-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VQyrPr8/mC5lBnVXQNMdMkNZ1rWJqz5ET+QCt0L+st/EvFn7H3apUKD/op6IwRrQ HxDaHLp4HTpeL6OwFImtMw== 0000040493-97-000003.txt : 19970129 0000040493-97-000003.hdr.sgml : 19970129 ACCESSION NUMBER: 0000040493-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970128 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARCOURT GENERAL INC CENTRAL INDEX KEY: 0000040493 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 041619609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04925 FILM NUMBER: 97512286 BUSINESS ADDRESS: STREET 1: 27 BOYLSTON ST / BOX 1000 CITY: CHESTNUT HILL STATE: MA ZIP: 02167 BUSINESS PHONE: 6172328200 MAIL ADDRESS: STREET 1: 27 BOYLSTON ST STREET 2: BOX 1000 CITY: CHESTNUT HILL STATE: MA ZIP: 02167 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL CINEMA CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MID WEST DRIVE IN THEATRES INC DATE OF NAME CHANGE: 19660907 10-K 1 HARCOURT GENERAL, INC. 1996 10K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended October 31, 1996 Commission File Number 1-4925 HARCOURT GENERAL, INC. (Exact name of registrant as specified in its charter) Delaware 04-1619609 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 27 Boylston Street, Chestnut Hill, Massachusetts 02167 (Address of principal executive offices) (Zip Code) Registrant's telephone number and area code: 617-232-8200 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered Common Stock, $1.00 par value New York Stock Exchange Series A Cumulative Convertible New York Stock Exchange Stock, $1.00 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the voting stock held by non- affiliates of the registrant was approximately $2,367,314,577 on January 16, 1997. There were 50,827,141 shares of Common Stock, 20,024,090 shares of Class B Stock and 1,146,061 shares of Series A Cumulative Convertible Stock outstanding as of January 16, 1997. ______________________ Documents Incorporated by Reference Portions of the Company's 1996 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 14, 1997 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, 1996 TABLE OF CONTENTS PART I Page No. Item 1. Business 1 Item 2. Properties 5 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security 7 Holders PART II Item 5. Market for the Registrant's Common Equity 7 and Related Stockholder Matters Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of 8 Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 8 Item 9. Changes in and Disagreements with Accountants 8 on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant 8 Item 11. Executive Compensation 10 Item 12. Security Ownership of Certain Beneficial 10 Owners and Management Item 13. Certain Relationships and Related Transactions 10 PART IV Item 14. Exhibits, Financial Statement Schedules 11 and Reports on Form 8-K Signatures 13 PART I ITEM 1. BUSINESS The principal businesses of Harcourt General, Inc., a Delaware corporation formed in 1950 (the "Company"), are publishing and specialty retailing. The Company also has operations in career transition and related professional services. A. Publishing Harcourt Brace & Company ("Harcourt Brace") is among the world's largest publishing houses, publishing books, scholarly journals and related materials in both print and electronic media for the educational, scientific, technical, medical, professional and trade markets. Educational Publishing. The educational publishing group includes the operations of Harcourt Brace School; Holt, Rinehart and Winston; Harcourt Brace College and The Psychological Corporation. Harcourt Brace School publishes textbooks and related instructional materials for kindergarten through grade 8. Holt, Rinehart and Winston publishes instructional materials for grades 7 through 12. Harcourt Brace College publishes books and other materials for the college and university market under the Harcourt Brace, Saunders and Dryden Press imprints. The Psychological Corporation provides tests and related products and services for educational, psychological, clinical and professional assessment and, through its subsidiary Assessment Systems, provides computerized tests for business and professional credentialing and licensing. 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 Harcourt Brace Legal and Professional Publishing. Academic Press publishes scholarly books and journals in the life, physical, social and computer sciences, which are sold 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, and, through its International Medical News Group division, which was acquired in January 1996, publishes advertising-based newspapers for physicians. Harcourt Brace Professional Publishing publishes reference guides and newsletters for certified public accountants and tax professionals. Harcourt Brace Legal and Professional Publishing conducts review courses under the BAR/BRI name for individuals preparing for bar examinations, as well as review courses for CPA accreditation and graduate school entrance examinations. International Publishing. Most of the operations of Harcourt Brace are in the United States, but Harcourt Brace also has international publishing operations headquartered in London with offices in Europe, Canada, Mexico, Latin America, Asia, Australia and New Zealand. The international business of Harcourt Brace consists both of distributing English language products and adaptations in international markets as well as publishing translations and indigenous materials in those markets. In September 1996, Harcourt Brace acquired the exclusive rights to market and sell the professional medical publications of Mosby-Year Book ("Mosby") and certain of its affiliates in most parts of the world outside of the United States. Harcourt Brace also publishes original Spanish language health science publications and Spanish translations of English language health science publications through a subsidiary acquired in November 1996. In addition, in November 1996 Harcourt Brace acquired the rights to translate the professional health care related publications of Mosby and its United Kingdom affiliate into Spanish and to sell such translations worldwide. 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 in connection with the sales of the publications and services of these businesses are the quality of such publications and services 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 The Company owns approximately 53% of the outstanding equity of The Neiman Marcus Group, Inc. ("NMG"), which operates Neiman Marcus Stores, Bergdorf Goodman and NM Direct. NMG is a separate public company which is listed on the New York Stock Exchange and is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). On September 20, 1996, NMG filed an Annual Report on Form 10-K with respect to its fiscal year ended August 3, 1996. 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 "SEC"). 2 Neiman Marcus Stores Neiman Marcus Stores is a high fashion specialty retailer which offers women's and men's apparel, fashion accessories, shoes, cosmetics, furs, precious jewelry, decorative home accessories, fine china, crystal and silver, gourmet food products and children's apparel and gift items. As of October 31, 1996, Neiman Marcus operated 30 stores in 27 cities. The average Neiman Marcus store size is 142,000 gross square feet and the stores range in size from 90,000 gross square feet to 269,000 gross square feet. Neiman Marcus opened new stores in Short Hills, New Jersey in August 1995, King of Prussia, Pennsylvania in February 1996 and Paramus, New Jersey in August 1996. Neiman Marcus plans to open a new store in Honolulu, Hawaii, in August 1998. In addition, in January 1996, Neiman Marcus Stores commenced operations at its new 465,000 square foot National Service Center located in Longview, Texas, which consolidated the distribution operations for those Neiman Marcus stores which previously had been handled by several separate facilities in the Dallas area. Bergdorf Goodman Bergdorf Goodman is a high fashion, exclusive retailer of high quality women's and men's apparel, fashion accessories, precious jewelry, decorative home accessories, gifts and gourmet foods. It operates two leased stores on Fifth Avenue and 58th Street in New York City. The main store, consisting of 250,000 gross square feet, is dedicated to women's apparel and accessories, home furnishings and gifts. Bergdorf Goodman Men consists of 66,000 gross square feet and is dedicated to men's apparel and accessories. Bergdorf Goodman has an important direct marketing business which is operated by NM Direct. NM Direct NM Direct operates an upscale direct marketing business, which primarily offers apparel under the Neiman Marcus name and, through its Horchow catalog, offers hard goods such as home furnishings and decorative accessories to its domestic and international customers. NM Direct also offers a broad range of more moderately priced items through its Trifles and Grand Finale catalogues and publishes annually the world famous Neiman Marcus Christmas Catalogue. 3 Competition The specialty retail industry is highly competitive and fragmented. Moreover, NMG's apparel business is especially dependent upon its designer resources. NMG competes with large specialty retailers, traditional and better department stores, national apparel chains, designer boutiques, individual specialty apparel stores and direct marketing firms. NMG competes for customers principally on the basis of quality, assortment and presentation of merchandise, customer service, sales and marketing programs and value. In addition, NMG competes for quality merchandise principally based on relationships with designer resources and purchasing power. Neiman Marcus Stores and Bergdorf Goodman also compete for customers on the basis of store ambiance, and for real estate opportunities principally on the basis of their ability to attract customers. NM Direct competes principally on the basis of quality, assortment and presentation of merchandise, customer service, price and speed of delivery. C. Professional Services The Company believes that Drake Beam Morin ("DBM") is the world's leading organizational and individual transition consulting firm. DBM assists organizations and individuals worldwide in outplacement, employee selection, performance evaluation, career management and transition management. The Company believes that the principal competitive factors for DBM are quality of service (including its ability to respond promptly to clients' needs for services) and price. D. Discontinued Operations On June 30, 1995, NMG sold its Contempo Casuals subsidiary to The Wet Seal, Inc. for approximately 250,000 shares of Wet Seal Class A Common Stock and $100,000 in cash. On October 31, 1994, the Company sold its insurance operations to GNA Corporation, an affiliate of General Electric Capital Corporation, for $410.4 million in cash. For additional information with respect to this transaction, reference may be made to the Report on Form 8-K filed by the Company with the SEC on November 14, 1994. 4 E. Certain Additional Information 1. Employees
Percentage of Employees Number of of Each Operating Unit Number of Employees Who Covered by Collective Employees Are Part-Time Bargaining Agreements Harcourt Brace 4,900 80 None & Company The Neiman Marcus Group 15,000 4,700 1.0% Drake Beam Morin 890 390 None Corporate 100 None None
The figures in the above table are approximate as of October 31, 1996. 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 1996, including information on capital expenditures, seasonality, liquidity, capital resources and other financial information, reference is made to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section on pages 23 through 26 of the Company's Annual Report to Stockholders for the fiscal year ended October 31, 1996 (the "1996 Annual Report"), which information is incorporated herein. 3. Financial Information About Industry Segments The information set forth under the heading "Additional Financial Information" in Note 2 of the Notes to Consolidated Financial Statements on page 34 of the 1996 Annual Report is incorporated herein. 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, a suburb of Boston. The headquarters for Harcourt Brace's publishing operations are located in a leased office in Orlando, Florida. The headquarters for Drake Beam Morin are located in a leased office in New York City. 5 At October 31, 1996, the office, warehouse and other facilities owned or leased by Harcourt Brace and its publishing affiliates were located in 36 states, the District of Columbia, Puerto Rico and 13 foreign countries. NMG's operating divisions are headquartered in leased or owned facilities in Dallas (Neiman Marcus Stores), Irving, Texas (NM Direct) and New York City (Bergdorf Goodman). At October 31, 1996, the approximate square footage used in NMG's operations was as follows:
Owned Subject to Owned Ground Lease Leased Total Stores ................... 348,000 1,931,000 2,297,000 4,576,000 Distribution, support and office facilities and clearance centers .. 1,170,000 0 634,000 1,804,000
Leases for Neiman Marcus stores, including renewal options, range from 30 to 99 years. The lease on the Bergdorf Goodman main store expires in 2050 and the lease on the Bergdorf Goodman Men's store expires in 2010, with two 10-year renewal options. Leases are generally at fixed rentals, and a majority of leases provide for additional rentals based on sales in excess of predetermined levels. NMG also owns approximately 50 acres of land in Las Colinas, Texas, where its NM Direct operations are located in a 705,000 square foot facility, and also owns approximately 34 acres of land in Longview, Texas where its National Service Center is located in a 465,000 square foot facility. NMG also operates several small clearance centers which provide an outlet for the sale of marked down merchandise from Neiman Marcus Stores, Bergdorf Goodman and NM Direct. At October 31, 1996, Drake Beam Morin conducted its business from 83 leased offices in the United States and 82 offices in 24 countries around the world. For additional information about the properties of the Company, see Item 1 above and the information contained in Note 11 of the Notes to Consolidated Financial Statements under the heading "Leases" on page 39 of the 1996 Annual Report, which is incorporated herein. 6 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various suits and claims incidental to the ordinary course of its business. The Company does not believe that the disposition of any such suits or claims will have a material adverse effect on the financial position or continuing operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following information contained in the 1996 Annual Report is incorporated herein: (i) the last paragraph of Note 6 of the Notes to Consolidated Financial Statements on page 36 of the 1996 Annual Report relating to restrictions on the Company's ability to pay dividends; (ii) "Dividends per share" in Note 15 of the Notes to Consolidated Financial Statements on page 42 of the 1996 Annual Report; and (iii) "Stock Information" on page 46 of the 1996 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 16, 1997, there were 1,875 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 and Chief Executive Officer of the Company), reference is made to the information contained in the Company's Proxy Statement for the 1997 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 1996 Annual Report under the caption "Five Year Summary" on page 44 and is incorporated herein. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The response to this Item is contained in the 1996 Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 23 through 26 and is incorporated herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and supplementary data set forth in Item 14 are incorporated herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 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 and compliance with Section 16(a) of the Securities Exchange Act of 1934 by the Company's officers and directors is contained in the Proxy Statement for the 1997 Annual Meeting of Stockholders under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein. B. Executive Officers Below is the name, age and principal occupations for the last five years of each current executive officer of the Company. All such persons have been elected to serve until the next annual election of officers and their successors are elected or until their earlier resignation or removal. Richard A. Smith - 72 Chairman of the Company and of The Neiman Marcus Group, Inc.; Chief Executive Officer of the Company and of The Neiman Marcus Group, Inc. since January 15, 1997 and prior to December 1991; Chairman, President (until November 1, 1995) and Chief Executive Officer of GC Companies, Inc. since December 1993; Director of The Neiman Marcus Group, Inc., GC Companies, Inc., Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Financial Companies, Inc., and Bank of Boston Corporation and its principal subsidiary, The First National Bank of Boston. Mr. Smith is the father of Robert A. Smith and the father-in-law of Brian J. Knez, who are Presidents and Co-Chief Operating Officers and directors of the Company. Mr. Smith is the uncle of Jeffrey R. Lurie, a director of the Company. 8 Robert A. Smith - 37 President and Co-Chief Operating Officer of the Company and President and Chief Operating Officer of The Neiman Marcus Group, Inc. since January 15, 1997; Group Vice President of the Company and The Neiman Marcus Group, Inc. prior thereto; President and Chief Operating Officer of GC Companies, Inc. since November 1995. Mr. Smith is the son of Richard A. Smith, Chairman and Chief Executive Officer of the Company, the brother-in-law of Brian J. Knez, who is also President and Co-Chief Operating Officer and a director of the Company, and the cousin of Jeffrey R. Lurie, a director of the Company. Brian J. Knez - 39 President and Co-Chief Operating Officer of the Company since January 15, 1997; President and Chief Executive Officer of Harcourt Brace & Company since May 1995; President of the Scientific, Technical, Medical and Professional Group of Harcourt Brace from 1993 to May 1995; Group Vice President of the Scientific, Technical and Medical Group of Harcourt Brace from 1991 to 1993; Mr. Knez is the son-in-law of Richard A. Smith, Chairman and Chief Executive Officer of the Company, and the brother-in-law of Robert A. Smith, who is also President and Co-Chief Operating Officer and a director of the Company. John R. Cook - 55 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 prior to September 1992. Eric P. Geller - 49 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 to May 1992; Secretary of the Company and of The Neiman Marcus Group, Inc. 9 Peter Farwell - 53 Vice President - Corporate Relations of the Company and of The Neiman Marcus Group, Inc. Paul F. Gibbons - 45 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. Gerald T. Hughes - 40 Vice President-Human Resources of the Company and of The Neiman Marcus Group, Inc. since June 1994; Associate General Counsel of the Company and of The Neiman Marcus Group, Inc. with responsibility for labor and employment matters from August 1992 to June 1994; Labor Counsel of the Company and The Neiman Marcus Group, Inc. prior thereto. Michael F. Panutich - 48 Vice President - General Auditor of the Company and of The Neiman Marcus Group, Inc. since June 1993; Vice President - Accounting of the Company and of The Neiman Marcus Group, Inc. prior thereto. Stephen C. Richards - 41 Vice President and Controller of the Company and of The Neiman Marcus Group, Inc. since June 1993; Partner, Deloitte & Touche LLP, prior thereto. ITEM 11. EXECUTIVE COMPENSATION The response to this Item is contained in the Proxy Statement for the 1997 Annual Meeting of Stockholders under the captions "Directors' Compensation", "Executive Compensation" and "Transactions Involving Management" and is incorporated herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this Item is contained in the Proxy Statement for the 1997 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 1997 Annual Meeting of Stockholders under the captions "Executive Compensation" and "Transactions Involving Management" and is incorporated herein. 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 14(a)(1) Financial Statements The documents listed below are incorporated herein by reference to the Company's 1996 Annual Report to Shareholders and are incorporated herein by reference to Item 8 hereof: Consolidated Balance Sheets - October 31, 1996 and 1995. Consolidated Statements of Earnings for the fiscal years ended October 31, 1996, 1995, and 1994. Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1996, 1995 and 1994. Consolidated Statements of Shareholders' Equity for the fiscal years ended October 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Independent Auditors' Report. 14(a)(2) Consolidated Financial Statement Schedules The document and schedule listed below are filed as part of this Form 10-K: Page In Form 10-K Independent Auditors' Report on Consolidated Financial Statement Schedule F-1 Schedule VIII - Valuation and Qualifying Accounts and Reserves F-2 All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted because the information is disclosed in the Consolidated Financial Statements or because such schedules are not required or are not applicable. 11 14(a)(3) Exhibits The exhibits filed as part of this Annual Report are listed in the Exhibit Index immediately preceding the exhibits. The Company has identified with an asterisk in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Form 10-K in response to Item 14(c) of Form 10-K. 14(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended October 31, 1996. The Company filed a report on Form 8-K on November 25, 1996 describing in Item 2 (Acquisition or Disposition of Assets) the repurchase from the Company by NMG of all NMG's issued and outstanding preferred stocks and including pro forma financial information. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARCOURT GENERAL, INC. By:/s/ Richard A. Smith Richard A. Smith, Chairman of the Board and Chief Executive Officer Dated: January 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the following capacities and on the dates indicated. Signature Title Date Principal Executive Officer: s/Richard A. Smith Chairman of the Board and January 28, 1997 Richard A. Smith Chief Executive Officer Principal Financial Officer: s/John R. Cook Senior Vice President and January 28, 1997 John R. Cook Chief Financial Officer Principal Accounting Officer: s/Stephen C. Richards Vice President and January 28, 1997 Stephen C. Richards Controller 13 Directors: s/William F. Connell January 15, 1997 William F. Connell s/Gary L. Countryman January 28, 1997 Gary L. Countryman s/Jack M. Greenberg January 28, 1997 Jack M. Greenberg s/Herbert W. Jarvis January 28, 1997 Herbert W. Jarvis s/Brian J. Knez January 28, 1997 Brian J. Knez s/Jeffrey R. Lurie January 21, 1997 Jeffrey R. Lurie s/Lynn Morley Martin January 24, 1997 Lynn Morley Martin s/Maurice Segall January 28, 1997 Maurice Segall s/Robert A. Smith January 28, 1997 Robert A. Smith s/Paula Stern January 15, 1997 Paula Stern s/Hugo Uyterhoeven January 14, 1997 Hugo Uyterhoeven s/Clifton R. Wharton, Jr. January 28, 1997 Clifton R. Wharton, Jr. 14 EXHIBIT INDEX Page No. 3.1 Restated Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993. 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 Company's 8 1/4% Senior Notes Due 2002 and the Company's 8 7/8% Senior Debentures Due 2022, incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, File No. 33-46148. 4.3 Smith-Lurie/Marks Stockholders' Agreement, dated December 29, 1986, incorporated herein by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992. *10.1 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. 15 *10.2 1981 Stock Option Plan, as amended and restated, incorporated 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 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, 1994. *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, incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993. *10.8 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. 16 *10.9(a) Amended and Restated Deferred Compensation Agreement, dated August 27, 1990, between the Company and Richard A. Smith, incorporated herein by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1990. *10.9(b) Deferred Compensation Agreement dated as of December 15, 1994, between the Company and Richard A. Smith, incorporated herein by reference to Exhibit 10.9(b) of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995. 10.10 Intercompany Services Agreement, dated as of July 24, 1987, between the Company and NMG, incorporated herein by reference to Exhibit 10.17(c) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1987. 10.11 Amended and Restated Intercompany Services Agreement dated as of November 1, 1995, between the Company and GC Companies, Inc., incorporated herein by reference to Exhibit 10.11(b) of the Company s Annual Report on Form 10-K for the fiscal year ended October 31, 1995. 10.12 Reimbursement and Security Agreement, dated as of December 14, 1993, between the Company and GC Companies, Inc., incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993. *10.13 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, as amended, incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994. *10.15(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) 17 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992. *10.15(c)Resignation Agreement dated as of December 17, 1996 by and between the Company and Robert J. Tarr, Jr. 10.16 Exchange and Repurchase Agreement, incorporated herein by reference to Exhibit 10.1 to Registration Statement on Form S-3 of The Neiman Marcus Group, Inc. dated October 10, 1996, File No. 333-11721. 11.1 Computation of Average Number of Shares Outstanding Used In Determining Primary and Fully Diluted Earnings Per Share. 13.1 The following sections of the 1996 Annual Report to Stockholders ("1996 Annual Report") which are expressly incorporated by reference in this Annual Report on Form 10-K: Management's Discussion and Analysis of Financial Conditions and Results of Operations at pages 23 through 26 of the 1996 Annual Report Consolidated Financial Statements and the Notes thereto at pages 27 through 42 of the 1996 Annual Report Independent Auditors' Report at page 43 of the 1996 Annual Report The information appearing under caption "Five Year Summary" on page 44 of the 1996 Annual Report The information appearing under the caption "Stock Information" on page 46 of the 1996 Annual Report. 21.1 Subsidiaries of the Company. 23.1 Consent of Deloitte & Touche LLP. 27.1 Financial Data Schedule. __________________________ * Exhibits filed pursuant to Item 14(c) of Form 10-K. 18 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, 1996 and 1995, and for each of the three years in the period ended October 31, 1996, and have issued our report thereon dated December 9, 1996. Such consolidated financial statements and report are included in the Company's 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Harcourt General, Inc. and its subsidiaries, listed in Item 14(a)(2). The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /S/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Boston, Massachusetts December 9, 1996 F-1
HARCOURT GENERAL, INC. AND SUBSIDIARIES. SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES THREE YEARS ENDED OCTOBER 31, 1996 (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, 1996 Allowance for doubtful accounts $22,486 23,027 220 26,363(B) $19,370 (deducted from accounts receivable) Allowance for book returns (A) $49,403 94,182 (94) 90,302(C) $53,189 (deducted from accounts receivable) YEAR ENDED OCTOBER 31, 1995 Allowance for doubtful accounts $26,439 32,077 2,335 38,365(B) $22,486 (deducted from accounts receivable) Allowance for book returns (A) $49,091 82,548 437 82,673(C) $49,403 (deducted from accounts receivable) YEAR ENDED OCTOBER 31, 1994 Allowance for doubtful accounts $20,363 32,247 - 26,171(B) $26,439 (deducted from accounts receivable) Allowance for book returns (A) $49,730 79,097 - 79,736(C) $49,091 (deducted from accounts receivable) (A) Reflects gross allowance netted against accounts receivable. Reserves for returns to inventory and recovery of royalties payable are netted directly against those balances and are not material. (B) Write-off of uncollectible accounts net of recoveries. (C) Books actually returned during the year.
F-2 EX-10.15(C) 2 RESIGNATION AGRMNT. DATED 12/17/96 - RJ TAR EXHIBIT 10.15(C) HARCOURT GENERAL, INC. 27 BOYLSTON STREET CHESTNUT HILL, MASSACHUSETTS 02167 December 17, 1996 Mr. Robert J. Tarr, Jr. President and Chief Executive Officer Harcourt General, Inc. 27 Boylston Street Chestnut Hill, MA 02167 Dear Bob: This letter agreement sets forth the understandings you and Harcourt General, Inc. (the "Company") have reached in connection with your separation from employment by the Company. For good and valuable consideration, receipt of which is hereby acknowledged, you and the Company agree as follows: 1. Reference is made to the Employment Agreement dated as of November 15, 1991 between you and the Company, as the same was extended pursuant to Paragraph 1.01 thereof (such Agreement, as extended, being referred to herein as the "Employment Agreement"). You hereby resign as an employee, officer and director of the Company and each subsidiary of the Company (including NMG), effective as of the close of business on January 15, 1997 (the "Separation Date"), and the Company hereby accepts your resignation. 2. The Company shall make the following cash payments to you (or, in the event of your death, to your beneficiary or beneficiaries determined under paragraph 18 below): a. the sum of $2,830,769.16, payable in 46 bi-weekly installments of $61,538.46 each, commencing on January 23, 1997, subject to the deferral of a portion thereof as provided in paragraph 3 below; b. the sum of $3,200,000, of which $1,600,000 shall be paid in the first week of January 1998, and $1,600,000 shall be paid in the first week of January 1999, subject to the deferral of a portion thereof as provided in paragraph 3 below; and c. the sum of $800,000, payable in 12 monthly installments of $66,666.67 each, commencing on November 30, 1998. 3. Fifteen percent of each amount otherwise payable to you under paragraphs 2.a. and 2.b. above shall be deferred and credited to an account maintained for your benefit on the books of the Company (your "deferral account"), and the Company will credit matching deferrals to your deferral account in an amount equal to 3 percent of each amount otherwise payable to you under paragraph 2.a. or 2.b. above, as of the last day of the month in which such amount would otherwise have been payable. As of the last day of each calendar quarter, your deferral account will be credited with interest on the balance of the account from time to time during the quarter at an annual rate equal to the average prime interest rate published in the Eastern Edition of the Wall Street Journal on the last business day of the calendar quarter (or, if two or more such rates are published, the mean of such rates), increased by 2 percentage points. The amount of your deferral account will be paid to you on or about January 15, 1999 in the form of a single lump sum payment. In the event of your death prior to the complete distribution of your deferral account, the balance of such account will be paid as soon as practicable to your beneficiary or beneficiaries determined under paragraph 18 below in the form of a single lump sum payment. The Account established for your benefit under the Company's Key Employee Deferred Compensation Plan shall continue to be maintained, and bear interest, in accordance with such Plan until January 15, 1999, whereupon the amount of such Account shall be paid to you (or your beneficiary) in a lump sum. 4. Commencing on November 1, 1998, and continuing for the rest of your life, you will be entitled to receive retirement payments in the amount of $118,958.33 per month. If you die after this letter agreement takes effect and are survived by your spouse, she will be entitled to receive retirement payments commencing on the later of November 1, 1998 or the first day of the month following your death and continuing for the rest of her life, in the amount of $59,479.17 per month. Any payment for a month to you or your spouse under the Harcourt General, Inc. Retirement Plan ("HGRP") will be counted toward the applicable monthly amount under the preceding sentences, and the balance of such amount will be paid by the Company. In the event you elect to receive (and do receive) benefits under the HGRP in the form of a single lump sum payment, the monthly payments to you and your spouse under the HGRP shall be assumed to be those that would have been paid commencing on the first day of the month after the date of such lump sum payment either (x) in the form of a joint and 50% survivor annuity if you are married on such date or (y) in the form of a straight life annuity if you are not married on such date. Upon the later of your death or that of your surviving spouse, your beneficiary or beneficiaries, determined under paragraph 18 below, will be entitled to receive the benefit, if any, described in Paragraph 4.03(c) of the Employment Agreement. In addition, the benefits provided by this paragraph 4 will be offset against (and reduce to zero) any benefits payable to you or your surviving spouse, or to any other beneficiary, under the Company's Supplemental Executive Retirement Plan. 5. Commencing on the Separation Date, you will be entitled to participate in the plans and programs and to enjoy the benefits set forth in Paragraph 4.02 (a) of the Employment Agreement, except that until October 31, -2- 1998 you will be entitled to participate in the Company's Matching Gift Program as though you were still President and Chief Executive Officer of the Company. Upon your death, your surviving spouse and each of your children (until he or she attains the age of 22) shall be entitled to enjoy the benefits set forth in Paragraph 4.02(b) of the Employment Agreement. 6. All of your stock options and related stock appreciation rights shall remain exercisable in accordance with their terms until November 26, 2001. 7. You agree to repay all loans made to you by the Company on or before the Separation Date, except that the loan in the original principal amount of $1,018,980 shall be paid in accordance with its payment schedule of $63,286.25 on each of January 15, 1997 and April 15, 1997. You and the Company hereby agree you shall no longer be deemed eligible to borrow from the Company, whether pursuant to the Company's Key Executive Stock Purchase Loan Plan, the Employment Agreement, or otherwise. 8. The Company shall provide you with the basic life insurance referred to in Paragraph 4.02(a)(ii) of the Employment Agreement and the Company agrees to make all required premium payments with respect thereto upon receiving advice of the results of any required physical exam and the premium payment required. You may assign your interest in such policy (including the right to designate the beneficiary) to an irrevocable trust. In addition, the Company will make the final premium payment with respect to the Supplemental Life Insurance referred to in paragraph 4.04 of the Employment Agreement upon receipt of advice from the insurer of the premium payment required whereupon such policy shall be fully paid-up. 9. Through October 31, 1998, the Company will continue to provide you with the automobile currently maintained for you by the Company and will pay for all expenses associated with your use of such automobile. On or before October 31, 1998, you may purchase the automobile currently provided to you by the Company at its then depreciated book value. 10. All payments provided for in this letter agreement shall be reduced by any taxes or other amounts required to be withheld by the Company under applicable laws, including any taxes required to be withheld with respect to other benefits provided to you hereunder. 11. Except with respect to its obligations under the HGRP, (i) the Company shall not be required to set aside or segregate any of its assets of any kind to meet any of its obligations hereunder; (ii) all of the Company's obligations hereunder shall be reflected by book entries only, and neither you nor your spouse nor any other beneficiary shall have any rights on account of this letter agreement to any specific assets of the Company; and (iii) any rights that you, your spouse or any other beneficiary may have on account of this letter agreement shall be those of an unsecured general creditor. No benefit payable under this letter agreement, and no interest or rights hereunder belonging to yourself, your spouse or any other beneficiary, shall be subject to the claims of any creditor or to attachment, garnishment or other legal process, nor shall you, your spouse or any other beneficiary have -3- any right to alienate, anticipate, commute, pledge, encumber or assign any interest or rights under this letter agreement. 12. You agree that, until December 31, 1997, you shall not serve as an officer, director, employee or consultant (with or without compensation) to, any national specialty apparel chain, designer boutique, or any other companies as to which you and the Company have agreed in writing. In the event that any provision of this paragraph 12 shall be determined by any court of competent jurisdiction to be unenforceable by reason of its being extended over too great a time, too large a geographic area or too great a range of activities, it shall be interpreted to extend only over the maximum period of time, geographic area or range of activities as to which it may be enforceable. 13. You acknowledge that in the course of your duties you have been entrusted with confidential information of a proprietary nature, including but not limited to financial and statistical information regarding affairs of the Company and its subsidiaries, supplier and subcontractor lists, price and cost information, business plans and programs, merchandising opportunities, expansion plans, methods, techniques, marketing and other data, designs and knowhow, developed or obtained by the Company or its subsidiaries (collectively, "Proprietary Information"), and agree that you shall not, directly or indirectly, use or disclose Proprietary Information to any third party (except, prior to the Separation Date, as required for the proper performance of your duties on behalf of the Company). Proprietary Information also includes all information received by the Company or any of its subsidiaries from others with any understanding that such information will not be disclosed. For this purpose, Proprietary Information shall not include (i) information which is part of the public domain (other than by your act), or (ii) any information required to be disclosed by law. 14. You agree that, until December 31, 1997, you will not solicit or induce any Employee to discontinue employment with the Company or any of its subsidiaries (including NMG). The term "Employee" means any person who is an employee of the Company or any of its subsidiaries (including NMG) between the date this letter agreement takes effect and December 31, 1997. 15. The Company may not assign all or any part of its obligations under this letter agreement, and will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this letter agreement to the same extent that the Company would be required to perform it if no such succession had taken place. This letter agreement shall inure to the benefit of and be enforceable by and binding upon (i) any such successors and (ii) your personal and legal representatives, executors, administrators, heirs and beneficiaries. 16. The Company shall indemnify you for all losses, damages, costs, expenses, liabilities, judgments and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation in which you are a party or threatened to be made a party by reason of the fact that you were an officer, director or employee of the Company or any of its subsidiaries at -4- least to the same extent that the Company indemnifies its current officers and directors for such matters under its By-Laws. 17. (a) For valuable consideration you agree that this letter agreement shall be in complete and final settlement of any and all causes of action, rights or claims that you have had in the past, now have, or might now have, in any way related to, connected with or arising out of your employment or its termination or the Employment Agreement or pursuant to Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Massachusetts fair employment practices statute or any other federal, state or local employment law, regulation or other requirement, and you hereby release and forever discharge the Company and all of its subsidiaries (including without limitation NMG and its subsidiaries) and all of their respective past and present directors, officers, shareholders, employees, agents, successors, assigns and all others connected with any of them, both individually and in their official capacities, from any and all such causes of action, rights or claims. Excluded from the scope of this release of claims is any claim arising hereafter under the terms of this letter agreement or under any plan or option agreement referred to herein. (b) The Company hereby releases and forever discharges you from any and all causes of action, rights or claims which it now has or may now have against you; provided, however, that this release and discharge shall not constitute a release or discharge of any of your obligations under this letter agreement. 18. You may designate in a writing filed with the Company one or more persons (including your estate) as the beneficiary or beneficiaries of the benefits provided for under this letter agreement after your death. You may change such designation from time to time (other than the designation of an irrevocable insurance trust as a beneficiary of life insurance policies insuring your life), and the last such designation in writing filed with the Company will control. If you have failed to file a designation of beneficiary by the time of your death, or if all designated beneficiaries have predeceased you, the amounts payable under this agreement shall be paid to your estate. Different beneficiaries may be designated to receive different benefits hereunder. 19. In consideration of the payments to be made in accordance with paragraph 2.c. above, you agree to provide consulting services to the Company, if, as and when requested by the person succeeding you as the chief executive officer of the Company, for a maximum of one business day a month at mutually convenient times, for a period of one year commencing on the Separation Date. Such consulting shall not require that you have access to material non-public information of the Company. The Company shall reimburse all reasonable out- of-pocket expenses incurred by you in connection with such services. If you agree to render such services for a period exceeding one day in any month, the Company shall pay you $4,000 for each excess day. If during such period you become employed by a governmental agency or body and applicable governmental regulations preclude you from continuing to render such services to the Company, you shall be relieved of your obligations under this paragraph 19. -5- 20. The Company shall reimburse you for your reasonable legal fees incurred in connection with the preparation and execution of this letter agreement. 21. You shall not be required to mitigate the amount of any payment or benefit under this letter agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this letter agreement be reduced by any compensation or other fees earned by you as a result of employment by another employer, by services to a third party or (except for the amounts due under paragraph 7 hereof) by offset against any amount claimed to be owed by you to the Company. 22. This letter agreement contains the entire agreement between you and the Company, and, except as expressly provided for herein (including the plans, programs, options and benefits referred to herein), supersedes all prior oral and written agreements and understandings and commitments between you and the Company (including without limitation the Employment Agreement) relating to this letter agreement or your employment with the Company. No amendment to this letter agreement shall be made except by a written instrument signed by you and by a duly authorized officer of the Company. The Company encourages you to seek the advice of an attorney before signing this letter agreement. In signing this letter agreement, you represent and warrant that you have signed it voluntarily and with a full understanding of its terms and that you have had a full and sufficient opportunity of at least 21 days to consider this letter agreement and to consult with an attorney before signing it. 23. All notices required by this letter agreement shall be in writing and delivered by hand, overnight courier against receipt, or by registered or certified mail, postage prepaid, in your case, addressed to 40 White Oak Road, Wellesley, Massachusetts 02181, and in the Company's case, addressed to its Chairman of the Board of Directors, at 27 Boylston Street, Chestnut Hill, Massachusetts 02167 and shall be effective upon actual receipt. Either you or the Company may from time to time designate a new address by notice given to and actually received by the other. 24. You may revoke this letter agreement at any time during the seven- day period immediately following the date of your signing it by so notifying the Secretary of the Company in writing during that period. If you do not revoke it, then, at the expiration of the seven-day revocation period, this letter agreement shall take effect as a legally-binding agreement between you and the Company on the basis set forth above. -6- 25. This letter agreement shall be governed by the law of the Commonwealth of Massachusetts without regard to its law regarding choice of law. HARCOURT GENERAL, INC. By /s/ Richard A. Smith Richard A. Smith AGREED: /s/ Robert J. Tarr, Jr. Robert J. Tarr, Jr. Dated: December 17, 1996 The Neiman Marcus Group, Inc. hereby agrees to the continuation as provided above of the benefits referred to in Paragraph 4.02(a)(iv) of the Employment Agreement. The Neiman Marcus Group, Inc. By: /s/ Richard A. Smith Richard A. Smith -7- EX-11.1 3 COMPUTATION OF AVERAGE NUMBER OF SHARES
EXHIBIT 11.1 HARCOURT GENERAL, INC. AND SUBSIDIARIES OCTOBER 31, 1996 EXHIBIT TO FORM 10-K COMPUTATION OF AVERAGE NUMBER OF SHARES OUTSTANDING USED IN DETERMINING PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (In thousands) 1996 1995 1994 PRIMARY 1. Weighted average number of Common shares outstanding 71,277 75,006 77,802 2. Assumed conversion of Series A Cumulative Convertible Preferred Stock 1,292 1,480 1,677 3. Assumed exercise of certain stock options based on average market value during the year 201 278 330 4. Weighted average number of shares used in primary per share computations 72,770 76,764 79,809 FULLY DILUTED (A) 1. Weighted average number of Common shares outstanding 71,277 75,006 77,802 2. Assumed exercise of Series A Cumulative Convertible Preferred Stock 1,292 1,480 1,677 3. Assumed exercise of certain stock options based on market value at October 31 202 291 340 4. Weighted average number of shares used in primary per share computations 72,771 76,777 79,819 (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 4 SECTIONS OF 1996 ANNUAL REPORT TO STOCKHOLDERS INCORPORATED BY REFERENCE INTO ANNUAL REPORT ON FORM 10K [START PAGE 23] Management's Discussion and Analysis of Financial Condition and Results of Operations [Segment Operating Results] The following table presents revenues and operating earnings by business segment:
Years ended October 31 (in thousands) 1996 1995 1994 ==================================================================================== Revenues Publishing $1,092,631 $1,017,637 $919,498 Specialty retailing 2,075,003 1,888,249 1,789,461 Professional services 122,285 128,850 141,818 ----------------------------------- Total revenues $3,289,919 $3,034,736 $2,850,777 =================================== Operating earnings Publishing $196,997 $177,531 $165,436 Specialty retailing 172,354 161,698 157,713 Professional services 9,753 13,062 22,072 Corporate expenses (34,382) (34,395) (35,081) ----------------------------------- Total operating earnings $344,722 $317,896 $310,140 ====================================
[Operating Results 1996 vs. 1995] Publishing Publishing revenues increased 7.4% to $1.09 billion in 1996 from $1.02 billion in 1995. The Company's educational publishing group and its scientific, technical, medical and professional (STMP) publishing group both contributed significantly to the revenue increase. A substantial portion of the educational publishing group's revenue increase resulted from higher testing program revenues, primarily due to the acquisition of Assessment Systems, Inc. in the third quarter of 1995. The educational group revenues were also increased by strong testing program and secondary publishing revenues, offset in part by an anticipated decline in elementary program revenues resulting from fewer adoption opportunities in comparison to 1995. STMP revenue growth reflected both increased book and journal sales at W.B. Saunders as well as revenue increases due to the acquisition of International Medical News Group (IMNG), a medical newspaper publisher, in the first quarter of 1996. Publishing operating earnings increased 11.0% to $197.0 million in 1996 from $177.5 million in 1995. STMP operating earnings, specifically at W.B. Saunders and Academic Press, were significantly higher than those of the prior year due to higher sales volume of W.B. Saunders books, W.B. Saunders and Academic Press journals, and lower operating expenses as a percentage of revenues. Operating earnings at Holt, Rinehart and Winston and Harcourt Brace College were also higher than in 1995, although in aggregate earnings for the educational publishing group decreased slightly in comparison to the prior year primarily as a result of the decline in elementary program revenues and higher administrative and fulfillment expenses. Specialty retailing Specialty retailing revenues in 1996 increased 9.9% to $2.08 billion from $1.89 billion in 1995. The revenue growth was primarily attributable to a 5.4% increase in comparable sales and, to a lesser extent, the opening of two new Neiman Marcus stores during the year. Strong sales were achieved across most major merchandise categories and geographic regions. Additionally, fiscal 1996 included 53 weeks, while fiscal 1995 consisted of 52 weeks. The 53rd week is not included in comparable sales. Operating earnings from specialty retailing increased 6.6% to $172.4 million from $161.7 million in 1995. The increase is attributable to higher sales volume, partially offset by the full year impact of NMG's credit card receivables securitization. Gross margins were approximately 31.7% in 1996 compared to 32.4% in 1995, the lower percentage resulting primarily from higher markdowns during the calendar 1995 holiday season. Selling, general and administrative expenses increased primarily due to new store openings, higher selling costs and lower finance charge income. The Company utilizes the last-in, first-out (LIFO) method of accounting for valuing its inventories, which provides a better matching of revenues with expenses than the first-in, first-out (FIFO) method which is used by some specialty retail companies. The most important factors contributing to differences between the LIFO and FIFO methods include the rate of inflation, inventory levels and markdowns. As a result of these factors, operating earnings were $.7 million higher in 1996 and $10.4 million higher in 1995 than they would have been using the FIFO method. Operating earnings at NM Direct improved significantly in comparison to 1995, due to increased revenues and lower paper and postage expenses. [END PAGE 23] [START PAGE 24] The securitization of NMG's credit card receivables, which was completed in March 1995, had the effect of reducing finance charge income by $19.0 million in 1996 and $7.1 million in 1995. Finance charge income in 1997 is expected to be reduced by an amount comparable to 1996. Interest expense was also reduced, as the proceeds from the securitization were used to repay outstanding debt. Professional services Professional services revenues decreased 5.1% to $122.3 million from $128.9 million in 1995. The decrease was a result of lower volume in both group and individual outplacement programs, reflecting fewer outplacement opportunities and increased competition. Operating earnings for the professional services segment decreased 25.3% to $9.8 million from $13.1 million in 1995. The decrease was primarily due to the revenue shortfall in comparison to the prior year. Corporate expenses Corporate expenses remained essentially flat in 1996 at $34.4 million. Investment income Investment income decreased 31.6% to $27.3 million in 1996 from $39.9 million in 1995. The decrease was primarily due to a lower average short-term investment portfolio balance resulting primarily from the Company's stock repurchase program and acquisitions of NMG common stock and publishing businesses made during the year. Interest expense Interest expense decreased 6.6% to $82.9 million in 1996 from $88.7 million in 1995. The decrease was primarily due to lower debt levels at NMG resulting from the use of proceeds from NMG's credit card securitization in March 1995 to pay down outstanding debt. Income taxes The Company's effective income tax rate was 34% in 1996, unchanged from 1995. Minority interest Beginning in 1997, upon achievement by NMG of net earnings available to common shareholders of approximately $70.0 million, Harcourt General will no longer include in its earnings statement the proportionate share (currently 47%) of NMG earnings to which the minority shareholders of NMG will become entitled. [Operating Results 1995 vs. 1994] Publishing Publishing revenues increased 10.7% to $1.02 billion in 1995 from $919.5 million in 1994. Significant increases were achieved at the Company's educational and scientific, technical, medical and professional publishing groups. Educational group revenue gains resulted primarily from sales of elementary products in reading, mathematics and science, and testing programs, while STMP revenues increased principally because of higher journal sales at both Academic Press and W.B. Saunders. The publishing segment had operating earnings of $177.5 million in 1995, a 7.3% increase from $165.4 million in 1994. Significant operating earnings gains at the educational group and a slight increase at the STMP group were partially offset by lower international group earnings. Overall, operating margins were negatively affected by increased costs of paper, prepublication cost amortization and fulfillment. Specialty retailing Specialty retailing revenues in 1995 increased 5.5% to $1.89 billion from $1.79 billion in 1994. The higher revenues were a result of increased transaction volume and a higher average sale amount at both Neiman Marcus Stores and Bergdorf Goodman. Revenues at NM Direct were essentially flat compared to 1994. Operating earnings from specialty retailing increased 2.5% to $161.7 million in 1995 from $157.7 million in 1994. Increased earnings in 1995 at Neiman Marcus Stores and Bergdorf Goodman were partially offset by lower NM Direct earnings. Both Neiman Marcus Stores and Bergdorf Goodman improved gross profit as a result of increased transaction volume and higher average sale amounts, partially offset by higher markdowns. Lower NM Direct earnings were principally due to reduced demand for apparel and higher paper and postage costs. The impact of the LIFO method of accounting increased gross profit by $10.4 million in 1995 and reduced gross profit by $2.4 million in 1994. The securitization of NMG's credit card receivables, which was completed in March 1995, had the effect of reducing finance charge income by $7.1 million in 1995. [END PAGE 24] [START PAGE 25] Professional services Professional services revenues decreased 9.1% to $128.9 million in 1995 from $141.8 million in 1994. The decrease was a result of reduced prices for outplacement services, reflecting an increasingly competitive marketplace. Operating earnings for the professional services segment decreased 40.8% to $13.1 million in 1995 compared with $22.1 million in 1994. The decrease was primarily due to lower margins that have resulted from increased competition. Corporate expenses Corporate expenses decreased 2.0% to $34.4 million in 1995 compared to $35.1 million in 1994, primarily due to lower professional fees. Investment income Investment income increased $25.7 million to $39.9 million in 1995 from $14.2 million in the previous year. The increase was due to a larger portfolio balance as a result of the sale of the Company's insurance business in October 1994 and a higher rate of return on portfolio assets. Interest expense Interest expense increased 2.9% to $88.7 million in 1995 from $86.2 million in 1994. The increase was primarily the result of higher interest rates on NMG bank debt. Income taxes The Company's effective income tax rate was 34% in 1995, compared to 38% in 1994. The decrease in the rate was due to settlements of prior years' state and federal tax returns, and lower state and foreign taxes. Discontinued operations The loss from discontinued operations of $11.7 million in 1995 included $1.8 million of after-tax Contempo Casuals operating losses and an after-tax loss on disposal of $9.9 million. In 1994, earnings from discontinued operations included after-tax earnings of $37.1 million related to the Company's insurance business, an after-tax gain of $8.0 million on the sale of the insurance business, $35.0 million related to the settlement of certain tax matters associated with the sale of the Company's soft drink bottling business in 1989 and an after-tax loss from Contempo Casuals operations of $49.8 million, which included an after-tax restructuring charge of $28.1 million. [Liquidity and Capital Resources] The following discussion analyzes liquidity and capital resources by operating, investing and financing activities as presented in the Company's consolidated statements of cash flows. Cash generated by earnings from continuing operations before depreciation and amortization in 1996 was $371.2 million compared to $353.3 million in 1995. The cash provided by the Company's operations was sufficient to fund working capital, capital expenditures and dividend requirements. NMG uses its cash and revolving credit agreement to fund its own working capital and capital expenditures. The most significant changes in working capital were increases in inventories of $96.3 million and accounts receivable of $36.3 million, which were partially offset by a $38.2 million increase in accounts payable and accrued liabilities. Increases in inventories and accounts receivable were due in large part to the opening of two new Neiman Marcus stores in fiscal 1996, as well as to increased sales volume in both specialty retailing and publishing. During the second half of fiscal 1995, the Company used a portion of its cash to purchase short term investments with maturities greater than three months but with similar risk profiles to cash equivalent investments with maturities less than three months. This investment practice was continued in 1996, and the related activity is reflected as purchases and maturities of short-term investments in the consolidated statements of cash flows. These short-term investments are highly liquid and consist of high quality commercial paper, certificates of deposit, corporate debt securities and U.S. Government and agency securities. The Company acquired approximately 1.1 million shares of NMG common stock in privately negotiated transactions at an average price of $20.18 per share for a total of approximately $22.8 million. The publishing business completed several acquisitions in 1996 for a total cost of $20.6 million. Publishing capital expenditures in 1996 totaled $152.0 million and were principally related to prepublication costs. Capital expenditures for the publishing business are expected to approximate $150.0 million in fiscal 1997. Specialty retailing capital expenditures of $85.7 million in 1996 consisted principally of construction of new stores and a new distribution center, and renovations of existing stores. NMG opened new Neiman Marcus stores in Short Hills, New Jersey in August 1995, King of Prussia, Pennsylvania in February 1996 and Paramus, New Jersey in August 1996. Specialty retailing capital expenditures are expected to approximate $75.0 million in fiscal 1997 and will include the remodeling of certain Neiman Marcus stores and both Bergdorf Goodman stores. [END PAGE 25] [START PAGE 26] In October 1996, NMG sold 8 million shares of its common stock to the public at $35.00 per share. The net proceeds were used, together with an additional 3.9 million shares of NMG common stock and bank borrowings, to repurchase all of NMG's outstanding preferred stock from the Company. The Company will no longer receive the annual dividends of approximately $27.1 million from such preferred stocks. Financing activities during the year include the payment of $48.7 million in dividends and the purchase of approximately 1.7 million shares of the Company's common stock for $67.2 million in the open market at an average price of $39.18 per share. NMG increased its bank borrowings by $109.9 million during the year which included borrowings used to repay $40.0 million of senior notes at maturity in May 1996. In August 1996 an additional $52.0 million of senior notes were paid on maturity through borrowings under NMG's revolving credit facility. At October 31, 1996, the Company's consolidated long-term liabilities totaled $939.1 million. That amount included $361.9 million of NMG obligations, which are not guaranteed by Harcourt General. It is expected that the Company's debentures that mature in July 1997 will be paid out of the Company's cash balances. In addition to funding its debt, the Company has significant lease commitments which require cash outflows. Lease payments from continuing operations totaled $87.9 million in 1996, and minimum lease payments in 1997 are expected to be at comparable levels. The Company believes its financial resources are more than sufficient to meet its foreseeable cash requirements. Impact of inflation The Company's financial statements are prepared on a historical cost basis under generally accepted accounting principles. The Company uses the last-in, first-out method of accounting for substantially all of its inventories. Thus the cost of goods sold approximates current cost. The Company adjusts selling prices to maintain profit levels and will continue to do so as competitive conditions permit. In general, management believes that the impact of inflation or of changing prices is not material to the financial position or results of operations of its business segments. Seasonality The Company's businesses are seasonal in nature. More than one-half of the Company's annual operating earnings are historically generated in the third quarter of its fiscal year since that quarter includes the important educational publishing selling season. Conversely, second quarter operating earnings have historically been minimal during a period when publishing revenues are at their lowest level, and that business segment typically reports operating losses. Those losses partially offset retail earnings, which have historically been strong in the Company's second quarter which includes NMG's holiday selling season. 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 1996, the Board of Directors voted to increase the quarterly cash dividend on the Common Stock to 18 cents per share. The Board also increased the quarterly cash dividend on the Series A Stock to 20.55 cents per share and on the Class B Stock to 16.20 cents per share. Recent accounting pronouncements In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The Statement establishes a fair value-based method of accounting for stock-based compensation plans, which may be recognized or disclosed at the Company's option. The Company will adopt the disclosure approach under SFAS 123 beginning in fiscal 1997. In June 1996, the FASB issued Statement of Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125), which is effective for transactions entered into after December 31, 1996. The Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The effect of adopting SFAS 125 is not expected to be material to the Company's financial position or results of operations. [END PAGE 26] [START PAGE 27] Consolidated Statements of Earnings
Years ended October 31(in thousands except for per share amounts) 1996 1995 1994 =============================================================================================== Revenues $ 3,289,919 $ 3,034,736 $ 2,850,777 Costs applicable to revenues 1,906,974 1,765,090 1,656,525 Selling, general and administrative expenses 1,003,841 917,355 849,031 Corporate expenses 34,382 34,395 35,081 ------------------------------------ Operating earnings 344,722 317,896 310,140 Investment income 27,329 39,945 14,239 Interest expense (82,882) (88,735) (86,219) Earnings from continuing operations ------------------------------------ before income taxes 289,169 269,106 238,160 Income tax expense (98,318) (91,496) (90,885) ------------------------------------ Earnings from continuing operations 190,851 177,610 147,275 Earnings (loss) from discontinued operations, net -- (11,727) 30,257 ------------------------------------ Net earnings $ 190,851 $ 165,883 $ 177,532 ==================================== Amounts per share of common stock Earnings from continuing operations $ 2.62 $ 2.31 $ 1.84 Earnings (loss) from discontinued operations -- (.15) .38 ------------------------------------ Net earnings $ 2.62 $ 2.16 $ 2.22 ==================================== See notes to consolidated financial statements.
[END PAGE 27] [START PAGE 28] Consolidated Balance Sheets
October 31 (in thousands) 1996 1995 ============================================================================================ Assets Current assets Cash and equivalents $ 532,862 $ 363,750 Short-term investments 242,054 243,073 Accounts receivable, net 409,110 372,700 Inventories 592,141 495,222 Deferred income taxes 77,491 79,083 Other current assets 79,607 55,970 ----------------------- Total current assets 1,933,265 1,609,798 ----------------------- Property and equipment Land, buildings and improvements 503,050 496,660 Fixtures and equipment 416,152 330,602 ----------------------- 919,202 827,262 Less accumulated depreciation and amortization (344,276) (286,915) ----------------------- Total property and equipment, net 574,926 540,347 ----------------------- Other assets Prepublication costs, net 209,519 164,449 Intangible assets, net 456,494 442,566 Other 152,034 127,176 ----------------------- Total other assets 818,047 734,191 ----------------------- Total assets $3,326,238 $2,884,336 ======================= See notes to consolidated financial statements.
[END PAGE 28] [START PAGE 29] Consolidated Balance Sheets
October 31 (in thousands) 1996 1995 ============================================================================================= Liabilities Current liabilities Notes payable and current maturities of long-term liabilities $ 163,717 $ 15,484 Accounts payable 315,108 284,481 Accrued liabilities 333,205 334,479 Taxes payable 77,548 58,104 Other current liabilities 58,769 52,423 ------------------------ Total current liabilities 948,347 744,971 ------------------------ Long-term liabilities Notes and debentures 714,282 789,008 Other long-term liabilities 224,792 210,846 ------------------------ Total long-term liabilities 939,074 999,854 ------------------------ Deferred income taxes 187,632 198,398 Commitments and contingencies Minority interest 217,653 -- Shareholders' Equity Preferred stock Series A Cumulative Convertible - $l par value Issued and outstanding - 1,152 and 1,210 shares 1,152 1,210 Common stocks Class B Stock - $1 par value Issued and outstanding - 20,051 and 20,802 shares 20,051 20,802 Common Stock - $1 par value Issued and outstanding - 51,068 and 51,897 shares 51,068 51,897 Paid-in capital 743,947 727,285 Cumulative translation adjustments (4,493) (5,166) Retained earnings 221,807 145,085 ------------------------ Total shareholders' equity 1,033,532 941,113 ------------------------ Total liabilities and shareholders' equity $ 3,326,238 $2,884,336 ========================
[END PAGE 29] [START PAGE 30] Consolidated Statements of Cash Flows
Years ended October 31 (in thousands) 1996 1995 1994 ============================================================================================= Cash flows from operating activities Earnings from continuing operations $190,851 $177,610 $147,275 Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities: Depreciation and amortization 180,395 175,737 149,973 Deferred income taxes (9,174) 13,152 (38,909) Other (401) 4,183 10,932 Changes in assets and liabilities: Accounts receivable (36,327) (38,259) (86,499) Inventories (96,332) (54,376) (30,291) Other current assets (23,654) 4,302 6,870 Accounts payable and accrued liabilities 38,209 25,974 34,187 243,567 308,323 193,538 --------------------------------- Discontinued operating activities -- (3,410) (3,721) --------------------------------- Net cash provided by operating activities 243,567 304,913 189,817 --------------------------------- Cash flows from investing activities Capital expenditures (242,655) (220,053) (196,160) Purchases of short-term investments (280,939) (382,612) -- Maturities of short-term investments 281,958 139,539 -- Purchases of NMG common stock (22,841) -- -- Proceeds from sale of insurance business -- -- 410,432 Acquisitions (20,648) (42,490) (36,215) Other investing activities (12,888) 1,441 (9,570) --------------------------------- Net cash provided by (used for) investing activities (298,013) (504,175) 168,487 --------------------------------- Cash flows from financing activities Proceeds from borrowings 109,917 17,065 73,800 Repayment of debt (41,571) (247,431) (30,325) Proceeds from NMG public offering 268,800 -- -- Repurchase of Common Stock (67,150) (224,827) -- Proceeds from receivables securitization -- 245,965 -- Dividends paid (48,693) (47,730) (47,183) Other transactions 2,255 311 (1,862) ---------------------------------- Net cash provided by (used for) financing activities 223,558 (256,647) (5,570) ---------------------------------- Cash and equivalents Increase (decrease) during the year 169,112 (455,909) 352,734 Beginning balance 363,750 819,659 466,925 ---------------------------------- Ending balance $ 532,862 $ 363,750 $ 819,659 ================================== Supplemental schedule of cash flow information Cash payments for: Interest $ 82,185 $ 86,991 $ 82,409 Income taxes $ 104,845 $ 75,222 $ 56,821 See notes to consolidated financial statements.
[END PAGE 30] [START PAGE 31] Consolidated Statements of Shareholders' Equity
Cumulative Common Series A Paid-in Translation Retained (in thousands) Stocks Stock Capital Adjustments Earnings ============================================================================================= Balance at November 1, 1993 $ 77,307 $ 1,996 $ 861,928 $ (5,524) $ 115,871 Net earnings -- -- -- -- 177,532 Cash dividends paid -- -- -- -- (47,183) Conversion of Series A Stock 543 (543) -- -- -- Translation adjustments -- -- -- 814 -- Spinoff of theatre operations -- -- (135,804) -- -- Other equity transactions, net 37 -- 381 -- -- --------------------------------------------------------- Balance at October 31, 1994 77,887 1,453 726,505 (4,710) 246,220 Net earnings -- -- -- -- 165,883 Cash dividends paid -- -- -- -- (47,730) Conversion of Series A Stock 243 (243) -- -- -- Repurchase of Common Stock (5,539) -- -- -- (219,288) Translation adjustments -- -- -- (456) -- Other equity transactions, net 108 -- 780 -- -- ---------------------------------------------------------- Balance at October 31, 1995 72,699 1,210 727,285 (5,166) 145,085 Net earnings -- -- -- -- 190,851 Cash dividends paid -- -- -- -- (48,693) Conversion of Series A Stock 58 (58) -- -- -- Repurchase of Common Stock (1,714) -- -- -- (65,436) Translation adjustments -- -- -- 673 -- NMG issuance of common stock -- -- 15,153 -- -- Other equity transactions, net 76 -- 1,509 -- -- --------------------------------------------------------- Balance at October 31, 1996 $ 71,119 $ 1,152 $ 743,947 $ (4,493) $ 221,807 ========================================================= See notes to consolidated financial statements.
[END PAGE 31] [START PAGE 32] Notes to Consolidated Financial Statements [ 1. Summary of Significant Accounting Policies ] Principles of consolidation The consolidated financial statements include the accounts of Harcourt General, Inc. (the Company or Harcourt General) and its majority-owned subsidiaries. The consolidated financial statements of The Neiman Marcus Group, Inc. (NMG) are consolidated with a lag of one fiscal quarter, and the minority shareholders' interest in NMG is reflected as minority interest. NMG's fiscal year ends on the Saturday closest to July 31. In fiscal 1996, NMG's reporting period included 53 weeks as compared to 52 weeks in each of fiscal years 1995 and 1994. 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 is to invest cash with financial institutions that have acceptable credit ratings and to limit the amount of credit exposure to any one financial institution. Short-term investments In 1995 the Company began purchasing short-term investments as part of its investment practice. Short-term investments have maturities greater than three months, consist of commercial paper, certificates of deposit, corporate debt securities and U.S. Government and agency securities, and are carried at cost plus accrued interest, which approximates fair value. Short-term investments have risk profiles similar to cash equivalent investments. Accounts receivable Certain publications 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 an allowance for book returns of $53.2 million in 1996 and $49.4 million in 1995 and an allowance for doubtful accounts of $19.4 million in 1996 and $22.5 million in 1995. 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. Substantially all retail inventories are valued using the retail method on a LIFO basis. If the first-in, first-out (FIFO) method of inventory valuation had been used to value inventory, the inventories would have been $13.5 million and $14.2 million higher than reported at October 31, 1996 and October 31, 1995, respectively. Property and equipment Property and equipment are stated at cost. Depreciation and amortization are provided using straight-line or accelerated methods over the estimated useful lives of the related assets or over the terms of the related leases, if shorter. When property and equipment are retired or have been fully depreciated, the cost and the related accumulated depreciation are eliminated from the respective accounts. Gains or losses arising from the dispositions are reported as income or expense. Prepublication costs Prepublication costs are amortized using the sum-of-the-years-digits method over the estimated useful lives of the publications, not exceeding five years. Intangible assets Intangible assets consist primarily of goodwill and trademarks. Amortization is provided on a straight-line method over the estimated useful lives of these assets, not exceeding forty years. In 1996 the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and determined that no impairment [END PAGE 32] [START PAGE 33] loss need be recognized. On an annual basis the Company compares the carrying value of its long-lived assets against projected undiscounted cash flows to determine any impairment and to evaluate the reasonableness of the depreciation or amortization periods. Income taxes Income taxes are calculated in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires the asset and liability method of accounting for income taxes. Receivables and finance charge income NMG's credit operations generate finance charge income which is recognized as income when earned and is recorded as a reduction of selling, general and administrative expenses. Finance charge income amounted to $47.7 million in 1996, $55.9 million in 1995 and $54.3 million in l994. The securitization of NMG's credit card receivables, which was completed in March 1995, had the effect of reducing finance charge income by $19.0 million in 1996 and $7.1 million in 1995 (see Note 14). Credit risk with respect to trade receivables is limited due to the large number of customers to whom the Company extends credit. Collateral is not required as a condition of extending credit, but credit evaluation of customers' financial position is performed. The Company maintains reserves for potential credit losses. Earnings per common and common equivalent share Earnings per common share is based upon the weighted average number of common and, when dilutive, common equivalent shares outstanding during the year. Weighted average shares outstanding amounted to 72.8 million shares in 1996, 76.8 million shares in 1995 and 79.8 million shares in l994. Earnings per common and common equivalent share, assuming full dilution, have not been presented because the dilutive effect is not material. Significant estimates In the process of preparing its consolidated financial statements, the Company estimates the appropriate carrying values of certain assets and liabilities which are not readily apparent from other sources. The primary estimates underlying the Company's consolidated financial statements include allowances for book returns, doubtful accounts, valuation of inventories and prepublication costs, and accruals for pension and postretirement benefits. Actual results could differ from these estimates. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances. Changes in presentation Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. [ 2. Description of Continuing Operations ] Publishing Harcourt Brace & Company (Harcourt Brace) publishes textbooks and other materials for elementary and secondary schools and colleges, as well as scientific, technical, medical and professional books and journals, fiction, non-fiction, and children's books. Harcourt Brace also publishes and scores tests that measure individual aptitude and competency and conducts bar examination and accounting accreditation review courses. Specialty retailing NMG operates three specialty retail businesses: Neiman Marcus Stores, NM Direct and Bergdorf Goodman. Neiman Marcus Stores operates 30 stores in 16 states and the District of Columbia; Bergdorf Goodman operates two stores in New York City; and NM Direct operates NMG's direct marketing business, providing both apparel and home items through its various direct marketing catalogues. Professional services Drake Beam Morin provides human resources management consulting services such as career transition, outplacement and other consulting services to organizations and individuals worldwide. [END PAGE 33] [START PAGE 34] [ Additional Financial Information ]
Years ended October 31 (in thousands) 1996 1995 1994 ==================================================================================== Revenues Publishing $1,092,631 $1,017,637 $ 919,498 Specialty retailing 2,075,003 1,888,249 1,789,461 Professional services 122,285 128,850 141,818 ----------------------------------- Total revenues $3,289,919 $3,034,736 $2,850,777 =================================== Operating earnings Publishing $ 196,997 $ 177,531 $ 165,436 Specialty retailing 172,354 161,698 157,713 Professional services 9,753 13,062 22,072 Corporate expenses (34,382) (34,395) (35,081) ----------------------------------- Total operating earnings $ 344,722 $ 317,896 $ 310,140 =================================== Identifiable assets Publishing $1,033,951 $ 922,629 $ 842,850 Specialty retailing 1,342,202 1,191,085 1,408,238 Professional services 51,162 58,810 69,562 Corporate 898,923 711,812 921,714 ----------------------------------- Total identifiable assets $3,326,238 $2,884,336 $3,242,364 =================================== Capital expenditures Publishing $ 151,977 $ 122,669 $ 122,761 Specialty retailing 85,736 93,514 65,074 Professional services 4,457 3,799 6,910 Corporate 485 71 1,415 ----------------------------------- Total capital expenditures $ 242,655 $ 220,053 $ 196,160 =================================== Depreciation and amortization Publishing $ 113,379 $ 120,331 $ 94,879 Specialty retailing 60,381 49,087 49,269 Professional services 4,564 4,412 4,006 Corporate 2,071 1,907 1,819 ----------------------------------- Total depreciation and amortization $ 180,395 $ 175,737 $ 149,973 ===================================
[ 3. Intangible Assets ] Intangible assets consisted of the following:
October 31 (in thousands) 1996 1995 ==================================================================================== Goodwill $ 482,217 $ 465,500 Trademarks 73,000 73,000 Other 28,819 15,351 ----------------------- Total 584,036 553,851 Accumulated amortization (127,542) (111,285) ----------------------- Total $ 456,494 $ 442,566 =======================
During the past three years, the Company has acquired several publishing related companies. The results of operations from these acquired entities are reflected in the Company's statements of earnings from the date of acquisition. Cash paid for acquisitions amounted to approximately $20.6 million in 1996, $42.5 million in 1995 and $36.2 million in 1994. In fiscal 1996, the Company also purchased approximately 1.1 million shares of NMG common stock in the open market for approximately $22.8 million. Amortization expense was $17.9 million in 1996, $17.2 million in 1995 and $14.5 million in 1994. [ 4. The Neiman Marcus Group, Inc. ] On October 17, 1996, NMG completed a public offering of 8.0 million shares of its common stock at a price of $35.00 per share. The net proceeds from the offering ($267.3 million) were used by NMG to partially fund the repurchase of all of NMG's issued and outstanding preferred stocks from the Company. The total consideration paid by NMG to the Company in connection with the repurchase was $416.4 million, plus accrued and unpaid dividends through the date of the public offering. Of the total consideration, $260.0 million in cash was advanced to the Company during October 1996. In addition to the advance, on November 12, 1996 NMG paid the Company [END PAGE 34] [START PAGE 35] $27.2 million in cash and 3.9 million shares of its common stock (valued at $135.0 million at $35.00 per share) and completed the exchange for all of NMG's issued and outstanding preferred stocks. The impact of NMG's public offering and the repurchase of its preferred stocks from the Company is reflected in the 1996 financial statements. The Company presently owns approximately 53% of the outstanding common stock of NMG, as compared to 59% prior to the transaction. The NMG public offering resulted in the establishment of a minority interest liability of $217.7 million, which represents the NMG minority shareholders' interest in the shareholders' equity of NMG, and an increase of $15.2 million in paid-in capital, which represents the Company's incremental share of NMG's shareholders' equity, both at October 31, 1996. The cash flows of NMG are not available to the Company, except through NMG dividend payments. NMG did not pay dividends on its common stock in 1996. Additionally, the Company's consolidated long-term liabilities at October 31, 1996 include $361.9 million of NMG obligations, which are not guaranteed by Harcourt General. The Company and NMG are parties to an agreement pursuant to which the Company provides certain management, accounting, financial, legal, tax and other corporate services to NMG. The fees for these services are charged at the Company s cost and are subject to the approval of a committee of directors of NMG who are not affiliated with the Company. This agreement may be terminated by either party on 180 days' notice. Charges to NMG were $6.9 million in 1996, $6.5 million in 1995 and $6.9 million in 1994. Substantially all of the executive officers of the Company serve in similar capacities with NMG. During the period covered by these financial statements, the Company's Chairman of the Board and one other executive officer served as directors of NMG. [ 5. Accrued Liabilities ] Accrued liabilities consisted of the following:
October 31 (in thousands) 1996 1995 ==================================================================================== Accrued salaries and related charges $ 63,000 $ 62,564 Self-insurance reserves 49,569 45,683 Other 220,636 226,232 -------------------- Total $333,205 $334,479 ====================
[ 6. Long-Term Liabilities ] Long-term liabilities of Harcourt General and NMG at October 31, 1996 and 1995 were as follows:
(in thousands) Interest Rate Maturity 1996 1995 ==================================================================================== Harcourt General Revolving credit agreement Variable Dec. 1999 $ -- $ -- Senior debt 8.25% June 2002 149,425 149,358 Senior debt 8.88% June 2022 147,982 147,963 Subordinated notes 9.38% June 1997 124,938 124,844 Subordinated notes 9.50% Mar. 2000 124,905 124,873 Other long-term liabilities Various Various 158,025 145,385 -------------------------------------------- Total Harcourt General 705,275 692,423 -------------------- NMG Revolving credit agreement Variable Apr. 2000 186,500 77,100 Senior notes 9.89% May 1996 -- 40,000 Senior notes 9.59% Aug. 1996 52,000 52,000 Senior notes 9.24% Dec. 1996 40,000 40,000 Senior notes Variable Dec. 1996 40,000 40,000 Other long-term liabilities Various Various 79,016 73,815 --------------------------------------------- Total NMG 397,516 322,915 Less current maturities (163,717) (15,484) --------------------------------------------- Total long-term liabilities $939,074 $999,854 =============================================
The Company has a revolving credit agreement with 13 banks, pursuant to which the Company may borrow up to $400.0 million. The agreement, which expires in December 1999, may be terminated by the Company at any time on three business days' notice. The rate of interest payable is determined according to the senior debt rating of the Company and one of four pricing options selected by the Company. [END PAGE 35] [START PAGE 36] Other long-term liabilities of Harcourt General consist primarily of a liability for postretirement health care benefits and provisions for other employee benefits (see Note 13). NMG has a $500 million revolving credit agreement which expires in April 2000. NMG may terminate this agreement at any time on three business days notice. The rate of interest payable (5.9% at August 3, 1996) varies according to one of four pricing options selected by NMG. In addition to its revolving credit facility, NMG borrows from other banks on an uncommitted basis. Such borrowings are included in notes payable and current maturities of long-term liabilities and amounted to $26.5 million at August 3, 1996 and $7.1 million at July 29, 1995. The NMG senior notes are classified as long-term, since NMG has the ability and intent to repay them upon maturity through borrowings on its revolving credit agreement. In August 1996 NMG paid $52.0 million of its senior notes upon maturity. The variable rate note due in December 1996 bears interest at LIBOR plus 0.7% (6.0% at August 3, 1996) and is adjusted semi-annually. Other long-term liabilities of NMG consist primarily of certain employee benefit obligations and a liability for certain scheduled rent increases. The aggregate maturities of all long-term liabilities are as follows:
Harcourt (in thousands) General NMG Total ==================================================================================== 1997 $128,100 $35,600 $163,700 1998 4,000 5,600 9,600 1999 3,700 5,800 9,500 2000 128,600 297,900 426,500 2001 1,900 6,100 8,000 Thereafter 439,000 46,500 485,500
Certain of Harcourt General's and NMG's loan agreements contain, among other restrictions, provisions limiting the issuance of additional debt and guarantees, the purchase of the Company's capital stock and the payment of dividends. Certain of these loan agreements also require the maintenance of a minimum net worth. [ 7. Shareholders Equity ] Series A Cumulative Convertible Stock Each share of Series A Stock is convertible into 1.1 shares of Common Stock and is entitled to a quarterly dividend equal to the quarterly dividend on each share of Common Stock multiplied by 1.1, plus $.0075. Each share of Series A Stock is entitled to a liquidation preference of $5.00 plus any accrued but unpaid dividends. Liquidation proceeds remaining after the satisfaction of such preference and the payment of $4.55 per share of Common Stock would be distributed ratably to the holders of Common Stock and Series A Stock. There were 10,000,000 authorized shares of Series A Stock at October 31, 1996. Class B Stock and Common Stock The Class B Stock is not transferable except to family members and related entities but is convertible at any time on a share-for-share basis into Common Stock. The holders of Class B Stock are entitled to cash dividends which are 10% lower per share than the cash dividends paid on each share of Common Stock. The Class B Stock and the Common Stock are each entitled to vote separately as a class on charter amendments, mergers, consolidations and certain extraordinary transactions which are required to be approved by shareholders under Delaware law. Under certain circumstances, the holders of Class B Stock have the right to cast 10 votes per share for the election of directors. There were 40,000,000 and 100,000,000 shares of Class B Stock and Common Stock authorized for issuance at October 31, 1996, respectively. In April 1995, the Company completed a "Dutch Auction" tender offer and repurchased approximately 5.4 million shares of the Company's Common Stock at $40.50 per share. In May 1995, the Company's Board of Directors authorized the purchase of an additional 2.5 million shares of Common Stock in the open market. Through the year ended October 31, 1996, the Company repurchased approximately 1.8 million shares at an average price of approximately $39.12 per share. In December 1996, the Company's Board of Directors authorized an increase in the open market stock purchase program to 3.5 million shares of the Company's Common Stock. [END PAGE 36] [START PAGE 37] 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. The Company has allowed SAR treatment in connection with the exercise of certain options. Optionees allowed SAR treatment surrender an exercisable option for an amount of cash equal to the excess of the market price of the Common Stock at the time of surrender over the option exercise price. 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. There were 1.2 million authorized common shares available for future awards under the 1988 Stock Incentive Plan at October 31, 1996. Options outstanding at October 31, 1996 were granted at prices (not less than 100% of the fair market value on the date of grant) varying from $15.67 to $41.88 per share and expire between 1997 and 2005. There were 90 employees with options outstanding at October 31, 1996 with a weighted average exercise price of $28.84. There were 1.7 million shares of Common Stock reserved for issuance at October 31, 1996 upon the exercise of stock options. Option activity on the Company's Common Stock was as follows:
Years ended October 31 1996 1995 1994 ==================================================================================== Options outstanding - beginning of year 543,448 755,712 919,911 Granted 80,350 80,150 107,550 Exercised (61,496) (86,643) (33,805) SAR surrenders (109,081) (197,169) (68,860) Cancelled (6,035) (8,602) (169,084) --------------------------------- Options outstanding - end of year 447,186 543,448 755,712 ================================= Exercisable options - end of year 223,182 285,860 422,477 =================================
[ 8. Income Taxes ] A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
1996 1995 1994 Years ended October 31 (in thousands) Amount % Amount % Amount % ============================================================================================ Statutory tax expense $101,209 35 $ 94,188 35 $ 83,356 35 State income taxes, net of federal tax effect 5,768 2 5,932 2 5,853 2 Tax credits (98) -- (106) -- (193) -- Dividends received exclusion (2,451) (1) (1,893) (1) (2,042) (1) Foreign tax rate differentials (86) -- (501) -- (265) -- Permanent items 3,656 1 3,563 1 3,069 1 Change in valuation allowance (6,945) (2) (7,187) (2) -- -- Capital gains, settlements and other (2,735) (1) (2,500) (1) 1,107 1 Income tax expense from ------------------------------------------------ continuing operations $ 98,318 34 $ 91,496 34 $ 90,885 38 ================================================
Income tax expense was as follows:
Years ended October 31 (in thousands) 1996 1995 1994 ===================================================================================== Current Federal $ 97,115 $ 70,696 $ 65,681 State 10,377 8,249 9,329 Deferred Federal (7,671) 11,674 16,199 State (1,503) 877 (324) ---------------------------------- Income tax expense $ 98,318 $ 91,496 $ 90,885 =================================
[END PAGE 37] [START PAGE 38] Significant components of the net deferred tax liabilities stated on a gross basis were as follows:
October 31 (in thousands) 1996 1995 ==================================================================================== Gross deferred tax assets Accrued liabilities and reserves $ 84,702 $ 85,534 Employee benefits 37,190 33,871 Postretirement health care benefits 33,406 37,606 Inventories 22,336 26,387 Difference in basis of assets acquired 28,640 35,585 ---------------------- Total gross deferred tax assets 206,274 218,983 Valuation allowance (11,406) (18,351) ---------------------- Net deferred tax assets 194,868 200,632 Gross deferred tax liabilities Property, equipment, prepublication costs and intangibles 153,445 142,625 Pension and employee benefits accrual 22,295 19,744 Difference in basis of assets acquired 90,945 124,072 Accrued liabilities and reserves 38,324 33,506 ---------------------- Total gross deferred tax liabilities 305,009 319,947 ---------------------- Net deferred tax liabilities $ 110,141 $ 119,315 ======================
[ 9. Investment and Other Income ] Investment income consisted of the following:
Years ended October 31 (in thousands) 1996 1995 1994 ==================================================================================== Interest income $ 16,794 $ 31,492 $ 5,510 Dividend income 10,535 8,453 8,729 -------------------------------- Total investment income $ 27,329 $ 39,945 $ 14,239 ================================
[ 10. Discontinued Operations ] Discontinued operations consisted of the following:
Years ended October 31 (in thousands) 1995 1994 ==================================================================================== Loss from Contempo Casuals operations, net of income tax benefits of $1,300 and $36,000 $ (1,854) $(49,755) Loss on disposal of Contempo Casuals, net of income tax benefit of $7,100 (9,873) -- Earnings from insurance operations, net of income taxes of $20,844 -- 37,056 Gain on sale of insurance operations, net of income taxes of $4,475 -- 7,956 Tax settlements -- 35,000 --------------------- Earnings (loss) from discontinued operations $(11,727) $ 30,257 ======================
Contempo Casuals operations In June 1995, NMG sold its Contempo Casuals subsidiary to The Wet Seal, Inc. (Wet Seal) for approximately $1.0 million of Wet Seal Class A Common Stock and $100,000 in cash. Revenues related to the discontinued Contempo Casuals operations were $207.2 million in 1995 and $303.4 million in 1994. Insurance operations In October 1994, the Company sold its insurance businesses to an affiliate of General Electric Capital Corporation for $410.4 million in cash. Revenues applicable to discontinued insurance operations were $485.8 million in 1994. Tax settlements The Company recognized $35.0 million of tax benefits in 1994 for various federal and state tax settlements relating to the Company's soft drink bottling business, which was sold in 1989. [END PAGE 38] [START PAGE 39] [ 11. Commitments and Contingencies ] Leases The Company and NMG have long-term operating leases primarily for offices, distribution centers, retail stores, other facilities and equipment. Leases are generally for periods of up to 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 for the years ended October 31 was as follows:
(in thousands) 1996 1995 1994 ==================================================================================== Minimum rent $ 75,800 $ 71,900 $ 72,100 Rent based on revenues 10,700 8,400 9,100 -------------------------------- $ 86,500 $ 80,300 $ 81,200 ================================
Assuming renewal options are not exercised, the future minimum rental payments will be as follows:
Harcourt (in thousands) General NMG Total ==================================================================================== 1997 $27,800 $30,800 $58,600 1998 28,800 29,400 58,200 1999 24,400 28,500 52,900 2000 21,100 28,400 49,500 2001 17,100 27,800 44,900 Thereafter 71,000 520,600 591,600
Theatre operations In December 1993, the Company completed the spinoff of its theatre operations to a company named GC Companies, Inc. (GCC), listed on the New York Stock Exchange. In connection with the distribution, GCC and Harcourt General entered into various agreements which govern their ongoing relationship, including a Reimbursement and Security Agreement and an Intercompany Services Agreement. Under the Reimbursement and Security Agreement, GCC granted to Harcourt General a security interest in the stock of its theatre subsidiaries in order to secure GCC's obligation to indemnify Harcourt General from any losses which Harcourt General may incur due to its secondary liability on theatre leases which were transferred to GCC as part of the spinoff. In addition, GCC has agreed to certain financial covenants designed to protect Harcourt General from incurring such liabilities. As of October 31, l996, GCC's aggregate future rental payments due under such theatre leases amounted to approximately $650.0 million. The Intercompany Services Agreement provides for the services of Harcourt General's Chairman and Chief Executive Officer and one of its Presidents and Co-Chief Operating Officers, and such additional corporate services as the Company and GCC may mutually determine from time to time. Litigation Both Harcourt General and NMG are involved in various suits and claims in the ordinary course of business. Management does not believe that the disposition of such suits and claims will have a material adverse effect on the financial position or continuing operations of Harcourt General or NMG. [ 12. Pension Plans ] Harcourt General and NMG each have non-contributory defined benefit pension plans covering substantially all full-time employees other than union employees. Harcourt General and NMG also sponsor unfunded supplemental executive retirement plans which provide certain employees additional pension benefits. Benefits under these plans are based on employees' years of service and compensation over defined periods of employment. When funding is required, the policy of Harcourt General and NMG is to contribute amounts that are deductible for federal income tax purposes. [END PAGE 39] [START PAGE 40] Net pension expense was as follows:
Years ended October 31 (in millions) 1996 1995 1994 ==================================================================================== Service cost - benefits earned $ 13.1 $ 12.8 $ 11.2 Interest cost on projected benefit obligation 11.7 11.0 9.8 Actual return on assets (26.3) (20.5) (2.8) Net amortization and deferral 12.9 7.6 (8.8) ------------------------------- Net pension expense $ 11.4 $ 10.9 $ 9.4 ===============================
The following table sets forth the plans' funded status and amounts recognized in the consolidated balance sheets at October 31:
1996 1995 Funded Unfunded Funded Unfunded (in millions) Plans Plans Plans Plans ==================================================================================== Vested benefit obligation $ 122.5 $ 14.9 $ 105.7 $ 13.4 ======================================= Accumulated benefit obligation $ 130.3 $ 18.4 $ 111.4 $ 16.3 ======================================= Projected benefit obligation $ 159.2 $ 30.4 $ 138.4 $ 27.2 Plan assets at fair value 194.0 -- 169.1 -- --------------------------------------- Overfunded (underfunded) projected obligation 34.8 (30.4) 30.7 (27.2) Unrecognized net obligation at transition .4 .8 .2 .9 Unrecognized net loss 1.7 1.3 6.6 .5 Unrecognized prior service cost (1.6) 3.5 (1.5) 3.8 Prepaid (accrued) pension cost recognized --------------------------------------- in the consolidated balance sheets $ 35.3 $ (24.8) $ 36.0 $ (22.0) =======================================
Pension expense was computed assuming a discount rate of 7.5% and a long-term rate of return on plan assets of 9% for both Harcourt General and NMG for each of the years presented. The assumed rate of increases in future compensation levels for each of the years presented was 6.0% for Harcourt General and 5.0% for NMG. In addition to the pension plans, Harcourt General and NMG have defined contribution plans for certain employees. The savings plan of each company permits employee contributions and provides for certain matching contributions. The Company's employee stock ownership plan is non-contributory. [ 13. Postretirement Health Care Benefits ] The Company provides health care benefits for retired employees which are funded as claims are incurred. Retirees and active employees hired prior to March 1, 1989 are eligible for these benefits if they meet certain service and minimum age requirements. The actuarial present value of accumulated postretirement health care benefit obligations and the amounts recognized in the Company's consolidated balance sheets as of October 31 were as follows:
(in millions) 1996 1995 ==================================================================================== Retirees $ 31.6 $ 38.0 Fully eligible active plan participants 6.9 7.3 Other active plan participants 7.9 7.9 ------------------ Accumulated postretirement benefit obligation 46.4 53.2 Unrecognized net gain 34.6 27.7 ------------------ Accrued postretirement benefit liability $ 81.0 $ 80.9 ==================
The postretirement health care benefit cost was as follows:
Years ended October 31 (in millions) 1996 1995 1994 ==================================================================================== Service cost $ .6 $ .7 $ 1.3 Interest cost on accumulated benefit obligation 4.3 3.8 5.0 Net amortization and deferral (1.8) (2.1) (.1) ------------------------------- Postretirement benefit cost $ 3.1 $ 2.4 $ 6.2 ===============================
[END PAGE 40] [START PAGE 41] A health care cost trend rate of 10% was assumed in measuring the accumulated postretirement benefit obligation at October 31, 1996, 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 both 1996 and 1995. An increase of 1% in the health care cost trend rate would increase the accumulated postretirement obligation as of October 31, 1996 by $3.4 million. This change would increase the annual expense by $.4 million. The Company paid $2.9 million in fiscal 1996, $2.8 million during fiscal 1995 and $3.7 million during fiscal 1994 for postretirement health care benefit claims. [ 14. Financial Instruments ] The estimated fair values of the Company's financial instruments are as reported and disclosed in the consolidated financial statements, and as discussed below. Securitization of credit card receivables In March 1995, NMG sold all of its Neiman Marcus credit card receivables through a subsidiary to a trust in exchange for certificates representing undivided interests in such receivables. Certificates representing an undivided interest in $246.0 million of these receivables were sold to third parties in a public offering of $225.0 million 7.60% Class A certificates and $21.0 million 7.75% Class B certificates. NMG used the proceeds from this offering to pay down existing debt. NMG's subsidiary will retain the remaining undivided interest in the receivables not represented by the Class A and the Class B certificates. A portion of that interest is subordinated to the Class A and Class B certificates. NMG will continue to service all receivables for the trust. In anticipation of the securitization, NMG entered into several forward interest rate lock agreements which established a weighted average effective rate of approximately 8.0% on the certificates issued. Interest rate swap During September 1991, NMG entered into an interest rate swap agreement having a notional principal amount of $50.0 million that effectively fixed NMG's interest rate on $50.0 million of its variable rate debt at 8.94%. The interest rate swap matured in September 1996. The incremental pre-tax interest expense incurred due to the interest rate swap agreement was $1.2 million in 1996, $1.0 million in 1995 and $2.3 million in 1994. Debt The fair value of Harcourt General's and NMG's senior debt and subordinated notes was $741.7 million on October 31, 1996 and was based upon quoted prices and comparable publicly-traded issues. [END PAGE 41] [START PAGE 42] [ 15. Comparative Quarterly Financial Information (unaudited)]
1996 First Second Third Fourth Full (in millions except for per share data) Quarter Quarter Quarter Quarter Year =========================================================================================== Revenues $ 698.4 $ 844.3 $ 879.2 $ 867.9 $ 3,289.9 ================================================ Gross profit $ 280.2 $ 301.2 $ 418.8 $ 382.7 $ 1,382.9 ================================================ Net earnings $ 16.7 $ 10.4 $ 105.2 $ 58.5 $ 190.9 ================================================ Net earnings per common share $ .23 $ .14 $ 1.45 $ .81 $ 2.62 ================================================ Dividends per share Common Stock $ .17 $ .17 $ .17 $ .18 $ .69 Class B Stock $ .153 $ .153 $ .153 $ .162 $ .621 Series A Stock $ .1945 $ .1945 $ .1945 $ .2055 $ .7890
1995 First Second Third Fourth Full (in millions except for per share data) Quarter Quarter Quarter Quarter Year ============================================================================================= Revenues $ 663.3 $ 774.5 $ 813.2 $ 783.7 $ 3,034.7 =================================================== Gross profit $ 264.6 $ 272.7 $ 388.4 $ 343.9 $ 1,269.6 =================================================== Earnings (loss) from Continuing operations $ 13.6 $ 12.7 $ 96.0 $ 55.3 $ 177.6 Discontinued operations (1.8) 1.5 (11.4) -- (11.7) --------------------------------------------------- Net earnings $ 11.8 $ 14.2 $ 84.6 $ 55.3 $ 165.9 =================================================== Earnings (loss) per common share from Continuing operations $ .17 $ .16 $ 1.29 $ .74 $ 2.31 Discontinued operations (.02) .02 (.15) -- (.15) --------------------------------------------------- Net earnings $ .15 $ .18 $ 1.14 $ .74 $ 2.16 ==================================================== Dividends per share Common Stock $ .16 $ .16 $ .16 $ .17 $ .65 Class B Stock $ .144 $ .144 $ .144 $ .153 $ .585 Series A Stock $ .1835 $.1835 $ .1835 $ .1945 $ .7450
In the fourth quarter, the effect of adjusting the LIFO reserve for merchandise inventories to actual amounts increased net earnings by $3.9 million in 1996 and by $10.9 million in 1995. [END PAGE 42] [START PAGE 43] 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, 1996 and 1995 and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1996. 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, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1996 in conformity with generally accepted accounting principles. /S/ Deloitte & Touche LLP Deloitte & Touche LLP Boston, Massachusetts December 9, 1996 Statement of Management's Responsibility for Financial Statements The management of Harcourt General, Inc. and its subsidiaries is responsible for the integrity and objectivity of the financial and operating information contained in this Annual Report, including the consolidated financial statements covered by the Independent Auditors' Report. These statements were prepared in conformity with generally accepted accounting principles and include amounts that are based on the best estimates and judgments of management. The Company maintains a system of internal financial controls which provides management with reasonable assurance that transactions are recorded and executed in accordance with its authorization, that assets are properly safeguarded and accounted for, and that records are maintained so as to permit preparation of financial statements in accordance with generally accepted accounting principles. This system includes written policies and procedures, an organizational structure that segregates duties, and a comprehensive program of periodic audits by the internal auditors. The Company has policies and guidelines which require employees to maintain a high level of ethical standards. In addition, the Audit Committee of the Board of Directors, consisting solely of outside directors, meets periodically with management, the internal auditors and the independent auditors to review internal accounting controls, audit results and accounting principles and practices, and to recommend the selection of independent auditors to the Board of Directors. /s/ John R. Cook John R. Cook Senior Vice President and Chief Financial Officer /s/ Stephen C. Richards Stephen C. Richards Vice President and Controller [END PAGE 43] [START PAGE 44] Five Year Summary (unaudited)
(in thousands except for per share amounts) 1996 1995 1994 1993 1992 ============================================================================================== Revenues Publishing $1,092,631 $1,017,637 $ 919,498 $ 944,545 $ 865,336 Specialty retail 2,075,003 1,888,249 1,789,461 1,667,825 1,484,945 Professional services 122,285 128,850 141,818 146,252 121,391 ---------------------------------------------------------- Total $3,289,919 $3,034,736 $2,850,777 $2,758,622 $2,471,672 ========================================================== Operating earnings Publishing $ 196,997 $ 177,531 $ 165,436 $ 142,177 $ 124,503 Specialty retail 172,354 161,698 157,713 134,302 90,976 Professional services 9,753 13,062 22,072 28,395 23,938 Corporate expenses (34,382) (34,395) (35,081) (46,932) (41,501) ---------------------------------------------------------- Operating earnings 344,722 317,896 310,140 257,942 197,916 Investment income 27,329 39,945 14,239 14,072 23,239 Interest expense (82,882) (88,735) (86,219) (84,585) (85,442) Other income, net -- -- -- 18,303 8,341 ----------------------------------------------------------- Earnings from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change 289,169 269,106 238,160 205,732 144,054 Income tax expense (98,318) (91,496) (90,885) (77,876) (58,052) ---------------------------------------------------------- Earnings from continuing operations before extraordinary item and cumulative effect of accounting change 190,851 177,610 147,275 127,856 86,002 Discontinued operations, net -- (11,727) 30,257 43,477 21,868 Extraordinary item, net -- -- -- -- 419,557 Accounting change, net -- -- -- -- (32,967) ----------------------------------------------------------- Net earnings $ 190,851 $ 165,883 $ 177,532 $ 171,333 $ 494,460 =========================================================== Depreciation and amortization $ 180,395 $ 175,737 $ 149,973 $ 154,740 $ 140,522 Capital expenditures $ 242,655 $ 220,053 $ 196,160 $ 159,860 $ 185,997 Total assets $3,326,238 $2,884,336 $3,242,364 $2,805,878 $2,675,962 Total long-term liabilities $ 939,074 $ 999,854 $1,123,341 $1,107,371 $1,086,053 Weighted average number of common and common equivalent shares outstanding 72,770 76,764 79,809 79,625 79,139 Amounts applicable to common shareholders Earnings from continuing operations before extraordinary item and cumulative effect of accounting change $ 2.62 $ 2.31 $ 1.84 $ 1.60 $ 1.09 Net earnings applicable to common shareholders $ 2.62 $ 2.16 $ 2.22 $ 2.15 $ 6.25 Dividends paid on common stock $ .69 $ .65 $ .61 $ .57 $ .53
[END PAGE 44] [START PAGE 46] Shareholder Information Requests for general information or published financial information can be made in writing to the Corporate Relations Department, Harcourt General, Inc., 27 Boylston Street, Chestnut Hill, MA 02167. Telephone: (617) 232-8200. To hear the latest Company news, including quarterly earnings releases, or to request printed financial information or leave a message for the Company's Transfer Agent, individuals may call The Shareholder Line at (800) 225-9194, Extension 2345. News and information about Harcourt General, Inc. is also available on the Internet's World Wide Web at http://www.irin.com/H. Automatic Dividend Reinvestment and Cash Stock Purchase Plan The Plan provides shareholders with a convenient way to purchase Common shares by reinvesting their Common and Series A cash dividends and/or by investing additional cash amounts. The Company will absorb all brokerage and agency fees for stock purchased in connection with the Plan. For further information, please call The Shareholder Line or write to: Harcourt General, Inc., c/o The First National Bank of Boston, Automatic Dividend Reinvestment Plan, Post Office Box 1681, Boston, MA 02105. Transfer Agent and Registrar for Common, Series A and Class B Stock The First National Bank of Boston c/o Boston EquiServe Limited Partnership Shareholder Services Division Mail Stop 45-01-05 Post Office Box 644 Boston, MA 02102-0644 (800) 730-4001 Form 10-K The Company's Form 10-K as filed with the Securities and Exchange Commission is available upon written request to the Corporate Relations Department of the Company. Annual Meeting The Annual Meeting of Shareholders will be held on Friday, March 14, 1997 at 10:00 a.m. at The First National Bank of Boston, 100 Federal Street, Boston, Massachusetts. Stock Information Harcourt General's Common Stock and Series A Cumulative Convertible Stock are traded on the New York Stock Exchange under the symbols H and HPRA, respectively. The following table indicates the quarterly price range of the Common Stock and Series A Stock for the past two fiscal years. Common Stock
1996 1995 Quarter High Low High Low ==================================================================================== First $43.00 $38.63 $37.38 $32.13 Second $46.88 $38.88 $40.88 $32.88 Third $52.75 $43.88 $45.75 $40.00 Fourth $57.00 $47.75 $44.75 $38.00
Series A Stock
1996 1995 Quarter High Low High Low ==================================================================================== First $46.00 $42.75 $40.00 $36.50 Second $51.00 $46.25 $44.00 $37.38 Third $57.63 $48.38 $49.13 $44.75 Fourth $59.00 $52.63 $48.13 $45.63
Harcourt General had 8,357 and 8,694 Common shareholders of record at October 31, 1996 and 1995, respectively, and 583 and 627 Series A shareholders of record at October 31, 1996 and 1995, respectively. Each share of Series A Stock is convertible into 1.1 shares of Common Stock at any time. Corporate Address Harcourt General, Inc. 27 Boylston Street Chestnut Hill, MA 02167 (617) 232-8200 Harcourt General is an Equal Opportunity Employer. [END PAGE 46] EX-21.1 5 SUBSIDIARIES OF THE COMPANY Exhibit 21.1 HARCOURT GENERAL, INC. SUBSIDIARIES & AFFILIATES (includes The Neiman Marcus Group, Inc., of which Harcourt General, Inc. is the majority shareholder, and the direct and indirect subsidiaries of The Neiman Marcus Group, Inc.) JURISDICTION OF SUBSIDIARY/AFFILIATE INCORPORATION Academic Press Limited England Alison Licensing, Inc. Delaware Assessment Systems, Inc. Delaware Bailliere Tindall Limited England Bergdorf Goodman, Inc. New York Bergdorf Graphics, Inc. New York Broadcasters, Inc. Texas C.C. Group Limited Hong Kong Career Care, Inc. Delaware DBM Australia Limited Delaware DBM France, S.A. France DBM International, Inc. Delaware DBM Training and Consulting, Inc. Delaware Drake Beam Morin-Canada, Inc. Ontario Drake Beam Morin, Inc. Delaware Drake Beam Morin plc England and Wales Editorial Doyma Venezuela C.A. Venezuela Educalivres Group Inc. - Group Educalivres Inc. Quebec Emcor, Inc. Delaware Ermine Trading Corporation California Executive In Residence, Inc. New York Foundation for Marine Animal Husbandry, Inc. Florida GMN, INC. Delaware Grune & Stratton Limited England HG Land Co., Inc. Delaware HGI Investment Trust Massachusetts HRW and WBS Canada Corporation, Inc. New York HRW Distributors, Inc. Delaware Hammond Pond Investments, Inc. Massachusetts Harcourt Brace & Company Delaware Harcourt Brace & Company Asia Pte Ltd Singapore Harcourt Brace & Company Australia Pty. Limited Australia Harcourt Brace & Company Canada, Ltd. Ontario Harcourt Brace & Company Limited England Harcourt Brace & Company New Zealand Australia Harcourt Brace de Espana S.A. Spain Harcourt Brace Argentina S.A. Argentina Harcourt Brace Mexicana S.A. de C.V. Mexico Harcourt Brace Andina S.A. Columbia Harcourt Brace FSC, Inc. U.S. Virgin Islands Harcourt Brace Japan, Inc. Japan Harcourt Brace Legal and Professional Delaware Publications, Inc. Harcourt Brace Publishers International, Inc. Delaware Harcourt General Charitable Foundation, Inc. Massachusetts Harcourt General Services, Inc. Delaware Holt, Rinehart and Winston Limited England Holt, Rinehart & Winston Publishing Asia Limited Hong Kong Human Nature, Inc. Delaware Innovation Research, Inc. Delaware KO Corporation Delaware Lauriate Canada Inc. Ontario Louisiana CPR Review, Inc. Delaware Miller Comprehensive CPA Review, Inc. Delaware NM Direct de Mexico, S.A. de C.V. Mexico NM Nevada Trust Massachusetts Neiman Marcus Funding Corporation Delaware Neiman Marcus Holdings, Inc. California Neiman Marcus Holiday Express, Inc. Delaware Pastille By Mail, Inc. Delaware SIFTCO, Inc. Massachusetts T & A D Poyser Limited England The Neiman Marcus Group, Inc. Delaware The Psychological Corporation New York The Psychological Corporation Limited England W. B. Saunders Company Limited England EX-23.1 6 CONSENT OF DELOITTE & TOUCHE EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements of Harcourt General, Inc. on Form S-3 (Nos. 33-13936 and 33-46148) and Form S-8 (No. 33-26079) of our reports dated December 9, 1996, appearing in and incorporated by reference in the Annual Report on Form 10-K of Harcourt General, Inc. for the year ended October 31, 1996. /S/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Boston, Massachusetts January 27, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 This schedule contains a summary of financial information extracted from the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Operations and is qualified in its entirety by reference to such financial statements. 1000 YEAR OCT-31-1996 OCT-31-1996 532,862 242,054 428,480 19,370 592,141 1,933,265 919,202 344,276 3,326,238 948,347 714,282 0 1,152 71,119 961,261 3,326,238 3,289,919 3,289,919 1,906,974 2,945,197 0 117,209 82,882 289,169 98,318 190,851 0 0 0 190,851 2.62 2.62
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