year not having been exceeded prior to such day), then each holder having surrendered such shares for conversion on such day shall be deemed to have surrendered that percentage of such shares so surrendered which is equal to the ratio of (x) the difference between the Conversion Limit and the number of such shares surrendered for conversion during such Conversion Year but prior to such day, to (y) the number of such shares surrendered for conversion on such day. 11 (E) If the implementation of the proration provisions of this paragraph (iii) should result in any fractional shares of Series A Stock, such fractional shares shall be ignored for the purpose of conversion pursuant to this Section 4, and, although fewer shares than the number equal to the Conversion Limit may as a result of ignoring such fractional shares have been converted during any Conversion Year, no further conversions of Series A Stock shall be effected until the following Conversion Year. (F) All shares of Series A Stock surrendered for conversion and not converted by reason of the limitations imposed by this paragraph (iii) shall be returned to the holder together with the Common Stock, if any, issued upon conversion of the Series A Stock surrendered with such unconverted shares. (G) Notwithstanding the foregoing provisions of this paragraph (iii), no limitations on the number of shares of Series A Stock which may be converted shall apply if the Board of Directors shall approve a transaction in which the corporation is to be consolidated or merged with or into any other corporation or corporations, and one of the other corporations is to be the surviving entity (or, if the corporation is to be the surviving entity, at least a majority of the shares of Common Stock of the corporation to be outstanding immediately following such transaction shall as a result thereof be owned by one person or by a group of persons acting in concert), or all or substantially all of the properties and assets of the corporation are to be sold or transferred, or if the Board of Directors shall recommend a tender offer for at least a majority of the Common Stock as being in the best interests of the holders of the Common Stock, or if the Board of Directors shall direct that notice be given to all holders of shares of Common Stock and Preferred Stock of the corporation that the Conversion Limit applicable to the Series A Stock is suspended until a specified date or eliminated altogether. (b) Adjustments. (i) In case the corporation shall (A) declare a dividend on its Common Stock in shares of its capital stock except in any case where a dividend on its Series A Stock also shall have been declared pursuant to Section 2(f), (B) subdivide outstanding shares of its Common Stock, (C) combine outstanding shares of its Common Stock into a smaller number of shares, or (D) issue by reclassification of its shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which the corporation is the continuing corporation) any shares of capital stock, then the conversion rate in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of any Series A Stock surrendered for conversion after such time shall be entitled to receive the number and kind of shares which he would have owned or have been entitled to receive had such Series A Stock been converted immediately prior to such time. Such adjustment shall be made successively whenever any event listed above shall occur. (ii) In case the corporation shall fix a record date for the issuance of rights, warrants or options to all holders of its Common Stock and/or Class B Stock entitling them to subscribe for or purchase shares of Common Stock and/or Class B Stock at a price per share less than the current market price per share of Common Stock (as defined in paragraph (v) below) on such record date, the conversion rate after such record date shall be determined by multiplying the conversion rate in effect immediately prior to such record date by a fraction, of which the numerator shall be the number of shares of Common Stock and Class B Stock outstanding on such record date plus the number of additional shares of Common Stock and/or Class B Stock to be offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock and Class B Stock outstanding on such record date plus the number of shares of Common Stock and/or Class B Stock which the aggregate offering price of the total number of shares so to be offered would purchase at such current market price. Such adjustment shall be made 12 successively whenever such a record date is fixed. In the event that such rights, warrants or options are not so issued, the conversion rate shall again be adjusted to be the conversion rate which would then be in effect if such record date had not been fixed. To the extent that such rights, warrants or options expire unexercised, the conversion rate shall be readjusted to the conversion rate which would then be in effect had the adjustments made as of the record date for the issuance of such rights, warrants or options been made upon the basis of the issuance of rights, warrants or options to subscribe for or purchase only the number of shares of Common Stock and/or Class B Stock as to which such rights, warrants or options were actually exercised. In the case of an issuance by the corporation to all holders of its Common Stock and/or Class B Stock of rights, warrants or options entitling them to subscribe for or purchase securities convertible into, exchangeable for or carrying a right to purchase shares of Common Stock and/or Class B Stock (collectively, 'Convertible Securities'), for purposes of this paragraph (ii), such issuance shall be deemed to be an issuance of rights, warrants or options to such holders entitling them to subscribe for or purchase Common Stock and/or Class B Stock at an aggregate offering price equal to the aggregate offering price of the Convertible Securities plus the minimum aggregate amount (if any) payable upon conversion of such shares or securities into Common Stock and/or Class B Stock. (iii) In case the corporation shall fix a record date for the making of a distribution to all holders of its Common Stock and/or Class B Stock (including any such distribution made in connection with a consolidation or merger in which the corporation is the continuing corporation) of evidences of its indebtedness or assets (excluding dividends paid in, or distributions of, cash to the extent permitted by law) or subscription rights, warrants or options (excluding those referred to in paragraph (ii) above), the conversion rate after such record date shall be determined by multiplying the conversion rate in effect immediately prior to such record date by a fraction, of which the numerator shall be the current market price per share of Common Stock (as defined in paragraph (v) below) on such record date, and of which the denominator shall be such current market price per share of Common Stock, less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive in the absence of fraud) of the portion of the assets or evidences of indebtedness so to be distributed, or of such subscription rights, warrants or options applicable, to one share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the conversion rate shall again be adjusted to be the conversion rate which would then be in effect if such record date had not been fixed. (iv) In case of any reclassification or change of outstanding Common Stock and/or Class B Stock, or in case of any consolidation or merger of the corporation with or into another corporation, or in case of any sale or conveyance to another corporation or entity (other than by mortgage or pledge) of all or substantially all of the properties and assets of the corporation, the corporation (or its successor in such consolidation or merger, or the purchaser of such properties and assets) shall make appropriate provision so that the holder of each share of Series A Stock then outstanding shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance, by a holder of the number of shares of Common Stock into which such Series A Stock might have been converted immediately prior to such reclassification, change, consolidation, merger, sale or conveyance, and shall have no other conversion rights under these provisions; provided, that effective provision shall be made, in the Articles or Certificate of Incorporation of the resulting or surviving corporation or otherwise, so that the provisions set forth herein for the protection of the conversion rights of Series A Stock shall thereafter be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities and property deliverable upon conversion of the Series A Stock remaining outstanding or other convertible preferred stock or other securities received by the holders of Series A Stock in place thereof; and provided, further, that any such resulting or surviving corporation shall expressly assume the obligation to deliver, upon the exercise of the conversion 13 privilege, such shares, securities or property as the holders of the Series A Stock remaining outstanding, or other convertible preferred stock received by the holders in place thereof, shall be entitled to receive pursuant to the provisions hereof, and to make provisions for the protection of the conversion right as above provided. In case securities or property other than Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all reference in this paragraph (iv) shall be deemed to apply, so far as appropriate and as nearly as may be, to such other securities or property. The subdivision or combination of the number of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock (whether with or without par value) shall not be deemed to be a reclassification of the Common Stock of the corporation for the purposes of this paragraph (iv). (v) For the purpose of any computation under paragraphs (ii) and (iii) of this subsection 4(b), the current market price per share of Common Stock on any record date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing forty-five business days before such date. The closing price for each day shall be the last sale price (regular way) or, in case no such sale takes place on such day, the average of the closing bid and asked prices (regular way), in either case on the composite tape, or, if the Common Stock is not quoted on the composite tape, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which the Common Stock is listed or admitted to trading, or if it is not listed or admitted to trading on any such securities exchange, the average of the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the corporation for that purpose. (vi) No adjustment in the conversion rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (vi), would require an increase or decrease of at least one percent in such rate; provided, however, that any adjustments which by reason of this paragraph (vi) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 4 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. (vii) Upon occurrence of any of the events described in paragraphs (i) through (iv) above, the corporation shall promptly (A) file with the transfer agent or agents for the Series A Stock a statement signed by the President or one of the Vice Presidents of the corporation and by its Treasurer or Assistant Treasurer, disclosing the nature of such event, the conversion rate in effect immediately thereafter and the kind and amount of stock or other securities or property into which Series A Stock shall be convertible after such event, and (B) cause a notice containing a summary of the information set forth in said statement to be mailed to the holders of record of Series A Stock. Where appropriate, such notice may be given in advance and included as a part of a notice required to be mailed under the provisions of subsection 4(c) hereof. (viii) In any case in which this subsection 4(b) shall require that an adjustment shall become effective immediately after a record date for an event, the corporation may defer until the occurrence of such event (A) issuing to the holder of Series A Stock converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder an amount in cash in lieu of a fractional share pursuant to subsection 4(f) hereof; provided, however, the corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares of Common Stock (or other securities or property, as the case may be), and such cash, upon the occurrence of the event requiring such adjustment. (ix) Except as otherwise expressly provided in this subsection 4(b), no adjustment in the conversion rate shall be made by reason of the issuance or sale, in exchange for cash, property or services, of shares of Common Stock and/or Class B Stock, or any securities convertible into or 14 exchangeable for shares of Common Stock and/or Class B Stock, or securities carrying the right to purchase any of the foregoing. (x) Any determination as to fair market value or as to whether an adjustment in the conversion rate in effect hereunder is required pursuant to paragraphs (i) through (iv) of this subsection 4(b), or as to the amount of any such adjustment, if required, shall be binding upon the holders of Series A Stock and the corporation if made in good faith by the Board of Directors. (xi) In the event that at any time, as a result of an adjustment made pursuant to paragraph (i) or paragraph (iv) of this subsection 4(b), the holder of any shares of Series A Stock thereafter surrendered for conversion shall become entitled to receive any shares of capital stock of the corporation other than shares of Common Stock, thereafter the number of such other shares so receivable upon conversion of any shares of Series A Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in paragraphs (i) through (x) above, and the provisions of subsections (a) and (c) through (h) of this Section 4 with respect to the Common Stock shall apply on like terms to any such other shares. (c) Advance Notice of Certain Events. In case at any time: (i) the corporation shall authorize the issuance to all holders of its Common Stock of rights, warrants or options to subscribe for or purchase shares of its Common Stock or of any other subscription rights, warrants or options; or (ii) the corporation shall authorize the distribution to all holders of its Common Stock of evidences of its indebtedness or assets (other than dividends paid in, or distributions of, cash to the extent permitted by law); or (iii) there is any consolidation or merger to which the corporation is a party and for which approval of any shareholders of the corporation is required, or a conveyance or transfer of all or substantially all of the properties and assets of the corporation, or a tender offer for at least a majority of the Common Stock which has been recommended by the Board of Directors as being in the best interests of the holders of the Common Stock; or (iv) there is a total voluntary or involuntary dissolution, liquidation or winding up of the corporation; or (v) the corporation proposes to take any action (other than actions of the character described in paragraph (i) of subsection 4(b) above) which would require an adjustment of the conversion rate pursuant to subsection 4(b) above; then the corporation shall cause to be filed with the transfer agent or agents for the Series A Stock, and shall cause to be mailed to the holders of record of the outstanding Series A Stock, at least twenty days (or ten days in any case specified in clause (i) or (ii) above or in the case of a recommended tender offer as specified in clause (iii) above) prior to the applicable record date (or effective date if there shall be no record date) hereinafter specified, a notice stating (A) the date as of which the holders of Common Stock of record to be entitled to receive any such rights, warrants, options or distribution are to be determined, or (B) the date on which any such consolidation, merger, conveyance, transfer, tender offer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such distribution, right, warrant, option, consolidation, merger, conveyance, transfer, tender offer, dissolution, liquidation or winding up. The failure to give the notice required by this subsection 4(c) or any defect therein shall not affect the legality or validity of any distribution, right, warrant, option, consolidation, merger, 15 conveyance, transfer, tender offer, dissolution, liquidation, or winding up, or the vote upon any such action. (d) Status of Stock Converted. All shares of Series A Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the right, if any, to receive notices and to vote, shall forthwith cease and terminate except only the right of the holders thereof to receive Common Stock in exchange therefor. (e) Shares Reserved for Conversion. The corporation shall at all times reserve and keep available, out of its authorized and unissued stock, solely for the purpose of effecting the conversion of Series A Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series A Stock from time to time outstanding. (f) Fractions Upon Conversion. No fractional shares of Common Stock are to be issued upon conversion, but in lieu thereof the corporation will pay therefor a cash adjustment (computed to the nearest cent) in an amount equal to such fraction of the market price per share of Common Stock computed on the basis of the last reported sale price (regular way) on the business day which next precedes the date of conversion, or, in case no such sale takes place on such day, the average of the closing bid and asked prices (regular way) of Common Stock, in either case on the composite tape, or, if the Common Stock is not quoted on the composite tape, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which the Common Stock is listed or admitted to trading, or if the Common Stock is not listed or admitted to trading on any such securities exchange, the average of the closing bid and asked prices on said last trading day as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the corporation for that purpose. (g) Taxes Upon Conversion. The corporation will pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of Series A Stock pursuant to this Section 4. The corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Stock in a name other than that in which the Series A Stock so converted was registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the corporation the amount of any such tax, or has established, to the satisfaction of the corporation, that such tax has been paid. (h) Affidavit of Mailing. An affidavit of the transfer agent or transfer agents for the Series A Stock or of the Secretary of the corporation to the effect that any notice provided for in this Section 4 has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 5. Voting Rights. (a) Except as set forth in this Section 5 and as required by applicable law, the holders of Series A Stock shall not be entitled to vote. (b) If and whenever accrued dividends on Series A Stock shall not have been paid or declared and a sum sufficient for the payment thereof set aside, in an amount equivalent to six quarterly dividends on all shares of Series A Stock at the time outstanding, then and in such event the holders of Series A Stock and each other series of Preferred Stock now or hereafter issued which shall be 16 accorded such class voting right by the Board of Directors and which shall have the right to elect two directors as the result of a prior or subsequent default in payment of dividends on such series (each such other series being hereinafter called 'Other Series of Preferred Stock'), voting separately as a class without regard to series, shall be entitled to elect two directors, and the holders of all shares otherwise entitled to vote for directors, voting separately as a class, shall be entitled to elect the remaining members of the Board of Directors. Such special voting rights of the holders of Series A Stock may be exercised until all dividends in default on the Series A Stock shall have been paid in full or declared and funds sufficient therefor set aside, and when so paid or provided for such special voting rights of the holders of Series A Stock shall cease, but subject always to the same provisions for the vesting of such special voting rights in the case of any such future dividend default or defaults. At any time after such special voting rights shall have so vested in the holders of Series A Stock, the Secretary of the corporation may, and upon the written request of the holders of record of ten percent or more in number of shares of Series A Stock and each Other Series of Preferred Stock then outstanding addressed to him at the principal executive office of the corporation shall, call a special meeting of the holders of Preferred Stock so entitled to vote, for the election of the directors to be elected by them as herein provided, to be held within fifty days after such call and at such place and upon such notice provided by law and in the bylaws for the holding of meetings of shareholders; provided, however, that the Secretary shall not be required to call such special meeting in the case of any such request received less than ninety days before the date fixed for any annual meeting of shareholders, and if in such case such special meeting is not called, the holders of Preferred Stock so entitled to vote shall be entitled to exercise the special voting rights provided in this paragraph at such annual meeting. If any such special meeting required to be called as above provided shall not be called by the Secretary within thirty days after receipt of any such request, then the holders of record of ten percent or more in number of shares of Series A Stock and each Other Series of Preferred Stock then outstanding may designate in writing one of their number to call such meeting, and the person so designated may, at the expense of the corporation, call such meeting to be held at the place and upon the notice above provided, and for that purpose shall have access to the stock books of the corporation. No such special meeting and no adjournment thereof shall be held on a date later than thirty days before the annual meeting of the shareholders or a special meeting held in place thereof next succeeding the time when the holders of Series A Stock become entitled to elect directors as above provided. If, at any meeting so called or at any annual meeting held while the holders of shares of Series A Stock have the special voting rights provided for in this paragraph, the holders of not less than forty percent of the then outstanding shares of Series A Stock and each Other Series of Preferred Stock are present in person or by proxy, which percentage shall be sufficient to constitute a quorum for the election of additional directors as herein provided, the then authorized number of directors of the corporation shall be increased by two, as of the time of such special meeting or the time of the first such annual meeting held while such holders have said special voting rights and such quorum is present, and the holders of the Series A Stock and each Other Series of Preferred Stock, voting as a class, shall be entitled to elect the additional directors so provided for. If the directors of the corporation are then divided into classes under provisions of the Restated Certificate of Incorporation, as amended, or the bylaws, the two additional directors shall be members of those respective classes of directors in which a vacancy is created as a result of such increase in the authorized number of directors. Upon the election at such meeting by the holders of the shares of Series A Stock and each Other Series of Preferred Stock, voting as a class for the two directors they are entitled so to elect, the persons so elected, together with such persons as may be or may have been elected as directors by the holders of all shares otherwise entitled to vote for directors, shall constitute the duly elected directors of the corporation. The additional directors so elected by holders of Series A Stock and each Other Series of Preferred Stock, voting as a class, shall serve until the next annual meeting or until their respective successors shall be elected and qualified, or if any such director is a member of a class of directors under provisions dividing the directors into classes as aforesaid, each such director shall serve until the annual meeting at which the term of office of his class shall expire or until his successor shall be elected and shall qualify, and at each subsequent meeting of shareholders at which the directorship of any director elected by the vote of holders of Series A Stock and each Other Series of Preferred 17 Stock under the special voting rights set forth in this paragraph is up for election said special voting rights shall apply in the re-election of such director or in the election of his successor, provided, however, that whenever the holders of Series A Stock and each Other Series of Preferred Stock shall be divested of the special rights to elect two directors as above provided, the terms of office of all persons elected as directors by the holders of Series A Stock and each Other Series of Preferred Stock, voting as a class, or elected to fill any vacancies resulting from the death, resignation, or removal of directors so elected by the holders of Series A Stock and each Other Series of Preferred Stock, shall forthwith terminate and the authorized number of directors shall be reduced accordingly. If, at any time after a special meeting of shareholders or an annual meeting of shareholders at which the holders of Series A Stock and each Other Series of Preferred Stock have elected additional directors as provided above, and while the holders of Series A Stock and each Other Series of Preferred Stock shall be entitled to elect two directors, the number of directors who have been elected by the holders of Series A Stock and each Other Series of Preferred Stock (or who by reason of one or more resignations, deaths or removals have succeeded any directors so elected) shall by reason of resignation, death or removal be less than two but at least one, the vacancy in the directors elected by the holders of the Series A Stock and each Other Series of Preferred Stock may be filled by the remaining director elected by such holders, and failing such election within thirty days after such vacancy arises, or if there shall not be incumbent at least one director elected by such holders, the Secretary of the corporation may, and upon the written request of the holders of record of ten percent or more in number of shares of Series A Stock and each Other Series of Preferred Stock then outstanding addressed to him at the principal office of the corporation shall, call a special meeting of the holders of Preferred Stock so entitled to vote, for an election to fill such vacancy or vacancies, to be held within fifty days after such call and at the place and upon the notice provided by law and in the bylaws for the holding of meetings of shareholders; provided, however, that the Secretary shall not be required to call such special meeting in the case of any such request received less than ninety days before the date fixed for any annual meeting of shareholders, and if in such case such special meeting is not called, the holders of Preferred Stock so entitled to vote shall be entitled to fill such vacancy or vacancies at such annual meeting. If any such special meeting required to be called as above provided shall not be called by the Secretary within thirty days after receipt of any such request, then the holders of record of ten percent or more in number of shares of Series A Stock and each Other Series of Preferred Stock then outstanding may designate in writing one of their number to call such meeting, and the person so designated may, at the expense of the corporation, call such meeting to be held at the place and upon the notice above provided, and for that purpose shall have access to the stock books of the corporation; no such special meeting and no adjournment thereof shall be held on a date later than thirty days before the annual meeting of the shareholders or a special meeting held in place thereof next succeeding the time when the holders of Series A Stock and each Other Series of Preferred Stock become entitled to elect directors as above provided. (c) So long as any shares of Series A Stock shall be outstanding, the corporation shall not, without the affirmative vote or written consent of the holders of a majority of the number of shares of Series A Stock at the time outstanding, amend the Restated Certificate of Incorporation to increase the authorized number of shares of Preferred Stock. (d) So long as any shares of Series A Stock shall be outstanding, the corporation shall not, without the affirmative vote or written consent of the holders of two-thirds of the number of shares of Series A Stock at the time outstanding, amend the Restated Certificate of Incorporation to: (i) change the designations, preferences, limitations or other relevant rights of the Series A Stock; (ii) effect an exchange, reclassification or cancellation of all or part of the Series A Stock; (iii) effect an exchange or create a right of exchange of another class or series into Series A Stock; 18 (iv) change the Series A Stock into the same or a different number of shares of the same or another class or series; or (v) cancel or otherwise affect dividends on the shares of Series A Stock which have accrued but have not been declared. C. Authorized Shares of Capital Stock. Except as may be provided in the terms and conditions fixed by the Board of Directors for any series of Preferred Stock, the number of authorized shares of any class or classes of stock of the corporation may be increased or decreased by the affirmative vote of the holders of a majority of the outstanding shares of stock of the corporation entitled to vote. D. Preemptive or Preferential Rights of Stockholders. No stockholder of this corporation shall have any preemptive or preferential right to purchase or subscribe to any shares of any class of this corporation now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of any class, now or hereafter to be authorized, whether or not the issue of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights of such stockholder, other than such rights, if any, as the Board of Directors in its discretion from time to time may grant, and at such price as the Board of Directors in its discretion may fix; and the Board of Directors may issue shares of any class of this corporation, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of any class, without offering any such shares or securities, either in whole or in part, to the existing stockholders of any class. FIFTH: The minimum amount of capital with which the corporation will commence business is One Thousand Dollars ($1,000.00). SIXTH: The corporation is to have perpetual existence. SEVENTH: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. EIGHTH: The following provisions are inserted for the regulation and conduct of the affairs of the corporation, and it is expressly provided that they are intended to be in furtherance and not in limitation or exclusion of the powers elsewhere conferred herein or in the by-laws or conferred by law: (a) The Board of Directors may at any time set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may at any time reduce or abolish any such reserve. (b) Except as may be otherwise expressly required by law or by other provisions of this Restated Certificate of Incorporation or the by-laws, the Board of Directors shall have and may exercise, transact, manage, promote and carry on all of the powers, authorities, businesses, objects and purposes of the corporation, provided, however, that the directors may not effect or consummate: (1) any merger or consolidation of the corporation or any Subsidiary with or into any other corporation; (2) any sale, lease, exchange or other disposition of all or substantially all of the assets of the corporation to or with any other person; or (3) any issuance or transfer by the corporation or any Subsidiary of any voting securities of the corporation or any Subsidiary to any other person except for voting securities issued pursuant to stock option, purchase, bonus or other plans for natural persons who are directors, employees, consultants and/or agents of the corporation and its Subsidiaries; 19 unless and until such transaction is authorized by the affirmative vote of the holders of at least 66 2/3% of the outstanding stock of the corporation entitled to vote generally in the election of directors considered for the purposes of this Article Eighth as one class, but the foregoing requirement shall not apply, and the provisions of Delaware law relating to the percentage of stockholder approval, if any, shall apply to (i) any merger or other transaction described in the preceding subparagraphs (1), (2) and (3) if the other party to the merger or other transaction is a Subsidiary of the corporation, or (ii) any merger or other transaction described in the preceding subparagraphs (1), (2) and (3) if at any time prior to its consummation the transaction has been approved by a resolution adopted by not less than two-thirds of all of the directors then in office. For purposes of this Article Eighth a 'Subsidiary' is any corporation more than 50% of the voting securities of which are owned directly or indirectly by the corporation; and a 'person' is any individual, partnership, corporation or entity. (c) The election of directors need not be by ballot unless the by-laws so require and no director need be a stockholder. (d) By-laws not inconsistent with the Certificate of Incorporation may be made, and by-laws may be altered, amended or repealed in the manner therein specified provided (1) that no inconsistency with the Certificate of Incorporation results from such alteration or repeal, (2) that the Board of Directors shall not alter, amend or repeal Sections 3.1 to 3.4 inclusive and Section 13 of the by-laws as amended at the 1978 Annual Meeting of Stockholders without the approval of the holders of at least 66 2/3% of the outstanding stock of the corporation entitled to vote generally in the election of directors, considered for the purposes of this paragraph (d) as one class, and (3) that no change of the time or place of the meeting for the election of directors shall be made within 60 days next before the day on which such meeting is to be held, and that in case of any change of such time or place, notice thereof shall be given to each stockholder in person or by letter mailed to his last known post-office address at least 20 days before the meeting is held. (e) The Board of Directors may from time to time determine whether and to what extent and at what times and places and under what conditions and regulations the accounts and books and papers of the corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account, book or document of the corporation, except as and to the extent expressly provided by law with reference to the right of stockholders to examine the original or duplicate stock ledger, or otherwise expressly provided by law, or except as expressly authorized by resolution of the Board of Directors. (f) A director of this corporation shall not, in the absence of fraud, be disqualified by his office from dealing or contracting with the corporation, either as vendor, vendee or otherwise, nor in the absence of fraud, shall any contract or other transaction of the corporation be void or voidable or otherwise affected by reason of the fact that any director, or any firm or association in which any director is a member, or any corporation of which any director is an officer, director or stockholder, or any trust of which any director is a trustee or beneficiary, is in any way pecuniarily interested in such contract or transaction, provided that at the meeting of the Board of Directors or of any committee thereof having authority in the premises, authorizing or confirming said contract or transaction, the interest of such director, firm, association, corporation, or trust and in the case of a firm, association, corporation, or trust, the relation of such director thereto, is disclosed or made known to the meeting; nor shall any director be liable to account to the corporation for any profit realized by him from or through any such contract or transaction of this corporation, by reason of the fact that he or any firm or association of which he is a member, or any corporation of which he is an officer, director or stockholder, or any trust of which he is a trustee or beneficiary, was pecuniarily interested in such transaction or contract. Directors so 20 interested may be counted when present at meetings of the Board of Directors or of any such committee for the purpose of determining the existence of a quorum. No such interested director shall vote to authorize or confirm any such contract or transaction, and if he does so vote his vote shall be disregarded; but in respect of any contract or transaction with any wholly-owned subsidiary of the corporation, or with any corporation in which such director is interested only by virtue of being a director or officer or both, and not as a stockholder, such director may vote and act as freely as though his interests in such corporation did not exist. Any contract, transaction or act of the corporation or of the Board of Directors or of any committee thereof, or of any officer, which shall be ratified by a majority in interest of stockholders having voting power, at any annual meeting or at a special meeting called for the purpose, shall be as valid and as binding as though ratified by every stockholder of the corporation. In any situation in which a director should disclose his pecuniary interest in a contract or transaction as provided for in this section, it shall not be necessary for him to disclose the extent or the details of such pecuniary interest. (g) The Board of Directors may issue all or any part of the authorized stock of the corporation at such times and on such lawful conditions as it may from time to time determine; and no stockholders shall have any preemptive right to subscribe for any issue of the corporation's stock or of any other securities. (h) To the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended, a director of the corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of the foregoing sentence by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. (Added by amendment March 13, 1987.) NINTH: Meetings may be held without the State of Delaware if the by-laws so provide. The books of the corporation may be kept (subject to any provisions contained in the statute) outside of the State of Delaware at such place or places as may be from time to time designated by the Board of Directors or in the by-laws of the corporation. No action required or permitted to be taken by the stockholders of the corporation may be taken except at the annual meeting of the stockholders or at a special meeting of the stockholders duly called for as provided by the by-laws of the corporation. The stockholders entitled to vote generally in the election of directors, considered for the purposes of this Article Ninth as one class, shall have the authority to remove any director of the corporation with or without cause as provided in the by-laws of the corporation. TENTH: The corporation reserves the right to modify, revise, alter, amend, change, repeal, or rescind any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this reservation, provided, however, that the provisions of Paragraphs (b), (c) and (d) of Article Eighth, and the provisions of Articles Ninth and Tenth of this Restated Certificate of Incorporation shall not be modified, revised, altered or amended, repealed or rescinded, in whole or in part, except by the affirmative vote of the holders of not less than 66 2/3% of the outstanding stock entitled to vote generally in the election of directors considered for the purposes of this Article Tenth as one class. 21 IN WITNESS WHEREOF, this Restated Certificate of Incorporation, having been duly adopted by the Board of Directors and the stockholders of the corporation in accordance with the provisions of Section 242 and 245 of the Delaware General Corporation Law, has been executed on this 18th day of December, 1984. HARCOURT GENERAL, INC. By ______/s/ RICHARD A. SMITH_____ RICHARD A. SMITH President Attest: __/s/ SAMUEL FRANKENHEIM__ SAMUEL FRANKENHEIM Assistant Secretary 22 EX-10.7 3 DEFERRED COMPENSATION AND RETIREMENT INCOME PLAN EXHIBIT 10.7 HARCOURT GENERAL, INC. DEFERRED COMPENSATION AND RETIREMENT INCOME PLAN FOR NON-EMPLOYEE DIRECTORS Effective January 1, 1993 HARCOURT GENERAL, INC. DEFERRED COMPENSATION AND RETIREMENT INCOME PLAN FOR NON-EMPLOYEE DIRECTORS Table of Contents ARTICLE PAGE ARTICLE 1. Introduction . . . . . . . . . . . . . . . . . . . 1 1.1. Amendment and restatement . . . . . . . . . . . . . 1 1.2. Status of Plan. . . . . . . . . . . . . . . . . . . 1 ARTICLE 2. Definitions. . . . . . . . . . . . . . . . . . . . 2 2.1. "Account" . . . . . . . . . . . . . . . . . . . . . 2 2.2. "Board" . . . . . . . . . . . . . . . . . . . . . . 2 2.3. "Committee" . . . . . . . . . . . . . . . . . . . . 2 2.4. "Common Stock". . . . . . . . . . . . . . . . . . . 2 2.5. "Company" . . . . . . . . . . . . . . . . . . . . . 2 2.6. "Compensation". . . . . . . . . . . . . . . . . . . 2 2.7. "Effective Date". . . . . . . . . . . . . . . . . . 2 2.8. "Market Price". . . . . . . . . . . . . . . . . . . 2 2.9. "Non-Employee Director" . . . . . . . . . . . . . . 3 2.10. "Participant". . . . . . . . . . . . . . . . . . . 3 2.11. "Plan" . . . . . . . . . . . . . . . . . . . . . . 3 2.12. "Plan Year". . . . . . . . . . . . . . . . . . . . 3 2.13. "Prior Plan" . . . . . . . . . . . . . . . . . . . 3 2.14. "Retainer" . . . . . . . . . . . . . . . . . . . . 3 2.15. "Unforeseen Emergency" . . . . . . . . . . . . . . 3 2.16. "Year of Service". . . . . . . . . . . . . . . . . 4 ARTICLE 3. Participation. . . . . . . . . . . . . . . . . . . 5 3.1. Commencement of participation . . . . . . . . . . . 5 3.2. Continuation of participation . . . . . . . . . . . 5 ARTICLE 4. Elective Deferrals . . . . . . . . . . . . . . . . 6 4.1. Elective deferrals. . . . . . . . . . . . . . . . . 6 4.2. Accounts. . . . . . . . . . . . . . . . . . . . . . 6 4.3. Investment equivalent alternatives. . . . . . . . . 7 4.4. Time of payment.. . . . . . . . . . . . . . . . . . 9 4.5. Form of payment . . . . . . . . . . . . . . . . . . 10 4.6. Death prior to payment. . . . . . . . . . . . . . . 10 4.7. Unforeseen Emergency. . . . . . . . . . . . . . . . 11 ARTICLE 5. Retirement Income Benefits . . . . . . . . . . . . 13 5.1. Retirement income benefits. . . . . . . . . . . . . 13 5.2. Forfeitures . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 6. Administration . . . . . . . . . . . . . . . . . . 15 6.1. Plan administration and interpretation. . . . . . . 15 6.2. Powers, duties, procedures, etc.. . . . . . . . . . 15 6.3. Information . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 7. Amendment and Termination. . . . . . . . . . . . . 17 7.1. Amendments. . . . . . . . . . . . . . . . . . . . . 17 7.2. Termination of Plan . . . . . . . . . . . . . . . . 17 7.3. Existing rights . . . . . . . . . . . . . . . . . . 17 ARTICLE 8. Miscellaneous. . . . . . . . . . . . . . . . . . . 19 8.1. No funding. . . . . . . . . . . . . . . . . . . . . 19 8.2. Grantor trust . . . . . . . . . . . . . . . . . . . 19 8.3. Nonassignability. . . . . . . . . . . . . . . . . . 19 8.4. Limitation of Participants' rights. . . . . . . . . 20 8.5. Participants bound. . . . . . . . . . . . . . . . . 20 8.6. Receipt and release . . . . . . . . . . . . . . . . 20 8.7. Notices . . . . . . . . . . . . . . . . . . . . . . 21 8.8. Governing law . . . . . . . . . . . . . . . . . . . 21 8.9. Headings and subheadings. . . . . . . . . . . . . . 21 HARCOURT GENERAL, INC. DEFERRED COMPENSATION AND RETIREMENT INCOME PLAN FOR NON-EMPLOYEE DIRECTORS ARTICLE I. Introduction A. Amendment and restatement. The Company originally adopted the General Cinema Corporation Deferred Compensation Plan for Non-Employee Directors, effective April 20, 1990, to provide a means by which members of the Board who are not employees of the Company may elect to defer receipt of designated amounts of Compensation earned in that capacity. The Company hereby amends and restates that Plan to make certain clarifications, to provide an additional benefit in the form of retirement income to Non- Employee Directors who satisfy the requirements for such benefits as set forth herein and, coincident with the change in the name of the Company, to rename such Plan the "Harcourt General, Inc. Deferred Compensation and Retirement Income Plan for Non-Employee Directors." This amended and restated Plan shall be effective as of January 1, 1993, except that the amendment and restatement of Article 4 shall be effective as of May 1, 1991. B. Status of Plan. The Plan is intended neither to be a qualified plan within the meaning of I.R.C. section 401(a) nor to constitute a "pension benefit plan" or a "welfare benefit plan" subject to the requirements of the Employee Retirement Income Security Act of 1974. The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent. ARTICLE II. Definitions Whenever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context: A. "Account" means, for each Participant, the account maintained for his or her benefit under Section 4.2. B. "Board" means the Board of Directors of the Company. C. "Committee" means the Compensation Committee of the Board. D. "Common Stock" means the Common Stock, $1.00 par value, of the Company. E. "Company" means Harcourt General, Inc., formerly General Cinema Corporation, a Delaware corporation, and any successor to all or substantially all of the Company's assets or business which assumes the obligations of the Company. F. "Compensation" means the amount of Retainer payable for service on the Board, plus any fees payable for attendance at a meeting, for service as Chair or Vice Chair of the Board, or for service on or as a chair of any committee of the Board, determined without reduction for any elective deferrals under Article 4. G. "Effective Date" means January 1, 1993, except that Article 4 shall be effective as of May 1, 1991. H. "Market Price" means, as of any date, the mean of the highest and lowest sales prices of the Common Stock on such date (or, if no trading shall have occurred on such date, on the next previous date on which trading shall have occurred), as reported on the New York Stock Exchange Composite Tape. I. "Non-Employee Director" means a member of the Board who is not an officer or employee of the Company or any of its subsidiaries. J. "Participant" means any Non-Employee Director who participates in the Plan as set forth in Article 3. K. "Plan" means the Harcourt General, Inc. Deferred Compensation and Retirement Income Plan for Non-Employee Directors as set forth herein and all subsequent amendments hereto. L. "Plan Year" means the calendar year. M. "Prior Plan" means the General Cinema Corporation Deferred Compensation Plan for Non-Employee Directors, effective April 20, 1990. N. "Retainer" means the amount of retainer payable for service on the Board, exclusive of any fees payable for attendance at a meeting, for service as Chair or Vice Chair of the Board, or for service on or as a chair of any committee of the Board, and determined without reduction for any elective deferrals under Article 4. O. "Unforeseen Emergency" means a severe financial hardship to a Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in I.R.C. section 152(a)) of the Participant, loss of property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. P. "Year of Service" means a 12-month period of service as a Non-Employee Director, including periods of service before the Effective Date of the Plan. ARTICLE III. Participation A. Commencement of participation. Each Non-Employee Director shall become a Participant in this Plan upon the later of (a) the Effective Date or (b) the day on which he or she becomes a Non-Employee Director. B. Continuation of participation. An individual who has become a Participant in the Plan shall continue to be a Participant so long as he or she remains a Non-Employee Director, and so long thereafter as any amount is payable to him or her in accordance with Article 4 or 5. ARTICLE IV. Elective Deferrals A. Elective deferrals. An individual who is a Non- Employee Director on any November 1 may elect to defer all or a specified portion of his or her Compensation for services to be performed on or after that date by filing a written election with the Committee before such November 1. In addition, an individual may elect before the date he or she becomes a Non-Employee Director, or within thirty (30) days thereafter, to defer all or a specified portion of all Compensation payable to the individual for services to be performed after such deferral election (or, if later, after the date he or she becomes a Non-Employee Director) by filing a written election with the Committee. Each deferral election under this Section 4.1 shall be made on a form approved or prescribed by the Committee and shall also specify the time and form of distribution of the amounts deferred and the investment equivalent alternative described in Section 4.3 to be applied to such amounts. Each such election may be revoked or modified, effective for amounts earned on and after any November 1, by an election filed before that November 1, but may not otherwise be revoked or modified except as provided in Section 4.7 in the event of an Unforeseen Emergency. B. Accounts. The Committee shall maintain a bookkeeping account for each Participant reflecting elective deferrals made for the Participant's benefit under Section 4.1, or under the Prior Plan, and interest credited to such elective deferrals in accordance with Section 4.3, together with any adjustments hereunder. Elective deferrals shall be credited to the Account as of the day such amounts become payable to the Participant. As of each February 15th, the Committee shall provide the Participant with a statement of his or her Account as of the end of the preceding Plan Year. C. Investment equivalent alternatives. When a Participant elects to make elective deferrals in accordance with Section 4.1, he or she shall also elect whether interest shall be credited to such elective deferrals under the cash-based option or the stock- based option described below. (a) Cash-Based Option: Under the cash-based option, elective deferrals shall accrue interest, to be compounded at the end of each fiscal quarter of the Company, at a rate equal to the average of the top rates paid by major New York banks on primary new issues of three-month negotiable certificates of deposit (usually on amounts of $1,000,000 or more) as quoted in the Wall Street Journal on the last business day of the fiscal quarter. (b) Stock-Based Option: Under the stock-based option, elective deferrals will be converted hypothetically into Common Stock equivalent units. The number of such units shall be determined by dividing the amount of elective deferrals in each fiscal quarter by the average of the Market Prices of the Common Stock during the last five (5) trading days of such fiscal quarter. Units will be calculated to the nearest thousandth. On each dividend payment date for the Common Stock, dividend equivalents in the form of additional units representing Common Stock will be credited to the Participant's Account equal to (i) the per-share cash dividend divided by the Market Price of Common Stock on the payment date, multiplied by (ii) the number of such units reflected in such Account on the day before the dividend payment date. At the end of the period of deferral elected by the Participant, the Common Stock equivalent units will be valued for payment by multiplying the applicable number of units by the average of the Market Prices of Common Stock during the last ten (10) trading days before the date on which the elective deferrals (and interest attributable thereto) are to be paid (or on which payments are to commence). If the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to such shares of Common Stock or other securities through merger, consolidation, sale of all or substantially all the property of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other distribution with respect to such shares of Common Stock or other securities, appropriate adjustments will be made by the Company in the number of Common Stock equivalent units credited to a Participant's Account. D. Time of payment. When a Participant elects to make elective deferrals in accordance with Section 4.1, the Participant shall also elect whether the elective deferrals (including interest attributable thereto) shall be paid, or begin to be paid, (a) at a specified date at least twenty-four months in the future (which date shall be the last day of a fiscal quarter) or (b) upon termination of his or her service as a member of the Board. If alternative (a) under this Section 4.4 is elected, payment will be made or will commence on the date specified. If alternative (b) under this Section 4.4 is elected, payment will be made or will commence at the end of the fiscal quarter in which the Participant's service as a member of the Board terminates. The foregoing election shall be made on a form approved or prescribed by the Committee. Payment of a Participant's Account shall be made in accordance with the Participant's elections under this Section 4.4 and Section 4.5. Each Participant's Account shall be reduced by the amount of any payment made to or on behalf of the Participant (including interest paid with respect to such payment) as of the date such payment is made. E. Form of payment. When a Participant elects to make elective deferrals in accordance with Section 4.1, the Participant shall also elect whether such elective deferrals (including interest attributable thereto) shall be paid in (a) a lump sum, or (b) a specified number of annual installments (not to exceed 10). Each installment (other than the first) shall accrue interest from the date of the first installment to the date on which such installment is paid, compounded quarterly at a rate equal to the average of the top rates paid by major New York banks on primary new issues of three-month negotiable certificates of deposit (usually on amounts of $1,000,000 or more) as quoted in the Wall Street Journal on the last business day of the fiscal quarter. The foregoing election shall be made on a form approved or prescribed by the Committee. F. Death prior to payment. In the event that a Participant dies prior to complete distribution of his or her Account, the balance of his or her Account shall be paid in a single lump sum to the beneficiary or beneficiaries designated by the Participant. If no such beneficiary has been designated or if no designated beneficiary survives the Participant, the balance of such Account shall be paid to the Participant's estate. Payment of such amount shall be made within sixty (60) days from the date of receipt by the office of the Secretary of the Company of notice of the Participant's death. Such designation or designations of beneficiary must be in writing, dated, signed by the Participant and acknowledged before a notary public, and no such designation shall require Company consent. No beneficiary designation shall be deemed effective unless the same is on file in the office of the Secretary of the Company prior to the death of the Participant. The Company may rely in all cases on the genuineness, accuracy and date of any such beneficiary designation and shall be fully protected in making payment in accordance therewith. Any beneficiary designation filed in the office of the Secretary of the Company prior to the death of the Participant shall be deemed to have revoked all earlier designations, and no beneficiary designation filed after the date of a Participant's death shall be deemed effective. G. Unforeseen Emergency. A Participant who has an Unforeseen Emergency may, with the consent of a majority of the disinterested members of the Committee, receive a distribution of that portion of his or her Account as to which interest is being credited under the cash-based option described in Section 4.3(a) and which the Committee determines is necessary to satisfy the emergency need, including any amounts necessary to pay any federal, state or local income taxes reasonably anticipated to result from the distribution, but only to the extent such need is not covered by insurance and cannot reasonably be relieved by the liquidation of the Participant's assets (to the extent that such liquidation would not in itself cause a severe financial hardship) or by cessation of elective deferrals under the Plan. A Participant who has an Unforeseen Emergency may also cease or reduce future deferrals under the Plan with the consent of a majority of the disinterested members of the Committee. A Participant requesting a distribution, or a cessation or reduction of future deferrals, on account of an Unforeseen Emergency shall apply in writing in a letter submitted to the Committee and shall provide such information as the Committee may require. ARTICLE V. Retirement Income Benefits A. Retirement income benefits. Except as provided in Section 5.2, each Participant who has completed ten (10) or more Years of Service shall be entitled upon the termination of his or her service as a member of the Board to receive an annual retirement income benefit equal to the amount of the annual Retainer in effect at the time of such termination of service. Such retirement income benefit shall be payable in quarterly installments which begin as of the last day of the fiscal quarter in which the Participant's service terminates and which continue for a period equal to the Participant's Years of Service (including fractional years), but not beyond the Participant's lifetime. The retirement income payment for the first fiscal quarter shall be deferred to the extent necessary so that the sum of such payment and any Retainer payable for such quarter (and the amount paid for any subsequent quarter) shall not exceed one full quarterly Retainer payment. Any benefit otherwise payable for the fiscal quarter in which the Participant dies shall be multiplied by a fraction equal to that fraction of the fiscal quarter that preceded the Participant's death. Such prorated benefit shall be payable in accordance with the provisions of Section 4.6 above. No benefit shall be paid under this Section 5.1 for any fiscal quarter that begins after the Participant's death. B. Forfeitures. Notwithstanding any provision of the Plan to the contrary, no retirement income benefit shall be payable under Section 5.1 to a Participant who, while a member of the Board or after ceasing to be a member of the Board, engages in behavior which, in the sole discretion of the Board, casts such discredit on the Participant, the Board or the Company as to justify a forfeiture of retirement income benefits. In addition, in the event a Participant receiving retirement income benefits under Section 5.1 joins the board of directors or becomes an executive officer of a competitor of the Company within three years of the termination of his or her service as a member of the Board, such Participant shall immediately forfeit any remaining retirement income benefits payable to him or her under Section 5.1. The Board's decision as to the applicability of this Section 5.2 in any case shall be conclusive and binding on all persons. ARTICLE VI. Administration A. Plan administration and interpretation. The Plan shall be administered by the Committee which may appoint persons to assist in the administration of the Plan. The Committee shall have complete control and authority to determine the rights and benefits and all claims, demands and actions arising out of the provisions of the Plan of any Participant or other person having or claiming to have any interest under the Plan. The Committee shall have the exclusive power to interpret the Plan and to decide all matters under the Plan. Such interpretation and decision shall be final, conclusive and binding on all Participants and any person claiming under or through any Participant, in the absence of clear and convincing evidence that the Committee acted arbitrarily and capriciously. Any individual serving on the Committee who is a Participant will not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company. B. Powers, duties, procedures, etc. The Committee shall have such powers and duties, may adopt such rules and tables, may act in accordance with such procedures, may appoint such officers or agents, and may delegate such powers and duties as it deems necessary or advisable for the administration of the Plan. C. Information. To enable the Committee to perform its functions, the Company shall supply full and timely information to the Committee on all matters relating to the service of Participants as a member of the Board and such other pertinent facts as the Committee may require. ARTICLE VII. Amendment and Termination A. Amendments. The Board shall have the right to amend this Plan from time to time, subject to Section 7.3, by an instrument in writing approved by the Board and executed on the Company's behalf by a duly authorized officer. B. Termination of Plan. The Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Participant or a consideration for, or an inducement or condition of, the performance of services by any Participant as a member of the Board. The Board reserves the right to terminate this Plan at any time, subject to Section 7.3, by an instrument in writing approved by the Board and executed on the Company's behalf by a duly authorized officer. Upon termination of the Plan, no further benefits shall accrue on behalf of any individual then a Participant, nor shall any individual not a Participant as of the date of termination be eligible to become a Participant thereafter. C. Existing rights. No amendment or termination of the Plan shall reduce: (a) any benefits payable to (or in respect of) a Participant who has ceased to be a member of the Board, or (b) any benefits to which a current Board member would have been entitled, currently or in the future, in the event his or her service as a Board member had terminated on the date of such amendment or termination. ARTICLE VIII. Miscellaneous A. No funding. Nothing in the Plan will be construed to create a trust or to obligate the Company or any other person to segregate a fund, purchase an insurance contract, or in any other way currently to fund the future payment of any benefits hereunder, nor will anything herein be construed to give any Participant or any other person rights to any specific assets of the Company or of any other person. The Plan constitutes a mere promise by the Company to make benefit payments in the future, and is intended to be unfunded for tax purposes. Any benefits which become payable hereunder shall be paid from the general assets of the Company, and the rights of any Participant or of his or her estate or beneficiary shall be those of an unsecured general creditor. B. Grantor trust. The Company in its sole discretion may establish a trust (a "grantor trust") of which it is treated as the owner under Subpart E of Subchapter J, Chapter 1 of the Code to provide for the payment of benefits hereunder, subject to the claims of the Company's general creditors in the event of insolvency, and subject to such other terms and conditions as the Company may deem necessary or advisable to ensure that benefits are not includable, by reason of the trust, in the income of trust beneficiaries prior to their actual distribution. C. Nonassignability. None of the benefits, payments, proceeds or claims of any Participant shall be subject to any claim of any creditor and, in particular, the same shall not be subject to attachment or garnishment or other legal process by any creditor of the Participant or his or her beneficiary, nor shall any Participant or beneficiary have any right to alienate, anticipate, commute, pledge, sell, transfer, encumber or assign any of the benefits or payments or proceeds which he or she may expect to receive, contingently or otherwise, under the Plan. D. Limitation of Participants' rights. Participation in the Plan shall not give any Participant the right to be retained as a member of the Board or any right or interest in the Plan other than as herein provided. E. Participants bound. Any action with respect to this Plan taken by the Committee, the Board or the Company or any action authorized by or taken at the direction of the Committee, the Board or the Company shall be conclusive upon all Participants entitled to benefits under the Plan. F. Receipt and release. Any payment to any Participant in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Company, the Board and the Committee under the Plan, and the Committee may require such Participant, as a condition precedent to such payment, to execute a receipt and release to such effect. If any Participant is determined by the Committee to be incompetent by reason of physical or mental disability to give a valid receipt and release, the Committee may cause the payment or payments becoming due to such person to be made to another person for his or her benefit without responsibility on the part of the Committee, the Board or the Company to follow the application of such funds. G. Notices. All notices and elections to be delivered hereunder shall be delivered to the attention of the Secretary of the Company. H. Governing law. The Plan shall be construed, administered, and governed in all respects under and by the laws of the Commonwealth of Massachusetts. If any provision shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. I. Headings and subheadings. Headings and subheadings in this Plan are inserted for convenience only and are not to be considered in the construction of the provisions hereof. IN WITNESS WHEREOF, Harcourt General, Inc. has caused this Plan to be executed by its duly authorized officer this ______ day of _______________, 1993. HARCOURT GENERAL, INC. By: s/ EX-10.11 4 INTERCOMPANY SERVICES AGREEMENT Exhibit 10.11 INTERCOMPANY SERVICES AGREEMENT This Intercompany Services Agreement ("Agreement"), dated as of December 14, 1993, between Harcourt General, Inc., a Delaware corporation ("Harcourt"), and GC Companies, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company is a wholly owned subsidiary of Harcourt; WHEREAS, the Board of Directors of Harcourt has approved a transaction in which Harcourt's theatre business will be transferred to the Company, all of the shares of stock in the Company will be distributed to the shareholders of Harcourt, and the Company will become a publicly owned corporation (the "Spinoff"); WHEREAS, Harcourt is willing effective November 1, 1993 to provide many of the corporate services to the Company heretofore provided by it to the theatre business and such corporate services as may be required by a publicly owned corporation, and the Company desires to receive and pay for such services, as provided herein; NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained in this Agreement, Harcourt and the Company hereby agree as follows: 1. Corporate Services To Be Made Available. For the period provided for under paragraph 6 hereof, Harcourt agrees to make available to the Company, and the Company agrees to purchase from Harcourt, the services described below, together with such other services as to which Harcourt and the Company may from time to time agree (collectively the "Corporate Services"), on the terms provided herein: (a) auditing, accounting, payroll, and bookkeeping advice and services, to be provided by Harcourt's internal accounting and auditing staff; (b) legal advice and services to be provided by Harcourt's internal legal staff, including, without limitation, assistance with respect to claims which may be or have been asserted or are the subject of litigation (provided that Harcourt's internal legal staff shall not provide services to the Company with respect to any disagreements between Harcourt and the Company); the preparation and review of documents involving loans, financing transactions, real estate matters, contracts and disclosure relating to reporting requirements under the federal securities laws; consultation related to legal and administrative proceedings and compliance with applicable laws and regulations; (c) tax advice and services, including, without limitation, the preparation of federal, state and local tax returns, to be provided by Harcourt's internal tax staff; (d) accounting services related to financial reporting and the preparation of financial statements and disclosure documents required under the federal securities laws, to be provided by Harcourt's controller's staff; (e) financial advice and services, including, without limitation, assistance with respect to the raising of additional capital, cash management, treasury management, and risk management services, to be provided by Harcourt's corporate and treasury staff; (f) personnel advice and services, including, without limitation, the administration of employee insurance plans, pension plans, compensation, incentive, retirement and benefit plans, to be provided by Harcourt's human resources staff; and (g) assistance in organizational matters associated with shareholders' meetings and meetings of the board of directors and the committees of the board, assistance in preparation of certain public documents, including, without limitation, preparation of annual and quarterly reports and proxy statements, and in administration of compensation, incentive, benefit and retirement plans, and such other management and other services, not specified herein, which are of the type normally performed by the corporate staffs of public corporations, to be provided by Harcourt's corporate staff. Harcourt and the Company will cooperate in planning the scope and timing of the Corporate Services provided by Harcourt under this Agreement in order to minimize or eliminate interference with the conduct of Harcourt's business activities. If such interference is unavoidable, Harcourt will apportion, in its sole discretion, the available services in a fair and reasonable manner. 2. Standard of Conduct. In providing Corporate Services to the Company, Harcourt's officers and employees shall conduct themselves in accordance with the Company's written policies and procedures. Harcourt will use reasonable efforts in providing the Corporate Services to the Company and will perform such services with the same degree of care, skill and prudence customarily exercised for its own operations. To the extent possible, such Corporate Services will be substantially identical in nature and quality to the services currently provided or otherwise made available during the term of this Agreement by Harcourt to its subsidiaries and their respective operating divisions, including Harcourt's theatre division. Notwithstanding the foregoing, in providing such Corporate Services Harcourt and its directors, officers and employees will not be responsible for and shall have no liability for the accuracy, completeness or timeliness of any advice or service or any return, report, filing or other document which it or any of them provides, prepares or assists in preparing, except to the extent that any inaccuracy, incompleteness or untimeliness arises from the gross negligence or willful misconduct of Harcourt or its directors, officers or employees. The Company shall indemnify, defend and hold harmless Harcourt and its directors, officers and employees from and against any and all damage, cost, loss, liability and expense (including reasonable attorneys fees) in connection with any and all actions or threatened actions arising out of the performance of the Corporate Services hereunder, except in circumstances where the party that would otherwise be indemnified hereunder is found by a court of competent jurisdiction to have not met the standard of care described in the preceding sentence. In no event will Harcourt or its directors, officers or employees be liable for any indirect, special or consequential damages in connection with or arising out of the performance of Corporate Services under this Agreement. 3. Cost of Services. (a) Promptly following the completion of the Spinoff, Harcourt and the Company shall estimate the probable level of Corporate Services to be provided under this Agreement and shall agree upon the amount of the fee to be paid to Harcourt by the Company for the Company's fiscal year ending October 31, 1994, on the assumption that such estimated level of Corporate Services will actually be provided. In determining the fee to be paid, Harcourt and the Company shall value Corporate Services based on Harcourt's direct and indirect costs allocable thereto, calculated in accordance with Harcourt's usual accounting practices. (b) The Company agrees to pay to Harcourt on the first business day of each fiscal quarter (except that the payment for the fiscal quarter beginning November 1, 1993 shall be made promptly after the initial determination of the fee in accordance with subparagraph (a)) that portion of the fee, determined initially as set forth in subparagraph (a) and subject to adjustment in accordance with subparagraph (c), attributable to the Corporate Services to be provided by Harcourt during such quarter. (c) As soon as practicable after the end of fiscal 1994, but in no event later than January 31, 1995, Harcourt and the Company shall, based on a detailed review, determine the actual level of Corporate Services rendered by Harcourt during fiscal 1994 and make such adjustments in the fee as is necessary to reflect such level. Harcourt shall cause its employees to keep records of the time they devote in providing Corporate Services to the Company, in order to facilitate such review and determination and to permit a proper adjustment to be made. With the benefit of experience, Harcourt and the Company shall estimate the level of Corporate Services to be provided for the Company's fiscal years subsequent to fiscal 1994, and shall follow the same procedures for payment, review and adjustment. (d) The Company also agrees to reimburse Harcourt, within 15 business days of presentation of invoices therefor, for all reasonable out-of-pocket expenses incurred by Harcourt in providing Corporate Services. (e) In addition, the Company agrees to reimburse Harcourt within 15 business days of presentation of invoices therefor, for all reasonable expenses for outside professional services incurred by Harcourt for the benefit of the Company, including, without limitation, public accounting services, outside legal services, actuarial services, banking and financial advisory services, property tax and personnel consulting services, and outside marketing, public relations and appraisal services. (f) The failure of the Company to make any payment hereunder within 30 days of the date such payment is due shall result in the Company owing Harcourt interest at the rate of 10% per annum on the amount due from the date payable to the actual payment date. 4. Requirement of Approval By Independent Directors of the Company. All determinations on behalf of the Company made pursuant to paragraphs 3 and 6 hereof must be approved by a committee consisting solely of directors of the Company who are not employed by or otherwise affiliated with Harcourt (the "Independent Committee"). In carrying out its duties pursuant to this Agreement, the Independent Committee may retain such independent accountants, lawyers and other experts as it deems necessary or prudent to retain, and the expenses of all such professionals shall be reimbursed by the Company. 5. Information and Witnesses. Harcourt shall provide to the Company and the Company shall provide to Harcourt, upon the other's written request, at reasonable times, full and complete access to, and duplication rights with respect to, any and all Information, as defined below, as the other may reasonably request and require, and Harcourt shall use its best efforts to make available to the Company, and the Company shall use its best efforts to make available to Harcourt, upon the other's written request, the officers, directors, employees and agents of Harcourt and of the Company, respectively, as witnesses to the extent that such persons may reasonably be required in connection with any legal, administrative or other proceedings in which the Company or Harcourt, as the case may be, may from time to time be a party; provided, however, that neither Harcourt nor the Company need provide any Information or make available witnesses to the other to the extent that doing so would (i) unreasonably interfere with the performance by any person of such person's duties to the party to which a request under this paragraph 5 is made or otherwise cause unreasonable burden to such party, (ii) result in a waiver of any attorney-client or work product privilege of such party or its legal counsel, (iii) require either Harcourt or the Company to provide any Information which relates to the subject matter of any legal, administrative or other proceeding in which Harcourt and the Company are adverse parties, or (iv) result in any breach of any agreement with a third party; and provided, further, that the party providing Information or making available witnesses pursuant to this paragraph 5 shall be entitled to receive from the other party, upon presentation of reasonably detailed invoices therefor, payment of its reasonable out-of-pocket costs (including reasonable attorneys' fees) incurred in connection with providing Information or making witnesses available. The term "Information" as used in this paragraph 5 means any books, records, contracts, instruments, data, facts and other information in the possession or under the control of either Harcourt or the Company and necessary or desirable for use in legal, administrative or other proceedings or for auditing, accounting or tax purposes. 6. Term of Agreement. This Agreement shall become effective as of November 1, 1993, shall remain in effect through October 31, 1994, and shall continue in effect thereafter unless terminated as of the end of a month, with respect to the performance of Corporate Services in whole or in part, by either party upon not less than 90 days' written notice. Termination of Corporate Services in part shall not result in the termination of this Agreement. Termination of Corporate Services in whole shall result in the termination of this Agreement except that the obligations of the parties under paragraphs 3, 5 and 9 shall continue after such termination. A final fee adjustment on the basis described in paragraph 3(c) shall be made within 90 days of the date as of which Corporate Services are terminated in whole. An appropriate revision of quarterly fees remaining to be paid shall be made following the date as of which Corporate Services are terminated in part. 7. Independence. All employees and representatives of Harcourt providing the Corporate Services to the Company will be deemed for purposes of all compensation and employee benefits to be employees or representatives of Harcourt and not employees or representatives of the Company. In performing such services such employees and representatives will be under the direction, control and supervision of Harcourt (and not of the Company) and Harcourt will have the sole right to exercise all authority with respect to the employment (including termination of employment), assignment and compensation of such employees and representatives. 8. Independent Contractor. The relationship of Harcourt to the Company which is created hereunder is that of an independent contractor. This Agreement is not intended to create and shall not be construed as creating between the Company and Harcourt the relationship of affiliate, principal and agent, joint venture, partnership, or any other similar relationship, the existence of which is hereby expressly denied. 9. Confidentiality. Any and all information which is not generally known to the public which is exchanged between the parties in connection with the performance of this Agreement, whether of a technical or business nature, shall be considered to be confidential. The parties agree that confidential information shall not be disclosed to any third party or parties without the written consent of the other party, except as permitted below. Each party shall take reasonable measures to protect against disclosure of confidential information by its officers, employees and agents. Confidential information shall not include any information (i) which is or becomes part of the public domain other than as a result of the breach of a party's obligation hereunder, (ii) which is obtained from third parties who are not bound by confidentiality obligations or (iii) which is required to be disclosed by law or the rules of any state or Federal regulatory agency or any securities exchange (including NASDAQ) on which the Company's or Harcourt's securities might be listed for trading. The provisions of this section shall survive the termination of this Agreement. 10. Miscellaneous. (a) Nonassignability of Agreement. Except by operation of law or in connection with the sale of all or substantially all the assets of a party hereto, this Agreement shall not be assignable, in whole or in part, directly or indirectly, by either party hereto without the prior written consent of the other, and any attempt to assign any rights or obligations arising under this Agreement without such consent shall be void; provided, however, that the provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by Harcourt and the Company and their respective successors and permitted assigns. (b) Further Assurances. Subject to the provisions hereof, each of the parties hereto shall make, execute, acknowledge and deliver such other actions and documents as may be reasonably required in order to effectuate the purposes of this Agreement, and to comply with all applicable laws, regulations, orders and decrees, and obtain all required consents and approvals and make all required filings with any governmental agency, other regulatory or administrative agency, commission or similar authority, as may be necessary or desirable in this connection. (c) Waivers. No failure or delay on the part of Harcourt or the Company in exercising any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, or any abandonment or discontinuance of steps to enforce such a right, preclude any other or further exercise thereof or the exercise of any other right. No modification or waiver of any provision of this Agreement nor consent to any departure by Harcourt or the Company therefrom shall in any event be effective unless the same shall be in writing, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Any consent or waiver by the Company under this paragraph 10(c) shall be approved by the Independent Committee. (d) Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the transactions contemplated hereby. (e) Amendments. This Agreement may be amended or supplemented only in writing executed by the parties hereto under authorization by their respective Boards of Directors (including, in the case of the Company, the approval of the Independent Committee). (f) Notices. All notices, approvals and other communications provided for herein shall be validly given, made or served, if in writing and delivered personally, by telegram or by telephonic facsimile transmission, or sent by registered mail, postage prepaid, to: The Company at: 27 Boylston Street Chestnut Hill, MA 02167 Attention: President Harcourt at: 27 Boylston Street Chestnut Hill, MA 02167 Attention: President and shall become effective upon receipt. (g) Governing Law. Despite any different result required by any conflicts of law provisions, this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. (h) Force Majeure. Anything else in this Agreement notwithstanding, Harcourt shall be excused from performance hereunder while, and to the extent that, its performance is prevented by fire, drought, explosion, flood, invasion, rebellion, earthquake, civil commotion, strike or labor disturbance, governmental or military authority, act of God, mechanical failure or any other event or casualty beyond the reasonable control of Harcourt, whether similar or dissimilar to those enumerated in this paragraph (hereafter a "Casualty"). In the event of a Casualty, the Company shall be responsible for making its own alternative arrangements with respect to the interrupted services. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. HARCOURT GENERAL, INC. s/Robert J. Tarr, Jr. Robert J. Tarr, Jr. President and Chief Executive Officer GC COMPANIES, INC. s/Richard A. Smith Richard A. Smith Chairman, President and Chief Executive Officer EX-10.12 5 REIMBURSEMENT AND SECURITY AGREEMENT EXHIBIT 10.12 REIMBURSEMENT AND SECURITY AGREEMENT Dated as of December 14, 1993 TABLE OF CONTENTS PAGE 1. Definitions; Certain Rules of Construction . . . . . . . . 1 2. Certain Payment Provisions . . . . . . . . . . . . . . . . 12 2.1. Reimbursement and Indemnification . . . . . . . . . 12 2.2. Guarantor's Fee . . . . . . . . . . . . . . . . . . 12 2.3. Interest on Overdue Payments. . . . . . . . . . . . 12 3. General Covenants. . . . . . . . . . . . . . . . . . . . . 12 3.1. Financial Statements and Reports. . . . . . . . . . 12 3.1.1. Annual Reports . . . . . . . . . . . . . . 12 3.1.2. Quarterly Reports. . . . . . . . . . . . . 13 3.1.3. SEC Reports. . . . . . . . . . . . . . . . 14 3.1.4. Notice of Litigation; Notice of Defaults . . . . . . . . . . . . . . . . . 14 3.1.5. Certain Exceptions . . . . . . . . . . . . 15 3.1.6. Other Information. . . . . . . . . . . . . 15 3.2. Liens . . . . . . . . . . . . . . . . . . . . . . . 15 3.3. Distributions . . . . . . . . . . . . . . . . . . . 17 3.4. Merger, Consolidation and Dispositions of Assets. . 18 3.5. Issuance of Stock by Theatre Subsidiaries; Subsidiary Distributions . . . . . . . . . . . . . 18 3.5.1. Issuance of Stock by Subsidiaries. . . . . 18 3.5.2. No Restrictions on Subsidiary Distributions. . . . . . . . . . . . . . . 19 3.6. Guaranteed Leases and Transferred Leases. . . . . . 19 3.6.1. No Transfer. . . . . . . . . . . . . . . . 19 3.6.2. Amendments, Renewals, Extensions, Etc. . . 19 3.7. Conduct of Theatre Business . . . . . . . . . . . . 19 3.7.1. Theatre Subsidiaries . . . . . . . . . . . 19 3.7.2. Theatre Business . . . . . . . . . . . . . 19 4. First Tier Covenants . . . . . . . . . . . . . . . . . . . 20 4.1. Consolidated Net Worth. . . . . . . . . . . . . . . 20 4.2. Consolidated Adjusted Cash Flow to Consolidated Fixed Charges. . . . . . . . . . . . . . . . . . . 20 4.3. Consolidated Cash Flow to Consolidated Interest Charges. . . . . . . . . . . . . . . . . . . . . . 20 5. Second Tier Covenants. . . . . . . . . . . . . . . . . . . 20 5.1. Investments and Acquisitions. . . . . . . . . . . . 20 5.2. Financing Debt. . . . . . . . . . . . . . . . . . . 21 5.3. Distributions . . . . . . . . . . . . . . . . . . . 22 5.4. Capital Expenditures. . . . . . . . . . . . . . . . 22 5.5. Payment of Theatre Obligations. . . . . . . . . . . 23 6. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.1. Events of Default . . . . . . . . . . . . . . . . . 23 6.2. Certain Payments Upon an Event of Default . . . . . 25 6.3. Enforcement of Payment and Security following a Payment Default; Setoff. . . . . . . . . . . . . . 25 6.4. Specific Performance; Exercise of Rights. . . . . . 26 6.5. Cumulative Remedies . . . . . . . . . . . . . . . . 26 6.6. Annulment of Defaults . . . . . . . . . . . . . . . 26 6.7. Waivers . . . . . . . . . . . . . . . . . . . . . . 26 6.8. Obligations Absolute. . . . . . . . . . . . . . . . 27 7. Security . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.1. Credit Security . . . . . . . . . . . . . . . . . . 27 7.1.1. Pledged Stock. . . . . . . . . . . . . . . 27 7.1.2. Pledged Rights . . . . . . . . . . . . . . 27 7.1.3. Proceeds and Products. . . . . . . . . . . 28 7.2. Representations, Warranties and Covenants with Respect to the Security. . . . . . . . . . . . . . 28 7.2.1. Pledged Stock. . . . . . . . . . . . . . . 28 7.2.2. No Liens or Restrictions on Transfer or Change of Control. . . . . . . . . . . . . 28 7.2.3. Perfection of the Security . . . . . . . . 28 7.3. Administration of the Security. . . . . . . . . . . 28 7.3.1. Pledged Securities . . . . . . . . . . . . 29 7.4. Right to Realize upon Credit Security . . . . . . . 29 7.4.1. General Authority. . . . . . . . . . . . . 29 7.4.2. Marshaling, etc. . . . . . . . . . . . . . 30 7.4.3. Sales of Security. . . . . . . . . . . . . 31 7.4.4. Sale Without Registration. . . . . . . . . 32 7.4.5. Application of Proceeds. . . . . . . . . . 33 7.5. Custody of Credit Security. . . . . . . . . . . . . 33 8. Expenses; Indemnity. . . . . . . . . . . . . . . . . . . . 33 8.1. Expenses. . . . . . . . . . . . . . . . . . . . . . 33 8.2. General Indemnity . . . . . . . . . . . . . . . . . 33 9. Successors and Assigns . . . . . . . . . . . . . . . . . . 34 10. Confidentiality . . . . . . . . . . . . . . . . . . . . . 34 11. Notices . . . . . . . . . . . . . . . . . . . . . . . . . 34 12. Course of Dealing; Amendments and Waivers . . . . . . . . 35 13. Termination and Defeasance. . . . . . . . . . . . . . . . 36 14. General . . . . . . . . . . . . . . . . . . . . . . . . . 36 REIMBURSEMENT AND SECURITY AGREEMENT This Reimbursement and Security Agreement, dated as of December 14, 1993, is between Harcourt General, Inc., a Delaware corporation ("Harcourt"), and GC Companies, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company is a wholly owned subsidiary of Harcourt. WHEREAS, the Board of Directors of Harcourt has approved a transaction in which Harcourt's theatre business will be transferred to the Company, all of the shares of stock of the Company will be distributed to the shareholders of Harcourt and the Company will become a publicly owned corporation (the "Spinoff"). WHEREAS, Harcourt has secondary liability with respect to leases for certain theatre properties assigned by Harcourt General to the Company and, in turn, assigned by the Company to certain subsidiaries of the Company. WHEREAS, Harcourt has guaranteed the obligations of subsidiaries of the Company under certain theatre leases to which such subsidiaries are parties. NOW THEREFORE, in consideration of the premises and of the mutual agreements, provisions, covenants and conditions contained in this Agreement and for other good and valuable consideration, Harcourt and the Company hereby agree as follows: 1. Definitions; Certain Rules of Construction. Except as specified to the contrary or unless the context clearly requires otherwise, (a) the word "including" shall be construed as "including without limitation", (b) accounting terms not otherwise defined herein shall have the meaning provided under GAAP, (c) terms defined in the UCC and not otherwise defined herein shall have the meaning provided under the UCC, and (d) the singular shall include the plural and vice versa. Certain capitalized terms are used in this Agreement as specifically defined as follows: 1.1. "Affiliate" means, with respect to any specified Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such specified Person; provided, however, that the Company and its Subsidiaries, on the one hand, and Harcourt and its Subsidiaries, on the other hand, shall not be deemed Affiliates of each other for purposes of this Agreement. 1.2. "Bankruptcy Code" means Title 11 of the United States Code (or any successor statute) and the rules and regulations thereunder. 1.3. "Bankruptcy Default" means an Event of Default referred to in Section 6.1.8. 1.4. "Capital Expenditures" means, for any period, amounts added or required to be added to the property, plant and equipment or other fixed assets account on the balance sheet of the Company or any of its Subsidiaries, prepared in accordance with GAAP. 1.5. "Capitalized Lease" means any lease which is required to be capitalized on the balance sheet of the lessee in accordance with GAAP, including Statement Nos. 13 and 98 of the Financial Accounting Standards Board. 1.6. "Capitalized Lease Obligations" means the amount of the liability reflecting the aggregate discounted amount of future payments under all Capitalized Leases calculated in accordance with GAAP, including Statement Nos. 13 and 98 of the Financial Accounting Standards Board. 1.7. "Cash Equivalents" means: (a) negotiable certificates of deposit, time deposits (including sweep accounts), demand deposits and bankers' acceptances issued by any United States financial institution having capital and surplus and undivided profits aggregating at least $100,000,000 and rated both Prime-1 by Moody's Investors Service, Inc. and A-1 by Standard & Poor's Corporation; (b) short-term corporate obligations rated both Prime-1 by Moody's Investors Service, Inc. and A-1 by Standard & Poor's Corporation; (c) any direct obligation of the United States of America or any agency or instrumentality thereof, or of any state or municipality thereof, (i) which has a remaining maturity at the time of purchase of not more than one year or (ii) which is subject to a repurchase agreement with any financial institution referred to in clause (a) above, exercisable within one year from the time of purchase and (iii) which, in the case of obligations of any state or municipality, is rated AA or better by Moody's Investors Service, Inc.; (d) any mutual fund or other pooled investment vehicle rated AA or better by Moody's Investors Service, Inc. which invests principally in obligations described above; and (e) repurchase agreements with respect to Securities described in clause (c) above with any financial institutions described in clause (a) above. 1.8. "Company" is defined in the introductory paragraph. 1.9. "Computation Covenant" means each of Sections 3.3, 3.4.4 and 4, and, if applicable, Sections 5.1.6, 5.2.3 and 5.4. 1.10. "Consolidated" and "Consolidating", when used with reference to any term, mean that term as applied to the accounts of the Company (or other specified Person) and all of its Subsidiaries (or other specified group of Persons), or such of its Subsidiaries as may be specified, consolidated (or combined) or consolidating (or combining), as the case may be, in accordance with GAAP and with appropriate deductions for minority interests in Subsidiaries. 1.11. "Consolidated Adjusted Cash Flow" means, for any period, the total of (a) Consolidated Net Income for such period plus (b) all amounts deducted in computing such Consolidated Net Income in respect of (i) depreciation and amortization, (ii) interest on Indebtedness (including payments in the nature of interest under Capitalized Leases), (iii) taxes based on or measured by net income and (iv) rental payments and accruals under operating leases for real property; provided, however, that Consolidated Adjusted Cash Flow for any period ending on or prior to October 31, 1993 shall be deemed to be Consolidated Adjusted Cash Flow specified for such period in Exhibit 1. 1.12. "Consolidated Cash Flow" means, for any period, the total of (a) Consolidated Net Income for such period, plus (b) all amounts deducted in computing such Consolidated Net Income in respect of (i) depreciation and amortization, (ii) interest on Indebtedness (including payments and accruals in the nature of interest under Capitalized Leases) and (iii) taxes based on or measured by net income; provided, however, that Consolidated Cash Flow for any period ending on or prior to October 31, 1993 shall be deemed to be Consolidated Cash Flow specified for such period in Exhibit 1. 1.13. "Consolidated Fixed Charges" means, for any period, the sum of: (a) Consolidated Interest Charges for such period, plus (b) the aggregate amount of all rental payments for real property operating leases accrued or paid by the Company and its Subsidiaries for such period. 1.14. "Consolidated Forecasted Charges" means for any period the sum of: (a) the aggregate amount of interest including payments in the nature of interest under Capitalized Leases required to be paid by the Company and its Subsidiaries during such period (whether such interest is to be reflected as an item of expense or capitalized); plus (b) the aggregate amount of minimum rental payments for real property operating leases required to be paid by the Company and its Subsidiaries during such period; plus (c) to the extent not included in clauses (a) and (b) above, the aggregate amount of cash payments that the Company and its Subsidiaries may be required to make during such period pursuant to contractual commitments, including without limitation, commitments to make Investments in cash either during such period or on demand; plus (d) the aggregate amount required to be paid by the Company and its Subsidiaries during such period pursuant to any final judgment rendered against the Company or any of its Subsidiaries by any court, tribunal or agency or pursuant to any settlement of litigation or other proceedings. For purposes of computing projected interest under the preceding sentence for any period: (i) it shall be assumed that the amount of Indebtedness outstanding on the first day of such period remains outstanding during the entire period except to the extent that such Indebtedness is subject to a mandatory payment of principal during such period; (ii) if the Company or any of its Subsidiaries has committed to incur additional Indebtedness during such period, interest on such Indebtedness will be taken into account from and after the date on which such Person is committed to incur it; and (iii) where interest varies with or depends on a floating rate, the rate in effect on the first day of such period will be assumed to be in effect and remain constant during the entire period for which interest is being computed. 1.15. "Consolidated Interest Charges" means, for any period, the aggregate amount of interest, including payments in the nature of interest under Capitalized Leases, paid or accrued by the Company and its Subsidiaries (whether such interest is reflected as an item of expense or capitalized) for such period in accordance with GAAP on a Consolidated basis. 1.16. "Consolidated Net Income" means, for any period, the net income (or loss) of the Company and its Subsidiaries for such period, determined in accordance with GAAP on a Consolidated basis excluding extraordinary gains (or losses); provided, however, the net losses for such period from Investments in Persons (other than Subsidiaries) by the Company or any of its Subsidiaries shall only be included to the extent that such net losses, together with net losses from such Investments for prior periods, exceeds $25,000,000. 1.17. "Consolidated Net Worth" means, at any date, stockholders' equity of the Company and the Subsidiaries at such date determined in accordance with GAAP on a Consolidated basis. 1.18. "Consolidated Trailing Theatre Cash Flow" means, as of the end of any fiscal quarter as of which the amount thereof shall be determined, two-thirds of the sum of (a) the net income (or loss) of the Theatre Subsidiaries for the 18-month period then ended determined in accordance with GAAP on a Consolidated basis, excluding extraordinary gains (or losses) plus (b) all amounts deducted in computing such consolidated net income (or loss) in respect of (i) depreciation and amortization, (ii) interest on indebtedness (including payments in the nature of interest under Capitalized Leases) and (iii) taxes based on or measured by net income; provided, however, that Consolidated Trailing Theatre Cash Flow for any 18-month period which includes any fiscal quarter ending on or prior to October 31, 1993 shall be calculated using Consolidated Trailing Theatre Cash Flow for such fiscal quarter specified for such fiscal quarter in Exhibit 1. 1.19. "Cumulative Consolidated Adjusted Net Income" means at the time of determination the total of (a) the net income (or loss) of the Company and its Subsidiaries for the period from November 1, 1993 through the fiscal quarter of the Company most recently ended, determined in accordance with GAAP on a Consolidated basis plus (b) all amounts deducted in computing such net income (or loss) in respect of depreciation and amortization. 1.20. "Default" means any Event of Default and any event or condition which with the passage of time or giving of notice, or both, would become an Event of Default. 1.21. "Distribution" means, with respect to the Company (or other specified Person): (a) the declaration or payment of any dividend, (other than dividends payable in shares of capital stock of the Company (or such specified Person)), on or in respect of any shares of any class of capital stock of the Company (or such specified Person); (b) the purchase, redemption or other retirement of any shares of any class of capital stock of the Company (or such specified Person), or of options, warrants or other rights for the purchase of such shares, directly, indirectly through a Subsidiary or otherwise; (c) any other distribution on or in respect of any shares of any class of equity of or beneficial interest in the Company (or such specified Person); (d) any prepayment, purchase, redemption or defeasance of any Subordinated Indebtedness of the Company (or such specified Person); and (e) any payment, loan or advance by the Company (or such specified Person) to, or any other Investment by the Company (or such specified Person) in, any beneficial owner of 5% or more of any class of capital stock of or other equity interest in the Company (or such specified Person) or any Affiliate of such beneficial owner; provided, however, that the term "Distribution" shall not include payments in the ordinary course of business in respect of (i) reasonable compensation paid to employees, officers and directors, (ii) advances to employees for travel expenses, drawing accounts and similar expenditures, (iii) rent paid to or account payables for services rendered or goods sold by non-Affiliates which may hold stock of the Company (or such specified Person), or (iv) intercompany accounts payable and real property leases to non-Affiliates which may hold stock of the Company (or such specified Person). For purposes of the proviso to Section 3.3, $1,000,000 in cash Distributions made by the Company to repurchase options or stock appreciation rights granted to employees of the Company and its Subsidiaries shall be excluded in determining the aggregate amount of Distributions made by the Company. 1.22. "Event of Default" is defined in Section 6.1. 1.23. "Exchange Act" means the federal Securities Exchange Act of 1934 (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. 1.24. "First Tier Default" means any failure by the Company to perform or observe the provisions of Section 4. 1.25. "Financing Debt" means: (a) Indebtedness in respect of borrowed money; (b) Indebtedness evidenced by notes, debentures or similar instruments; (c) Indebtedness in respect of Capitalized Lease Obligations; (d) Indebtedness in respect of the deferred purchase price of assets (other than normal trade accounts payable in the ordinary course of business); (e) Indebtedness in respect of mandatory redemption or dividend rights on capital stock (or other equity); (f) Indebtedness in respect of unfunded pension liabilities; and (g) Indebtedness consisting of reimbursement obligations with respect to letters of credit, security binders and other financial guarantees. 1.26. "GAAP" means generally accepted accounting principles as from time to time in effect including the statements and interpretations of the United States Financial Accounting Standards Board and any predecessor or successor entity; provided, however, that for purposes of compliance with Sections 3.3, 3.4.4, 4, and 5.4 and the related definitions, "GAAP" means such principles as in effect on October 31, 1993 as applied by the Company and its Subsidiaries in the preparation of their Consolidated financial statements for the fiscal year ending October 31, 1993, and consistently followed without giving effect to any subsequent changes therein other than changes consented to in writing by Harcourt. 1.27. "Guaranteed Lease" means a lease for real property, as from time to time in effect, which Harcourt has guaranteed pursuant to a Guarantee. 1.28. "Guarantees" means the respective guarantees provided by Harcourt to lessors of real property leased by Subsidiaries of the Company, as from time to time in effect. 1.29. "Harcourt" is defined in the introductory paragraph. 1.30. "Indebtedness" means all obligations, contingent or otherwise, which in accordance with GAAP are required to be classified upon the balance sheet of the Company (or other specified Person) as liabilities, but in any event including: (a) liabilities secured by any Lien existing on property owned or acquired by the Company (or such specified Person) whether or not the liability secured thereby shall have been assumed; (b) Capitalized Lease Obligations; (c) all guarantees and endorsements in respect of Indebtedness of others; (d) mandatory redemption, repurchase or dividend obligations with respect to capital stock or other equity interests; (e) unfunded pension liabilities; and (f) reimbursement obligations with respect to letters of credit, security binders and other financial guarantees. 1.31. "Indemnified Party" is defined in Section 8.2. 1.32. "Intercompany Services Agreement" means the Intercompany Services Agreement dated as of November 1, 1993, as from time to time in effect, between the Company and Harcourt. 1.33. "Investment" means, with respect to the Company (or other specified Person): (a) any share of capital stock, partnership or other equity interest, evidence of Indebtedness or other security issued by any other Person; (b) any loan, advance or extension of credit to, or contribution to the capital of, any other Person; (c) any guarantee of the Indebtedness of any other Person; (d) any acquisition of all or any part of the business of any other Person or the assets comprising such business or part thereof; (e) any commitment or option to make any Investment if the consideration for such commitment or option exceeds $1,000; and (f) any other similar investment. The investments described in the foregoing clauses (a) through (f) shall be included in the term "Investment" whether they are made or acquired by purchase, exchange, issuance of stock or other securities, merger, reorganization or any other method; provided, however, that the term "Investment" shall not include (i) current trade and customer accounts receivable for property leased, goods furnished or services rendered in the ordinary course of business and payable in accordance with customary trade terms, (ii) advances and prepayments to suppliers for property leased, goods furnished and services rendered in the ordinary course of business, (iii) advances to employees for travel expenses, drawing accounts and similar expenditures, (iv) stock or other securities acquired in connection with the satisfaction or enforcement of Indebtedness or claims due to the Company (or such specified Person) or as security for any such Indebtedness or claim or (v) demand deposits in banks or trust companies. 1.34. "Lease Exposure" means, at any time, the sum of the then present values of (i) all present and future rental payments and other amounts guaranteed by Harcourt under the Guarantees and (ii) all present and future rental payments and other amounts owing under the Transferred Leases, calculated by discounting each such rental payment and each such other amount from its payment date to the date of calculation of such present value at a per annum interest rate equal to the sum of (a) the then prevailing rate of interest on debt securities customarily issued by the Treasury of the United States having a ten year maturity date plus (b) .75%. 1.35. "Lien" means, with respect to the Company (or any other specified Person): (a) Any lien, encumbrance, mortgage, pledge, charge or security interest of any kind upon any property or assets of the Company (or such specified Person), whether now owned or hereafter acquired, or upon the income or profits therefrom. (b) Any arrangement or agreement which prohibits the Company (or such specified Person) from creating encumbrances, mortgages, pledges, liens, charges or security interests. (c) The acquisition of, or the agreement to acquire, any property or asset upon conditional sale or subject to any other title retention agreement, device or arrangement (including a Capitalized Lease). (d) The sale, assignment, pledge or transfer for security of any accounts, general intangibles or chattel paper of the Company (or such specified Person), with or without recourse. (e) The transfer of any tangible property or assets for the purpose of subjecting such items to the payment of Indebtedness in priority to payment of the general creditors of the Company (or such specified Person). (f) The existence for a period of more than 90 consecutive days of any Indebtedness against the Company (or such specified Person) which if unpaid would by law or upon a Bankruptcy Default be given any priority over general creditors. 1.36. "Nontheatre Subsidiaries" means any Subsidiary of the Company that is not a Theatre Subsidiary. 1.37. "Obligations" means all present and future liabilities, obligations and Indebtedness of the Company owing to Harcourt under or in connection with this Agreement, including interest and fees under Section 2, reimbursement, indemnification and guarantee obligations under Section 2, payment obligations under Sections 6.2 and 8.2 and other charges, indemnities and expenses from time to time owing hereunder (whether accruing before or after a Bankruptcy Default). 1.38. "Payment Default" means any failure by the Company to perform or observe the provisions of Section 2 or Section 6.2. 1.39. "Person" means any present or future natural person or any corporation, association, partnership, joint venture, company, business trust, trust, organization, business or government or any governmental agency or political subdivision thereof. 1.40. "Pledged Rights" is defined in Section 7.1.2. 1.41. "Pledged Securities" means, collectively, the Pledged Stock and the Pledged Rights. 1.42. "Pledged Stock" is defined in Section 7.1.1. 1.43. "PPI" means the Producer Price Index for Finished Goods published by the Bureau of Labor Statistics (1982 = 100). 1.44. "Securities Act" means the federal Securities Act of 1933 (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. 1.45. "Security" means all assets now or from time to time hereafter subjected to a security interest, mortgage or charge (or intended or required so to be subjected pursuant to this Agreement) to secure the payment or performance of any of the Obligations, including the assets described in Sections 7.1.1 through 7.1.3. 1.46. "Smith Family Group" means the group of Persons originally party to the Smith-Lurie/Marks Stockholders Agreement dated as of the date of the Spinoff (whether or not such agreement is terminated) and the progeny of each such Person. 1.47. "Spinoff" is defined in the Recitals. 1.48. "Subordinated Indebtedness" means Indebtedness of the Company (or other specified Person) which by its terms or any agreement is subordinated to the prior payment of any Financing Debt of the Company (or such specified Person). 1.49. "Subsidiary" means any Person of which the Company (or other specified Person) shall at the time, directly or indirectly through one or more of its Subsidiaries, (a) own at least 50% of the outstanding capital stock (or other shares of beneficial interest) entitled to vote generally, (b) hold at least 50% of the partnership, joint venture or similar interests or (c) be a general partner or joint venturer. 1.50. "Theatre Subsidiaries" means each present and future Subsidiary of the Company that is engaged in whole or in part in the business of (i) motion picture exhibition or (ii) managing the motion picture exhibition or concession business of any other Person. 1.51. "Transferred Leases" means the theatre leases transferred by Harcourt General to the Company and in turn by the Company to Subsidiaries of the Company in connection with the Spinoff, as from time to time in effect. 1.52. "UCC" means the Uniform Commercial Code as in effect in Massachusetts; provided, however, that with respect to the perfection of Harcourt's Lien on the Security and the effect of perfection or non perfection thereof, the term UCC shall mean the Uniform Commercial Code as in effect in any jurisdiction the laws of which are made applicable by Section 9-103 of the Uniform Commercial Code as in effect in Massachusetts. 1.53. "Wholly-Owned Subsidiary" means any Subsidiary of which all of the outstanding capital stock (or other shares of beneficial interest) entitled to vote generally (other than directors' qualifying shares) is owned by the Company (or other specified Person) directly or indirectly through one or more Wholly-Owned Subsidiaries. 2. Certain Payment Provisions. 2.1. Reimbursement and Indemnification. The Company hereby unconditionally and irrevocably agrees (a) to pay Harcourt, immediately upon written notice by Harcourt, any and all amounts paid by Harcourt pursuant to, or in respect of, any Guarantee or Transferred Lease and (b) to indemnify, defend and hold harmless Harcourt and its Affiliates and their respective directors, officers, employees and agents from and against any and all claims, losses, liabilities, damages, cost and expenses (including reasonable attorneys' fees and expenses) arising from or in connection with any Guarantee or Transferred Lease. 2.2. Guarantor's Fee. The Company will pay to Harcourt (a) a quarterly guarantor's fee for the quarter ending January 31, 1994 of $75,000 payable on the Distribution Date or promptly thereafter and (b) a quarterly guarantor's fee, payable in advance on the first business day of each November, February, May and August, commencing on February 1, 1994, in an amount equal to the product of (a) .015% multiplied by (b) the Lease Exposure as of such day. 2.3. Interest on Overdue Payments. The Company will, on demand, pay to Harcourt interest on any overdue payment required to be made under this Agreement at a per annum rate equal to 2% plus the rate of interest from time to time announced by The First National Bank of Boston as its "Base Rate". 3. General Covenants. The Company covenants that it will, and it will cause its Subsidiaries to, comply with the following provisions: 3.1. Financial Statements and Reports. 3.1.1. Annual Reports. The Company will furnish to Harcourt as soon as available, and in any event within 110 days after the end of each fiscal year, the Consolidated balance sheet of the Company and its Subsidiaries as at the end of such fiscal year, the Consolidated statements of income, of changes in shareholders' equity and of cash flows of the Company and its Subsidiaries for such fiscal year audited and certified by Deloitte & Touche (or, if they cease to be auditors of the Company and its Subsidiaries, other independent certified public accountants of recognized national standing), together with: (a) The statement of such accountants that they have caused this Agreement to be reviewed and that in the course of their audit of the Company and its Subsidiaries no facts have come to their attention that cause them to believe that any First Tier Default or any Default exists or, if such is not the case, specifying such First Tier Default or Default and the nature thereof; (b) A certificate of the Company signed by the chief financial officer or treasurer of the Company to the effect that such officer has caused this Agreement to be reviewed and has no knowledge of any First Tier Default or any Default, or if such officer has such knowledge, specifying such First Tier Default or Default and the nature thereof, and what action the Company has taken, is taking or proposes to take with respect thereto; (c) Computations by the Company demonstrating, as of the end of such fiscal year, compliance with the Computation Covenants; and (d) In the event of a change in GAAP after October 31, 1993, computations by the Company, certified by the chief financial officer or treasurer of the Company, reconciling the financial statements referred to above with the financial information used in the computations referred in Section 3.1.1(c); 3.1.2. Quarterly Reports. The Company will furnish to Harcourt as soon as available and, in any event, within 55 days after the end of each of the first three fiscal quarters of the Company, the internally prepared Consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal quarter, the Consolidated statements of income, of changes in shareholders' equity and of cash flows of the Company and its Subsidiaries for such month and for the portion of the fiscal year then ended, together with: (a) A certificate of the Company signed by the chief financial officer or treasurer of the Company to the effect that such financial statements have been prepared in accordance with GAAP and present fairly, in all material respects, the financial position of the Company and its Subsidiaries covered thereby at the dates thereof and the results of their operations for the periods covered thereby, subject only to normal year-end audit adjustments and the addition of footnotes; (b) Computations by the Company demonstrating, as of the end of such fiscal quarter, compliance with the Computation Covenants; (c) A certificate of the Company signed by the chief financial officer or treasurer of the Company to the effect that such officer has caused this Agreement to be reviewed and has no knowledge of any First Tier Default or any Default, or if such officer has such knowledge, specifying such First Tier Default and the nature thereof and what action the Company has taken, is taking or proposes to take with respect thereto; (d) In the event of a change in GAAP after October 31, 1993, computations by the Company, certified by the chief financial officer or treasurer of the Company, reconciling the financial statements referred to above with the financial information used in the computations referred to in Section 3.1.2(b). 3.1.3. SEC Reports. (a) The Company will promptly furnish to Harcourt such registration statements, proxy statements and reports as may be filed by the Company with the Securities and Exchange Commission. (b) Delivery by the Company to Harcourt of the Company's Annual Report on Form 10-K with respect to any fiscal year, and the Company's Quarterly Report on Form 10-Q with respect to any fiscal quarter, in each case as filed with the Securities and Exchange Commission, shall satisfy the Company's obligations to provide such of the financial statements described in the introductory paragraphs to Sections 3.1.1 and 3.1.2, as are contained in such report, provided that such report is provided to Harcourt within the time period specified in such introductory paragraph. 3.1.4. Notice of Litigation; Notice of Defaults. (a) The Company will promptly furnish to Harcourt notice of (i) any notice or other communication from any lessor that the Company or any Theatre Subsidiary is in default under any Guaranteed Lease or any Transferred Lease; (ii) any litigation or administrative or arbitration proceeding commenced, or to the knowledge of the Company, threatened, relating to any Guaranteed Lease or any Transferred Lease; and (iii) any other litigation or administrative or arbitration proceeding commenced, or to the knowledge of the Company threatened, against or relating to the Company or any of its Subsidiaries if the damages claimed in such proceeding are $5,000,000 or more or if such proceeding may result in a material adverse change in the business or assets or in the condition, financial or otherwise, of the Company and its Subsidiaries on a consolidated basis or of the Company on an individual basis; provided, however, that, so long as no notice of termination of legal services has been given under the Intercompany Services Agreement, and Harcourt General continues to be primarily responsible for the provision of legal services to the Company thereunder, no such notice need be given by the Company to Harcourt unless requested by Harcourt. (b) Promptly upon acquiring knowledge thereof, the Company will notify Harcourt of the existence of any First Tier Default or any Default, specifying the nature thereof and what action the Company or any Subsidiary has taken, is taking or proposes to take with respect thereto. 3.1.5. Certain Exceptions. Notwithstanding the provisions of Section 3.1.1, 3.1.2 and 3.1.3(a), so long as no notice of termination of accounting services has been given under the Intercompany Services Agreement, and Harcourt continues to provide accounting services thereunder, the Company shall not be required, unless otherwise requested by Harcourt, to furnish Harcourt with (a) the financial statements, certificates and computations specified in Section 3.1.1 or 3.1.2 or (b) the registration statements, proxy statements or reports specified in Section 3.1.3(a). 3.1.6. Other Information. From time to time upon request of any authorized officer of Harcourt, each of the Company and its Subsidiaries will furnish to Harcourt such other information regarding the business, assets, financial condition, income or prospects of the Company and its Subsidiaries as such officer may reasonably request. Harcourt's authorized officers and representatives shall have the right during normal business hours upon reasonable notice and at reasonable intervals to examine the books and records of the Company and its Subsidiaries, to make copies, notes and abstracts therefrom and to make an independent examination of such books and records for the purpose of verifying the accuracy of the reports delivered by any of the Company and its Subsidiaries pursuant to this Section 3.1 and ascertaining compliance with or obtaining enforcement of this Agreement. 3.2. Liens. Neither the Company nor any of its Subsidiaries shall create, incur or enter into, or suffer to be created or incurred or to exist, any Lien (including any arrangement or agreement which prohibits it from creating any Lien), except the following: 3.2.1. Liens on the Security which secure the Obligations for the benefit of Harcourt. 3.2.2. Liens to secure federal income taxes owing by Harcourt for periods beginning prior to the Spinoff. 3.2.3. Liens to secure other taxes and assessments and other governmental charges if the validity or amount of such tax, assessment or other governmental charge is being contested in good faith by the Company or any Subsidiary by appropriate proceedings (so long as the Company, or such Subsidiary, in accordance with GAAP, has set aside on its books adequate reserves with respect thereto); provided, however, that each of the Company and its Subsidiaries will pay or bond, or cause to be paid or bonded, all such taxes, assessments or other governmental charges immediately upon the commencement of proceedings to foreclose any Lien which may have attached as security therefor (except to the extent such proceedings shall have been dismissed or stayed). 3.2.4. Deposits or pledges made (a) in connection with, or to secure payment of, workers' compensation, unemployment insurance, old age pensions or other social security, (b) in connection with casualty insurance, (c) to secure the performance of bids, tenders, contracts (other than contracts relating to Financing Debt) or leases, (d) to secure statutory obligations or surety or appeal bonds, or (e) to secure indemnity, performance or other similar bonds in the ordinary course of business. 3.2.5. Liens in respect of judgments or awards (a) which have been in force for less than the applicable appeal period, so long as execution is not levied, or (b) in respect of which the Company or any Subsidiary of the Company shall at the time be prosecuting an appeal or proceeding for review, so long as execution thereof shall have been stayed pending such appeal or review and the Company or such Subsidiary shall have taken appropriate reserves therefor in accordance with GAAP. 3.2.6. Liens of carriers, warehousemen, mechanics and similar Liens, in each case being contested in good faith by the Company or any Subsidiary in appropriate proceedings (so long as the Company or such Subsidiary shall, in accordance with GAAP, have set aside on its books adequate reserves with respect thereto), which in each case do not materially detract from the value of any asset or other property material to the operations or business of the Company or any of its Subsidiaries or impair the use thereof in the business of the Company or any of its Subsidiaries. 3.2.7. Encumbrances in the nature of (a) zoning restrictions, (b) easements, (c) restrictions of record on the use of real property, (d) landlords' and lessors' Liens on rented premises and (e) restrictions on transfers or assignment of leases, which in each case do not materially detract from the value of any asset or other property material to the operations or business of the Company or any of its Subsidiaries or impair the use thereof in the business of the Company or any of its Subsidiaries. 3.2.8. Restrictions under federal and state securities laws on the transfer of securities. 3.2.9. Liens constituting (a) purchase money security interests existing or created on the date on which such property is acquired, and (b) the renewal, extension or refunding of any security interest referred to in the foregoing clause (a) in an amount not to exceed the amount thereof remaining unpaid immediately prior to such renewal, extension or refunding; provided, however, that each such security interest shall attach solely to the particular item of property so acquired, and the principal amount of Indebtedness (including Indebtedness in respect of Capitalized Lease Obligations) secured thereby shall not exceed the cost (including all such Indebtedness secured thereby, whether or not assumed) of such item of property. 3.2.10. Liens consisting of covenants contained in agreements relating to senior Financing Debt of the Company prohibiting the Company and its Subsidiaries from creating encumbrances, mortgages, liens, charges or security interests on their assets (other than Liens on the Security which secure the Obligations for the benefit of Harcourt). 3.3. Distributions. So long as no Event of Default has occurred and is continuing: (a) The Company may make Distributions from time to time so long as immediately before and after giving effect thereto there shall exist no First Tier Default; provided, however, that the aggregate amount of such Distributions, other than Distributions permitted by clause (b) of this Section 3.3, shall not exceed the sum of (i) $25,000,000 plus (ii) 50% of Cumulative Consolidated Adjusted Net Income plus (iii) the aggregate amount of net cash proceeds to the Company from the sale of equity securities of the Company after the date of the Spinoff plus (iv) the aggregate amount of Financing Debt of the Company which is converted into common stock of the Company after the date of the Spinoff minus (v) the aggregate amount of Capital Expenditures made by the Company and its Subsidiaries after October 31, 1993. (b) At such times when Distributions are prohibited under the proviso to Section 3.3(a), the Company may nevertheless make a Distribution so long as (i) immediately before and after giving effect thereto, there shall exist no First Tier Default and (ii) after giving effect to such Distribution, the total of (x) the aggregate amount of cash and Cash Equivalents of the Company and its Subsidiaries then on hand less (y) the aggregate principal amount of all Financing Debt of the Company and its Subsidiaries then outstanding, exceeds the aggregate amount of Consolidated Forecasted Charges for the twelve-month period immediately following such Distribution. 3.4. Merger, Consolidation and Dispositions of Assets. Neither the Company nor any of the Theatre Subsidiaries shall (a) become a party to any merger or consolidation or shall sell, lease, sell and leaseback, sublease or otherwise dispose of any of its assets, or (b) contract, or make other arrangements, with any Person (other than a Theatre Subsidiary) to manage the theatre business of, or provide concession services to, any Theatre Subsidiary, except the following: 3.4.1. Any Theatre Subsidiary may sell or otherwise dispose of (a) inventory in the ordinary course of business, (b) tangible assets to be replaced in the ordinary course of business by other tangible assets of equal or greater value and (c) tangible assets that are no longer used or useful in the business of the Company or such Theatre Subsidiary. 3.4.2. Any Theatre Subsidiary may merge or liquidate into any other Theatre Subsidiary so long as after giving effect thereto, the surviving company is a directly owned, Wholly Owned Subsidiary of the Company. 3.4.3. The Company may sell or otherwise dispose of Investments other than Investments in Theatre Subsidiaries. 3.4.4. In addition to assets sold and exchanged pursuant to Section 3.4.1, the Theatre Subsidiaries may sell assets at not less than fair market value; provided, however, that immediately after giving effect to each sale proposed to be made pursuant to this Section 3.4.4, the aggregate amount of Consolidated Trailing Theatre Cash Flow attributable to all assets sold and proposed to be sold pursuant to this Section 3.4.4 shall not exceed the amount equal to 10% of Consolidated Trailing Theatre Cash Flow determined as of the end of the fiscal quarter ending immediately prior to such proposed sale; and provided, further, that the aggregate amount of the above locations sold or otherwise disposed of in connection with sales made pursuant to this Section 3.4.4 shall not exceed 10% of the theatre locations operated by GCC and its subsidiaries as of October 31, 1993. 3.5. Issuance of Stock by Theatre Subsidiaries; Subsidiary Distributions. 3.5.1. Issuance of Stock by Subsidiaries. No present Theatre Subsidiary shall issue or sell any shares of its capital stock or other evidence of beneficial ownership to any Person other than the Company. 3.5.2. No Restrictions on Subsidiary Distributions. Except for this Agreement and agreements relating to senior Financing Debt of the Company, neither the Company nor any of its Subsidiaries shall enter into or be bound by any agreement (including covenants requiring the maintenance of specified amounts of net worth or working capital) restricting the right of any such Subsidiary to make Distributions or extensions of credit to the Company (directly or indirectly through another Subsidiary of the Company). 3.6. Guaranteed Leases and Transferred Leases. 3.6.1. No Transfer. No Theatre Subsidiary shall transfer, assign or sublease any Guaranteed Lease or any Transferred Lease to any other Person (other than another Theatre Subsidiary) without the prior written consent of Harcourt; provided, however, that the Theatre Subsidiaries may transfer and assign any Guaranteed Lease or Transferred Lease in connection with a sale of assets permitted under Section 3.4.4. 3.6.2. Amendments, Renewals, Extensions, Etc. No Theatre Subsidiary shall (a) amend, modify or terminate any Guaranteed Lease or Transferred Lease without the prior written consent of Harcourt if, as a result of such amendment, modification or termination, Harcourt's liability with respect to such Guaranteed Lease or Transferred Lease shall be increased or the time period for which Harcourt has any liability for such Guaranteed Lease or Transferred Lease shall be extended or (b) renew or extend the term of any Guaranteed Lease or any Transferred Lease without the prior written consent of Harcourt unless Harcourt shall not be liable for any Theatre Subsidiary's obligations with respect to such renewed or extended term. 3.7. Conduct of Theatre Business. 3.7.1. Theatre Subsidiaries. The Theatre Subsidiaries will engage only in the business of owing and operating theatres for motion picture exhibition and other activities incidental thereto. 3.7.2. Theatre Business. The Company's motion picture exhibition business and activities incidental thereto will be conducted only by the Theatre Subsidiaries. The Company shall own and hold all interests in the Theatre Subsidiaries directly and not indirectly through another Subsidiary of the Company; provided, however, that each of Knights Holding Corp., Knights Realty Corp. and Knights Theatre Corp. may be indirectly owned by the Company so long as it is inactive and does not engage in any operations or activities or own any material assets. 4. First Tier Covenants. The Company covenants that, at any time when Consolidated Net Worth is less than the then Lease Exposure, it will comply with the following provisions: 4.1. Consolidated Net Worth. Consolidated Net Worth shall not at any time be less than the total of (a) Consolidated Net Worth as of October 31, 1993 minus (b) $25,000,000. 4.2. Consolidated Adjusted Cash Flow to Consolidated Fixed Charges. On the last day of each fiscal quarter of the Company, Consolidated Adjusted Cash Flow for the period of six consecutive fiscal quarters then ended shall equal or exceed 120% of Consolidated Fixed Charges for such six consecutive fiscal quarters. 4.3. Consolidated Cash Flow to Consolidated Interest Charges. On the last day of each fiscal quarter of the Company, Consolidated Cash Flow for the period of six consecutive fiscal quarters then ended shall equal or exceed 300% of Consolidated Interest Charges for such six consecutive fiscal quarters. 5. Second Tier Covenants. The Company covenants that it will, and it will cause its Subsidiaries to, comply with the provisions of this Section 5 during the period from the occurrence of a First Tier Default through such time as the Company is in compliance with each of the provisions of Section 4 as are then applicable. 5.1. Investments and Acquisitions. Neither the Company nor any of its Subsidiaries shall have outstanding, acquire, commit itself to acquire or hold any Investment (including any Investment consisting of the acquisition of any business) except that: 5.1.1. The Company and its Subsidiaries may continue to have outstanding and hold Investments outstanding immediately prior to such First Tier Default; provided, however, that, unless permitted pursuant to Section 5.1.6, neither the Company nor any of its Subsidiaries shall exercise any option to make an Investment held by it prior to such First Tier Default. 5.1.2. The Company may make and hold Investments in Theatre Subsidiaries consisting of (a) cash equity Investments and (b) loans; provided, however, that the proceeds of such Investments are applied by the Theatre Subsidiaries solely as provided in Section 5.5. 5.1.3. Nontheatre Subsidiaries may make and hold Investments in the Company and the Theatre Subsidiaries consisting of loans which, in the case of loans to the Company, are subordinated on terms satisfactory to Harcourt to the prior payment of the Obligations; provided, however, that (i) the proceeds of such loans made to the Company are used only to pay the Obligations or to make Investments in Theatre Subsidiaries permitted by Section 5.1.2 and (ii) the proceeds of such loans made to Theatre Subsidiaries are applied by the Theatre Subsidiaries solely as provided in Section 5.5. 5.1.4. The Theatre Subsidiaries may make and hold Investments in other Theatre Subsidiaries consisting of loans; provided, however, that the proceeds of such loans are applied by the Theatre Subsidiaries solely as provided in Section 5.5. 5.1.5. The Company and its Subsidiaries may make and hold Investments in Cash Equivalents. 5.1.6. The Company and any Nontheatre Subsidiaries may make and hold other Investments consisting of follow-on equity Investments to maintain the Company's or such Nontheatre Subsidiary's proportionate equity interest in Persons that are not Wholly-Owned Subsidiaries in which the Company or such Nontheatre Subsidiary held an equity Investment immediately prior to such First Tier Default; provided, however, that the aggregate amount of all such follow-on Investments made during each period when the provisions of Section 5 apply shall not exceed $10,000,000. 5.2. Financing Debt. Neither the Company nor any of its Subsidiaries shall create, incur, assume or otherwise become or remain liable with respect to any Financing Debt except the following: 5.2.1. Financing Debt outstanding immediately prior to such First Tier Default. 5.2.2. Financing Debt consisting of inter-company loans and advances among the Company and its Subsidiaries which are not prohibited by Section 5.1. 5.2.3. Additional Financing Debt of the Company consisting of Indebtedness for borrowed money the proceeds of which are used to finance Investments permitted by Section 5.1.6; provided, however, that the aggregate amount of Financing Debt outstanding pursuant to this Section 5.2.3 shall not at any one time exceed $10,000,000. 5.3. Distributions. Neither the Company nor any of its Subsidiaries shall make any Distribution except the following: 5.3.1. Nontheatre Subsidiaries may make Distributions to the Company or any Wholly-Owned Subsidiary of the Company. 5.3.2. Theatre Subsidiaries may make cash distributions to the Company, the proceeds of which are used by the Company to make (a) regularly scheduled payments of principal of and interest on Financing Debt owed to non- Affiliates and permitted under Section 5.2.1, under the terms of such Financing Debt in effect immediately prior to such First Tier Default, (b) regularly scheduled payments of principal of and interest on Financing Debt permitted under Section 5.2.3 or (c) payments to Harcourt pursuant to Sections 2, 6.2 or 8.2. 5.4. Capital Expenditures. Neither the Company nor any of its Subsidiaries shall make any Capital Expenditures except (a) Capital Expenditures necessary to (i) maintain facilities operated by the Company and its Subsidiaries immediately prior to such First Tier Default or (ii) equip new theatres committed for by Theatre Subsidiaries prior to such First Tier Default with customary theatre equipment and facilities and (b) Capital Expenditures made for purposes of remaining competitive with other theatre operators; provided, however, that the aggregate amount of such Capital Expenditures made by the Company and its Subsidiaries at any time the provisions of Section 5 apply shall not exceed the amount equal to the product of (x) $5,000,000 multiplied by (y) the sum of one plus the percentage increase (expressed as a decimal) in the PPI during the period from December 31, 1993 to the month immediately preceding the occurrence of such First Tier Default; and provided, further, that, in the event that the provisions of Section 5 apply during two or more nonconsecutive periods during any twelve month period, the aggregate amount of such Capital Expenditures made during such twelve month period shall not exceed the product of (x) $5,000,000 multiplied by (y) the sum of one plus the percentage increase in the PPI during the period from December 31, 1993 to the month immediately preceding the commencement of such twelve month period. For purposes of this Section 5.4, Capital Expenditures to increase the number of auditoriums in a facility or otherwise expand such facility or to improve the quality of seats, carpeting, refreshment stands or other amenities within a facility may only be made for purposes of remaining competitive with other theatre operators and shall not be considered Capital Expenditures made solely to maintain facilities pursuant to clause (a)(1) of the immediately preceding paragraph. 5.5. Payment of Theatre Obligations. The Theatre Subsidiaries shall use cash generated from operations, cash reserves, proceeds of borrowings and other funds of the Theatre Subsidiaries only to pay obligations of the Theatre Subsidiaries under leases of real property, to make Distributions permitted under Section 5.3.2, to make Capital Expenditures permitted under Section 5.4, to make Investments permitted under Section 5.1.4, and to pay accounts payable, taxes, assessments and other expenses of the Theatre Subsidiaries incurred in the ordinary course of business. 6. Defaults. 6.1. Events of Default. The following events are referred to as "Events of Default": 6.1.1. The Company shall fail to make any payment in respect of amounts required under Section 2 as the same shall become due. 6.1.2. The Company or any of its Subsidiaries shall fail to perform or observe any of the provisions of Sections 3.2 through 3.7 or Section 5, if applicable. 6.1.3. The Company or any of its Subsidiaries shall fail to perform or observe any other covenant, agreement or provision to be performed or observed by it under this Agreement (other than Section 4), and such failure shall not be rectified or cured to the written satisfaction of Harcourt within 30 days after the earlier of (a) notice thereof by Harcourt to the Company or (b) the date on which the Company shall have had knowledge thereof. 6.1.4. Any representation or warranty of or with respect to the Company or any of its Subsidiaries made to Harcourt in, pursuant to or in connection with this Agreement shall be materially false on the date as of which it was made. 6.1.5. (a) The Company or any of its Subsidiaries shall fail to make any payment when due (after giving effect to any applicable grace periods) in respect of any Financing Debt outstanding in an aggregate amount of principal and accrued interest exceeding $1,000,000; (b) the Company or any of its Subsidiaries shall fail to perform or observe the terms of any agreement relating to such Financing Debt, and such failure shall continue, without having been duly cured, waived or consented to, beyond the period of grace, if any, specified in such agreement, and such failure shall permit the acceleration of such Financing Debt; (c) all or any part of such Financing Debt of the Company or any of its Subsidiaries shall be accelerated or become due or payable prior to its stated maturity for any reason whatsoever (other than voluntary prepayments thereof); K\H any Lien on any property of the Company or any of its Subsidiaries securing any such Financing Debt shall be enforced by foreclosure or similar action; or (e) any holder of any such Financing Debt shall exercise any right of rescission with respect to the issuance thereof. 6.1.6. Except as permitted by Section 3.4: (a) the Company shall cease to own directly all the capital stock of the Theatre Subsidiaries that are Wholly- Owned Subsidiaries as of the date of the Spinoff; (b) any Person (other than a member of the Smith Family Group), together with "affiliates" and "associates" of such Person within the meaning of Rule 12b-2 of the Exchange Act, shall become the beneficial owner within the meaning of Rule 13d-3 of the Exchange Act of more voting stock or total equity capital of the Company than that beneficially owned by the Smith Family Group if such Person together with such "affiliates" and "associates" is also the beneficial owner within the meaning of Rule 13d-3 of the Exchange Act of at least 15% of either the voting stock or total equity capital of the Company; or (c) the Company or any Theatre Subsidiary shall initiate any action to dissolve, liquidate or otherwise terminate its existence. 6.1.7. This Agreement shall cease for any reason (other than the scheduled termination thereof in accordance with its terms) to be in full force and effect; or any party hereto shall so assert in a judicial or similar proceeding; or the security interests created by this Agreement shall cease to be enforceable and of the same effect and priority purported to be created hereby. 6.1.8. The Company or any of its Subsidiaries shall: (a) commence a voluntary case under the Bankruptcy Code or authorize, by appropriate proceedings of its board of directors or other governing body, the commencement of such a voluntary case; (b) have filed against it a petition commencing an involuntary case under the Bankruptcy Code which shall not have been dismissed within 30 days after the date on which said petition is filed, or file an answer or other pleading within said 30-day period admitting or failing to deny the material allegations of such a petition or seeking, consenting to or acquiescing in the relief therein provided; (c) have entered against it an order for relief in any involuntary case commenced under the Bankruptcy Code; (d) seek relief as a debtor under any applicable law, other than the Bankruptcy Code, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or consent to or acquiesce in such relief; (e) have entered against it an order by a court of competent jurisdiction (i) finding it to be bankrupt or insolvent, (ii) ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its creditors or (iii) assuming custody of, or appointing a receiver or other custodian for, all or a substantial portion of its property; or (f) make an assignment for the benefit of, or enter into a composition with, its creditors, or appoint, or consent to the appointment of, or suffer to exist a receiver or other custodian for, all or a substantial portion of its property. 6.2. Certain Payments Upon an Event of Default. If one or more Events of Default shall occur and be continuing, then Harcourt may by notice in writing to the Company require the Company immediately to deposit with Harcourt in cash an amount equal to the then Lease Exposure (which cash shall be held by Harcourt and applied to the payment of the Company's Obligations under Section 2) and thereupon such amount shall become immediately due and payable without presentation, protest or further demand or notice of any kind, all of which are hereby expressly waived; provided, however, that if a Bankruptcy Default shall have occurred, such amount shall automatically become immediately due and payable. 6.3. Enforcement of Payment and Security following a Payment Default; Setoff. If any one or more Payment Defaults shall occur, (a) Harcourt may proceed to enforce payment of the Obligations in such manner as it may elect and to realize upon any and all rights in the Security and (b) may offset and apply toward the payment of the Obligations (and/or toward the curing of any Event of Default) any Indebtedness from Harcourt to the Company or any of its Subsidiaries, regardless of the adequacy of any security for the Obligations. Harcourt shall have no duty to determine the adequacy of any such security in connection with any such offset. 6.4. Specific Performance; Exercise of Rights. If any one or more Events of Default has occurred and is continuing or if one or more Payment Defaults shall occur, Harcourt may proceed to protect and enforce its rights by suit in equity, action at law and/or other appropriate proceeding, either for specific performance of any covenant or condition contained in this Agreement or in any instrument or assignment delivered pursuant to this Agreement, or in aid of the exercise of any power granted in this Agreement or any such instrument or assignment. 6.5. Cumulative Remedies. To the extent not prohibited by applicable law which cannot be waived, all of the Harcourt's rights hereunder and under, or with respect to, each Guarantee and Transferred Lease shall be cumulative. 6.6. Annulment of Defaults. A First Tier Default or a Payment Default shall be deemed not to have occurred or to exist for any purpose hereunder, and an Event of Default shall be deemed not to have occurred and be continuing for any purpose hereunder, in each case, if Harcourt shall have waived it in writing, stated in writing that it has been cured to Harcourt's reasonable satisfaction or entered into an amendment to this Agreement which by its express terms cures such First Tier Default or such Event of Default. No such action by Harcourt shall extend to or affect any subsequent First Tier Default or Event of Default or impair any rights of Harcourt upon the occurrence thereof. 6.7. Waivers. To the extent that such waiver is not prohibited by the provisions of applicable law that cannot be waived, the Company waives: (a) all presentments, demands for performance, notices of nonperformance (except to the extent required by the provisions of this Agreement), protests, notices of protest and notices of dishonor; (b) any requirement of diligence or promptness on the part of Harcourt in the enforcement of its rights under this Agreement; (c) any and all notices of every kind and description which may be required to be given by any statute or rule of law; and (d) any defense (other than indefeasible payment in full) which it now or hereafter may have with respect to its liability under this Agreement, or with respect to the Obligations. 6.8. Obligations Absolute. The obligations of the Company under Sections 2.1, 2.2, 6.2 and 8 are absolute and unconditional and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (a) the invalidity, unenforceability or irrecoverability of any obligations under any Guarantee, any Guaranteed Lease or any Transferred Lease; (b) any change in the terms of, or any amendment to, any waiver, consent or modification of any Guarantee, any Guaranteed Lease or Transferred Lease; or (c) any other circumstance which might constitute a defense available to, or a discharge of Harcourt or the Company other than in the case of the Company, indefeasible payment in full. 7. Security. 7.1. Credit Security. As security for the payment and performance of the Obligations, the Company hereby mortgages, pledges and collaterally grants and assigns to Harcourt, and hereby creates a security interest in favor of Harcourt in, all of the Company's right, title and interest in and to (but none of its obligations or liabilities with respect to) the items and types of present and future property described in Sections 7.1.1 through 7.1.3, whether now owned or hereafter acquired, all of which shall be included in the term "Security": 7.1.1. Pledged Stock. (a) All shares of capital stock or other evidence of beneficial interest in any present or future Theatre Subsidiary which is a corporation, business trust or limited liability company, (b) all partnership interests in any present or future Theatre Subsidiary which is a limited partnership, (c) all joint venture interests in any joint venture in the motion picture exhibition industry and (d) all options, warrants and similar rights to acquire such capital stock or such interests. All such capital stock, interests, options, warrants and other rights are collectively referred to as the "Pledged Stock". 7.1.2. Pledged Rights. All rights to receive profits or surplus of, or other Distributions (including income, return of capital and liquidating distributions) from, any Theatre Subsidiary that is a partnership or joint venture, including any distributions by any such Person to partners or joint venturers. All such rights are collectively referred to as the "Pledged Rights". 7.1.3. Proceeds and Products. All proceeds, including insurance proceeds, and products of the items of Security described or referred to in Sections 7.1.1 through 7.1.2 and, to the extent not included in the foregoing, all Distributions with respect to the Pledged Securities. 7.2. Representations, Warranties and Covenants with Respect to the Security. The Company hereby represents, warrants and covenants that: 7.2.1. Pledged Stock. All shares of capital stock, limited partnership interests and similar securities included in the Pledged Stock are and shall be at all times duly authorized, validly issued, fully paid and (in the case of capital stock and limited partnership interests) nonassessable. The Company will deliver to Harcourt certificates representing the Pledged Stock, registered, if Harcourt so requests, in the name of Harcourt or its nominee, as pledgee, or accompanied by a stock transfer power executed in blank and, if Harcourt so requests, with the signature guaranteed, all in form and manner satisfactory to Harcourt. Pledged Stock that is not evidenced by a certificate will be registered in Harcourt's name as pledgee on the issuer's records, all in form and substance satisfactory to Harcourt. Upon the occurrence of a Default, Harcourt may transfer into its name or the name of its nominee, as pledgee, any Pledged Securities. 7.2.2. No Liens or Restrictions on Transfer or Change of Control. All Security shall be free and clear of any Liens and restrictions on the transfer thereof, except for Liens permitted by Section 3.2. None of the Pledged Stock is subject to any options to purchase or similar rights of any Person. Except with the written consent of Harcourt, neither the Company nor any Theatre Subsidiary is, and neither Harcourt nor any Theatre Subsidiary will be, party to or bound by any agreement, license or franchise which restricts the change of control or ownership of any Theatre Subsidiary. 7.2.3. Perfection of the Security. Upon Harcourt's request from time to time, the Company will make, execute, acknowledge and deliver, and file and record in the proper filing and recording places, all such instruments, and will take all such other action, as Harcourt deems advisable for confirming to it the Security or to carry out any other purposes of this Agreement. 7.3. Administration of the Security. The Security shall be administered as follows, and if Payment Default shall have occurred, Section 7.4 shall also apply. 7.3.1. Pledged Securities. (a) Distributions. (i) Until an Event of Default shall have occurred and is continuing, the Company shall be entitled, to the extent permitted by this Agreement, to receive all Distributions on or with respect to the Pledged Securities (other than Distributions constituting additional Pledged Securities). All Distributions constituting additional Pledged Securities will be retained by Harcourt (or if received by the Company shall be held by the Company in trust and shall be immediately delivered by the Company to Harcourt in the original form received, endorsed in blank) and held by Harcourt as part of the Security. (ii) If an Event of Default has occurred and is continuing, all Distributions on or with respect to the Pledged Securities shall be retained by Harcourt (or if received by the Company shall be held by the Company in trust and shall be immediately delivered by it to Harcourt in the original form received, endorsed in blank) and held by Harcourt as part of the Security or applied by Harcourt in accordance with Section 7.4.5. (b) Voting. (i) Until an Event of Default shall have occurred and is continuing, the Company shall be entitled to vote or consent with respect to the Pledged Securities in any manner not inconsistent with the terms of this Agreement, and Harcourt will, if so requested, execute appropriate revocable proxies therefor. (ii) If an Event of Default has occurred and is continuing, if and to the extent that Harcourt shall so notify the Company in writing, only Harcourt shall be entitled to vote or consent or take any other action with respect to the Pledged Securities and the Company will, if so requested, execute or cause to be executed appropriate proxies therefor. 7.4. Right to Realize upon Credit Security. Except to the extent prohibited by applicable law that cannot be waived, this Section 7.4 shall govern Harcourt's right to realize upon the Security if any Payment Default shall have occurred. The provisions of this Section 7.4 are in addition to any rights and remedies available at law or in equity. 7.4.1. General Authority. To the extent specified in written notice from Harcourt to the Company, the Company grants Harcourt full and exclusive power and authority, subject to the other terms hereof and applicable law, to take any of the following actions (for the sole benefit of Harcourt but at the Company's expense): (a) To ask for, demand, take, collect, sue for and receive all payments in respect of any Pledged Securities which the Company could otherwise ask for, demand, take, collect, sue for and receive for its own use. (b) To extend the time of payment of Pledged Securities and to make any allowance or other adjustment with respect thereto. (c) To settle, compromise, prosecute or defend any action or proceeding with respect to Pledged Securities and to enforce all rights and remedies thereunder which the Company could otherwise enforce. (d) To enforce the payment of any Pledged Securities, either in the name of the Company or in its own name, and to endorse the name of the Company on all checks, drafts, money orders and other instruments tendered to or received in payment of any Security. (e) To notify the third party payor with respect to any Pledged Securities of the existence of the security interest created hereby and to cause all payments in respect thereof thereafter to be made directly to Harcourt; provided, however, that whether or not Harcourt shall have so notified such payor the Company will at its expense render all reasonable assistance to Harcourt in collecting such items and in enforcing claims thereon. OXY To sell, transfer, assign or otherwise deal in or with any Security or the proceeds thereof, as fully as the Company otherwise could do. 7.4.2. Marshaling, etc. Harcourt shall not be required to make any demand upon, or pursue or exhaust any of its rights or remedies against, the Company or any guarantor, pledgor or any other Person with respect to the payment of the Obligations or to pursue or exhaust any of its rights or remedies with respect to any collateral therefor or any direct or indirect guarantee thereof. Harcourt shall not be required to marshal the Security or any guarantee of the Obligations or to resort to the Security or any such guarantee in any particular order, and all of its rights hereunder or otherwise shall be cumulative. To the extent it may lawfully do so, the Company hereby absolutely and irrevocably waives and relinquishes the benefit and advantage of, and covenants not to assert against Harcourt, any valuation, stay, appraisement, extension, redemption or similar laws now or hereafter existing which, but for this provision, might be applicable to the sale of any Security made under the judgment, order or decree of any court, or privately under the power of sale conferred by this Agreement, or otherwise. Without limiting the generality of the foregoing, the Company agrees that it will not invoke or utilize any law which might prevent, cause delay in or otherwise impede the enforcement of the rights of Harcourt in the Security, and hereby waives all such laws, and that it will not invoke or raise as a defense to any enforcement by Harcourt of its rights and remedies relating to the Security or the Obligations any legal or contractual requirement with which Harcourt may have in good faith failed to comply. In addition, the Company hereby waives any right to prior notice (except to the extent expressly required by this Agreement) or judicial hearing in connection with foreclosure on or disposition of any Security, including any such right which the Company would otherwise have under the Constitution of the United States of America or of any state or territory thereof or any other jurisdiction. 7.4.3. Sales of Security. All or any part of the Security may be sold for cash or other value in any number of lots at public or private sale, without demand, advertisement or notice; provided, however, that Harcourt shall give the Company 10 days' prior written notice of the time and place of any public sale, or the time after which a private sale may be made, which notice the Company and Harcourt hereby agrees to be reasonable. At any sale or sales of Security, Harcourt or any of its respective officers acting on its behalf, or Harcourt's assigns, may bid for and purchase all or any part of the property and rights so sold, may use all or any portion of the Obligations owed to Harcourt as payment for the property or rights so purchased, and upon compliance with the terms of such sale may hold and dispose of such property and rights without further accountability to the Company, except for the proceeds of such sale or sales pursuant to Section 7.4.5. The Company acknowledges that any such sale will be made by Harcourt on an "as is" basis with disclaimers of all warranties, whether express or implied, to the extent permitted by applicable law. The Company agrees that (a) Harcourt may, in its sole discretion, restrict any such sale to one or more purchasers who will agree to guarantee the payment and performance of the Guaranteed Leases and Transferred Leases of Theatre Subsidiaries, the Pledged Securities of which are included in such sale and who, in the reasonable judgment of Harcourt, are financially capable of performing such guarantee and (b) that such manner of disposition is commercially reasonable notwithstanding the possibility that a substantially higher price might be realized if such sale were not so restricted. The Company will execute and deliver or cause to be executed and delivered such instruments, documents, assignments, waivers, certificates and affidavits, will supply or cause to be supplied such further information and will take such further action as Harcourt shall require in connection with any such sale. 7.4.4. Sale Without Registration. The Company agrees that if, at any time when Harcourt shall determine to exercise its rights hereunder to sell all or part of the securities included in the Security, the securities in question shall not be effectively registered under the Securities Act (or other applicable law), Harcourt may, in its sole discretion, sell such securities by private or other sale not requiring such registration in such manner and in such circumstances as Harcourt may deem necessary or advisable in order that such sale may be effected in a commercially reasonable manner in accordance with applicable law without such registration and the related delays, uncertainty and expense. Without limiting the generality of the foregoing, in any event Harcourt may, in its sole discretion, (a) approach and negotiate with a single purchaser or one or more possible purchasers to effect such sale, (b) restrict such sale to one or more purchasers each of whom will represent and agree that such purchaser is purchasing for its own account, for investment and not with a view to the distribution or sale of such securities and (c) cause to be placed on certificates representing the securities in question a legend to the effect that such securities have not been registered under the Securities Act (or other applicable law) and may not be disposed of in violation of the provisions thereof. The Company hereby agrees that such manner of disposition is commercially reasonable, that it will upon Harcourt's request give any such purchaser access to such information regarding the issuer of the securities in question as Harcourt may reasonably request and that Harcourt shall not incur any responsibility for selling all or part of the securities included in the Security at any private or other sale not requiring such registration, notwithstanding the possibility that a substantially higher price might be realized if the sale were deferred until after registration under the Securities Act (or other applicable law) or until made in compliance with certain other rules or exemptions from the registration provisions under the Securities Act (or other applicable law). The Company acknowledges that there is no adequate remedy at law for breach by it of this Section 7.4.4 and that such breach would not be adequately compensable in damages and therefore agrees that this Section 7.4.4 may be specifically enforced. 7.4.5. Application of Proceeds. The proceeds of all sales and collections in respect of any Security or other assets of the Company, all funds collected from the Company and any cash contained in the Security, the application of which is not otherwise specifically provided for herein, shall be applied as follows: First, to the payment of the costs and expenses of such sales and collections, the reasonable expenses of Harcourt and the reasonable fees and expenses of its special counsel; Second, any surplus then remaining to the payment of the Obligations in such order and manner as Harcourt may in its sole discretion determine; Third, any surplus then remaining shall be paid to the Company, subject, however, to the rights of the holder of any then existing Lien of which Harcourt has actual notice. 7.5. Custody of Credit Security. Except as provided by applicable law that cannot be waived, Harcourt will have no duty as to the custody and protection of the Security, the collection of any part thereof or of any income thereon or the preservation or exercise of any rights pertaining thereto, including rights against prior parties, except for the use of reasonable care in the custody and physical preservation of any Security in its possession. Harcourt will not be liable or responsible for any loss or damage to any Security, or for any diminution in the value thereof, by reason of the act or omission of any agent selected by Harcourt acting in good faith. 8. Expenses; Indemnity. 8.1. Expenses. The Company will pay: (a) all recording and filing fees and transfer and documentary stamp and similar taxes at any time payable in respect of this Agreement, or any Security; and (b) all other reasonable expenses incurred by Harcourt in connection with the enforcement of any rights hereunder, including costs of collection and reasonable attorneys' fees and expenses. 8.2. General Indemnity. The Company hereby agrees to indemnify Harcourt, each of the directors, officers, employees and agents of Harcourt, and each Person, if any, who controls Harcourt (Harcourt and each of such directors, officers, employees, agents and control Persons is referred to as an "Indemnified Party"), and hold each of them harmless from and against any and all claims, damages, liabilities and reasonable expenses (including reasonable fees and disbursements of counsel with whom any Indemnified Party may consult in connection therewith and all reasonable expenses of litigation or preparation therefor) which any Indemnified Party may incur or which may be asserted against any Indemnified Party in connection with (a) the existence or exercise of any security rights with respect to the Security in accordance with this Agreement or (b) this Agreement or any transaction contemplated hereby, other than litigation commenced by the Company against Harcourt which seeks enforcement of any of the rights of the Company hereunder and is determined adversely to Harcourt in a final nonappealable judgment and except to the extent such claims, damages, liabilities and expenses result from the gross negligence or willful misconduct of Harcourt. 9. Successors and Assigns. Any reference in this Agreement to any of the parties hereto shall be deemed to include the successors and assigns of such party, and all covenants and agreements by or on behalf of the Company or Harcourt that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns; provided, however, that the Company may not assign its rights or obligations under this Agreement. 10. Confidentiality. Harcourt agrees that it will make no disclosure of confidential information furnished to it by the Company or any of its Subsidiaries unless such information shall have become public, except: (a) in connection with operations under or the enforcement of this Agreement; (b) pursuant to any statutory or regulatory requirement or any mandatory court order, subpoena or other legal process; (c) to its counsel, auditors and other professional advisors with an instruction to such Person to keep such information confidential; and (d) with the prior written consent of the Company, to any other Person. 11. Notices. Except as otherwise specified in this Agreement, any notice required to be given pursuant to this Agreement shall be given in writing. Any notice, demand or other communication in connection with this Agreement shall be deemed to be given if given in writing (including telex, telecopy or similar teletransmission) addressed as provided below (or to the addressee at such other address as the addressee shall have specified by notice actually received by the addressor), and if actually delivered in fully legible form to such address (evidenced in the case of a telex by receipt of the correct answerback). If to the Company, to it at: 27 Boylston Street Chestnut Hill, Massachusetts 02167 Telecopy No.: (617) 278-5396 Attention: President If to Harcourt, to it at: 27 Boylston Street Chestnut Hill, Massachusetts 02167 Telecopy No.: (617) 731-2354 Attention: President 12. Course of Dealing; Amendments and Waivers. No course of dealing between Harcourt, on one hand, and the Company or any of its Subsidiaries or their Affiliates, on the other hand, shall operate as a waiver of any of the rights of Harcourt under this Agreement or with respect to the Obligations. The Company acknowledges that if Harcourt, without being required to do so by this Agreement, gives any notice or information to the Company or any of its Subsidiaries or their Affiliates, Harcourt shall not by implication have amended, waived or modified any provision of this Agreement, or created any duty to give any such notice or information or to obtain any such consent on any future occasion. No delay or omission on the part of Harcourt in exercising any right under this Agreement or with respect to the Obligations shall operate as a waiver of such right or any other right hereunder or thereunder. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. No waiver, consent or amendment with respect to this Agreement shall be binding unless it is in writing and signed by Harcourt and in the case of an amendment, signed by the Company. Although Harcourt shall have no duty to agree to any waiver, consent or amendment relating to this Agreement, Harcourt shall give due consideration in accordance with its business judgment to each request made by the Company for any such consent, waiver or amendment. Any amendment, waiver or consent entered into by any party for any of the following purposes need not be specifically authorized or approved by the Board of Directors of such party if such amendment, waiver or consent is approved by an officer of such party who is authorized to approve such type of amendment, waiver or consent: (a) to cure any ambiguity herein, (b) to cure, correct or supplement any defect or inconsistent provision contained herein; or (c) to make any provision in regard to matters or questions arising hereunder which is not inconsistent with the provisions of this Agreement and which does not adversely affect the interests of such party. 13. Termination and Defeasance. This Agreement may be terminated at any time by Harcourt in its sole discretion by providing written notice to the Company. This Agreement shall terminate at such time as the Lease Exposure is less than $50,000,000 if at such time no First Tier Default, Payment Default or Event of Default has occurred and is continuing; provided, however, that Sections 2, 3.1 and 3.6, Sections 6.3 through 6.8 (insofar as they relate to Sections 2, 3.1 and 3.6), 8, 9, 10 and 11 shall survive the termination of this Agreement. Upon any such termination, the Security shall revert to the Company and the right, title and interest of Harcourt therein shall terminate. Thereupon, on the Company's demand and at its cost and expense, Harcourt shall execute proper instruments, acknowledging satisfaction of and discharging this Agreement, and shall redeliver to the Company any Security then in its possession. 14. General. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and thereof and supersedes all prior and current understandings and agreements, whether written or oral. This Agreement may be executed in any number of counterparts which together shall constitute one instrument. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of The Commonwealth of Massachusetts except as may be required by the UCC with respect to matters involving the perfection of Harcourt's Lien on the Security and the enforcement of such Lien. Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first above written. HARCOURT GENERAL, INC. By s/Robert J. Tarr, Jr. Title: President and Chief Executive Officer GC COMPANIES, INC. By s/Richard A. Smith Title: Chairman, President and Chief Executive Officer EXHIBITS 1 - Certain Financial Data Exhibit 1 CERTAIN FINANCIAL DATA Consolidated Adjusted Cash Flow for the fiscal quarter ending July 31, 1992, shall be 26,926,000; for the fiscal quarter ending October 31, 1992, shall be 17,883,000; for the fiscal quarter ending January 31, 1992, shall be 31,053,000; for the fiscal quarter ending April 30, 1993, shall be 21,245,000; for the fiscal quarter ending July 31, 1993, shall be 33,290,000; and for the fiscal quarter ending October 31, 1993, shall be determined by mutual agreement by Harcourt and the Company on or prior to January 31, 1994. Consolidated Cash Flow for the fiscal quarter ending July 31, 1992, shall be 10,237,000; for the fiscal quarter ending October 31, 1992, shall be 1,955,000; for the fiscal quarter ending January 31, 1992, shall be 13,748,000; for the fiscal quarter ending April 30, 1993, shall be 5,599,000; for the fiscal quarter ending July 31, 1993, shall be 15,939,000; and for the fiscal quarter ending October 31, 1993, shall be determined by mutual agreement by Harcourt and the Company on or prior to January 31, 1994. Consolidated Trailing Theatre Cash Flow for the fiscal quarter ending July 31, 1992, shall be 6,825,000; for the fiscal quarter ending October 31, 1992, shall be 1,303,000; for the fiscal quarter ending January 31, 1992, shall be 9,165,000; for the fiscal quarter ending April 30, 1993, shall be 3,733,000; for the fiscal quarter ending July 31, 1993, shall be 10,626,000; and for the fiscal quarter ending October 31, 1993, shall be determined by mutual agreement by Harcourt and the Company on or prior to January 31, 1994. EX-11.1 6 COMPUTATION OF AVG. NO. SHARES EXHIBIT 11.1 HARCOURT GENERAL, INC. AND SUBSIDIARIES OCTOBER 31, l993 EXHIBIT TO FORM 10-K
COMPUTATION OF AVERAGE NUMBER OF SHARES OUTSTANDING USED IN DETERMINING PRIMARY AND FULLY DILUTED EARNINGS PER SHARE In thousands 1993 1992 1991 PRIMARY 1. Weighted average number of Common shares outstanding 76,493 75,554 74,907 2. Assumed conversion of Series A Cumulative Convertible Preferred Stock 2,736 3,449 3,969 3. Assumed exercise of certain stock options based on average market value during the year 396 136 - 4. Weighted average number of shares used in primary per share computations 79,625 79,139 78,876 FULLY DILUTED(A) 1. Weighted average number of Common shares outstanding 76,493 75,554 74,907 2. Assumed conversion of Series A Cumulative Convertible Preferred Stock 2,736 3,449 3,969 3. Assumed exercise of certain stock options based on market value at October 31 420 178 - 4. Weighted average number of shares used in fully diluted per share computations 79,649 79,181 78,876 (A) This calculation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
EX-13.1 7 ANNUAL REPORT Exhibit 13.1 {page 16} BUSINESS REVIEW PUBLISHING The following review of operations discusses the results of Harcourt General's four business segments: publishing, specialty retailing, insurance and professional services. The professional services segment - which consists of Drake Beam Morin's professional outplacement service operations - is reported separately for the first time this year. Previously, it had been included in publishing results. Publishing results for prior years have been restated to conform to this new reporting format. The absence of a theatre review reflects the treatment of that business as a discontinued operation, following the spinoff of the theatre business along with $64 million in cash to Harcourt General shareholders in December 1993. Harcourt Brace & Company ranks among the world's largest and most prestigious publishing houses, providing quality product for the educational, scientific, technical, medical, professional and trade markets. Within the educational market, Harcourt Brace is a leading publisher of textbooks and other instructional materials for elementary and secondary schools under the Harcourt Brace and Holt, Rinehart and Winston imprints. The Company's well-known college imprints include Harcourt Brace College, Holt College, Saunders College and Dryden Press. The Psychological Corporation, the Company's testing business, is the largest for-profit publisher of tests for educational, psychological, clinical and professional assessment. Academic Press and W.B. Saunders, the Company's scientific, technical, medical (STM) publishing businesses, hold well-established market leadership positions. Academic Press is one of the leading international publishers of books and scholarly journals in the life, physical and social sciences. W.B. Saunders is the world's leading publisher of medical books and periodicals for the health sciences. In the professional field, the Company conducts the largest bar examination review program in the country under the BAR/BRI name. Harcourt Brace Professional Publishing produces accounting and tax practice reference materials. The trade division publishes distinguished literature for children and adults. The Company has international operations in London, Tokyo, Sydney, Toronto and Montreal as well as a foreign export division based in Orlando, Florida. These operations publish locally and distribute U.S. product internationally in the educational, STM, professional and trade areas. {page 17} Fiscal 1993 was a year of significant progress for the publishing segment, which represents Harcourt General's largest earnings contributor. A continuing emphasis on product development at all divisions has greatly enhanced the market positions of our various imprints. The Harcourt Brace publishing businesses are among the leaders in their market segments and hold significant untapped potential for revenue growth and earnings appreciation through continued revitalization efforts. Publishing revenues increased 9.2% in 1993 to $944.5 million from $865.3 million in 1992. Operating earnings improved to $142.2 million, a 14.2% increase from the previous year due to a very strong performance by our elementary and secondary educational publishing operations. Operating margins improved to 15.1% from 14.4%. Educational Publishing The educational publishing businesses include Harcourt Brace School, which produces textbooks and related instructional materials for the elementary grades; Holt, Rinehart and Winston (HRW), which publishes instructional materials for grades 7 through 12; Harcourt Brace College, which publishes post-secondary educational materials; and The Psychological Corporation, which provides tests for educational, psychological, clinical and professional assessment. Harcourt Brace School In 1993, Harcourt Brace School achieved revenue growth in excess of 50% and a very strong increase in operating earnings. This improved performance was led by the success of the Treasury of Literature reading program, which secured 47% of the market in Texas, 63% of the available business in the Arizona state adoption, and a significant share of market in the open territory states. Continued sales of Mathematics Plus - introduced in 1992 and now the number one-selling new elementary mathematics program - also contributed to the school division's substantially improved operating results in 1993. New products to be introduced in 1994 include Passports, a supplemental reading program that complements Treasury of Literature, as well as revisions of Mathematics Plus and Being Healthy. Because market demand for elementary textbooks will be substantially less in fiscal 1994, operating results from this business will decline significantly from 1993 levels. However, Harcourt Brace School is developing major new programs in a number of subject areas in preparation for very significant adoption opportunities in 1995 and 1996. Holt, Rinehart and Winston Holt Rinehart and Winston Both revenues and operating income improved significantly this year at HRW, reflecting very strong sales of SciencePlus, Elements of Writing and Elements of Literature, all of which were introduced in 1993. SciencePlus, a three-year program for the middle school market, captured a 45% market share in California. Elements of Literature and Elements of Writing - both 7th-12th grade programs secured significant share of market in the key states of Virginia, South Carolina and Louisiana. Sales of previously published backlist product were also strong during the year. {page 18} In 1994, HRW will benefit from continued demand for these very successful products as well as sales of its new biology program, Biology: Visualizing Life, which was introduced in the latter half of 1993. In addition, HRW will introduce a new interactive multimedia biology program, Concepts of Biology, in 1994. The division will publish a new edition of The American Nation, an important history textbook, in 1994 and a new mathematics program in 1995. HRW's results in the coming year will be dampened by a decrease in secondary textbook demand compared to 1993. However, as in the elementary market, secondary adoptions will increase substantially in 1995 and 1996. The Psychological Corporation The Psychological Corporation had a modest decrease in revenues in 1993 compared to very strong year-ago sales, which were boosted by the introduction of a revised version of the Wechsler Intelligence Scale for Children (WISC-III), the most widely used intellectual ability measure in the world. Strong sales in 1993 of the seventh edition of the Metropolitan Achievement Test (MAT 7) and the Bayley Scales of Infant Development, Second Edition (BSID-II), both introduced in 1993, helped to offset the decreased revenues from WISC-III. Over the long-term there is significant opportunity for The Psychological Corporation to play a vital role in educational reform, as that movement will likely result in the use of a greater variety of assessment methodologies. With its broad product base, The Psychological Corporation is well-positioned to benefit from increased demand for numerous types of assessment tools. Harcourt Brace College College revenues in 1993 increased slightly while operating earnings declined substantially as a result of increased operating expenses that reflect a staff expansion and higher marketing costs. Strong sales of Saunders science textbooks were more than offset by disappointing sales of Dryden Press texbooks in business and economics subject areas due to in part to declines in business school enrollments. Best-selling titles in 1993 included Boone and Kurtz, Contemporary Business, Seventh Edition; Serway and Faughn, College Physics, Third Edition; and the 12th edition of the Harbrace College Handbook. The college division initiated a print-based custom publishing operation in 1993. This program is able to meet an individual instructor's teaching needs by combining his or her classroom material with portions of an existing Harcourt Brace textbook. Harcourt Brace College has made meaningful progress over the past two years in the area of author acquisitions. As a result, important new textbooks are currently under development in the fields of economics, marketing and accounting, which will help return the college division's Dryden Press imprint to its former leadership position in the business and economics market. We also expect to strengthen our product offerings in a number of other areas, including mathematics, behavioral sciences and education over the next several years. Scientific, Technical, Medical Publishing Academic Press Academic Press had slightly higher sales in 1993 due to increased journal subscription revenue which more than offset lower book sales, reflecting the release of fewer titles. Academic Press published approximately 400 scientific and technical books and more than 200 scientific journals during the year. 1993 also marked the introduction of the new AP Professional imprint to publish technical and reference books for advanced computer professionals. Fourteen new titles were released in 1993 under this new imprint, and approximately 30 titles are scheduled for publication in 1994. {page 19} Despite the challenging funding situation facing many libraries worldwide, Academic Press should benefit in 1994 from a planned increase in the number of journal issues as well as from continued growth of the AP Professional imprint. W.B. Saunders Company Revenues at W.B. Saunders were virtually unchanged in 1993. Operating earnings decreased from a very strong performance in 1992. Higher journal and clinic subscription revenues offset lower sales of backlist book titles. Revenues were affected by concerns within the medical community regarding health care reform and its potential impact on physicians and other health care professionals. In 1993, W.B. Saunders published approximately 150 books and 140 periodicals for the health sciences market. Major titles contributing to 1993 sales included Albert & Jakobiec's Principles & Practice of Ophthalmology, Magee's Orthopaedic Physical Assessment, and Jarvis Physical Examination & Health Assessment. In addition, substantial progress was made in expanding Saunders product offering for the nursing and health-related professions. The 1993 book publication schedule overall was significantly lighter than 1992, when Saunders published nearly 200 books, including major titles like Braunwald's Heart Disease and Wyngaarden, Smith & Bennett's Cecil Textbook of Medicine. W.B. Saunders will benefit in 1994 from an increase in the number of medical books scheduled for publication. Included in that schedule is the 28th edition of Dorland's Illustrated Medical Dictionary, a major title first published in 1900. The company will also introduce 12 new periodicals in 1994. Going forward, W.B. Saunders will focus on maintaining its leading worldwide position in medical book publishing while continuing to expand into new allied health and nursing publishing niches. Professional Publishing Professional publishing revenues benefited in 1993 from the addition of the CPA Services product line, a professional accounting newsletter and executive report publisher which was acquired at the end of fiscal 1992. Products under development during 1994 will include new accounting and tax reference materials, several new professional newsletters, and various software applications for the CPA market, including a CD-ROM version of the bestselling GAAP Guide. Legal & Professional Harcourt Brace's Legal and Professional operation conducts the largest bar examination review program in the country under the BAR/BRI name. The division also conducts review courses for CPA accreditation and graduate school entrance examinations. More than 30,000 individuals completed Legal and Professional's review courses in 1993. Harcourt Brace Trade In 1993, the Harcourt Brace trade division benefited from strong sales of children's titles. Several Harcourt Brace trade publications earned distinctions during the year. Virginia Woolf's Orlando secured a position on the Publishers Weekly bestseller list, as did the popular children's book Stellaluna, which reached the number-one position on this list. Other successful titles released in 1993 include Harriet Doerr's national bestseller Consider This, Senora, and Terry Waite's Taken On Trust. Beginning in 1994, the division will publish fewer adult hardcover titles. Its program will emphasize high-quality literary hardcovers, the Harvest trade paperback line, and the children's book imprints. Foreign / International Harcourt Brace's international operations had slightly lower revenues in 1993, reflecting the discontinuation of elementary textbook publishing businesses in England and Australia and the trade business in Japan. {page 20} SPECIALTY RETAILING The Company's specialty retailing operations include a collection of distinctive retailing brand equities - Neiman Marcus, NM Direct, Bergdorf Goodman and Contempo Casuals. Neiman Marcus, a world-renowned high-fashion specialty retailer, serves customers through 27 stores in 24 cities. NM Direct, the Neiman Marcus mail order operation, includes the well-known Horchow catalogues in addition to those of Neiman Marcus. Bergdorf Goodman and Bergdorf Goodman Men, with perhaps the preeminent retail locations in the world at Fifth Avenue and 58th Street in New York City, offer customers quality apparel and accessories from leading international designers. Contempo Casuals provides contemporary fashion apparel and accessories for young women through a chain of 290 stores in regional shopping malls in 35 states and Puerto Rico. Neiman Marcus, NM Direct, Bergdorf Goodman and Contempo Casuals - which make up the Company's specialty retailing operations - achieved the highest level of financial performance in their six years of operation under Harcourt General management. Total revenues for our specialty retailing operations grew 11.5% in fiscal 1993 to $2.02 billion, with comparable revenues growing 6.6%. Operating earnings were $120.2 million, a 47.5% increase over 1992's performance. Each of our divisions realized gross margin improvement, and the group's operating margin increased to 6.0% from 4.5% in 1992. Results of our up-scale businesses Neiman Marcus stores, NM Direct and Bergdorf Goodman - drove this performance, as business at Contempo Casuals remained weak throughout the year. The bulk of planned store renovation and expansion work at Neiman Marcus and Bergdorf Goodman has been completed, greatly enhancing the competitive market positions of these retail franchises. Our focus in 1994 will be on maintaining the positive revenue and earnings momentum at Neiman Marcus, NM Direct and Bergdorf Goodman while focusing on returning Contempo Casuals to profitability. The degree of improvement at the Contempo Casuals Division will be the major determinant of our ability to show meaningful earnings gains from our specialty retailing operations in fiscal 1994. Neiman Marcus Division The Neiman Marcus Division includes the Neiman Marcus stores and the mail order operations of NM Direct, both of which made significant progress in 1993. Revenues in 1993 for the Neiman Marcus Division increased 12.7% to $1.45 billion. Comparable store sales at the Neiman Marcus stores grew 7.6% while NM Direct continued its double-digit revenue growth trend. Operating earnings for the division rose 45.7% to $121.5 million from $83.4 million the previous year. Operating margins improved to 8.5% from 6.6% in 1992. The performance improvement at Neiman Marcus stores was primarily the result of a number of evolutionary merchandising changes implemented during the year. These changes include an expansion of merchandise offered at the Neiman Marcus opening price points along with increased assortments in the career and [page 21] casual merchandise categories. Both initiatives were designed to increase profitability by increasing transaction volume and expanding our customer base. NM Direct made a strong contribution to the division's profit improvement due to an increase in the number of transactions and higher gross margins. The mail order operation distributed approximately 75 catalogues in 1993, an increase of roughly 10% over the number mailed in 1992. The catalogues have an average circulation of 1.2 million households per book. Selective expansion and remodeling projects are continuing at Neiman Marcus stores. Expansion plans include four new Neiman Marcus stores, the first of which is scheduled to open in Short Hills, New Jersey in calendar 1995, followed by new stores in Paramus, New Jersey and King of Prussia, Pennsylvania, both in 1996. A fourth new store in Honolulu, Hawaii will follow. Remodeling work at the San Francisco store was completed in the fall. Ongoing projects include renovations in Boston; Westchester, New York; NorthPark in Dallas; and Northbrook, just outside Chicago. NM Direct recently initiated a major expansion of its telemarketing and fulfillment facility in Las Colinas, Texas. Planned for completion in 1994, that expansion will accommodate continued growth in the mail order business. Bergdorf Goodman Both Bergdorf Goodman and Bergdorf Goodman Men registered strong revenue growth in fiscal 1993, with broad-based improvement across merchandise categories. Annual revenues increased 10.0% to $219.1 million. Sales growth at both the main store and the men's store more than compensated for a decline in mail order revenues. Operating earnings increased 66.2% to $12.8 million, with gross margin improvement offsetting a modest increase in selling expenses due to new advertising campaigns. New advertising and sales promotion campaigns were initiated at both of the Bergdorf Goodman stores in 1993 to generate increased store traffic and expand the active customer base. The campaigns had a positive impact as both the number of transactions and the average dollar amount per transaction increased for the year. Upcoming renovation plans include a remodeling of the main store's sixth floor, which will feature designer sportswear, coats, dresses and eveningwear. That project is scheduled to begin in the spring of 1994. Bergdorf Goodman Men has yet to reach the volume level required to achieve profitability. It is making important progress toward that goal, however, and will continue to focus on programs to expand its share of the upscale New York market. Contempo Casuals Business at Contempo Casuals continued to be disappointing in fiscal 1993. The Contempo customers - young women in the 17- to 24-year-old age bracket - continue to feel the impact of economic uncertainty while business also suffered from a lack of inspiring fashion trends. Despite a comparable store revenue decrease of 4.9% in 1993, inventory and expense control initiatives held Contempo's operating loss to $3.6 million, approximately equal to the operating loss incurred in 1992. Including losses associated with the test of Pastille, a new retail concept, the Contempo Division had a total operating loss of $14.1 million in 1993 compared with an operating loss of $9.5 million in 1992. Efforts underway to restore Contempo to profitability in 1994 include the development of a more focused merchandising approach featuring fewer fashion trends in greater depth; an enhanced visual presentation; and a continued emphasis on cost and inventory controls. The Pastille operation should significantly reduce its operating loss in 1994. {page 22} INSURANCE Harcourt General's insurance operations include Federal Home Life Insurance Company, PHF Life Insurance Company and The Harvest Life Insurance Company. The Company's four insurance divisions - farm, general agency, structured settlements and credit - are engaged primarily in the underwriting of individual health, life, accident and credit insurance policies as well as the sale of annuity products. Harcourt General's insurance operations achieved an exceptionally strong performance in 1993, with revenues increasing 18.0% to $548.0 million from $464.6 million in 1992. Operating earnings grew 65.6% to $70.9 million from $42.8 million in the previous year. The revenue growth was primarily attributable to improved structured settlement sales as well as significant capital gains and higher investment income due to a larger portfolio balance. Operating earnings were favorably impacted by the higher capital gains along with increased interest margins on deferred annuity business and favorable claims experience in the farm and credit health markets. These were partially offset by lower structured settlement results due to adverse mortality experience. Total revenues and operating earnings include $27.8 million of capital gains in 1993 compared to capital gains of $2.7 million in 1992. These gains result primarily from calls on debt securities held in the insurance investment portfolio as a result of the current low interest rate environment and are beyond the Company's control. Results in fiscal 1993 also include a $4.6 million charge recognized in the third quarter primarily relating to the write-off of deferred acquisition costs in conjunction with the reinsurance of a block of major medical business, fulfilling our stated intention to exit the major medical field. The insurance companies' marketing efforts in fiscal 1993 were aided in part by improved credit ratings secured in fiscal 1992. The A.M. Best rating agency removed its contingency qualification from Federal Home Life Insurance Company and now rates that business A+/Superior. In addition, Duff & Phelps currently rates the insurance companies AA-. The insurance operations are managed conservatively and have significantly increased in value over the past two years. Financial results in 1994 should benefit from steady improvement in the fundamental insurance business and higher sales of annuity products. Capital gains in fiscal 1994 should again be significant but will not reach the level recognized in 1993. Insurance Liquidity and Capital Resources Cash provided by insurance operations in fiscal 1993 totaled $31.1 million. This amount reflects insurance net earnings of $46.0 million adjusted for operating and non-operating items totaling $14.9 million. A decrease in unearned premiums and an increase in deferred policy acquisition costs were partially offset by increases in policyholder reserves. The insurance companies used $439.6 million of cash in investing activities, primarily to purchase fixed maturity securities. Cash provided by insurance financing activities consisted primarily of proceeds from policyholder deposits of $393.0 million. The investment portfolio of the insurance companies included $24.3 million of non-investment grade debt securities at October 31, 1993. These assets, stated at their current market value, represented less than 1.0% of the $3.1 billion market value of the total investment portfolio at year-end. The portfolio also included real estate currently valued at $16.9 million, equal to approximately 0.5% of the total investment portfolio at October 31, 1993. The portfolio of securities is diversified so that no particular issue is individually material to the total investment portfolio. Under the current investment policy of the insurance company, these securities generally will be held to maturity. Therefore, the primary risk is default of the issuer rather than liquidity risk associated with market volatility. {Page 23} PROFESSIONAL SERVICES Founded in 1967, Drake Beam Morin (DBM) is the world's leading provider of organizational and individual transition consulting. DBM operates a total of 151 offices - 67 domestic and 84 international - in 26 countries. The professional services segment, which consists of the operations of Drake Beam Morin (DBM), had substantially higher revenues and operating earnings in fiscal 1993. Revenues grew 20.5% to $146.3 million from $121.4 million in 1992. Operating earnings were $28.4 million, an increase of 18.6% over the previous year, continuing the company's very strong growth record. As the world's leading human resources management consulting firm, DBM assists organizations and individuals worldwide in employee selection, performance, career management and transition management. DBM services a wide array of clients including large and small corporations as well as private and government organizations, providing consulting services to individuals throughout all levels of the organization. DBM's services include both individual executive counseling / placement programs and group programs. The company has also expanded its services in recent years to include employee training and consulting for organizations in the process of change. Drake Beam Morin's performance improvement in 1993 was the result of substantial increases in both group and individual executive program revenues stemming from a number of major new corporate contracts. Operating earnings improved due to the volume increase but were offset somewhat by higher personnel and operational costs supporting the increased level of business. In 1994, Drake Beam Morin will continue to expand its new training and consulting line of business. In addition, the company plans to add eight new domestic offices as well as new foreign offices in Canada and Mexico. Demand for DBM's services should remain strong as business organizations, both domestically and internationally, continue to restructure and downsize to remain competitive. {Page 25} FINANCIAL REVIEW FINANCIAL STATEMENT PRESENTATION The accompanying consolidated financial statements present the Company's spinoff of its theatre operations to Harcourt General shareholders as a discontinued operation, and the acquisition of Harcourt Brace & Company in November 1991 is treated as a pooling-of-interests. It is also important to note that The Neiman Marcus Group, Inc. (NMG) is not a wholly-owned subsidiary of Harcourt General and that the insurance companies operate in a regulated industry. Certain current and prior year amounts have been restated to present the theatre division spinoff as well as the reporting of the Company's professional services operation as a separate business segment which previously had been included in publishing results. GENERAL CINEMA THEATRES On December 15, 1993, Harcourt General completed the spinoff of its General Cinema Theatre operations along with $64.0 million in cash in a tax-free distribution to Harcourt General shareholders. The newly created company, GC Companies, Inc., will operate General Cinema Theatres and will pursue investment and acquisition opportunities. Under the plan of distribution, the Company transferred net theatre assets totaling approximately $135.0 million, including $64.0 million in cash, to GC Companies. The theatre business has been treated as a discontinued operation in the accompanying consolidated statements of operations and cash flows, and fiscal years 1992 and 1991 have been restated to reflect this accounting treatment. HARCOURT BRACE & COMPANY On November 25, 1991, Harcourt General merged with Harcourt Brace & Company (Harcourt Brace) in a business combination accounted for as a pooling-of- interests. The merger was completed after Harcourt General acquired 90% of the outstanding debentures of Harcourt Brace for $1.1 billion in cash and issued 2.9 million shares of Class B Stock and 2.4 million shares of Common Stock in exchange for the outstanding Harcourt Brace common and preferred stocks. The accompanying financial statements utilize pooling-of-interests accounting and reflect the combined historical accounts of the two companies to give retroactive effect to the merger. In fiscal 1992, the Company recorded the purchase of the Harcourt Brace debt, which resulted in a net extraordinary after-tax gain of $419.6 million, or $5.30 per share. THE NEIMAN MARCUS GROUP, INC. As of October 31, 1993, Harcourt General held approximately 65% of the fully-converted equity in NMG. As a majority-owned subsidiary, NMG's financial statements are consolidated with those of Harcourt General with a lag of one quarter. Therefore, NMG's operating results for its fiscal year ended July 31, 1993 have been consolidated with the Company's operating results for its fiscal year ended October 31, 1993. NMG is a public company whose shares are listed on the New York Stock Exchange. Harcourt General has no claim on NMG's assets and is not legally responsible for its liabilities. The Company also has no access to NMG's earnings or cash flow other than through the receipt of cash dividends paid by NMG. The reverse is also true, and NMG has no claim on the Company's assets. HARCOURT GENERAL INSURANCE The Company's consolidated balance sheets include segregated balances for the insurance company's assets and liabilities. This approach is taken because substantially all insurance assets, including cash, are available to the Company only through dividend distributions which are restricted by state insurance regulations. Under state insurance regulations, without prior regulatory approval, the maximum dividend that the insurance company could have paid during the calendar year ending December 31, 1993 was approximately $18.5 million. The payment of dividends is also subject to other considerations, including the maintenance of insurance industry credit ratings. The insurance company did not distribute any dividends during the fiscal year ended October 31, 1993. In December 1991, Harcourt General invested $20.0 million of capital to strengthen the statutory capital surplus of the insurance company and secure improved credit ratings. {Page 26} SEGMENT OPERATING RESULTS The following table reflects revenues and operating earnings by business segment.
years ended October 31, (In thousands) 1993 1992 1991 Revenues: Publishing $ 944,545 $ 865,336 $ 807,689 Specialty retailing 2,016,914 1,808,354 1,744,800 Insurance 548,030 464,606 464,726 Professional services 146,252 121,391 103,795 Total revenues $3,655,741 $3,259,687 $3,121,010 Operating earnings (loss): Publishing $ 142,177 $ 124,503 ($ 73,792) Specialty retailing 120,191 81,510 82,277 Insurance 70,871 42,798 (45,296) Professional services 28,395 23,938 14,309 Corporate expenses (47,307) (41,876) (40,706) Merger and restructuring charges (72,777) Total operating earnings (loss) $ 314,327 $ 230,873 ($ 135,985)
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. The discussion of liquidity and capital resources for the insurance segment on page 22 appears separately because the assets, liabilities and cash flows of the insurance company are restricted by statute. Cash provided by continuing operating activities in 1993 was $255.2 million excluding adjustments for Harcourt General's insurance operations. The publishing and professional services business segments generated positive cash flows from operating activities while NMG's operating activities consumed $9.3 million of cash. The cash provided by the Company's operations was more than sufficient to fund working capital, capital expenditure and dividend requirements. Since October 31, 1992, working capital increased $163.7 million. The most significant items affecting working capital were increases in accounts receivable of $105.1 million and in inventories of $59.4 million, which were partially offset by a $46.3 million increase in current liabilities. These significant changes in working capital were mainly due to increased inventory requirements at NMG for new stores and transaction volume and higher accounts receivable balances resulting from a modification of credit terms offered to customers. Higher accounts receivable and inventory balances in the Company's other business segments also contributed to the increase in working capital. The $20.8 million gain in 1993 resulting from NMG's settlement of certain legal and tax issues with Carter Hawley Hale Stores, Inc. (CHH) did not result in a cash inflow to NMG. The settlement required a cash payment by NMG to CHH of $7.7 million. Cash flows used by investing activities excluding insurance operations were $244.9 million. The Company's investing activities in 1993 included capital expenditures for continuing operations totaling $159.9 million; $19.0 million of theatre division capital expenditures; and $64.0 million of cash transferred to the theatre division as part of the spinoff of that operation. Publishing capital expenditures in 1993 totaled $92.9 million and were related principally to expenditures for prepublication costs including plate expenditures. Capital investment in the publishing business is expected to approximate $140.0 million in fiscal 1994. Specialty retailing capital expenditures in 1993 totaled $56.3 million and were primarily related to store renovation and expansion projects. Capital expenditures for NMG in 1994 are expected to approximate $90.0 million. Future expansion plans include the opening of four new Neiman Marcus stores - one in calendar 1995 and two in calendar 1996, with a fourth store to follow. Five Neiman Marcus stores will undergo remodeling in 1994. In addition, NMG has initiated a major expansion of its mail order fulfillment facility, which is expected to be completed in 1994. As a result of the spinoff of the theatre division, Harcourt General will no longer have access to the cash flow of that business. In addition, the distribution reduced the Company's cash balances by $64.0 million and will reduce future investment income accordingly. Harcourt General will remain secondarily liable for certain lease obligations that were transferred to and assumed by GC Companies in connection with the spinoff. Financing activities primarily reflect additional borrowings of $77.2 million under NMG's revolving credit agreements as well as $44.0 million of dividend payments. On October 31, 1993, the Company's consolidated long-term debt totaled $1.1 billion. That amount includes $449.4 million of NMG debt, which is not guaranteed by Harcourt General. At year-end the Company's consolidated ratio of long-term debt to equity was 1.04 to 1. Excluding NMG's debt, the Company's debt to equity ratio was .61 to 1. On December 16, 1993, the Company replaced its existing revolving credit agreements with a new revolving credit agreement with 13 banks, pursuant to which the Company may borrow up to $400.0 million. The new revolving credit agreement expires on December 16, 1996. The Company also has uncommitted borrowing capacity with three banks totaling $75.0 million. With the exception of amounts outstanding under NMG's credit facilities, there were no committed or uncommitted borrowings outstanding at October 31, 1993. {Page 27} At July 31, 1993, NMG had available $95.0 million under its revolving credit agreements. Effective August 1, 1993, NMG entered into additional revolving credit agreements with four banks under which NMG may borrow up to $25.0 million from each financial institution. These agreements expire on July 30, 1994. At July 31, 1993, there were $17.2 million of uncommitted borrowings that are now outstanding under these new revolving credit agreements. NMG's $10.0 million par value 9.83% Senior Notes are due in May 1994. In addition to its funded debt, the Company has significant lease commitments which require cash outflows. Lease payments from continuing operations totaled $111.0 million in 1993, and minimum lease payments are expected to approximate $87.7 million in 1994. The Company believes its cash position, together with funds provided by operations and available revolving credit, is more than sufficient to meet its foreseeable cash requirements. SEASONALITY The Company's businesses are seasonal in nature. Approximately one-half of operating earnings are expected to be generated in the third quarter of the Company's fiscal year since that quarter includes the important educational publishing selling season. Conversely, second quarter operating earnings are expected to be minimal during a period when publishing sales are at their lowest level and that business segment typically reports operating losses. Those losses partially offset retail earnings, which are at their highest point since the Company's second quarter includes NMG's holiday selling season. 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 (LIFO) method of accounting for substantially all domestic publishing inventories and for approximately 75% of its retail inventories, or about 80% of the consolidated inventory reported in its financial statements. 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 results of operations in its business segments. DIVIDENDS The Company has a long-standing policy of returning a portion of its earnings and cash flow to shareholders through the payment of cash dividends. In September 1993, the Board of Directors voted to increase the quarterly cash dividend on the Common Stock to 15 cents per share. The Board also increased the quarterly cash dividend on the Series A Stock to 15.75 cents per share and on the Class B Stock to 13.5 cents per share. The Series A Stock dividend has been adjusted, effective with the January 1994 payment, to 17.25 cents per share as a result of the spinoff of GC Companies. This is the 25th consecutive year in which cash dividends have been increased. OPERATING RESULTS 1993 vs. 1992 Net earnings applicable to common shareholders were $171.3 million in 1993, or $2.15 per share, compared to net earnings of $494.5 million, or $6.25 per share, in 1992. The 1993 net earnings include earnings of $5.8 million from the theatre division; capital gains of $17.5 from the insurance division; and other income of $12.2 from NMG s settlement of legal and tax issues with Carter Hawley Hale Stores, Inc. The 1992 results have been restated to reflect the theatre division as a discontinued operation and include an after-tax gain on the retirement of Harcourt Brace debt of $419.6 million, or $5.30 per share, and an after-tax charge of $36.0 million, or $0.45 per share, relating to the adoption of Statement of Financial Accounting Standards No. 106 "Employer's Accounting for Postretirement Benefits Other Than Pensions" (FAS 106). PUBLISHING Publishing revenues increased 9.2% to $944.5 million in 1993, primarily the result of strong sales of new elementary and secondary textbooks. These increases were partially offset by the absence of $18.6 million in revenues generated in 1992 by the Company's Weber Costello subsidiary, which was sold in August 1992. Operating earnings in 1993 were $142.2 million compared to $124.5 million in 1992, an increase of 14.2%. The increase is attributable to incremental textbook revenues offset by the impact of increased operating expenses associated with the higher sales activity. SPECIALTY RETAILING Total revenues from specialty retailing increased 11.5% to $2.02 billion from $1.81 billion in fiscal 1992, benefiting from a new Neiman Marcus store in Troy, Michigan; 52 weeks of revenues from the Neiman Marcus store in Scottsdale, Arizona in 1993 compared to 42 weeks in 1992; 10 incremental Contempo Casuals stores; and 31 incremental Pastille stores. Comparable revenues for NMG increased 6.6%. Operating earnings from specialty retailing were $120.2 million in 1993, a 47.5% increase from $81.5 million in 1992. The earnings increase reflects higher transaction volume and improved gross margins at the Neiman Marcus Division and Bergdorf Goodman partially offset by an operating loss at Contempo Casuals. {Page 28} INSURANCE Insurance revenues increased 18.0% to $548.0 million in 1993 primarily due to higher premiums and investment income generated from both structured and deferred annuities. The stronger sales resulted from the restoration of the A.M. Best A+ / Superior rating at Federal Home Life Insurance Company. In addition, capital gains increased $25.1 million due primarily to calls on corporate debt securities held in the insurance portfolio. Operating earnings were $70.9 million in 1993 compared to $42.8 million in 1992, a 65.6% increase. The improvement was due primarily to the higher capital gains and favorable margins partially offset by a $4.6 million charge associated with the sale of a block of major medical business. PROFESSIONAL SERVICES Revenues from the professional services segment increased 20.5% in 1993 to $146.3 million from $121.4 million in 1992, benefiting from increased corporate downsizing and restructuring activities. Operating earnings for the professional services segment were $28.4 million in 1993 compared with $23.9 million in 1992. The improvement was primarily due to increased revenues partially offset by higher labor costs. CORPORATE EXPENSES Corporate expenses increased $5.4 million to $47.3 million in 1993, primarily due to higher employee and director benefit costs, professional fees and other corporate activities. INVESTMENT INCOME Investment income declined $9.2 million to $14.1 million in 1993, primarily due to lower interest rates and a lower average portfolio balance. The 1992 portfolio included $1.3 billion of cash for a 25-day period prior to the merger with Harcourt Brace. Interest earned on the insurance company's portfolio is included in insurance operating revenues. INTEREST EXPENSE Interest expense decreased $0.9 million to $84.6 million in 1993. A higher level of NMG debt was more than offset by lower interest rates on NMG borrowings. OTHER INCOME AND EXPENSE Other income in 1993 includes a $20.8 million pre-tax gain from the reduction in the level of NMG's estimated liabilities due to the settlement of various legal and tax issues with Carter Hawley Hale Stores. Other income in 1992 reflects an $11.6 million gain on the exchange of Cadbury Schweppes stock for subordinated debentures of the Company. INCOME TAXES The effective income tax rate was 36.9% in 1993 compared to 39.0% in 1992. The lower 1993 rate reflects lower state and foreign tax expenses. DISCONTINUED OPERATIONS Discontinued operations include after-tax earnings of the theatre division amounting to $10.5 million in 1993 and $6.2 million in 1992. The $4.7 million after-tax charge in 1993 reflects one-time expenses associated with the spinoff of the theatre business. The after-tax charge of $3.2 million in 1992 represents the theatre division's portion of the cumulative effect of a change in accounting for postretirement health care benefits. OPERATING RESULTS 1992 vs. 1991 Net earnings in 1992 were $494.5 million, or $6.25 per share. These results include an extraordinary after-tax gain on the retirement of Harcourt Brace debt of $419.6 million, or $5.30 per share, and an after-tax charge of $36.0 million, or $0.45 per share, relating to the adoption of FAS 106. Results have been restated to reflect as discontinued operations the after-tax earnings related to the theatre business of $3.0 million, or $.04 per share. The net loss for 1991 was $293.1 million, and the net loss applicable to common shareholders after the payment of dividends on Harcourt Brace's preferred stock (which was eliminated pursuant to the merger) was $305.8 million, or a loss of $3.88 per share. The 1991 net loss includes fourth quarter pre-tax charges of $338.5 million related to the publishing and insurance segments. The 1991 operating results have also been restated to reflect as discontinued operations after-tax earnings of $4.8 million, or $0.06 per share, related to the theatre business. PUBLISHING Publishing revenues in 1992 were $865.3 million, a 7.1% increase from fiscal 1991. While substantially all publishing business units had higher 1992 revenues as compared to 1991, significant increases were achieved in medical publishing and testing products. Growth in medical publishing revenues reflects higher frontlist sales of medical clinical and medical textbook products. Gains in testing products over the prior year were primarily due to the introduction in 1992 of a revised version of the Wechsler Intelligence Scale for Children. The publishing segment had operating earnings of $124.5 million in 1992 compared to a loss of $73.8 million in 1991. Substantially all publishing units had higher operating earnings in 1992 compared to 1991. Fiscal 1992 benefited from a lower level of intangible and plate amortization and from additional sales of testing products and medical books. The 1991 loss was primarily due to pre-tax charges of $168.5 million related to the Harcourt Brace merger and subsequent restructuring of the business. These charges included shortening the lives of certain tangible and intangible assets; write-downs of inventory and plate development costs associated with reduced expectations of sales of certain products; and the recognition of shorter revision cycles in the college market. {Page 29} SPECIALTY RETAILING Total revenues from specialty retailing increased 3.6% in 1992 over 1991 while consolidated NMG comparable sales declined 0.4%. Sales increases resulted from a comparable revenue increase of 1.6% at the Neiman Marcus Division, which includes the Neiman Marcus Stores and NM Direct, and from the opening of new Neiman Marcus stores in Minneapolis (August 1991) and Scottsdale (October 1991); 17 incremental Contempo Casuals stores; and 7 new Pastille stores. Partially offsetting these increases was a 13.0% decline in comparable store sales at Contempo Casuals. Operating earnings from specialty retailing were $81.5 million in 1992 compared to $82.3 million in 1991. The decline was primarily due to higher markdowns needed to maintain inventory currency at Contempo Casuals and higher occupancy costs associated with increased investment spending on store building and renovation. INSURANCE Insurance revenues in 1992 were at compared to 1991. Investment income was $198.1 million in 1992 and $160.4 million in 1991. The 1991 amount was reduced by $42.0 million of charges for portfolio valuation reserves recorded as capital losses. Premiums earned were $266.5 million in 1992 and $304.3 million in 1991. Premium income declined primarily due to a reduction in structured annuity sales, which were adversely affected during the period when the Federal Home Life subsidiary temporarily lost its A.M. Best A+/Superior rating. Operating earnings from Harcourt General Insurance were $42.8 million in 1992 compared to a loss of $45.3 million in 1991. Fiscal 1992 benefited from lower accident and health loss ratios and increased margins on deferred annuity contracts as a result of falling interest rates. The 1991 loss included additions to portfolio reserves and other charges totaling $89.0 million. PROFESSIONAL SERVICES Revenues from the professional services segment increased 17.0% to $121.4 million from $103.8 million in 1991, benefiting from increased activity in the Company s group and executive programs. Operating earnings for the professional services segment were $23.9 million in 1992 compared with $14.3 million in 1991. The improvement in 1992 was primarily due to increased revenues partially offset by higher operating expenses. CORPORATE EXPENSES Corporate expenses increased $1.2 million to $41.9 million in 1992, primarily due to additional costs related to relocation, higher executive compensation costs and increases in professional fees at NMG. Corporate expenses in 1991 included $8.2 million of charges incurred in connection with the Harcourt Brace merger. DISCONTINUED OPERATIONS Discontinued operations include after-tax operating earnings of the theatre division amounting to $6.2 million in 1992 and $4.8 million in 1991. The after-tax charge of $3.2 million in 1992 represents the theatre division's portion of the cumulative effect of a change in accounting for postretirement health care benefits. MERGER AND RESTRUCTURING CHARGES The 1991 charge of $72.8 million reflects $15.3 million of costs associated with the Harcourt Brace merger; $18.9 million of costs associated with the discontinuance of the Harcourt Brace ESOP; and $38.6 million of costs reflecting management's decision to consolidate certain facilities. INVESTMENT INCOME Investment income declined $105.3 million to $23.2 million in 1992, primarily due to the use of approximately $1.3 billion of the investment portfolio to purchase the debt of Harcourt Brace. The $1.3 billion earned approximately $88.4 million of income in fiscal 1991. Additionally, in fiscal 1992 the short-term investment portfolio earned a lower rate of return than in 1991 due to declining interest rates. INTEREST EXPENSE Interest expense decreased $262.8 million to $85.4 million in 1992, primarily due to the elimination in consolidation of the $1.8 billion of Harcourt Brace debt acquired by the Company. This debt incurred $249.5 million of interest expense in fiscal 1991. Interest expense was also reduced as a result of lower interest rates on NMG borrowings under its revolving credit facility. OTHER INCOME AND EXPENSE Other income in 1992 includes an $11.6 million gain on the exchange of Cadbury Schweppes stock for subordinated debentures of the Company. Other expense in 1991 includes a $17.3 million charge related to the guarantee by NMG of certain Carter Hawley Hale Stores employee benefits partially offset by a gain of $5.4 million from the sale of other assets. INCOME TAXES The effective income tax rate of 39.0% was significantly higher than the income tax benefit rate of 19.7% recognized in 1991. The lower 1991 rate reflected foreign tax expenses and a limitation on available net operating loss carrybacks. [page 30] CONSOLIDATED BALANCE SHEET
October 31 1993 1992 (In thousands) Assets CURRENT ASSETS Cash and equivalents $ 466,925 $ 430,728 Accounts receivable-trade, net 493,384 388,333 Inventories 470,525 411,093 Other current assets 73,111 63,806 Total current assets 1,503,945 1,293,960 PROPERTY AND EQUIPMENT Land, buildings and improvements 494,438 683,081 Fixtures and equipment 301,941 470,080 796,379 1,153,161 Less accumulated depreciation and amortization 279,838 445,678 Total property and equipment, net 516,541 707,483 OTHER ASSETS Prepublication costs, net 137,959 144,088 Intangible assets 400,028 415,072 Other 111,601 115,359 Total other assets 649,588 674,519 NET ASSETS OF DISCONTINUED THEATRE OPERATIONS 135,804 - INSURANCE ASSETS Fixed maturity securities, at amortized cost (market value $2,915,850 and $2,371,124) 2,665,378 2,226,486 Commercial paper 105,764 62,945 Other investments and cash 45,987 72,167 Premiums, accounts, and investment income receivable 70,965 61,315 Deferred policy acquisition costs 155,534 138,725 Other assets 127,320 108,070 Total insurance assets 3,170,948 2,669,708 $5,976,826 $5,345,670
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. [page 31]
October 31 1993 1992 (In thousands) LIABILITIES CURRENT LIABILITIES Notes payable and current maturities of long-term liabilities $ 64,904 $ 18,369 Accounts payable 283,693 258,936 Accrued liabilities 358,636 381,382 Taxes payable 35,322 28,179 Other current liabilities 49,331 58,765 Total current liabilities 791,886 745,631 LONG-TERM LIABILITIES Notes and debentures 923,618 902,295 Other long-term liabilities 167,031 183,758 Total long-term liabilities 1,090,649 1,086,053 DEFERRED INCOME TAXES 200,088 205,600 INSURANCE LIABILITIES Policyholder reserves and deposits 2,450,023 2,022,281 Unearned premiums 175,937 165,060 Policy and contract claims 123,621 111,118 Other insurance liabilities 93,044 85,486 Total insurance liabilities 2,842,625 2,383,945 Commitments and contingencies - - SHAREHOLDERS EQUITY PREFERRED STOCK: Series A Cumulative Convertible - $1.00 par value Authorized - 40,000 shares Issued and outstanding - 1,996 and 2,890 shares 1,996 2,890 COMMON STOCKS: Class B Stock - $1.00 par value Authorized 40,000 shares Issued and outstanding - 21,934 and 21,951 shares 21,934 21,951 Common Stock - $1.00 par value Authorized - 100,000 shares Issued and outstanding - 55,373 and 54,341 shares 55,373 54,341 Paid-in capital 861,928 860,133 Cumulative translation adjustments (5,524) (3,409) Retained earnings (deficit) 115,871 (11,465) Total shareholders equity 1,051,578 924,441 $5,976,826 $5,345,670
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. [page 32] CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended October 31 1993 1992 1991 (In thousands except for per share amounts) Revenues $3,655,741 $3,259,687 $3,121,010 Costs applicable to revenues 2,209,470 1,946,258 1,969,972 Selling, general and administrative expenses 1,084,637 1,040,680 1,173,540 Corporate expenses 47,307 41,876 40,706 Merger and restructuring charges - - 72,777 Operating earnings (loss) 314,327 230,873 (135,985) Investment income 14,072 23,239 128,533 Interest expense (84,585) (85,442) (348,260) Other income (expense), net 18,303 8,341 (15,171) Earnings (loss) from continuing operations before income taxes, extraordinary gain and cumulative effect of accounting change 262,117 177,011 (370,883) Income tax (expense) benefit (96,627) (69,084) 72,926 Earnings (loss) from continuing operations before extraordinary gain and cumulative effect of accounting change 165,490 107,927 (297,957) Discontinued theatre operations: Earnings from theatre operations, net of income taxes of $6,958, $3,863 and $3,024 10,503 6,172 4,835 Spinoff transaction expenses in 1993 and charge for cumulative effect of change in accounting for postretirement health care benefits in 1992, net (4,660) (3,182) - Earnings from discontinued theatre operations 5,843 2,990 4,835 Earnings (loss) before extraordinary gain and cumulative effect of accounting change 171,333 110,917 (293,122) Extraordinary gain on elimination of debt, net - 419,557 - Charge for cumulative effect of change in accounting for postretirement health care benefits, net - (36,014) - Net earnings (loss) 171,333 494,460 (293,122) Dividends on Harcourt Brace preferred stock 12,684 Net earnings (loss) applicable to common shareholders $ 171,333 $ 494,460 ($305,806) Amounts applicable to common shareholders: Earnings (loss) from continuing operations before extraordinary gain and cumulative effect of accounting change $ 2.08 $ 1.36 ($3.94) Earnings from discontinued theatre operations, net .07 .04 .06 Extraordinary gain, net - 5.30 - Cumulative effect of accounting change, net - (.45) - Net earnings (loss) $ 2.15 $ 6.25 ($3.88)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. [page 33] CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended October 31 1993 1992 1991 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Earnings (loss) from continuing operations $165,490 $107,927 ($297,957) Adjustments to reconcile earnings (loss) to net cash provided by continuing operations: Depreciation and amortization 169,254 153,417 293,776 Other income (20,755) - - Deferred income taxes 13,145 (1,943) 3,031 Non-cash interest 1,873 7,434 128,096 Gain on sales of long-term assets - (11,633) (1,098) Merger and restructuring charges - - 72,777 Other 16,797 10,130 24,567 Changes in assets and liabilities: Accounts receivable (105,218) (66,894) 15,436 Inventories (61,870) 3,486 9,214 Other current assets (11,746) (11,541) (9,870) Accounts payable and accrued liabilities 88,246 38,686 (110,258) 255,216 229,069 127,714 Insurance operating activities 1,431 (24,227) 55,069 Discontinued theatre operations 43,687 32,295 23,602 Net cash provided by operating activities 300,334 237,137 206,385 CASH FLOWS FROM INVESTING ACTIVITIES Theatre capital expenditures (18,984) (13,476) (5,606) Spinoff cash transfer (64,000) - - Capital expenditures (159,860) (185,997) (164,917) Other investing activities (2,057) (10,650) (12,669) (244,901) (210,123) (183,192) Insurance investing activities (439,558) (284,391) (303,607) Net cash used by investing activities (684,459) (494,514) (486,799) CASH FLOWS FROM FINANCING ACTIVITIES Cash used to purchase Harcourt Brace debt - (1,369,473) - Issuance of debt 77,200 369,330 194,400 Repayment of debt (6,500) (150,000) (157,839) Dividends paid (43,997) (40,826) (35,096) Equity transactions, net 632 4,546 (3,210) 27,335 (1,186,423) (1,745) Proceeds from policyholder deposits 392,987 255,560 264,942 Net cash provided (used) by financing activities 420,322 (930,863) 263,197 CASH AND EQUIVALENTS Increase (decrease) during the year 36,197 (1,188,240) (17,217) Beginning balance 430,728 1,618,968 1,636,185 Ending balance $466,925 $430,728 $1,618,968 SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest $ 82,280 $109,944 $ 232,856 Income taxes $ 84,087 $ 59,192 $ 64,350 Non-cash items: Extraordinary gain, net - $419,557 - Cumulative effect of accounting change, net - ($36,014) -
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. [page 34] CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Series A Cumulative Retained Years ended October 31, Stocks, $1 Stock, $1 Paid-in Translation Earnings 1993, 1992 and 1991 Par Value Par Value Capital Adjustments (Deficit) (In thousands) Balance at October 31, 1990 $74,868 $4,079 $846,517 $5,836 ($141,713) Net loss (293,122) Cash dividends paid, Harcourt General (35,096) Preferred dividends, Harcourt Brace 9,851 (9,851) Conversion of Series A Stock 226 (226) Translation adjustments (1,238) Adjustment to conform fiscal year of Harcourt Brace 14,683 Other equity transactions, net 66 2 (2,128) Balance at October 31, 1991 75,160 3,855 854,240 4,598 (465,099) Net earnings 494,460 Cash dividends paid, Harcourt General (40,826) Conversion of Series A Stock 965 (965) Translation adjustments (8,007) Other equity transactions, net 167 5,893 Balance at October 31, 1992 76,292 2,890 860,133 (3,409) (11,465) Net earnings 171,333 Cash dividends paid, Harcourt General (43,997) Conversion of Series A Stock 894 (894) Translation adjustments (2,115) Other equity transactions, net 121 1,795 Balance at October 31, 1993 $77,307 $1,996 $861,928 ($5,524) $115,871
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. [page 35] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended October 31, 1993, 1992 and 1991 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. The assets of Harcourt General Insurance are restricted to the insurance subsidiary by statute and are unavailable for use by the Company except through dividend distributions (see Note 7). 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 market value. The Company's practice of investing cash only with financial institutions that have acceptable credit ratings limits the amount of credit exposure to any one financial institution. Accounts Receivable Certain publishing products are sold to customers with a right of return. Revenues from such sales represent gross sales less 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 both the allowance for book returns of $49.7 million in 1993 and $45.6 million in 1992 and the allowance for doubtful accounts of $20.4 million in 1993 and $12.8 million in 1992. Inventories Inventories are stated at the lower of cost or market. All domestic publishing inventories are valued using the last-in-first-out (LIFO) method. Approximately seventy-five percent of retail inventories are valued using the retail method on a LIFO basis. The remaining retail inventories are valued using the retail or cost method on a first-in-first-out (FIFO) basis. If the FIFO method of inventory valuation had been used to value inventory, the inventories would have been $22.2 million and $25.9 million higher than reported at October 31, 1993 and October 31, 1992, 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. Prepublication Costs Prepublication costs are amortized using the sum-of-the-years-digits method over the estimated useful lives not exceeding five years. Intangible Assets Intangible assets represent trademarks and goodwill. Amortization is provided on a straight-line method over the estimated useful lives of these assets not exceeding forty years. Income Taxes Income taxes are calculated in accordance with Accounting Principles Board Opinion No. 11. The Company accounts for certain revenue and expense items differently for financial reporting purposes than for income tax purposes. Deferred taxes are provided in recognition of these differences. In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which mandates a change in the method of accounting for income taxes. The Company will adopt this new standard during the first quarter of fiscal 1994 and has determined that its effect on the Company's financial position or results of continuing operations will not be material. Receivables and Finance Charge Income NMG extends credit to its retail customers. NMG's retail credit operations produce finance charge income which is treated as a reduction of selling, general and administrative expenses. Finance charge income amounted to $36.3 million in 1993, $28.3 million in 1992 and $27.7 million in 1991. Credit risk with respect to trade receivables is limited due to the large number of customers to whom the Company extends credit. Ongoing credit evaluation of customers' financial position is performed, and collateral is not required as a condition of extending credit. The Company maintains reserves for potential credit losses. Earnings (Loss) Per Common and Common Equivalent Share Earnings (loss) 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 79.6 million shares in 1993, 79.1 million shares in 1992 and 78.9 million shares in 1991. Earnings (loss) per common and common equivalent share, assuming full dilution, have not been presented because the dilutive effect is not material. [page 36] Statement of Financial Accounting Standards No. 115 In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115). FAS 115 revises the accounting and reporting for all investments in debt securities and for investments in equity securities that have determinable fair values. The Company is required to adopt FAS 115 no later than fiscal 1995 and has not yet determined its impact on the Company's continuing operations or financial position. Changes in Presentation Certain prior year amounts have been restated to conform to the current year presentation and to reflect the spinoff of the theatre operations. 2. DISCONTINUED OPERATIONS On December 15, 1993, the Company completed the spinoff of its theatre operations in a tax-free distribution to its shareholders. The newly created company is named GC Companies, Inc. (GCC). Under the plan of distribution, the Company transferred to GCC approximately $135.0 million of net theatre assets including $64.0 million in cash. Each common shareholder of the Company received one share of Common Stock in GCC for every ten shares of Harcourt General Common and Class B shares held on December 10, 1993, which was the record date for the distribution. In connection with the distribution, GCC and Harcourt General have entered into various agreements which govern their ongoing relationship, including a Distribution Agreement; a Reimbursement and Security Agreement; an Intercompany Services Agreement; an Information Services Agreement; a Tax Agreement; and certain subleases. The consolidated statements of operations and cash flows have been restated to reflect the theatre business as a discontinued operation. Revenues applicable to discontinued operations were $495.0 million in 1993, $457.2 million in 1992 and $466.8 million in 1991. Under the Reimbursement and Security Agreement, GCC has 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 losses 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. Prior to the distribution, GCC's employees participated in a noncontributory defined benefit pension plan covering substantially all full-time employees of Harcourt General. The projected benefit obligation for GCC plan participants was estimated to be $15.8 million and $13.2 million at October 31, 1993 and 1992, respectively. Following the distribution, certain assets with a value in excess of the projected benefit obligation will be transferred from Harcourt General's defined benefit pension plan to a new plan for GCC participants. GCC employees may, at their election, exercise all Harcourt General stock options which were vested on December 15, 1993 or convert such vested stock options into options to purchase shares of GCC Common Stock. All non-vested Harcourt General options held by GCC employees at December 15, 1993 will automatically be converted into GCC stock options based upon a formula. At October 31, 1993, there were 144,694 vested and 71,790 non-vested Harcourt General stock options held by GCC employees. Under the Intercompany Services Agreement, Harcourt General provides certain management, accounting, financial, legal, tax and other corporate services to GCC. The fees for these services are based on Harcourt General's costs and are subject to the approval of a committee of directors of GCC who are not affiliated with Harcourt General. After October 31, 1994, this agreement may be terminated on 90 days notice. The Company's Chairman of the Board serves as the Chairman, President and Chief Executive officer of GCC, and the Company's Chief Executive Officer and President serves as a director of GCC. 3. MERGER WITH HARCOURT BRACE & COMPANY Harcourt Brace & Company (Harcourt Brace) was acquired on November 25, 1991 through an exchange of stock and the purchase of approximately $1.7 billion of certain Harcourt Brace indebtedness for approximately $1.1 billion in cash. This acquisition was accounted for as a pooling-of-interests. Subsequent to the acquisition, all remaining Harcourt Brace indebtedness was purchased from bondholders for approximately $188.0 million in cash. In the aggregate, these purchases resulted in a net extraordinary gain on a consolidated basis of $419.6 million, net of $175.0 million of costs associated with the acquisition of the debt including transaction fees, redemption premiums, other direct costs and taxes. During 1991 the Company earned $88.4 million of income on the $1.3 billion it used to acquire Harcourt Brace debt, and Harcourt Brace incurred $249.5 million of interest expense on the debt acquired by the Company. Both of these amounts are included in the statement of operations for the year ended October 31, 1991. The financial statements for the year ended October 31, 1991 also reflect dividends paid on Harcourt Brace's preferred stock. Prior to the acquisition, Harcourt Brace's fiscal year ended December 31. In 1991 Harcourt Brace's fiscal year-end was changed to October 31 to conform to the Company's fiscal year. As a result of this change, the [page 37] $14.7 million net loss incurred by Harcourt Brace during the period from November 1, 1990 to December 31, 1990 has been eliminated from retained earnings at October 31, 1991. In the fourth quarter of 1991, Harcourt General and Harcourt Brace recorded costs directly and indirectly associated with the merger, together with other charges to current operating results, totaling $338.5 million before taxes. Merger and restructuring charges ($72.8 million) included merger costs; costs associated with the discontinuance of the Harcourt Brace ESOP; and a provision to consolidate certain facilities and relocate certain functions and businesses. Other charges ($265.7 million) included increased amortization to reflect the shortened estimated useful lives of both tangible and intangible assets; recognition of a decline in the market value of certain insurance portfolio holdings; the write-off of certain deferred insurance policy acquisition costs; the write-down of inventory, plate, development costs and royalty advances associated with reduced expectations of sales for certain products; and various other charges. 4. DESCRIPTION OF CONTINUING OPERATIONS Publishing Harcourt Brace publishes textbooks and other materials for elementary and secondary schools and colleges, as well as scientific, technical and medical books and journals, fiction, non-fiction and children s books. It publishes and scores tests that measure individual aptitude and competency and also conducts bar examination review and accounting accreditation review courses. Specialty Retailing NMG operates three specialty retailing store businesses: Neiman Marcus, Bergdorf Goodman and Contempo Casuals (which includes Pastille). Neiman Marcus operates 27 stores in 14 states and the District of Columbia. Bergdorf Goodman operates two stores in New York City, and Contempo Casuals and Pastille operate 329 stores in 37 states and Puerto Rico. In addition, all three specialty retailers operate mail order businesses through NM Direct. Insurance Harcourt General Insurance underwrites and acts as agents of individual accident, life, health and credit insurance policies and sells annuity products. On a combined basis, the life and health operations provide insurance coverage in all 50 states. Professional Services Drake Beam Morin (DBM) provides human resources management consulting services such as career transition, outplacement and other consulting services.
Additional Financial Information Years ended October 31, (In thousands) 1993 1992 1991 REVENUES: Publishing $944,545 $865,336 $807,689 Specialty retailing 2,016,914 1,808,354 1,744,800 Insurance 548,030 464,606 464,726 Professional services 146,252 121,391 103,795 Total revenues $3,655,741 $3,259,687 $3,121,010 OPERATING EARNINGS (LOSS): Publishing $142,177 $124,503 $(73,792) Specialty retailing 120,191 81,510 82,277 Insurance 70,871 42,798 (45,296) Professional services 28,395 23,938 14,309 Corporate expenses (47,307) (41,876) (40,706) Merger and restructuring charges - - (72,777) Total operating earnings (loss) $314,327 $230,873 $(135,985) IDENTIFIABLE ASSETS: Publishing $739,746 $811,614 $843,945 Specialty retailing 1,362,657 1,221,693 1,156,453 Insurance 3,170,948 2,669,708 2,300,018 Professional services 55,973 46,587 37,376 Corporate 511,698 382,714 1,642,450 Total identifiable assets $5,841,022 $5,132,316 $5,980,242 Capital expenditures: Publishing $92,864 $106,491 $ 64,221 Specialty retailing 56,325 73,933 96,787 Insurance 2,556 465 900 Professional services 4,813 2,892 3,849 Corporate 5,858 2,681 60 Total capital expenditures $162,416 $186,462 $ 165,817 DEPRECIATION AND AMORTIZATION: Publishing $104,603 $91,403 $ 244,660 Specialty retailing 59,025 57,376 45,500 Insurance 2,178 975 1,919 Professional services 3,036 2,205 1,782 Corporate 2,590 2,433 1,834 Total depreciation and amortization $171,432 $154,392 $ 295,695
5. INTANGIBLE ASSETS Intangible assets consisted of the following at October 31: (In thousands) 1993 1992 Goodwill $ 394,452 $ 395,369 Trademarks 73,000 73,000 Other 17,205 17,110 Total 484,657 485,479 Accumulated amortization (84,629) (70,407) Total $ 400,028 $415,072
Amortization expense was $14.4 million in 1993, $14.3 million in 1992 and $151.6 million in 1991. [page 38] 6. THE NEIMAN MARCUS GROUP, INC. The Company owns 21.4 million shares of NMG Common Stock and all of the outstanding shares of both the NMG 9 1/4% Cumulative Redeemable Preferred Stock (9 1/4% Preferred Stock) and 6% Cumulative Convertible Preferred Stock (6% Preferred Stock). On a fully-converted basis the shares presently owned by the Company represent approximately sixty-five percent of the voting power and equity of NMG. The 6% Preferred Stock is entitled to vote on all matters and is convertible on a per share basis into approximately 8.99 shares of NMG Common Stock subject to certain antidilution adjustments. The conversion price for the 6% Preferred Stock at October 31, 1993 was approximately $41.70 per share of Common Stock acquired on such conversion, which was substantially above the market price of NMG Common Stock on October 31, 1993. The earnings and cash flow of NMG are not available to the Company, except through NMG dividend payments on the $374.9 million stated value of the 6% Preferred Stock, $50.0 million stated value of the 9 1/4% Preferred Stock, and the Company's shares of NMG Common Stock. In August 1990, NMG adopted a dividend reinvestment plan enabling all shareholders to invest their dividends in shares of NMG Common Stock. During NMG's fiscal years 1993, 1992 and 1991, the Company reinvested $15.6 million, $30.9 million and $25.9 million, respectively, of common and preferred dividends in additional shares of NMG's Common Stock. The Company ceased participation in NMG's dividend reinvestment plan after the January 1993 dividend payment. 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 based on the Company's costs and are subject to the approval of a committee of directors of NMG who are unaffiliated with the Company. This agreement may be terminated by either party on 180 days' notice. Charges to NMG were $7.4 million in 1993, $6.6 million in 1992 and $5.6 million in 1991. The Company's Chairman of the Board; President and Chief Executive Officer; Senior Vice President and Chief Financial Officer; and Senior Vice President and General Counsel as well as certain other officers of the Company serve in similar capacities with NMG. The first two named officers also serve as directors of both companies. 7. INSURANCE
Condensed Consolidated Results of Operations The condensed consolidated results of operations for Harcourt General Insurance are as follows: Years ended October 31, (In thousands) 1993 1992 1991 Insurance premiums and other income $296,399 $266,479 $ 304,280 Net investment income 251,631 198,127 160,446 Total revenues 548,030 464,606 464,726 Policy benefit expenses 154,450 177,005 177,535 Increase in policyholder reserves and deposits 207,328 139,172 170,366 Underwriting, acquisition, and general expenses 115,381 105,631 162,121 Earnings (loss) before income taxes 70,871 42,798 (45,296) Income tax expense (benefit) 24,835 15,067 (15,146) Net earnings (loss) $ 46,036 $ 27,731 ($30,150)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Condensed consolidated statements of cash flows for Harcourt General Insurance are as follows: Years ended October 31, (In thousands) 1993 1992 1991 OPERATING ACTIVITIES: Net earnings (loss) $ 46,036 $ 27,731 ($30,150) Changes in: Policyholder reserves 41,774 (8,511) 53,209 Unearned premiums (9,457) 2,512 (6,401) Policy and contract claims 3,604 4,027 (8,089) Deferred policy acquisition costs (17,351) (17,550) 13,440 Income taxes payable 1,679 3,256 (19,346) Realized investment (gains) losses, net (27,610) (3,495) 23,675 Amortization of acquired insurance in force 2,013 2,659 5,845 Other, net (9,593) (4,960) (2,481) Net cash provided by operating activities 31,095 5,669 29,702 INVESTING ACTIVITIES: Purchase of fixed maturity securities (1,082,430) (728,274) (585,463) Proceeds from sale of fixed maturity securities 84,621 80,980 330,176 Prepayment, call and maturity of investment securities 603,360 236,206 73,838 Change in short-term investments (42,079) 124,521 (121,431) Other, net (3,030) 2,176 (727) Net cash used in investing activities (439,558) (284,391) (303,607) [page 39] Financing Activities: Proceeds from policyholder deposits 392,987 255,560 264,942 Capital contributions, advances and repayments, net (896) 25,327 13,746 Net cash provided by financing activities 392,091 280,887 278,688 Increase (decrease) in cash ($ 16,372) $ 2,165 $ 4,783
REVENUES AND EXPENSES Premiums from traditional life insurance contracts are recognized as revenues when due whereas accident and health premiums are recognized over the contract period. Amounts received from policyholders under non-traditional life policies and investment contracts are recorded as liabilities. Revenues recorded on nontraditional life contracts consist only of policy charges for the cost of insurance, policy administration and surrenders assessed during the period. Expenses for non-traditional life policies include interest credited to policyholder account balances and benefit claims incurred in excess of policyholder account balances. POLICYHOLDER RESERVES AND DEPOSITS For immediate annuities with life contingencies, the policyholder deposit liability represents the present value of future benefit payments. Future benefits are estimated based on insurance industry mortality tables and are discounted at interest rates ranging from 5.90% to 11.75% at issue, graded from 5.80% to 10.0% after 20 years. For deferred annuity contracts, the policyholder deposit liability approximates accumulated contract values. During 1993, interest was credited to such policies at rates ranging from 4.00% to 8.95%. Estimates of future investment yields, mortality and withdrawals are used to calculate policyholder reserves for traditional life insurance contracts whereas policyholder deposits for universal life-type contracts approximate premiums received plus accumulated interest, less mortality charges and expense loads. Reserves for cancelable accident and health insurance are based upon unearned premiums, claims incurred but not reported, and claims in the process of settlement. This estimate is based on the experience of the insurance industry and Harcourt GeneralInsurance, adjusted for current trends. DEFERRED POLICY ACQUISITION COSTS Costs incurred which are directly related to and vary with the production of new insurance policies are deferred. Deferred policy acquisition costs related to non-traditional life and investment contracts are amortized in relation to the present value of expected gross profits. For other products, such amounts are amortized in relation to the present value of expected future premiums. Amortization of deferred policy acquisition costs was $40.3 million in 1993, $31.5 million in 1992 and $65.5 million in 1991. INVESTMENTS Fixed maturity securities consist primarily of bonds, which are recorded at amortized cost. Harcourt General Insurance has the ability and intent to hold these securities until maturity. Other investments include mortgage and policy loans recorded at cost; short-term investments recorded at cost, which approximates market value; and real estate recorded at the lower of cost or fair value. Fixed maturity securities include $24.3 million (market value $31.3 million) and $48.4 million (market value $56.9 million) of non-investment grade debt securities at October 31, 1993 and October 31, 1992, respectively. These securities represent 1.0% and 2.1% of the total investment portfolio at October 31, 1993 and 1992, respectively. If market conditions permit, these non-investment grade debt securities might be sold. The amortized cost and estimated market value of fixed maturity securities were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value October 31, 1993 U.S. Government $ 89,239 $ 9,189 - $ 98,428 Public Utilities 267,695 34,633 - 302,328 Other Corporate Bonds 1,247,206 159,573 - 1,406,779 Mortgage-backed securities * 1,061,238 48,037 ($960) 1,108,315 $2,665,378 $251,432 ($960) $2,915,850 October 31, 1992 Public Utilities $363,275 $34,742 - $ 398,017 Other Corporate Bonds 927,572 70,528 ($13) 998,087 Mortgage-backed securities* 935,639 41,426 (2,045) 975,020 $2,226,486 $146,696 ($2,058) $ 2,371,124 * Includes $765.3 million in 1993 and $728.3 million in 1992 of mortgage-backed securities guaranteed by the U.S. Government.
The specific identification method is used to determine the cost of securities sold. Sales of fixed maturity securities resulted in gross realized gains of $33.2 million in 1993, $26.5 million in 1992 and $26.6 million in 1991 and gross realized losses of $7.5 million in 1993, $24.1 million in 1992 and $36.6 million in 1991. [page 40] The following table sets forth the contractual maturities of fixed maturity securities.
October 31, 1993 Amortized Market (In thousands) Cost Value Due in one year or less $ 32,257 $ 33,306 Due after one year through five years 203,263 229,079 Due after five years through ten years 563,380 610,363 Due after ten years 805,240 934,787 Mortgage-backed securities 1,061,238 1,108,315 $2,665,378 $2,915,850
Expected maturities may differ from contractual maturities because certain lenders or borrowers have the right to call or prepay obligations with or without call or prepayment penalties. INVESTMENT INCOME
The components of net investment income were as follows: Years ended October 31, (In thousands) 1993 1992 1991 Fixed maturity securities $213,973 $191,618 $177,274 Short-term investments 3,065 3,627 7,404 Realized investment gains (losses) 27,745 2,727 (24,994) Other investment income 11,275 4,725 5,242 Investment expense (4,427) (4,570) (4,480) Net investment income $251,631 $198,127 $160,446
Income tax expense on net realized investment gains was $9.9 million in 1993 and $0.9 million in 1992. The income tax benefit on net realized investment losses was $8.5 million in 1991. REINSURANCE Harcourt General Insurance utilizes reinsurance agreements. These agreements do not release Harcourt General Insurance from its primary liability as direct insurer of the risks reinsured but allow Harcourt General Insurance to recover a portion of losses from reinsurers. Harcourt General Insurance continually monitors the financial condition of the parties to these reinsurance agreements. Ceded policy and claim reserves for reinsured policies were $87.4 million and $58.6 million for fiscal years 1993 and 1992, respectively. The effect of reinsurance on premiums and amounts earned on long-duration contracts was not material. The effect of reinsurance on premiums written and earned on short-duration contracts was as follows:
Years ended October 31, (In thousands) 1993 1992 1991 Written Direct $229,351 $244,669 $212,431 Ceded (61,778) (44,781) (26,719) Net premiums $167,573 $199,888 $185,712 Earned Direct $218,476 $220,445 $212,483 Ceded (41,444) (23,069) (20,371) Net premiums $177,032 $197,376 $192,112
STATUTORY FINANCIAL INFORMATION The condensed financial statement information for Harcourt General Insurance was prepared in accordance with generally accepted accounting principles which are different in certain respects from the statutory reporting practices required by state insurance regulatory authorities. Certain statutory financial information of the life insurance companies, which is reported on a calendar year basis, was as follows:
Nine Months ended September 30, Years ended (unaudited) December 31, (In thousands) 1993 1992 1991 Statutory net income $ 12,113 $ 18,511 $ 27,894 Statutory capital and surplus $171,219 $151,977 $137,829
The maximum dividend that the life insurance companies may pay to shareholders during a year without prior regulatory approval is generally the greater of statutory net income for the previous year or 10 percent of statutory surplus. [page 41]
8. LONG-TERM LIABILITIES Interest (In thousands) Rate Maturity 1993 1992 HARCOURT GENERAL: Revolving credit agreements (a) Variable Senior debt (b) 8.25-8.88% 2002-2022 $297,153 $ 297,079 Subordinated notes (c) 9.375-9.5% 1997-2000 249,465 249,339 Other long-term liabilities (d) Various 113,610 135,265 Total Harcourt General $660,228 $ 681,683 NMG: Revolving credit agreement (e) Variable $232,200 $ 155,000 Senior notes (f) 9.24-9.89% 1994-1996 182,000 182,000 Other long-term liabilities (g) Various 81,125 85,739 Total NMG $495,325 $ 422,739 Less current maturities (64,904) (18,369) Total long-term liabilities $1,090,649 $1,086,053
(a) At October 31, 1993, the Company had revolving credit agreements with ten banks pursuant to which the Company was able to borrow an aggregate of $500.0 million. There were no outstanding borrowings on October 31, 1993. Effective December 16, 1993, the Company entered into a new revolving credit agreement with 13 banks pursuant to which the Company may borrow up to $400.0 million and concurrently terminated the existing revolving credit agreements. The new agreement, which expires on December 16, 1996, may be terminated by the Company at any time on three business days notice. The rate of interest payable varies according to the senior debt rating of the Company and one of four pricing options selected by the Company. The Company is required to pay a facility fee on the total amount of the revolving credit facility and a commitment fee on the unused portion of the facility at annual rates dependent upon the senior debt rating of the Company. Based on the Company's present senior debt rating, the annual facility fee and commitment fee are equal to .1500% and .0375%, respectively. The agreement contains, among other restrictions, provisions limiting the issuance of additional debt, the maintenance of minimum net worth, and the payment of dividends. (b) Senior debt consists of $150.0 million of non-redeemable 8.25% senior notes due June 2002 and $150.0 million of non-redeemable 8.875% senior debentures due June 2022. The unsecured notes and debentures were issued at a discount and rank equally with all other unsecured and unsubordinated indebtedness of the Company. The notes and debentures contain certain covenants which are no more restrictive than the terms of the Company's other issues of senior indebtedness. (c) Subordinated notes consist of $125.0 million of non-redeemable 9.375% notes due June 1997 and $125.0 million of non-redeemable 9.50% notes due March 2000. The notes were issued at a discount. (d) Other long-term liabilities consist primarily of a liability for postretirement health care benefits and provisions for other employee benefits (see Note 12). (e) NMG has a revolving credit agreement with nine banks pursuant to which NMG may borrow up to $300.0 million, of which $100.0 million expires during fiscal 1995; $175.0 million expires during fiscal 1996; and $25.0 million may be terminated on not less than three years notice. NMG may terminate the agreement at any time. The rate of interest payable (3.6% at July 31, 1993) varies according to one of four pricing options selected by NMG. The revolving credit agreement contains, among other restrictions, provisions limiting the issuance of additional debt, the amount and type of investments and the payment of dividends. Under the terms of this agreement the amount available for dividend payments was $128.5 million at July 31, 1993. During 1993, NMG borrowed from other banks on an uncommitted basis. Such bank borrowings are included in notes payable and current maturities of long-term liabilities and amounted to $27.2 million at July 31, 1993. Of these borrowings, $17.2 million related to the new revolving credit agreements described below. [page 42] On August 1, 1993, NMG entered into new revolving credit agreements with four banks under which NMG may borrow up to $25.0 million from each bank. These credit agreements will expire on July 30, 1994 and contain covenants similar to those in the previously existing revolving credit agreement. (f) NMG senior notes consist of: (In thousands) Interest rate Due Principal Amount 9.83% May 1994 $10,000 9.89% May 1996 $40,000 9.59% August 1996 $52,000 9.24% December 1996 $40,000 Variable December 1996 $40,000 The notes have no sinking fund requirements. All fixed-rate senior notes may be redeemed at a premium plus accrued interest. The variable rate note bears interest at LIBOR plus 0.7% (4.20% at July 31, 1993) and is adjusted semi-annually. NMG has entered into an interest rate swap agreement having a notional principal amount of $50.0 million. The agreement effectively fixes the interest rate on variable rate debt at 8.94%. The amount to be paid or received is accrued as interest rates change and is recognized over the life of the agreement. The interest rate swap matures in September 1996. (g) Other long-term liabilities consist primarily of the present value of certain employee benefit obligations assumed by NMG when it was acquired from Carter Hawley Hale Stores, Inc. (CHH), postretirement health care benefits, and a provision for certain scheduled rent increases. The present value of the employee benefit obligations of CHH accretes on average by 10% annually. The aggregate maturities of all long-term liabilities are as follows: Harcourt (In thousands) General NMG Total 1994 $19,000 $45,900 $64,900 1995 2,800 73,900 76,700 1996 2,500 165,600 168,100 1997 127,700 138,000 265,700 1998 3,000 6,000 9,000 Thereafter 505,200 65,900 571,100 Certain of Harcourt General's loan agreements contain, among other restrictions, provisions limiting the issuance of additional debt and guarantees, the execution of additional leases, the redemption of the Company's capital stock and the payment of dividends. Under the most restrictive of all covenants, $250.0 million was available for the payment of dividends. 9. SHAREHOLDERS' EQUITY SERIES A CUMULATIVE CONVERTIBLE STOCK In accordance with the Restated Certificate of Incorporation of Harcourt General, certain adjustments have been made to both the conversion rate and the dividend rate for the Series A Stock as a result of the spinoff of GCC on December 15, 1993. Effective December 11, 1993, each share of Series A Stock became 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. CLASS B 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. COMMON STOCK INCENTIVE PLANS The Company has established stock incentive plans which provide for the granting of stock options, stock appreciation rights (SARs), restricted stock and other stock-based awards. Eligible employees have been granted 10-year options under the 1981 Stock Option Plan and the 1988 Stock Incentive Plan. No further grants may be made under the 1981 plan. The number of authorized shares for which future awards may be granted under the 1988 Stock Incentive Plan was 1.5 million shares of Common Stock at October 31, 1993. [page 43] Options outstanding at October 31, 1993 were granted at prices (not less than 100% of the fair market value on the date of grant) varying from $11.31 to $35.63 per share and expire between 1994 and 2003. There were 113 employees with options outstanding, and the weighted average exercise price for all options outstanding was $21.43 at October 31, 1993. The number of options outstanding and their exercise price will be adjusted pursuant to a formula as a result of the spinoff of GCC. There were 2.2 million shares of Common Stock reserved at October 31, 1993 for issuance upon the exercise of stock options. The Company has permitted stock options held by certain employees to become fully vested and has allowed SAR treatment in connection with the exercise of certain options. Optionees electing SAR treatment surrender an exercisable option for an amount of cash equal to the excess of the market price of the Common Stock over the option price when the option is exercised. Option activity on the Company's common shares was as follows:
Years ended October 31, 1993 1992 1991 Options outstanding - beginning of year 918,432 852,030 943,628 Granted 105,250 461,338 89,150 Exercised (131,676) (217,408) (115,471) SARs (32,346) (40,900) (28,612) Cancelled (19,680) (136,628) (36,665) Options outstanding - end of year 839,980 918,432 852,030 Exercisable options - end of year 452,800 486,402 490,430 Restricted common stock issued - 100,000 42,075
10. INCOME TAXES A reconciliation of the statutory Federal income tax rates to the Company's effective tax rate is as follows:
Years ended October 31, 1993 1992 1991 (Dollar amounts in thousands) Amount % Amount % Amount % Statutory tax (expense) benefit ($91,295) (35) ($60,184) (34) $126,100 34 State income taxes net of Federal tax effect (5,214) (2) (4,961) (3) (3,628) (1) Tax credits 704 - 842 - - - Dividends received exclusion 1,646 1 1,435 1 4,230 1 Unrealized net operating loss carry forward - - - - (46,808) (13) Foreign tax rate differentials 310 - 264 - (2,017) (1) Permanent items (3,920) (2) (6,475) (3) (4,475) (1) Settlements, capital gains and other 1,142 1 (5) - (476) - Income tax (expense) benefit from continuing operations ($96,627) (37) ($69,084) (39) $ 72,926 19
State income tax expense was $8.0 million in 1993, $8.2 million in 1992 and $6.0 million in 1991. The tax benefit (expense) of deferred items was as follows:
October 31, (In thousands) 1993 1992 1991 Depreciation and amortization ($8,525) ($1,451) $2,279 Settlements (8,600) 704 4,871 Inventory valuation 255 3,183 2,531 Insurance (831) (6,853) 676 Other 5,911 1,449 5,551 Deferred tax benefit (expense) (11,790) (2,968) 15,908 Amounts included in current deferred taxes (1,355) 4,911 (12,877) (13,145) 1,943 3,031 Discontinued theatre operations 18,657 - - Extraordinary item and accounting change - (70,582) - Net change in deferred taxes $5,512 ($68,639) $3,031
The tax provided on the extraordinary item reflects the permanent tax differences associated with the elimination of long-term debt. The tax provided on the change in accounting for postretirement health care benefits reflects the Company's combined effective Federal and state statutory rates. [page 44]
11. Investment and Other Income (Expense), Net Investment and other income (expense) consisted of the following: Years ended October 31, (In thousands) 1993 1992 1991 Investment income Interest income $ 8,605 $ 11,342 $125,128 Dividend income 5,467 11,897 3,405 Total investment income $14,072 $ 23,239 $128,533 Other income (expense) CHH matters $20,755 - ($17,300) Gain on sale of securities - $11,633 - Other (2,452) (3,292) 2,129 Total other income (expense) $18,303 $ 8,341 ($15,171)
When NMG was formed as part of the restructuring of CHH in 1987, NMG and CHH entered into a variety of agreements, including agreements regarding the allocation of taxes and the guaranty by NMG of certain CHH employee benefits. As a result of CHH filing under Chapter 11 of the Bankruptcy Code in 1991, NMG began making payments as guarantor of certain CHH employee benefits. In fiscal 1991, NMG increased its total estimate of liabilities related to CHH and recorded a charge of $17.3 million. In October 1992, CHH successfully emerged from Chapter 11 with the result that all disputes between the parties have been settled. NMG paid CHH $7.7 million and was discharged as guarantor of certain CHH employee benefits. In light of the above, NMG re-evaluated its liabilities to CHH and recognized a gain on settlement of these liabilities of $20.8 million. 12. COMMITMENTS AND CONTINGENCIES LEASES The Company and NMG have long-term operating leases primarily for retail stores, distribution centers, offices, other facilities and equipment. Leases are generally for periods of up to thirty years with renewal options at fixed rentals. Certain leases also provide for additional rentals based on revenues in excess of predetermined levels. Rent expense for continuing operations under operating leases was as follows:
Years ended October 31, (In thousands) 1993 1992 1991 Minimum rent $102,823 $ 95,297 $90,729 Rent based on revenues 8,200 7,300 7,813 $111,023 $102,597 $98,542
Unless renewal options are exercised, the future minimum rental payments will be as follows:
Harcourt (In thousands) General NMG Total 1994 $27,300 $60,400 $ 87,700 1995 25,300 59,900 85,200 1996 23,400 57,000 80,400 1997 20,200 54,700 74,900 1998 15,000 49,600 64,600 Thereafter 81,800 1,100,000 1,181,800
Harcourt General is secondarily liable for certain lease obligations that were transferred to and assumed by GCC in connection with the spinoff of GCC on December 15, 1993. Under the terms of the Reimbursement and Security Agreement, GCC is obligated to indemnify Harcourt General against liabilities with respect to such transferred obligations. As of October 31, 1993, GCC's future rental obligations over the next twenty years under such theatre leases amounted to $806.7 million. 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 with additional pension benefits. As of January 1, 1992, the Harcourt General plans cover most of the Harcourt Brace employees. Benefits under the plans are based on employees years of service and compensation prior to retirement. When funding is required, the policy is to contribute amounts that are deductible for Federal income tax purposes. Net pension income (expense) from continuing operations was as follows:
Years ended October 31, (In millions) 1993 1992 1991 Harcourt General ($1.8) ($1.4) $ 3.2 NMG (6.5) (5.7) (6.1) Net pension (expense) ($8.3) ($7.1) ($ 2.9)
Net pension expense for both Harcourt General and NMG included the following components:
Years ended October 31, (In millions) 1993 1992 1991 Service cost - benefits earned ($9.5) ($8.2) ($4.0) Interest cost on projected benefit obligation (8.7) (7.7) (6.8) Actual return on assets 17.6 15.8 15.7 Net amortization and deferral (7.7) (7.0) (7.8) Net pension (expense) ($8.3) ($7.1) ($ 2.9)
[page 45]
The following table sets forth the plans' funded status and amounts recognized in the balance sheets at October 31: 1993 1992 Overfunded Non-funded Overfunded Non-funded (In millions) Plans Plans Plans Plans Vested benefit obligation ($91.6) ($12.4) ($81.2) ($10.0) Accumulated benefit obligation ($95.2) ($14.3) ($83.8) ($11.3) Projected benefit obligation ($118.6) ($20.6) ($100.8) ($15.9) Plan assets at fair value * 162.5 - 141.0 - Assets in excess of (less than) projected obligation $43.9 ($20.6) $40.2 ($15.9) Unrecognized net (asset) obligation at transition (2.9) 1.4 (3.5) 1.6 Unrecognized net (gain) loss (3.3) 1.4 (0.3) (0.2) Unrecognized prior service cost 2.9 1.7 3.1 1.8 Prepaid (accrued) pension cost recognized in the balance sheets $40.6 ($16.1) $39.5 ($12.7) * PLAN ASSETS INCLUDE $9.9 MILLION AND $6.7 MILLION OF HARCOURT GENERAL COMMON AND SERIES A STOCK AT OCTOBER 31, 1993 AND 1992, RESPECTIVELY, AND CONSIST PRIMARILY OF EQUITY AND FIXED INCOME SECURITIES.
The plans' funded status by company as of October 31 was as follows: 1993 1992 Overfunded Non-funded Overfunded Non-funded (In millions) Plans Plans Plans Plans Harcourt General $ 27.0 ($3.9) $ 27.9 ($2.7) NMG 13.6 (12.2) 11.6 (10.0) $ 40.6 ($16.1) $ 39.5 ($12.7)
Assumptions used in the computation of pension costs for both Harcourt General (HG) and NMG as of October 31 were as follows:
1993 1992 1991 HG NMG HG NMG HG NMG Discount rate 7.5% 8.5% 8.5% 8.5% 8.5% 8.5% Long-term rate of return on plan assets 9.0% 9.0% 9.0% 10.0% 10.0% 10.0% Rate of increases in future compensation levels 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
In addition to the pension plans, Harcourt General and NMG each have two defined contribution plans for certain employees. The Savings Plans permit employee contributions and provide for certain matching contributions. The Employee Stock Ownership Plans are non-contributory. 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 retirement benefits if they have met certain service and minimum age requirements. Beginning in fiscal 1992, the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, Employers Accounting for Postretirement benefits Other Than Pensions. This statement requires accrual of these postretirement health care benefits during the years in which an employee provides services. Prior to fiscal 1992, the expense for these benefits was recognized as actual claims were incurred. The Company paid $3.0 million during fiscal 1993 and $2.4 million during fiscal 1992 for postretirement health care benefit claims. The cumulative effect of adopting this change in fiscal 1992 resulted in a charge to continuing operations of $36.0 million, net of applicable taxes of $23.2 million. [page 46] The actuarial present value of accumulated postretirement benefit obligations and the amounts recognized in the Company's consolidated balance sheets as of October 31 was as follows:
(In thousands) 1993 1992 Retirees $61,053 $57,969 Fully eligible active plan participants 8,308 8,024 Other active plan participants 18,545 14,308 Unrecognized net loss (8,880) - Accumulated postretirement benefit obligation $79,026 $80,301 The postretirement benefit cost for continuing operations was as follows:
Years ended October 31, (In thousands) 1993 1992 Service cost $ 1,519 $1,509 Interest cost on accumulated benefit obligation 6,239 5,731 Postretirement benefit cost $ 7,758 $7,240
The assumed health care cost trend rate used in measuring accumulated postretirement benefit obligation was 18% in 1993 and 20% in 1992, gradually declining to 5% in the year 2005. Measurement of the accumulated postretirement benefit obligation was based on an assumed 7.5% discount rate in 1993 and an assumed rate of 8.5% in 1992. In fiscal 1993, NMG used an assumed discount rate of 8.5%. An increase of 1% in the health care cost trend rate would increase the accumulated postretirement obligation as of October 31, 1993 by $10.2 million. This change would increase the annual expense by $1.2 million. LITIGATION 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 continuing operations of Harcourt General or NMG. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS During the normal course of business the Company uses various financial instruments. Discussed below is the fair value of financial instruments not presented elsewhere in these financial statements. INTEREST RATE SWAP The fair value of NMG's interest rate swap is the amount at which it could be settled based on estimates obtained from dealers. The estimated pre-tax cost to settle the interest rate swap was approximately $6.6 million at July 31, 1993. This amount changes during the life of the swap as a function of maturity, interest rates and the credit standing of the parties to the swap agreement. If the swap is held to maturity, no settlement cost is incurred. LONG-TERM DEBT The fair value of Harcourt General's and NMG's senior debt and subordinated notes was $832.8 million on October 31, 1993 and was based upon comparable publicly-traded issues or discounted cash flows. The discount rate used was based upon the Company's estimated current incremental borrowing rates. POLICYHOLDER RESERVES AND DEPOSITS Policyholder reserves and deposits include immediate and deferred annuities; structured settlements not involving life contingencies; and insurance contracts. As of October 31, 1993, the fair value of these liabilities was $2,473.2 million. The fair value for immediate annuities and structured settlements was computed as the present value of the future payments under these contracts discounted at 7.1%. The fair value for deferred annuities was computed as the account value less the surrender charge that would apply if the contract were surrendered, adjusted to recognize any interest valued above the current credited rate guaranteed beyond October 31, 1993. Market adjusted annuity contracts were further adjusted by the market value adjustment formula specified in such contracts. [page 47]
14. COMPARATIVE QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The 1993 and 1992 comparative quarterly financial information has been restated to reflect the spinoff of the discontinued theatre operations. 1993 First Second Third Fourth Full (In thousands except for per share data) Quarter Quarter Quarter Quarter Year Revenues $806,840 $933,242 $1,008,476 $907,183 $3,655,741 Gross profit $317,263 $289,771 $ 462,353 $376,884 $1,446,271 Earnings (loss) from: Continuing operations $26,816 $5,666 $102,142 $30,866 $165,490 Theatre operations 4,989 139 4,613 (3,898) 5,843 Net earnings $31,805 $5,805 $106,755 $26,968 $171,333 Net earnings (loss) per common share from: Continuing operations $.34 $.07 $1.28 $.39 $2.08 Theatre operations .06 - .06 (.05) .07 Net earning $.40 $.07 $1.34 $.34 $2.15 Dividends per share: Common Stock $0.14 $0.14 $0.14 $0.15 $0.57 Class B Stock $0.126 $0.126 $0.126 $0.135 $0.513 Series A Stock $0.1475 $0.1475 $0.1475 $0.1575 $0.60 1992 First Second Third Fourth Full (In thousands except for per share data) Quarter Quarter Quarter Quarter Year Revenues $754,618 $822,629 $867,554 $814,886 $3,259,687 Gross profit $302,782 $257,445 $364,660 $388,542 $1,313,429 Earnings (loss) before extraordinary gain and cumulative effect of accounting change from: Continuing operations $23,429 ($5,069) $ 67,684 $ 21,883 $ 107,927 Theatre operations 269 1,799 2,944 (2,022) 2,990 $ 23,698 ($3,270) $ 70,628 $19,861 $ 110,917 Net earnings (loss) $407,241 ($3,270) $ 70,628 $19,861 $ 494,460 Net earnings (loss) per common share: Before extraordinary item and cumulative effect of accounting change from: Continuing operations $ .30 ($.06) $ .85 $ .28 $ 1.36 Theatre operations - .02 .04 (.03) .04 Extraordinary gain 5.31 - - - 5.30 Cumulative effect of accounting change (.46) - - - (.45) Net earnings $5.15 ($.04) $.89 $.25 $6.25 Dividends per share: Common Stock $0.13 $0.13 $0.13 $0.14 $0.53 Class B Stock $0.117 $0.117 $0.117 $0.126 $0.477 Series A Stock $0.1375 $0.1375 $0.1375 $0.1475 $0.56
[page 48] 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, 1993 and 1992 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1993. 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, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1993 in conformity with generally accepted accounting principles. As discussed in Note 12 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions in fiscal 1992. Deloitte & Touche Boston, Massachusetts December 16, 1993 [page 49]
FIVE YEAR SUMMARY (UNAUDITED) (In thousands except for per share amounts) REVENUES 1993 1992 1991 1990 1989 Publishing $944,545 $865,336 $807,689 $853,725 $816,285 Specialty retailing 2,016,914 1,808,354 1,744,800 1,688,611 1,467,504 Insurance 548,030 464,606 464,726 476,810 456,298 Professional services 146,252 121,391 103,795 82,212 69,437 Total $3,655,741 $3,259,687 $3,121,010 $3,101,358 $2,809,524 Operating earnings (loss) Publishing $142,177 $124,503 ($73,792) $121,650 ($2,774) Specialty retailing 120,191 81,510 82,277 99,191 83,212 Insurance 70,871 42,798 (45,296) 26,118 28,149 Professional services 28,395 23,938 14,309 17,062 8,919 Corporate expenses (47,307) (41,876) (40,706) (42,072) (59,377) Merger and restructuring charges - - (72,777) - - OPERATING EARNINGS (LOSS) 314,327 230,873 (135,985) 221,949 58,129 Investment income 14,072 23,239 128,533 124,411 185,065 Interest expense (84,585) (85,442) (348,260) (363,021) (448,125) Other income (expense), net 18,303 8,341 (15,171) 126,020 23,861 EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 262,117 177,011 (370,883) 109,359 (181,070) Income tax (expense) benefit (96,627) (69,084) 72,926 (47,987) 40,041 EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 165,490 107,927 (297,957) 61,372 (141,029) Discontinued Operations, Net* 5,843 2,990 4,835 (30,989) 1,217,242 Extraordinary Item, Net - 419,557 - - (32,287) Accounting change, net - (36,014) - - - NET EARNINGS (LOSS) 171,333 494,460 (293,122) 30,383 1,043,926 Dividends on Harcourt Brace preferred stock - - 12,684 18,242 59,741 Net earnings (loss) applicable to common shareholders $171,333 $494,460 ($305,806) $12,141 $984,185 Depreciation and amortization $171,432 $154,392 $295,695 $156,004 $154,759 Capital expenditures 162,416 186,462 165,817 136,943 175,420 Insurance assets 3,170,948 2,669,708 2,300,018 2,096,118 1,524,695 Total assets 5,976,826 5,345,670 6,208,348 6,250,126 6,048,002 Total long-term liabilities 1,090,649 1,086,053 980,224 2,658,734 2,452,873 Weighted average number of common and common equivalents shares outstanding 79,625 79,139 78,876 79,027 78,676 AMOUNTS APPLICABLE TO COMMON SHAREHOLDERS: Earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change $2.08 $1.36 ($3.94) $.55 ($2.55) Net earnings (loss) applicable to common shareholders $2.15 $6.25 ($3.88) $.15 $12.51 Dividends paid on common stock $.57 $.53 $.49 $.45 $.41 *EFFECTIVE DECEMBER 15, 1993, THE COMPANY DISTRIBUTED ITS THEATRE OPERATIONS TO ITS SHAREHOLDERS. IN MARCH 1989, THE COMPANY SOLD ITS BEVERAGE BUSINESS, AND IN NOVEMBER 1989, HARCOURT BRACE SOLD ITS SIX THEME PARKS AND RELATED LAND HOLDINGS.
[page 51] Stock Information Harcourt General's Common Stock and Series A Cumulative Convertible Stock are traded on the New York Stock Exchange under the symbols H and HPRA, respectively. The following table indicates the quarterly price range of the Common Stock and Series A Stock for the past two fiscal years. These prices are prior to the tax-free distribution of shares in GC Companies, Inc., which was effective on December 15, 1993.
Common Stock 1993 1992 Quarter High Low High Low First $38.13 $28.50 $20.50 $16.63 Second $37.50 $31.25 $23.00 $18.75 Third $40.00 $32.63 $26.13 $21.63 Fourth $46.13 $37.50 $30.00 $24.13 Series A Stock 1993 1992 Quarter High Low High Low First $37.13 $28.00 $20.00 $17.13 Second $36.63 $32.75 $22.50 $19.00 Third $39.00 $33.75 $25.75 $21.25 Fourth $46.00 $40.25 $28.88 $24.63 Harcourt General had 13,398 and 14,018 Common shareholders of record at October 31, 1993 and 1992, respectively, and 847 and 937 Series A shareholders of record at October 31, 1993 and 1992, respectively. Following an adjustment related to the spinoff of GC Companies, the Series A shares are now convertible into Common Stock on a 1:1.1 basis.
EX-21.1 8 SUBSIDIARIES & AFFILIATES LISTING Exhibit 21.1 HARCOURT GENERAL, INC. SUBSIDIARIES & AFFILIATES
JURISDICTION OF NAME OF SUBSIDIARY INCORPORATION STOCKHOLDER Acadata (London) England Harcourt Brace & Limited Company Limited (50%) Academic Press Ontario Harcourt Brace & Canada Limited Company Academic Press, Inc. New York Harcourt Brace & Company Academic Press Limited England Harcourt Brace & Company Limited (99%) Harcourt Brace & Company (1%) Agence D'Arc Inc. Quebec HRW Publications Ltd. American Agriculturist New York The Harvest Insurance Services, Inc. Agency, Inc. AP Export Company, Inc. Delaware Academic Press, Inc. AP Journals, Inc. Delaware Harcourt Brace & Company Bailliere Tindall Limited England Harcourt Brace & Company Limited (99%) Harcourt Brace & Company (1%) BAR/BRI Review Courses, Delaware Harcourt Brace Legal and Inc. Professional Publications, Inc. Bergdorf Goodman, Inc. New York Neiman Marcus Holdings, Inc. Bergdorf Graphics, Inc. New York Bergdorf Goodman, Inc. Books for Professionals, Delaware Harcourt Brace & Company Inc. Broadcasters, Inc. Texas Neiman Marcus Holdings, Inc. C.C. Group Limited Hong Kong The Neiman Marcus Group,Inc. Inc. (50%) Contempo Casuals (50%) Chatterton Corp. New York Verily Enterprises, Inc. Contempo Casuals California The Neiman Marcus Group, Inc. (Page 1) Coronado Publishers, Inc. Delaware Academic Press, Inc. DBM France, S.A. France Drake Beam Morin, Inc. (99%) DBM International, Inc. Delaware Drake Beam Morin, Inc. DBM Training and Delaware Drake Beam Morin, Inc. Consulting, Inc. Devices for Learning, Inc. Delaware Harcourt Brace & Company Drake Beam Morin-Canada, Ontario Drake Beam Morin, Inc. Inc. Drake Beam Morin, Inc. Delaware SIFTCO, Inc. Emcor, Inc. Delaware Harcourt General, Inc. Executive In Residence, New York Drake Beam Morin, Inc. Inc. Fanwick & Rubin, Inc. New York Verily Enterprises, Inc. Federal Home Life Insurance Indiana Harcourt General Insurance, Company Inc. Foundation for Marine Animal Florida Harcourt Brace & Company Husbandry, Inc. GCC Films, Inc. Delaware Harcourt General, Inc. GCC Investment Trust Massachusetts Hammond Pond Investments, Inc. (50%) Emcor, Inc. (50%) GCC Land Co., Inc. Delaware Harcourt General, Inc. General Cinema Broadcasting, Delaware Harcourt General, Inc. Inc. GMN, INC. Delaware Harcourt General, Inc Grune & Stratton, Inc. New York Harcourt Brace & Company Grune & Stratton Limited England Harcourt Brace & Company Limited (50%) Harcourt Brace & Company (50%) Hammond Pond Investments, Massachusetts SIFTCO, Inc. Inc. Harcourt Brace & Company Delaware SIFTCO, Inc. (Page 2) Harcourt Brace & Company Australia Harcourt Brace & Company Australia Pty. Limited (99%) Harcourt Brace & Company Quebec Academic Press Canada Canada, Inc. Limited Harcourt Brace & Company England Academic Press, Inc. (99%) Limited Harcourt Brace & Company (1%) Harcourt Brace & Company Australia Harcourt Brace & Company New Zealand Pty. Limited Australia Pty. Limited Harcourt Brace Educational Massachusetts Harcourt Brace & Company Development Group, Inc. Harcourt Brace Export Delaware Harcourt Brace & Company Corporation Harcourt Brace FSC, Inc. U.S. Virgin Harcourt Brace & Company Islands Harcourt Brace Inter- New York Harcourt Brace & Company national Corporation Harcourt Brace Japan, Inc. Japan Harcourt Brace & Company (99.17%) Harcourt Brace Legal and Delaware SIFTCO, Inc. Professional Publications, Inc. Harcourt Brace Real Ohio Harcourt Brace & Company Properties Corporation Harcourt General Annuity Delaware Harcourt General Insurance, Service Corporation Inc. Harcourt General Charitable Massachusetts Harcourt General, Inc. Foundation, Inc. Harcourt General Insurance, Delaware Harcourt Brace & Company Inc. Harvest & HBJ Insurance, Florida Harcourt General Insurance, Inc. Inc. HBJ Farm Publications, Inc. Ohio The Harvest Insurance Agency, Inc. Health Careers Academy New Jersey Holt, Rinehart and Winston, Delaware Harcourt Brace & Company Inc. Holt, Rinehart and England W.B. Saunders Company Limited Winston Limited (99%) Harcourt Brace & Company (1%) (Page 3) Holt, Rinehart and Winston Ontario HRW and WBS Canada of Canada Limited Corporation, Inc. Holt, Rinehart & Winston Hong Kong Harcourt Brace & Company (99%) Publishing Asia Limited Harcourt Brace & Company Australia Pty. Limited (1%) HRW and WBS Canada New York Harcourt Brace & Company Corporation, Inc. HRW Distributors, Inc. Delaware Harcourt Brace & Company HRW Publications Ltd. Quebec Holt, Rinehart and Winston of Canada Limited Human Nature, Inc. Delaware Harcourt Brace & Company (83%) Innovation Research, Inc. Delaware Harcourt Brace & Company Johnson Reprint Company England Harcourt Brace & Company Limited Limited (99%) Harcourt Brace & Company (1%) Johnson Reprint Corporation New York Academic Press, Inc. Last Call, Inc. New Jersey The Neiman Marcus Group, Inc. Laureate Canada Inc. Ontario HRW and WBS Canada Corporation, Inc. Learned & Tested, Inc., The Delaware Harcourt Brace & Company Education Company Les Editions Etudes Vivantes Quebec Harcourt Brace & Company Ltee Canada, Inc. Mercury of Delaware, Inc. Delaware Miller Accounting Delaware Harcourt Brace & Company Publications, Inc. Miller Comprehensive CPA Delaware Legal and Professional Review, Inc. Publications, Inc. MSRD, Inc. New York The Psychological Corporation Neiman Marcus Holdings, Inc. California The Neiman Marcus Group, Inc. Pastille, Inc. Delaware The Neiman Marcus Group, Inc. Pastille By Mail, Inc. Delaware The Neiman Marcus Group, Inc. PHF Life Insurance Company Florida Federal Home Life Insurance Company Reference Works Limited England W.B. Saunders Company Limited (99%) Harcourt Brace & Company (1%) Richard J. Katz & Co., Inc. New York Harcourt General Insurance, Inc. (Page 4) Security Funding Corporation Delaware Harcourt General Insurance, Inc. Selective Programs, Inc. New York Harcourt General Insurance, Inc. Seminar Press Limited England Harcourt Brace & Company Limited (99%) Harcourt Brace & Company (1%) SIFTCO, Inc. Massachusetts Harcourt General, Inc. T & A D Poyser Limited England Harcourt Brace & Company Limited (50%) Harcourt Brace & Company (50%) The Harcourt Brace Delaware Harcourt Brace & Company Quads, Inc. The Harvest Insurance Ohio The Harvest Life Insurance Agency, Inc. Company The Harvest Life Insurance Ohio The Harvest Insurance Agency, Agency, Inc. Inc. (77%) The Harvest Life Insurance Ohio Federal Home Life Insurance Company Company The Marine Research Center Florida at Sea World, Inc. The Neiman Marcus Group, Delaware Harcourt General, Inc. (65%) Inc. The Psychological New York Harcourt Brace & Company Corporation The Psychological England Harcourt Brace & Company Corporation Limited Limited (99%) Harcourt Brace & Company (1%) Verily Enterprises, Inc. New York Harcourt General Insurance, Inc. W. B. Saunders Company Delaware Harcourt Brace & Company W. B. Saunders Company Ontario HRW and WBS Canada Canada Limited Corporation, Inc. W. B. Saunders Company England Harcourt Brace & Company Limited Limited (99%) Harcourt Brace & Company (1%)
(Page 5) EX-23.1 9 INDEPENDENT AUDITOR'S CONSENT DATED 1/27/94 EXHIBIT 23.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in the Registration Statements of Harcourt General, Inc. on Form S-3 (No. 33-13936 and 33-46148) and Form S-8 (No. 33-26079) of our report dated December 16, 1993 appearing in and incorporated by reference in this Annual Report on Form 10-K of Harcourt General, Inc. for the year ended October 31, 1993. s/Deloitte & Touche DELOITTE & TOUCHE Boston, Massachusetts January 27, 1994 -----END PRIVACY-ENHANCED MESSAGE-----