-----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, TAN2D+0Drp4fG9PyTLa5klIXZvTsFWlbScAtauxWZY9NLufrOU63aqHHtV1GxATo YG4mBRnA9/Azxpys4CBZ9Q== 0000040493-00-000002.txt : 20000203 0000040493-00-000002.hdr.sgml : 20000203 ACCESSION NUMBER: 0000040493-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 20000128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARCOURT GENERAL INC CENTRAL INDEX KEY: 0000040493 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 041619609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04925 FILM NUMBER: 515867 BUSINESS ADDRESS: STREET 1: 27 BOYLSTON ST BOX 1000 CITY: CHESTNUT HILL STATE: MA ZIP: 02467 BUSINESS PHONE: 6172328200 MAIL ADDRESS: STREET 1: 27 BOYLSTON ST STREET 2: BOX 1000 CITY: CHESTNUT HILL STATE: MA ZIP: 02467 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL CINEMA CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MID WEST DRIVE IN THEATRES INC DATE OF NAME CHANGE: 19660907 10-K 1 HARCOURT GENERAL, INC. FORM 10K FY99 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, 1999 Commission File Number 1-4925 HARCOURT GENERAL, INC. (Exact name of registrant as specified in its charter) Delaware 04-1619609 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 27 Boylston Street, Chestnut Hill, Massachusetts 02467 (Address of principal executive offices) (Zip Code) Registrant's telephone number and area code: 617-232-8200 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered Common Stock, $1.00 par value New York Stock Exchange Series A Cumulative Convertible New York Stock Exchange Stock, $1.00 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the Common Stock held by non-affiliates of the registrant was $2.118 billion on January 21, 2000. There were 51,712,107 shares of Common Stock, 20,020,258 shares of Class B Stock and 812,769 shares of Series A Cumulative Convertible Stock outstanding as of January 21, 2000. Documents Incorporated by Reference Portions of the Company's 1999 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 10, 2000 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, 1999 TABLE OF CONTENTS PART I Page No. Item 1 Business 1 Item 2. Properties 3 Item 3. Legal Proceedings 4 Item 4. Submission of Matters to a Vote of Security Holders 4 PART II Item 5. Market for the Registrant's Common Equity 5 and Related Stockholder Matters Item 6. Selected Financial Data 5 Item 7. Management's Discussion and Analysis of 5 Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About 5 Market Risk Item 8. Financial Statements and Supplementary Data 6 Item 9. Changes in and Disagreements with Accountants 6 on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant 6 Item 11. Executive Compensation 8 Item 12. Security Ownership of Certain Beneficial 9 Owners and Management Item 13. Certain Relationships and Related Transactions 9 PART IV Item 14. Exhibits, Financial Statement Schedules, 9 and Reports on Form 8-K Signatures S-1 PART I ITEM 1. BUSINESS General Harcourt General, Inc., a Delaware corporation formed in 1950 (the "Company"), is a leading global multiple-media publisher providing educational, training and assessment products and services to classroom, corporate, professional and consumer markets. Prior to October 22, 1999, the Company owned a controlling interest in The Neiman Marcus Group, Inc. ("NMG"), a high-end specialty retailer. On October 22, 1999, the Company distributed to its stockholders approximately 21.4 million of the 26.4 million shares of NMG common stock held by the Company (the "Distribution"). For more information about the Distribution and the relationship between the Company and NMG, see Note 2 to the Consolidated Financial Statements in Item 14 below. The Company operates its business through four principal segments, described below and in Note 3 to the Consolidated Financial Statements in Item 14 below. Education Group. The Education Group is a leading content provider to classroom and at-home K-12 and supplemental learners offering a complementary array of value-added products and services through school, library and direct-to-consumer channels. The Education Group includes the operations of Harcourt School Publishers; Holt, Rinehart and Winston ("HRW"); Steck-Vaughn; and Harcourt Trade Publishers. The Education Group publishes textbooks and related instructional materials for kindergarten to grade eight through Harcourt School and for the middle and secondary education markets through HRW. Steck-Vaughn publishes supplemental educational materials used in elementary, secondary and adult education, test preparation materials, and offers English language literacy programs for training workers for whom English is a second language. Harcourt Trade publishes children's books, general adult fiction and nonfiction hardcover books, and trade paperbacks under the Harvest imprint. Higher Education Group. The Higher Education Group brings traditional and technology-enabled content to adults seeking higher education in traditional and non-traditional settings, offering a broad array of products and services to the campus- based, direct-to-consumer and corporate markets. The Higher Education Group includes Harcourt College Publishers, Harcourt Learning Direct, Archipelago Productions and Harcourt Professional Education. Harcourt College publishes textbooks and other materials for the college and university market under the Harcourt, Saunders, Dryden and HRW imprints. Harcourt Learning Direct provides traditional and technology-based distance learning opportunities in vocational, degree and professional self-study programs. Harcourt Professional Education conducts review courses under the BAR/BRI name for individuals preparing for bar examinations, as well as live-lecture and computer-based review courses for law and accounting examinations, and publishes print and electronic information resources, including reference guides and newsletters for financial, legal and human resources professionals. Corporate and Professional Services Group. The Corporate and Professional Services Group produces technology-based training, assessment and educational products and services for the corporate learner market and individual professionals. The Corporate and Professional Services Group includes the operations of NETg; The Psychological Corporation; Assessment Systems, Inc. ("ASI"); Drake Beam Morin ("DBM"); and Knowledge Communication, Inc. ("KCI"). NETg develops and sells self-study information technology and related professional training products and services which are delivered by CD-ROM, the Internet, and corporate intranets to information technology professionals. The Psychological Corporation provides tests and related products and services for educational and psychological assessment. ASI develops and administers computer-based tests and related services for professional and regulatory licensing and credentialing and corporate pre-employment testing. DBM is one of the world's leading organizational and individual transition consulting firms, assisting organizations and individuals worldwide in outplacement, career and transition management and employee selection. KCI provides technology-based professional development and business skills training. Worldwide Scientific, Technical and Medical Group. The Worldwide Scientific, Technical and Medical ("STM") Group is a leading provider of information products through both traditional and new technology-enabled channels to health, scientific and technical professionals worldwide. The STM Group includes Harcourt Health Sciences, comprised of the global medical publishing operations of W.B. Saunders, Mosby and Churchill Livingstone; Academic Press; and Harcourt Publishers International. Harcourt Health Sciences publishes books, periodicals and electronic products in the health sciences, and advertising-based newsletters for health professionals. Academic Press publishes scholarly books, journals, data bases and products and value-added services in print and electronic media, in the life, physical, social and computer sciences. Harcourt Publishers International is responsible for international distribution of Harcourt English language products and the publication of adaptations, translations and indigenous materials worldwide. Competition Numerous companies compete in all of the markets in which the Company's various businesses operate. The Company believes that the principal competitive factors in connection with these businesses are the breadth, quality, timeliness, and price of products and services; customer service and support; the ability to acquire intellectual property rights; editorial, marketing, and distribution capabilities; the ability to maintain key vendor alliances; ability to compete in non-U.S. markets; the reputation of the Company; and the Company's financial and management resources. Certain Additional Information Employees At October 31, 1999, the Company had approximately 13,600 employees worldwide. Approximately 1% of the Company's employees are subject to collective bargaining agreements. The Company believes that its relations with its employees are generally good. Capital Expenditures; Seasonality; Liquidity; Capital Resources For a review of the Company's financial results for fiscal 1999, 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, 1999 (the "1999 Annual Report"), which information is incorporated herein. Financial Information About Industry Segments and Geographical Operations The information set forth under the heading "Description of Continuing Operations and Segment Information" in Note 3 of the Notes to Consolidated Financial Statements on pages 34 and 35 of the 1999 Annual Report is incorporated herein. Executive Officers of the Registrant The information set forth under the heading "Executive Officers" in Item 10 below is incorporated herein. ITEM 2. PROPERTIES The Company's corporate headquarters are located in leased facilities in Chestnut Hill, Massachusetts, a suburb of Boston. At October 31, 1999, the Company operated out of approximately 5.3 million square feet of office and distribution facilities throughout the world, consisting of approximately 185,000 square feet of owned office facilities, 2.7 million square feet of leased office facilities, 1.7 million square feet of owned distribution facilities, and 700,000 square feet of leased distribution facilities. For additional information about the properties of the Company, see the information contained in Note 12 of the Notes to Consolidated Financial Statements under the heading "Leases" on page 42 of the 1999 Annual Report, which is incorporated herein. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various suits and claims incidental to the ordinary course of its business. The Company does not believe that the disposition of any such suits or claims will have a material adverse effect on the financial position or continuing operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a Special Meeting held on September 15, 1999, the Company's stockholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the total number of shares of authorized capital stock from 320 million to 370 million shares (consisting of 150 million shares of Common Stock, 80 million shares of Class B Stock, 100 million shares of a new class of stock denominated as Class C Stock and 40 million shares of Preferred Stock), and to establish the relative rights, powers and limitations of the Common, Class B and new Class C Stock. The votes cast at the Special Meeting were as follows: Common Stock Class B Stock For: 29,406,122 19,990,595 Against: 10,042,920 91 Abstain: 23,888 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following information contained in the 1999 Annual Report is incorporated herein: (i) "Dividends per share" in Note 16 of the Notes to Consolidated Financial Statements on page 46 of the 1999 Annual Report; and (ii) "Stock Information" (including the accompanying table and text) on page 50 of the 1999 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 14, 2000, there were 1,624 record holders of Class B Stock. For further information with respect to the Class B Stock, including the ownership by the family of Richard A. Smith (the Chairman of the Company) of 99.9% of the Class B Stock, reference is made to the information contained in the Company's Proxy Statement for the 2000 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 1999 Annual Report under the caption "Five Year Summary (Unaudited)" on page 48 and is incorporated herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The response to this Item is contained in the 1999 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The response to this Item is contained in the 1999 Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures about Market Risk" on page 25 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 Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A. Directors The response to this Item regarding the directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934 by the Company's officers and directors is contained in the Proxy Statement for the 2000 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 Set forth below are the names, ages (at January 14, 2000) 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 - 75 Chairman of the Company and of The Neiman Marcus Group, Inc.; Chief Executive Officer of the Company from January 1997 until November 1999; Chief Executive Officer of The Neiman Marcus Group, Inc. from January 1997 to December 1998; Chief Executive Officer of the Company and The Neiman Marcus Group, Inc. prior to 1991; Chairman, President (until November 1995) and Chief Executive Officer of GC Companies, Inc.; Director of the Company, The Neiman Marcus Group, Inc. and GC Companies, Inc. Mr. Smith is the father of Robert A. Smith and the father-in- law of Brian J. Knez. Mr. Smith is the uncle of Jeffrey R. Lurie, a director of the Company. Robert A. Smith - 40 President and Co-Chief Executive Officer of the Company since November 1999; President and Co-Chief Operating Officer of the Company from January 1997 to November 1999; Co-Chief Executive Officer of Harcourt, Inc. since May 1999; Group Vice President of the Company prior thereto; Co-Chief Executive Officer of The Neiman Marcus Group, Inc. since May 1999; Chief Executive Officer of The Neiman Marcus Group, Inc. from December 1998 to May 1999; President and Chief Operating Officer of The Neiman Marcus Group, Inc. from January 1997 to December 1998; Group Vice President of The Neiman Marcus Group, Inc. prior thereto; President and Chief Operating Officer of GC Companies, Inc. since November 1995; Director of the Company and of The Neiman Marcus Group, Inc. Mr. Smith is the son of Richard A. Smith, the brother-in-law of Brian J. Knez, and the cousin of Jeffrey R. Lurie, a director of the Company. Brian J. Knez - 42 President and Co-Chief Executive Officer of the Company since November 1999; President and Co-Chief Operating Officer of the Company from January 1997 to November 1999; Co-Chief Executive Officer of The Neiman Marcus Group, Inc. since May 1999; President (until November 1998) and Chief Executive Officer of Harcourt, Inc. since May 1995 and Co-Chief Executive Officer since May 1999; President of the Scientific, Technical, Medical and Professional Group of Harcourt, Inc. prior thereto; Director of the Company and of The Neiman Marcus Group, Inc. Mr. Knez is the son-in-law of Richard A. Smith and the brother-in-law of Robert A. Smith. John R. Cook - 58 Senior Vice President and Chief Financial Officer of the Company and of The Neiman Marcus Group, Inc.; Director of The Neiman Marcus Group, Inc. Eric P. Geller - 52 Senior Vice President, General Counsel and Secretary of the Company and of The Neiman Marcus Group, Inc. Kathleen A. Bursley - 45 Vice President of the Company since December 1998; Vice President and General Counsel of Harcourt, Inc. Peter Farwell - 57 Vice President - Corporate Relations of the Company and of The Neiman Marcus Group, Inc. Paul F. Gibbons - 48 Vice President and Treasurer of the Company and of The Neiman Marcus Group, Inc. Gerald T. Hughes - 43 Vice President-Human Resources of the Company and of The Neiman Marcus Group, Inc. Catherine N. Janowski - 39 Vice President and Controller of the Company and of The Neiman Marcus Group, Inc. since November 1997; Director, Corporate Accounting of the Company and of The Neiman Marcus Group, Inc. prior thereto. James P. Levy - 59 Vice President of the Company since December 1998; President and Chief Operating Officer of Harcourt, Inc. since November 1998; President of Harcourt Education and Lifelong Learning & Assessment Groups prior thereto. Gail S. Mann - 48 Vice President-Corporate Law and Associate General Counsel since August 1999; Vice President, Assistant General Counsel, Secretary and Clerk, Digital Equipment Corporation from 1994 until September 1998. Michael F. Panutich - 51 Vice President - General Auditor of the Company and of The Neiman Marcus Group, Inc. Paul Robershotte - 46 Vice President - Strategy and Business Development of the Company and of The Neiman Marcus Group, Inc. since February 1999; President and Chief Executive Officer of Age Wave Communications from February 1996 until June 1998; Executive Vice President and Chief Operating Officer of Age Wave, Inc. from May 1995 until February 1996; Vice President and Director of Bain & Co. prior thereto. ITEM 11. EXECUTIVE COMPENSATION The response to this Item is contained in the Proxy Statement for the 2000 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 2000 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 2000 Annual Meeting of Stockholders under the captions "Executive Compensation" and "Transactions Involving Management" and is incorporated herein. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 14(a)(1) Financial Statements The documents listed below are incorporated herein by reference to the Company's 1999 Annual Report to Stockholders: Consolidated Balance Sheets - October 31, 1999 and 1998. Consolidated Statements of Operations for the fiscal years ended October 31, 1999, 1998, and 1997. Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1999, 1998 and 1997. Consolidated Statements of Shareholders' Equity for the fiscal years ended October 31, 1999, 1998 and 1997. 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 II - 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. 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 On October 4, 1999, the Company filed a report on Form 8- K reporting the receipt of a favorable ruling from the Internal Revenue Service regarding the planned distribution to its shareholders of most of the Company's equity position in The Neiman Marcus Group, Inc., and the Company's declaration of a dividend to its common shareholders of such shares. On November 1, 1999, the Company filed a report on Form 8-K reporting the distribution on October 22, 1999 of 21,440,960 shares of Class B Common Stock of The Neiman Marcus Group, Inc. to holders of the Company's Common Stock and Class B Stock. 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/ Brian J. Knez Brian J. Knez, President and Co-Chief Executive Officer By:/s/ Robert A. Smith Robert A. Smith, President and Co-Chief Executive Officer Dated: January 24, 2000 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 Officers: /s/ Brian J. Knez President and Co-Chief January 24, 2000 Brian J. Knez Executive Officer /s/ Robert A. Smith President and Co-Chief January 24, 2000 Robert A. Smith Executive Officer Principal Financial Officer: /s/ John R. Cook Senior Vice President and January 24, 2000 John R. Cook Chief Financial Officer Principal Accounting Officer: /s/ Catherine N. Janowski Vice President and January 24, 2000 Catherine N. Janowski Controller S-1 Directors: /s/ Richard A. Smith January 24, 2000 Richard A. Smith /s/ William F. Connell January 24, 2000 William F. Connell /s/ Gary L Countryman January 24, 2000 Gary L. Countryman /s/ Jack M. Greenberg January 24, 2000 Jack M. Greenberg /s/ Brian J. Knez January 24, 2000 Brian J. Knez /s/ Jeffrey R, Lurie January 24, 2000 Jeffrey R. Lurie /s/ Lynn Morley Martin January 24, 2000 Lynn Morley Martin /s/ Maurice Segall January 24, 2000 Maurice Segall S-2 Directors: /s/ Robert A. Smith January 24, 2000 Robert A. Smith /s/ Paula Stern January 24, 2000 Paula Stern /s/ Hugo Uyterhoeven January 24, 2000 Hugo Uyterhoeven /s/ Clifton R. Wharton, Jr. January 24, 2000 Clifton R. Wharton, Jr. S-3 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Harcourt General, Inc. Chestnut Hill, Massachusetts We have audited the consolidated financial statements of Harcourt General, Inc. and its subsidiaries (the "Company") as of October 31, 1999 and 1998, and for each of the three years in the period ended October 31, 1999, and have issued our report thereon dated December 9, 1999. Such consolidated financial statements and report are included in the Company's 1999 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company listed in Item 14(a)(2). The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts December 9, 1999 F-1 Schedule II HARCOURT GENERAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES THREE YEARS ENDED OCTOBER 31, 1999 (In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ____Additions____ Balance at Charged to Charged Beginning Costs and To Other Balance at Description of Period Expenses Accounts Deductions End of Period ________________________________________________________________________________________________ YEAR ENDED OCTOBER 31, 1999 Allowance for doubtful accounts $ 40,253 8,564 (1,389) 7,606(C) $ 39,822 (deducted from accounts receivable) Allowance for book returns (A) $ 71,200 171,740 (4,821) 143,999(D) $ 94,120 (deducted from accounts receivable) YEAR ENDED OCTOBER 31, 1998 Allowance for doubtful accounts $ 30,318 5,924 13,113(B) 9,102(C) $ 40,253 (deducted from accounts receivable) Allowance for book returns (A) $ 65,911 84,779 27,930(B) 107,420(D) $ 71,200 (deducted from accounts receivable) YEAR ENDED OCTOBER 31, 1997 Allowance for doubtful accounts $ 13,832 10,670 13,775 7,959(C) $ 30,318 (deducted from accounts receivable) Allowance for book returns (A) $ 53,189 102,175 3,915 93,368(D) $ 65,911 (deducted from accounts receivable) (A) Reflects gross allowance netted against receivable. Reserves for returns to inventory and recovery of royalties payable are netted directly against those balances and are not material. (B) Reflects additions to the allowance from acquisitions during the year. (C) Write-off uncollectible accounts net of recoveries. (D) Books actually returned during the year.
EXHIBIT INDEX 3.1 Restated Certificate of Incorporation of the Company. 3.2 By-Laws of the Company, as amended. 4.1 Indenture, dated as of May 1, 1987, between the Company and Manufacturers Hanover Trust Company, as Trustee, and Terms Agreement, dated March 16, 1988, among the Company,The First Boston Corporation and Salomon Brothers Inc relating to the Company's 9 1/2% Subordinated Notes due 2000, incorporated herein by reference to Exhibit 1 to the Company's Report on Form 8-K, dated March 16, 1988. 4.2 Indenture dated as of April 23, 1992 between the Company and Bankers Trust Company, as Trustee, relating to the Company's 8 1/4% Senior Notes Due 2002 and the Company's 8 7/8% Senior Debentures Due 2022, incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, File No. 33-46148. 4.3 First Supplemental Indenture dated as of August 5, 1997 between the Company and Bankers Trust Company, as Trustee, relating to the Company's 6.70% Senior Notes Due 2007, the Company's 7.20% Senior Debentures Due 2027, and the Company's 7.30% Senior Debentures Due 2097, incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3,File No. 333-30621. 4.4 Indenture dated as of May 15, 1986 between National Education Corporation and Continental Illinois National Bank and Trust Company of Chicago, as Trustee,incorporated herein by reference to Exhibit 4.2 to Amendment No. 1 to National Education Corporation's Registration Statement on Form S-3, File No. 33-5552. 4.5 Tripartite Agreement dated as of June 1, 1990 among National Education Corporation, IBJ Schroder Bank & Trust Company and Continental Bank, National Association, as resigning Trustee, incorporated herein by reference to Exhibit 4 to National Education Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-6981. 4.6 First Supplemental Indenture dated as of July 21, 1997 among National Education Corporation, Harcourt General, Inc., and IBJ Schroder Bank & Trust Company, incorporated herein by reference to Exhibit 4 to the Company's Registration Statement on Form 8-A, dated July 22, 1997, File No. 1-4925. 4.7 Smith-Lurie/Marks Stockholders' Agreement, dated December 29, 1986, incorporated herein by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992. *10.1 1988 Stock Incentive Plan, incorporated herein by reference to Exhibit 28.1 to the Company's Registration Statement on Form S-8, File No. 33- 26079. *10.2 1997 Incentive Plan, incorporated herein by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997. *10.3 1983 Key Executive Stock Purchase Loan Plan, as amended, incorporated herein by reference to Exhibit 10.4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1984. *10.4 Executive Medical Plan, as amended, incorporated herein by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994. *10.5(a) Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1988. *10.5(b) Amendment to Supplemental Executive Retirement Plan, dated October 26, 1990, incorporated herein by reference to Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1990. *10.6 Deferred Compensation Plan for Non-Employee Directors,incorporated herein by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998. *10.7(a) Amended and Restated Deferred Compensation Agreement, dated August 27, 1990, between the Company and Richard A. Smith, incorporated herein by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1990. *10.7(b) Deferred Compensation Agreement dated as of December 15, 1994, between the Company and Richard A. Smith, incorporated herein by reference to Exhibit 10.9(b) of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995. *10.8(a) Split Dollar Life Insurance Agreement, dated as of June 21, 1990, by and between the Company and the Richard and Susan Smith 1990 Issue Trust, under a Declaration of Trust dated as of April 3, 1990, incorporated herein by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991. *10.8(b) Amendment, dated as of December 15, 1998, to Split Dollar Life Insurance Agreement, dated as of June 21, 1990, by and between the Company and the Richard and Susan Smith 1990 Issue Trust, under a Declaration of Trust dated as of April 3, 1990, incorporated herein by reference to Exhibit 10.8(b) of the Company's Annual Report on Form10- K for the fiscal year ended October 31, 1998. *10.9 Key Employee Deferred Compensation Plan, as amended, incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994. 10.10 Amended and Restated Intercompany Services Agreement, dated as of November 1, 1999, between the Company and The Neiman Marcus Group, Inc. 10.11 Amended and Restated Intercompany Services Agreementdated as of November 1, 1995, between the Company and GC Companies, Inc., incorporated herein by reference to Exhibit 10.11(b) of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995. 10.12(a) Credit Agreement dated as of July 18, 1997 among the Company, the banks listed therein, The Chase Manhattan Bank, as syndication agent, Morgan Guaranty Trust Company of New York, as documentation agent, and BankBoston, N.A.,as administrative agent, incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997. 10.12(b) Amendment dated January 30, 1998 to Credit Agreement dated as of July 18, 1997 among the Company, the banks listed therein, The Chase Manhattan Bank, as syndication agent, Morgan Guaranty Trust Company of New York, as documentation agent, and BankBoston, N.A., as administrative agent, incorporated herein by reference to Exhibit 10.12(b) to the Company's Annual Report on Form 10-K for fiscal year ended October 31, 1998. 10.13 Amended and Restated Agreement and Plan of Merger, dated as of July 1, 1999, among the Company, The Neiman Marcus Group, Inc., and Spring Merger Corporation, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999. 10.14 Amended and Restated Distribution Agreement dated as of July 1, 1999, between the Company and The Neiman Marcus Group, Inc., incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1999. 13.1 The following sections of the 1999 Annual Report to Stockholders ("1999 Annual Report") which are expressly incorporated by reference into this Annual Report on Form 10-K: Management's Discussion and Analysis of Financial Condition and Results of Operations at pages 23 through 26 of the 1999 Annual Report. Consolidated Financial Statements and the Notes thereto at pages 27 through 46 of the 1999 Annual Report. Independent Auditors' Report at page 47 of the 1999 Annual Report. The information appearing under the caption "Five Year Summary (Unaudited)" on page 48 of the 1999 Annual Report. The information appearing under the caption "Stock Information" (including the accompanying tables and text)on page 50 of the 1999 Annual Report. 21.1 Subsidiaries of the Company. 23.1 Consent of Deloitte & Touche LLP. 27.1 Financial Data Schedule. EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF HARCOURT GENERAL, INC. (Originally incorporated under the name MID-WEST DRIVE-IN THEATRES, INC. on November 1, 1950) FIRST: The name of the Corporation is HARCOURT GENERAL, INC. SECOND: Its registered office in the State of Delaware is located at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name and address of its registered agent is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. THIRD: The nature of the business, or objects or purposes to be transacted, promoted or carried on are: To own, operate, and manage hotels or motels; to purchase and acquire land, buildings, leases, contracts, options, corporate shares, trust certificates and any and all other property, rights or interests in hotel or motel enterprises, to buy, sell, lease and deal in hotel or motel furnishings, equipment and supplies of every kind. To own, operate and manage places of amusement, including motion pictures, theatrical productions, vaudeville exhibitions, bowling alleys, sports arenas, skating rinks, and all other athletic and recreational facilities for public exhibition or participation, and other enterprises incidental thereto; to purchase and acquire land, buildings, leases, contracts, options, corporate shares, trust certificates and any and all other property, rights or interests in amusement enterprises or activities in connection therewith; to buy, sell, lease and deal in apparatus, furnishings, equipment and supplies of every kind used or useful in amusement enterprises, and contracts for every variety of entertainment, and to construct and erect buildings or other structures of any and every kind required or incidental to the purposes of this Corporation; to borrow money and contract indebtedness for all proper corporate purposes, to issue bonds, notes and other evidences of indebtedness therefor, to secure the same by franchises, rights, property, assets and goodwill of this Corporation; and to assume or guarantee and secure in like manner the leases, contracts or other obligations and the payment of any dividends on any stock or shares and the principal or interest on any bonds, notes or other evidences of indebtedness of any person, firm, association, trust or other corporation, and to lend money to or advance money in behalf of any person, firm, association, trust or other corporation, in which this Corporation has an interest. To lend money, to advance money in behalf of, or invest in the stock, bonds, notes, debentures or other securities of any person, firm, association, trust or corporation engaged in the business of acquiring, building, equipping or operating restaurants, particularly, but without limitation, curb service restaurants so called, or engage in the business of acquiring real estate or interests in real estate upon which restaurants are to be constructed. To engage in the business of buying, preparing and selling foods and beverages of all kinds and to operate restaurants, liquor lounges, snack bars or refreshment stands in conjunction with, or as an incident to, any of the other enterprises in which the Corporation may be engaged. To purchase, lease or otherwise acquire, own, hold, use, develop, improve and otherwise deal in and with, and sell, convey, mortgage, lease, exchange, transfer and otherwise dispose of real estate and any interests in real estate. To lend money, to advance money on behalf of, or invest in the stocks, bonds, notes, debentures, securities or obligations of any person, firm, association, trust or corporation engaged in an enterprise organized for any of the purposes hereinbefore enumerated in this Article Third. To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, whether or not similar or related or incidental to or useful or advantageous in or in connection with any of the purposes or enterprises hereinbefore enumerated in this Article Third. FOURTH: The total number of shares of capital stock of all classes which this Corporation shall have authority to issue shall be 370,000,000 shares to wit: (a) 150,000,000 shares of Common Stock with a par value of $1.00 per share; (b) 80,000,000 shares of Class B Stock with a par value of $1.00 per share; (c) 100,000,000 shares of Class C Stock with a par value of $1.00 per share; and (d) 40,000,000 shares of Preferred Stock with a par value of $1.00 per share. The powers, preferences and the relative, participating, optional and other rights and the qualifications, limitations and restrictions thereof, of each class of stock, and the express grant of authority to the Board of Directors to fix by resolution the designations and the powers, preferences and rights of each share of Preferred Stock and the qualifications, limitations and restrictions thereof which are not fixed by this Amended and Restated Certificate of Incorporation, are as follows: A. Common Stock, Class B Stock and Class C Stock I. Dividends, etc. Subject to the rights of the holders of Preferred Stock, and subject to any other provisions of this Amended and Restated Certificate of Incorporation, as amended from time to time, holders of Common Stock, Class B Stock and Class C Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor, provided that in the case of cash dividends, if at any time a cash dividend is paid on the Common Stock, a cash dividend will also be paid on the Class C Stock, in an amount per share of Class C Stock equal to the amount of the cash dividend paid on each share of the Common Stock and a cash dividend will also be paid on the Class B Stock in an amount per share of Class B Stock equal to 90% of the amount of the cash dividend paid on each share of the Common Stock (rounded down, if necessary, to the nearest one-hundredth of a cent), and provided, further, that in the case of dividends or other distributions payable in stock of the Corporation other than Preferred Stock, including distributions pursuant to stock splits or divisions of stock of the Corporation other than Preferred Stock, which occur after the initial issuance of shares of Class B Stock by the Corporation, only shares of Common Stock shall be distributed with respect to Common Stock, only shares of Class B Stock in an amount per share equal to the amount per share paid with respect to the Common Stock shall be distributed with respect to Class B Stock and only shares of Class C Stock in an amount per share equal to the amount per share paid with respect to the Common Stock shall be distributed with respect to the Class C Stock, and that, in the case of any combination or reclassification of the Common Stock, the shares of Class B Stock shall also be combined or reclassified and the shares of Class C Stock shall also be combined or reclassified so that the number of shares of Class B Stock outstanding immediately following such combination or reclassification and the number of shares of Class C Stock outstanding immediately following such combination or reclassification shall bear the same relationship to the number of shares outstanding immediately prior to such combination or reclassification as the number of shares of Common Stock outstanding immediately following such combination or reclassification bears to the number of shares of Common Stock outstanding immediately prior to such combination or reclassification and provided further, that in the case of dividends or other distributions payable in property, if at any time such a dividend is paid on the Common Stock, a dividend will also be paid on the Class C Stock, at the same rate or ratio of shares or other property per share of Class C Stock as is paid on each share of Common Stock; provided that if rights to purchase Common Stock or rights that, upon adjustment, may be exercised to purchase Common Stock are issued to holders of Common Stock, rights to purchase Class C Stock or rights that, upon adjustment, may be exercised to purchase Class C Stock shall be issued at the same rate or ratio to the holders of Class C Stock. The Corporation shall not issue rights, warrants or options to holders of Common Stock, Class B Stock and/or Class C Stock entitling them to subscribe for or purchase shares of Class C Stock at a price per share less than the market price per share of Common Stock on the record date for such distribution, unless, in the judgment of the Board of Directors, the conversion rate for the Series A Stock (as defined below) shall have been adjusted pursuant to the terms of Section B hereof to the extent, if any, required in order to adequately account for such issuance. II. Voting. (a) At every meeting of the stockholders every holder of Common Stock shall be entitled to one (1) vote in person or by proxy for each share of Common Stock standing in his name on the transfer books of the Corporation, every holder of Class B Stock shall be entitled to one (1) vote in person or by proxy for each share of Class B Stock standing in his name on the transfer books of the Corporation and every holder of Class C Stock shall be entitled to one-tenth (1/10th) of one vote in person or by proxy for each share of Class C Stock standing in his name on the transfer books of the Corporation, except that each holder of Class B Stock shall be entitled to ten (10) votes per share on the election of any directors at any stockholders' meeting if more than 20% of the shares of Common Stock outstanding on the record date for such meeting are beneficially owned by, or if more than 20% of the total voting power attributable to the shares of the Common Stock outstanding on the record date for such meeting are voted either directly or by proxy for a person or persons other than those nominated by the Board of Directors by, a person or group of persons acting in concert (unless such person or group is also the beneficial owner of a majority of the shares of Class B Stock on such record date). (b) In addition to and not in lieu of any vote required by the General Corporation Law of Delaware, the provisions of this Amended and Restated Certificate of Incorporation shall not be modified, revised, altered or amended, repealed or rescinded in whole or in part, without the affirmative vote of the holders of a majority of the shares of the Common Stock and of a voting majority of the shares of the Class B Stock, each voting separately as a class. (c) The Corporation may not effect or consummate: (1) any merger or consolidation of the Corporation with or into any other corporation; (2) any sale, lease, exchange or other disposition of all or substantially all of the assets of the Corporation to or with any other person; or (3) any dissolution of the Corporation; unless and until such transaction is authorized by the vote, if any, required by Article Eighth of this Amended and Restated Certificate of Incorporation and by Delaware law; and unless and until such transaction is authorized by a majority of the voting power of the shares of Common Stock and of Class B Stock entitled to vote, each voting separately as a class, but the foregoing shall not apply to any merger or other transaction described in the preceding subparagraphs (1) and (2) if the other party to the merger or other transaction is a Subsidiary of the Corporation. For purposes of this paragraph (c) a "Subsidiary" is any corporation more than 50% of the voting securities of which are owned directly or indirectly by the Corporation; and a "person" is any individual, partnership, corporation or entity. (d) Following the initial issuance of shares of Class B Stock, the Corporation may not effect the issuance of any additional shares of Class B Stock (except in connection with stock splits and stock dividends) unless and until such issuance is authorized by the holders of a majority of the voting power of the shares of Common Stock and of Class B Stock entitled to vote, each voting separately as a class. (e) Every reference in this Amended and Restated Certificate of Incorporation to a majority or other proportion of shares of stock shall refer to such majority or other proportion of the votes of such shares of stock. (f) Except as may be otherwise required by law or by this Article Fourth, the holders of Common Stock, Class B Stock and Class C Stock shall vote together as a single class, subject to any voting rights which may be granted to holders of Preferred Stock. (g) For the avoidance of doubt, no director shall, for purposes of paragraph (f) of Article Eighth hereof, be deemed to be "pecuniarily interested" in any issuance of Class C Stock if such director would not be so interested but for the ownership, directly or indirectly, of Class B Stock by (or the extent of the voting power represented by shares of Class B Stock, or Common Stock issued upon the conversion of Class B Stock, held by) such director or any other person or entity or any relationship of such director to or with such other person or entity. III. Transfer. (a) No person holding shares of Class B Stock of record (hereinafter called a Class B Holder) may transfer, and the Corporation shall not register the transfer of, such shares of Class B Stock, whether by sale, assignment, gift, bequest, appointment or otherwise, except to a Permitted Transferee. A Permitted Transferee shall mean, with respect to each person from time to time shown as the record holder of shares of Class B Stock: (i) In the case of a Class B Holder who is a natural person; (A) The spouse of such Class B Holder, any lineal descendant of a grandparent of such Class B Holder, and any spouse of such lineal descendant (which lineal descendants, their spouses, the Class B Holder, and his or her spouse are herein collectively referred to as "Class B Holder's Family Members"); (B) The trustee of a trust (including a voting trust) principally for the benefit of such Class B Holder and/or one or more of his or her Permitted Transferees described in each subclause of this clause (i) other than this subclause (B), provided that such trust may also grant a general or special power of appointment to one or more of such Class B Holder's Family Members and may permit trust assets to be used to pay taxes, legacies and other obligations of the trust or of the estates of one or more of such Class B Holder's Family Members payable by reason of the death of any such Family Members; (C) Any organization contributions to which are deductible for federal income, estate or gift tax purposes of any split-interest trust described in Section 4947 of the Internal Revenue Code, as it may from time to time be amended (hereinafter called a "Charitable Organization"); (D) A corporation a majority of the beneficial ownership of outstanding capital stock of which entitled to vote for the election of directors is owned by, or a partnership a majority of the beneficial ownership of the partnership interests of which entitled to participate in the management of the partnership are held by, the Class B Holder or his or her Permitted Transferees determined under this clause (i), provided that if by reason of any change in the ownership of such stock or partnership interests, such corporation or partnership would no longer qualify as a Permitted Transferee, all shares of Class B Stock then held by such corporation or partnership shall, upon the election of the corporation given by written notice to such corporation or partnership, without further act on anyone's part, be converted into shares of Common Stock effective upon the date of the giving of such notice, and stock certificates formerly representing such shares of Class B Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock; and (E) The estate of such Class B Holder. (ii) In the case of a Class B Holder holding the shares of Class Stock in question as trustee pursuant to a trust (other than a Charitable Organization or a trust described in clause (iii) below), "Permitted Transferee" means (A) any person transferring Class B Stock to such trust and (B) any Permitted Transferee of any such transferor determined pursuant to clause (i) above. (iii) In the case of a Class B Holder holding the shares of Class B Stock in question as trustee pursuant to a trust (other than a Charitable Organization) which was irrevocable on the record date (hereinafter in this Section III called the "Record Date") for determining the persons to whom the Class B Stock is first issued by the Corporation, "Permitted Transferee" means (A) any person to whom or for whose benefit principal may be distributed either during or at the end of the term of such trust whether by power of appointment or otherwise and (B) any Permitted Transferee of any such person determined pursuant to clause (i) above. (iv) In the case of a Class B Holder which is a Charitable Organization holding record and beneficial ownership of the shares of Class B Stock in question, '"Permitted Transferees" means any Class B Holder. (v) In the case of a Class B Holder which is a corporation or partnership (other than a Charitable Organization) acquiring record and beneficial ownership of the shares of Class B Stock in question upon its initial issuance by the Corporation, "Permitted Transferee" means (A) any partner of such partnership, or stockholder of such corporation, on the Record Date, (3) any person transferring such shares of Class B Stock to such corporation or partnership, and (C) any Permitted Transferee of any such person, partner, or stockholder referred to in subclauses (A) and (B) of this clause (v), determined under clause (i) above. (vi) In the case of a Class B Holder which is a corporation or partnership (other than a Charitable Organization or a corporation or partnership described in clause (v) above) holding record and beneficial ownership of the shares of Class B Stock in question, "Permitted Transferee" means (A) any person transferring such shares of Class B Stock to such corporation or partnership and (B) any Permitted Transferee of any such transferor determined under clause (i) above. (vii) In the case of a Class B Holder which is the estate of a deceased Class B Holder, or which is the estate of a bankrupt or insolvent Class B Holder, which holds record and beneficial ownership of the shares of Class B Stock in question, "Permitted Transferee" means a Permitted Transferee of such deceased, bankrupt or insolvent Class B Holder as determined pursuant to clause (i), (ii), (iii), (iv), (v) or (vi) above, as the case may be. (b) Notwithstanding anything to the contrary set forth herein, any Class B Holder may pledge such Holder's shares of Class B Stock to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such shares shall not be transferred to or registered in the name of the pledgee and shall remain subject to the provisions of this Section III. In the event of foreclosure or other similar action by the pledgee, such pledged shares of Class B Stock may only be transferred to a Permitted Transferee of the pledgor or converted into shares of Common Stock, as the pledgee may elect. (c) For purposes of this Section III: (i) The relationship of any person that is derived by or through legal adoption shall be considered a natural one. (ii) Each joint owner of shares of Class B Stock shall be considered a "Class B Holder" of such shares. (iii) A minor for whom shares of Class B Stock are held pursuant to a Uniform Gifts to Minors Act or similar law shall be considered a Class Holder of such shares. (iv) Unless otherwise specified, the term "person" means both natural persons and legal entities. (v) Without derogating from the election conferred upon the Corporation pursuant to subclause (D) of clause (i) above, each reference to a corporation shall include any successor corporation resulting from merger or consolidation; and each reference to a partnership shall include any successor partnership resulting from the death or withdrawal of a partner. (d) Any transfer of shares of Class B Stock not permitted hereunder shall result in the conversion of the transferee's shares of Class B Stock into shares of Common Stock, effective the date on which certificates representing such shares are presented for transfer on the books of the Corporation. The Corporation may, in connection with preparing a list of stockholders entitled to vote at any meeting of stockholders, or as a condition to the transfer or the registration of shares of Class B Stock on the Corporation's books, require the furnishing of such affidavits or other proof as it deems necessary to establish that any person is the beneficial owner of shares of Class B Stock or is a Permitted Transferee. (e) At any time when the number of outstanding shares of Class B Stock as reflected on the stock transfer books of the Corporation falls below 12 1/2% of the aggregate number of the issued and outstanding shares of the Common Stock, Class B Stock and Series A Stock of the Corporation, or the Board of Directors and the holders of a majority of the outstanding shares of Class B Stock approve the conversion of all of the Class B Stock into Common Stock, then, immediately upon the occurrence of either such event the outstanding shares of Class B Stock shall be converted into shares of Common Stock. In the event of such a conversion, certificates formerly representing outstanding shares of Class B Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock. (f) Shares of Class B Stock shall be registered in the names of the beneficial owners thereof and not in "street" or "nominee" name. For this purpose, a "beneficial owner" of any shares of Class B Stock shall mean a person who, or an entity which, possesses the power, either singly or jointly, to direct the voting or disposition of such shares. The Corporation shall note on the certificates for shares of Class B Stock the restrictions on transfer and registration of transfer imposed by this Section III. IV. Conversion Rights. (a) Subject to the terms and conditions of this Section IV, each share of Class B Stock shall be convertible at any time or from time to time, at the option of the respective holder thereof, at the office of any transfer agent for Class B Stock, and at such other place or places, if any, as the Board of Directors may designate, or, if the Board of Directors shall fail so to designate, at the principal office of the Corporation (attention of the Secretary of the Corporation), into one (1) fully paid and nonassessable share of Common Stock. Upon conversion, the Corporation shall make no payment or adjustment on account of dividends accrued or in arrears on Class B Stock surrendered for conversion or on account of any dividends on the Common Stock issuable on such conversion. Before any holder of Class B Stock shall be entitled to convert the same into Common Stock, he shall surrender the certificate or certificates for such Class B Stock at the office of said transfer agent (or other place as provided above), which certificate or certificates, if the Corporation shall so request, shall be duly endorsed to the Corporation or in blank or accompanied by proper instruments of transfer to the Corporation or in blank (such endorsements or instruments of transfer to be in form satisfactory to the Corporation), and shall give written notice to the Corporation at said office that he elects so to convert said Class B Stock in accordance with the terms of this Section IV, and shall state in writing therein the name or names in which he wishes the certificate or certificates for Common Stock to be issued. Every such notice of election to convert shall constitute a contract between the holder of such Class B Stock and the Corporation, whereby the holder of such Class B Stock shall be deemed to subscribe for the amount of Common Stock which he shall be entitled to receive upon such conversion, and, in satisfaction of such subscription, to deposit the Class B Stock to be converted and to release the Corporation from all liability thereunder, and thereby the Corporation shall be deemed to agree that the surrender of the certificate or certificates therefor and the extinguishment of liability thereon shall constitute full payment of such subscription for Common Stock to be issued upon such conversion. The Corporation will as soon as practicable after such deposit of a certificate or certificates for Class B Stock, accompanied by the written notice and the statement above prescribed, issue and deliver at the office of said transfer agent (or other place as provided above) to the person for whose account such Class B Stock was so surrendered, or to his nominee or nominees, a certificate or certificates for the number of full shares of Common Stock to which he shall be entitled as aforesaid. Subject to the provisions of subsection (c) of this Section IV, such conversion shall be deemed to have been made as of the date of such surrender of the Class B Stock to be converted; and the person or persons entitled to receive the Common Stock issuable upon conversion of such Class B Stock shall be treated for all purposes as the record holder or holders of such Common Stock on such date. (b) The issuance of certificates for shares of Common Stock upon conversion of shares of Class B Stock shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares of Class B Stock converted, the person or persons requesting the issuance thereof shall pay to the Corporation the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the Corporation that such tax has been paid. (c) The Corporation shall not be required to convert Class B Stock, and no surrender of Class B Stock shall be effective for that purpose, while the stock transfer books of the Corporation are closed for any purpose; but the surrender of Class B Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books, as if the conversion had been made on the date such Class B Stock was surrendered. (d) The Corporation covenants that it will at all times reserve and keep available, solely for the purpose of issue upon conversion of the outstanding shares of Class B Stock, such number of shares of Common Stock as shall be issuable upon the conversion of all such outstanding shares, provided that nothing contained herein shall be construed to preclude the Corporation from satisfying its obligations in respect of the conversion of the outstanding shares of Class B Stock by delivery of shares of Common Stock which are held in the treasury of the Corporation. The Corporation covenants that if any shares of Common Stock, required to be reserved for purposes of conversion hereunder, require registration with or approval of any governmental authority under any federal or state law before such shares of Common Stock may be issued upon conversion, the Corporation will use its best efforts to cause such shares to be duly registered or approved, as the case may be. The Corporation will endeavor to list the shares of Common Stock required to be delivered upon conversion prior to such delivery upon each national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery. The Corporation covenants that all shares of Common Stock which shall be issued upon conversion of the shares of Class B Stock, will, upon issue, be fully paid and nonassessable and not entitled to any preemptive rights. (e) The Class C Stock shall not be convertible into another class of stock or any other security of the Corporation except that the Class C Stock shall be automatically converted into Common Stock upon any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary. V. Liquidation Rights. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation, the holders of each series of Preferred Stock shall be entitled to receive, out of the net assets of the Corporation, an amount for each share equal to the amount fixed and determined by the Board of Directors in any resolution or resolutions providing for the issuance of any particular series of Preferred Stock, plus an amount equal to all dividends accrued and unpaid on shares of such series to the date fixed for distribution, and no more, before any of the assets of the Corporation shall be distributed or paid over to the holders of Common Stock. After payment in full of said amounts to the holders of Preferred Stock of all series other than the Corporation's Series A Cumulative Convertible Stock, $1.00 par value (hereinafter the "Series A Stock"), and after payment of the full amount provided for the holders of Series A Stock in accordance with the first sentence of Section B.3. of this Article Fourth, the remaining assets and funds of the Corporation shall be divided among and paid ratably to the holders of Common Stock (including those persons who shall become holders of Common Stock by reason of converting their shares) in a manner not inconsistent with the provisions of Section B.3. of this Article Fourth regarding the rights of the holders of Series A Stock in any such liquidation, dissolution or winding up. If, upon such dissolution, liquidation or winding up, the assets of the Corporation distributable as aforesaid among the holders of Preferred Stock of all series shall be insufficient to permit full payment to them of said preferential amounts, then such assets shall be distributed among such holders, first in the order of their respective preferences, and second, as to such holders who are next entitled to such assets and who rank equally with regard to such assets, ratably in proportion to the respective total amounts which they shall be entitled to receive as provided in this Section V. A merger or consolidation of the Corporation with or into any other corporation or a sale or conveyance of all or any part of the assets of the Corporation (which shall not in fact result in the liquidation of the Corporation and the distribution of assets to stockholders) shall not be deemed to be a voluntary or involuntary liquidation or dissolution or winding up of the Corporation within the meaning of this Section V. B. Preferred Stock. The Board of Directors is hereby authorized from time to time to provide by resolution for the issuance of shares of Preferred Stock in one or more series not exceeding the aggregate number of shares of Preferred Stock authorized by this Amended and Restated Certificate of Incorporation, as amended from time to time; and to determine with respect to each such series the voting powers, if any (which voting powers if granted may be full or limited), designations, preferences and relative, participating, optional or other special rights and the qualifications, limitations or restrictions appertaining thereto, including without limiting the generality of the foregoing, the voting rights appertaining to shares of Preferred Stock of any series (which may be one vote per share or a fraction of a vote per share, and which may be applicable generally or only upon the happening and continuance of stated events or conditions), the rate of dividend to which holders of Preferred Stock of any series may be entitled (which may be cumulative or noncumulative), the rights of holders of Preferred Stock of any series in the event of liquidation, dissolution or winding up of the affairs of the Corporation, and the rights (if any) of holders of Preferred Stock of any series to convert or exchange such shares of Preferred Stock of such series for shares of any other class of capital stock (including the determination of the price or prices or the rate or rates applicable to such rights to convert or exchange and the adjustment thereof, the time or times during which the right to convert or exchange shall be applicable and the time or times during which a particular price or rate shall be applicable). Before the Corporation shall issue any shares of Preferred Stock of any series, a certificate setting forth a copy of the resolution or resolutions of the Board of Directors, fixing the voting powers, designations, preferences, the relative, participating, optional or other rights, if any, and the qualifications, limitations and restrictions, if any, appertaining to the shares of Preferred Stock of such series, and the number of shares of Preferred Stock of such series authorized by the Board of Directors to be issued shall be made under seal of the Corporation and signed by the president or vice president and by the secretary or an assistant secretary of the Corporation and acknowledged by such president or vice president as provided by the laws of the State of Delaware and shall be filed and a copy thereof recorded in the manner prescribed by the laws of the State of Delaware. The powers, preferences and the relative, participating, optional and other rights, and the qualifications, limitations and restrictions thereof of the series of Preferred Stock of the Corporation designated Series A Stock are as follows: 1. Designation and Number of Shares. The distinctive serial designation of the series shall be Series A Cumulative Convertible Stock, $1.00 par value. The number of shares of Series A Stock which the Corporation is authorized to issue is initially established at 10,000,000, which number of shares may be increased (if, and to the extent that, the Amended and Restated Certificate of Incorporation shall be further amended to increase the authorized number of shares of Preferred Stock) or decreased (but not below the number of shares of Series A Stock then outstanding) from time to time by the Board of Directors of the Corporation. 2. Dividends. (a) Subject to full dividends accrued on the outstanding shares of any Preferred Stock ranking senior to the Series A Stock in respect of the payment of dividends for all past dividend periods and for the then current dividend period having been paid or declared and set apart for payment, holders of the Series A Stock shall be entitled to receive, but only when and as declared by the Board of Directors out of funds legally available for the declaration and payment of dividends, cumulative dividends as fixed by the provisions of this paragraph, and no more, payable in cash quarterly on October 29, 1982 and thereafter on the last day of January, April, July and October in each year, to holders of record of the Series A Stock on the respective dates fixed in advance for this purpose by the Board of Directors prior to the payment of each such dividend. The quarterly dividend to be paid on each share of Series A Stock shall be the sum of (x) $.03 (adjusted, if necessary, in accordance with Section 2(f)), and (y) the product of (i) the amount of the dividend or dividends (including special dividends, if any) paid or to be paid in cash on each share of Common Stock during the quarter ending on the date on which the Series A Stock dividend is payable, and (ii) the conversion rate (as defined in Section 4 below). (b) Such dividends shall accrue and be cumulative as follows: as to shares issued prior to the record date for the first dividend payment, from the date of issuance; as to shares issued during the period commencing immediately after the record date for a dividend and terminating at the close of business on the payment date for such dividend, from such dividend payment date; and otherwise, from the quarterly payment date next preceding the date of issue of such shares. (c) Accumulations of dividends accrued on any shares of the Series A Stock shall not bear interest. (d) No dividend (other than a dividend in Common Stock, in Class B Stock or in any other class of stock of the Corporation ranking junior to the Series A Stock in respect of the payment of dividends) shall be declared or paid or set aside for payment, nor shall any other distribution be declared or made upon the Common Stock, upon the Class B Stock or upon any other stock ranking junior to the Series A Stock in respect of the payment of dividends, nor shall any Common Stock, Class B Stock or any other class of stock of the Corporation ranking junior to the Series A Stock in respect of the payment of dividends be redeemed, purchased or otherwise acquired for any consideration by the Corporation or by any corporation more than fifty percent of the voting securities of which are owned, directly or indirectly, by the Corporation, while any of the Series A Stock is outstanding, unless, in each case, all dividends accrued on all outstanding shares of the Series A Stock for all past dividend periods shall have been paid or declared and set apart for payment. (e) As used in this certificate, accrued dividends shall mean the sum of amounts in respect of shares of Series A Stock then outstanding which, as to each share, shall be an amount computed from the date from which dividends on such share become cumulative to the date with reference to which the expression is used, irrespective of whether such amount or any part thereof shall have been declared as dividends or there shall have existed any funds legally available for the declaration or payment thereof, less the aggregate of all dividends paid on such share. (f) If the Corporation shall declare a dividend on its Common Stock in shares of its Common Stock, the Board of Directors may in its discretion, and in lieu of any adjustment in the conversion rate (as defined in Section 4 below), declare a dividend on the Series A Stock in shares of its Series A Stock and provide for the issuance of said shares in accordance with this Article Fourth such that the number of shares of Series A Stock distributed on each share of Series A Stock then outstanding shall equal the number of shares of Common Stock distributed on each share of Common Stock then outstanding. In the event a dividend payable in Series A Stock is declared pursuant to this paragraph (f), the amount of $.03 set forth in clause (x) of Section 2(a), or such other amount as shall have resulted from any previous adjustments made in accordance with this paragraph (f), shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Series A Stock outstanding on the record date for such dividend and the denominator of which shall be the sum of the number of shares of Series A Stock outstanding on the record date for such dividend and the number of shares of Series A Stock payable thereon pursuant to the declaration of such dividend. In such event, the amount of $20 set forth in the first and third sentences of Section 3, or such other amount as shall have resulted from any previous adjustments made in accordance with this paragraph (f), shall be adjusted by multiplying such amount by the same fraction used in accordance with the immediately preceding sentence. 3. Liquidation Rights. In the event of any liquidation, dissolution or winding up (whether voluntary or involuntary) of the Corporation, holders of the Series A Stock shall be entitled to be paid in cash from the net assets of the Corporation available for distribution (after the prior claims of the holders of any Preferred Stock ranking senior to the Series A Stock shall have been satisfied) the sum of $20 per share (adjusted, if necessary, in accordance with Section 2(f)) plus dividends accrued on each share to the date fixed for payment thereof, before any amount shall be paid to holders of the Common Stock. If the net assets of the Corporation available for distribution are insufficient to allow payment in full to be made to the holders of the Series A Stock as provided in the immediately foregoing sentence, the holders of the Series A Stock shall be paid, ratably, in proportion to the full distributive amounts to which they are respectively entitled. If the net assets of the Corporation available for distribution are sufficient to allow payment in full to be made to the holders of the Series A Stock as provided in the first sentence of this Section 3, the holders of the Common Stock shall be entitled to be paid in cash out of the net assets, if any, remaining for distribution a sum per share equal to the amount obtained by dividing $20 (adjusted, if necessary, in accordance with Section 2(f)) by the conversion rate (as defined in Section 4, below), or, if such remaining net assets are insufficient to allow payment of such amount per share, then that amount per share derived by dividing the total amount of such remaining net assets by the number of shares of Common Stock then outstanding. After giving effect to the distributive amounts payable to holders of the Series A Stock and of the Common Stock as aforesaid, all such holders shall be entitled to share ratably in the net assets, if any, remaining for distribution, each share of Common Stock being valued as one share and each share of Series A Stock being valued as the number of shares equal to the product of one share and the conversion rate (as defined in Section 4, below), for this purpose. Neither the purchase or redemption by the Corporation of stock of any class, in any manner permitted by law, nor the consolidation or merger of the Corporation with or into any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its properties or assets, shall be deemed to be a liquidation, dissolution or winding up of the Corporation for the purposes of this Section 3. No holder of Series A Stock shall be entitled to receive any amounts with respect thereto upon any liquidation, dissolution or winding up of the Corporation other than the amounts provided for in this Section 3. 4. Conversion Rights. (a) Conversion Rate and Procedures. (i) Subject to the terms and conditions of this Section 4, the shares of Series A Stock shall be convertible at any time or from time to time, at the option of the respective holders thereof, at the office of any transfer agent for Series A Stock, and at such other place or places, if any, as the Board of Directors may designate, or, if the Board of Directors shall fail so to designate, at the principal office of the Corporation (attention of the Secretary of the Corporation), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100th of a share) of Common Stock at the rate of one share of Common Stock for each one share of Series A Stock surrendered for conversion, subject to the adjustments hereinafter specified. The term "conversion rate" as used herein shall mean, as of any time, the number of shares or fraction of shares of Common Stock into which one full share of Series A Stock shall be entitled to be converted. Upon conversion, the Corporation shall make no payment or adjustment on account of dividends accrued or in arrears on Series A Stock surrendered for conversion or on account of any dividends on the Common Stock issuable on such conversion. Before any holder of Series A Stock shall be entitled to convert the same into Common Stock, he shall surrender the certificate or certificates for such Series A Stock at the office of said transfer agent (or other place as provided above), which certificate or certificates, if the Corporation shall so request, shall be duly endorsed to the Corporation or in blank or accompanied by proper instruments of transfer to the Corporation or in blank (such endorsements or instruments of transfer to be in form satisfactory to the Corporation), and shall give written notice to the Corporation at said office that he elects so to convert said Series A Stock in accordance with the terms of this Section 4, and shall state in writing therein the name or names in which he wishes the certificate or certificates for Common Stock to be issued. Every such notice of election to convert shall constitute a contract between the holder of such Series A Stock and the Corporation, whereby the holder of such Series A Stock shall be deemed to subscribe for the amount of Common Stock which he shall be entitled to receive upon such conversion, and, in satisfaction of such subscription, to deposit the Series A Stock to be converted and to release the Corporation from all liability thereunder, and thereby the Corporation shall be deemed to agree that the surrender of the certificate or certificates therefor and the extinguishment of liability thereon, shall constitute full payment of such subscription for Common Stock to be issued upon such conversion. The Corporation will as soon as practicable after such deposit of a certificate or certificates for Series A Stock, accompanied by the written notice and the statement above prescribed, issue and deliver at the office of said transfer agent (or other place as provided above) to the person for whose account such Series A Stock was so surrendered, or to his nominee or nominees, a certificate or certificates for the number of full shares of Common Stock to which he shall be entitled as aforesaid, and if the certificate or certificates surrendered evidence a greater number of shares than the number of shares to be converted, one or more certificates evidencing the shares of Series A Stock not to be converted, and together with a cash adjustment of any fraction of a share as hereinafter stated, if not evenly convertible. Subject to the provisions of paragraph (ii) of this Section 4(a), such conversion shall be deemed to have been made as of the date of such surrender of the Series A Stock to be converted; and the person or persons entitled to receive the Common Stock issuable upon conversion of such Series A Stock shall be treated for all purposes as the record holder or holders of such Common Stock on such date. (ii) The Corporation shall not be required to convert Series A Stock, and no surrender of Series A Stock shall be effective for that purpose, while the stock transfer books of the Corporation are closed for any purpose; but the surrender of Series A Stock for conversion during any period while such books are so closed shall, subject to the provisions of paragraph (iii) of this subsection 4(a), become effective for conversion immediately upon the reopening of such books, as if the conversion had been made on the date such Series A Stock was surrendered, and at the conversion rate in effect at the date of such surrender. (iii) The right of each holder of Series A Stock to convert shall be limited as follows: (A) For purposes of this paragraph (iii), the term "Conversion Year" shall mean each twelve-month period commencing March 1 (except that the initial period commencing October 29, 1982 and ending February 28, 1983 shall also be deemed to be a "Conversion Year"), the term "Proration Period" shall mean the first fifteen days of the Conversion Year, and the term "Conversion Limit" shall be a number equal to ten percent of the total number of shares of Series A Stock which shall have been issued by the Corporation as of the beginning of the relevant Conversion Year. The total number of shares which shall have been issued by the Corporation as of the beginning of any Conversion Year, for purposes of calculating the Conversion Limit for such Conversion Year in accordance with the immediately preceding sentence, shall mean the aggregate number of shares of Series A Stock issued by the Corporation, without reduction for shares reacquired by the Corporation through conversion, purchase or otherwise (whether or not any such reacquired shares shall have been canceled); provided, however, that reacquired shares which are reissued by the Corporation shall not again be counted for the purpose of determining the total number of shares issued by the Corporation hereunder. (B) Shares of Series A Stock surrendered for conversion during any Proration Period shall not be converted during such Proration Period, but, subject to the following limitation, shall be converted promptly after the expiration of such Proration Period. If, during such Proration Period, the number of shares of Series A Stock surrendered for conversion shall exceed the Conversion Limit, conversions shall be made on a pro rata basis, each holder having surrendered shares being deemed to have surrendered that percentage of such shares which is equal to the ratio of the Conversion Limit to the total number of shares of Series A Stock actually surrendered for conversion during such Proration Period. (C) During the period of a Conversion Year following the Proration Period of such Conversion Year, shares of Series A Stock surrendered for conversion shall not be converted if, prior to the date of such surrender (but during such Conversion Year), a number of shares of Series A Stock equal to or greater than the Conversion Limit has been surrendered for conversion. (D) If, on any day during the period of a Conversion Year following the Proration Period of such Conversion Year, the number of shares of Series A Stock surrendered, when taken together with the number of such shares previously surrendered for conversion during such Conversion Year, exceeds the Conversion Limit (the Conversion Limit as to such Conversion Year not having been exceeded prior to such day), then each holder having surrendered such shares for conversion on such day shall be deemed to have surrendered that percentage of such shares so surrendered which is equal to the ratio of (x) the difference between the Conversion Limit and the number of such shares surrendered for conversion during such Conversion Year but prior to such day, to (y) the number of such shares surrendered for conversion on such day. (E) If the implementation of the proration provisions of this paragraph (iii) should result in any fractional shares of Series A Stock, such fractional shares shall be ignored for the purpose of conversion pursuant to this Section 4, and, although fewer shares than the number equal to the Conversion Limit may as a result of ignoring such fractional shares have been converted during any Conversion Year, no further conversions of Series A Stock shall be effected until the following Conversion Year. (F) All shares of Series A Stock surrendered for conversion and not converted by reason of the limitations imposed by this paragraph (iii) shall be returned to the holder together with the Common Stock, if any, issued upon conversion of the Series A Stock surrendered with such unconverted shares. (G) Notwithstanding the foregoing provisions of this paragraph (iii), no limitations on the number of shares of Series A Stock which may be converted shall apply if the Board of Directors shall approve a transaction in which the Corporation is to be consolidated or merged with or into any other corporation or corporations, and one of the other corporations is to be the surviving entity (or, if the Corporation is to be the surviving entity, at least a majority of the shares of Common Stock of the Corporation to be outstanding immediately following such transaction shall as a result thereof be owned by one person or by a group of persons acting in concert), or all or substantially all of the properties and assets of the Corporation are to be sold or transferred, or if the Board of Directors shall recommend a tender offer for at least a majority of the Common Stock as being in the best interests of the holders of the Common Stock, or if the Board of Directors shall direct that notice be given to all holders of shares of Common Stock and Preferred Stock of the Corporation that the Conversion Limit applicable to the Series A Stock is suspended until a specified date or eliminated altogether. (b) Adjustments. (i) In case the Corporation shall (A) declare a dividend on its Common Stock in shares of its capital stock except in any case where a dividend on its Series A Stock also shall have been declared pursuant to Section 2(f), (B) subdivide outstanding shares of its Common Stock, (C) combine outstanding shares of its Common Stock into a smaller number of shares, or (D) issue by reclassification of its shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation) any shares of capital stock, then the conversion rate in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of any Series A Stock surrendered for conversion after such time shall be entitled to receive the number and kind of shares which he would have owned or have been entitled to receive had such Series A Stock been converted immediately prior to such time. Such adjustment shall be made successively whenever any event listed above shall occur. (ii) In case the Corporation shall fix a record date for the issuance of rights, warrants or options to all holders of its Common Stock and/or Class B Stock entitling them to subscribe for or purchase shares of Common Stock and/or Class B Stock at a price per share less than the current market price per share of Common Stock (as defined in paragraph (v) below) on such record date, the conversion rate after such record date shall be determined by multiplying the conversion rate in effect immediately prior to such record date by a fraction, of which the numerator shall be the number of shares of Common Stock and Class B Stock outstanding on such record date plus the number of additional shares of Common Stock and/or Class B Stock to be offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock and Class B Stock outstanding on such record date plus the number of shares of Common Stock and/or Class B Stock which the aggregate offering price of the total number of shares so to be offered would purchase at such current market price. Such adjustment shall be made successively whenever such a record date is fixed. In the event that such rights, warrants or options are not so issued, the conversion rate shall again be adjusted to be the conversion rate which would then be in effect if such record date had not been fixed. To the extent that such rights, warrants or options expire unexercised, the conversion rate shall be readjusted to the conversion rate which would then be in effect had the adjustments made as of the record date for the issuance of such rights, warrants or options been made upon the basis of the issuance of rights, warrants or options to subscribe for or purchase only the number of shares of Common Stock and/or Class B Stock as to which such rights, warrants or options were actually exercised. In the case of an issuance by the Corporation to all holders of its Common Stock and/or Class B Stock of rights, warrants or options entitling them to subscribe for or purchase securities convertible into, exchangeable for or carrying a right to purchase shares of Common Stock and/or Class B Stock (collectively, "Convertible Securities"), for purposes of this paragraph (ii), such issuance shall be deemed to be an issuance of rights, warrants or options to such holders entitling them to subscribe for or purchase Common Stock and/or Class B Stock at an aggregate offering price equal to the aggregate offering price of the Convertible Securities plus the minimum aggregate amount (if any) payable upon conversion of such shares or securities into Common Stock and/or Class B Stock. (iii) In case the Corporation shall fix a record date for the making of a distribution to all holders of its Common Stock and/or Class B Stock (including any such distribution made in connection with a consolidation or merger in which the Corporation is the continuing corporation) of evidences of its indebtedness or assets (excluding dividends paid in, or distributions of, cash to the extent permitted by law) or subscription rights, warrants or options (excluding those referred to in paragraph (ii) above), the conversion rate after such record date shall be determined by multiplying the conversion rate in effect immediately prior to such record date by a fraction, of which the numerator shall be the current market price per share of Common Stock (as defined in paragraph (v) below) on such record date, and of which the denominator shall be such current market price per share of Common Stock, less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive in the absence of fraud) of the portion of the assets or evidences of indebtedness so to be distributed, or of such subscription rights, warrants or options applicable, to one share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the conversion rate shall again be adjusted to be the conversion rate which would then be in effect if such record date had not been fixed. (iv) In case of any reclassification or change of outstanding Common Stock and/or Class B Stock, or in case of any consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation or entity (other than by mortgage or pledge) of all or substantially all of the properties and assets of the Corporation, the Corporation (or its successor in such consolidation or merger, or the purchaser of such properties and assets) shall make appropriate provision so that the holder of each share of Series A Stock then outstanding shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance, by a holder of the number of shares of Common Stock into which such Series A Stock might have been converted immediately prior to such reclassification, change, consolidation, merger, sale or conveyance, and shall have no other conversion rights under these provisions; provided, that effective provision shall be made, in the Articles or Certificate of Incorporation of the resulting or surviving corporation or otherwise, so that the provisions set forth herein for the protection of the conversion rights of Series A Stock shall thereafter be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities and property deliverable upon conversion of the Series A Stock remaining outstanding or other convertible preferred stock or other securities received by the holders of Series A Stock in place thereof; and provided, further, that any such resulting or surviving corporation shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, such shares, securities or property as the holders of the Series A Stock remaining outstanding, or other convertible preferred stock received by the holders in place thereof, shall be entitled to receive pursuant to the provisions hereof, and to make provisions for the protection of the conversion right as above provided. In case securities or property other than Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all reference in this paragraph (iv) shall be deemed to apply, so far as appropriate and as nearly as may be, to such other securities or property. The subdivision or combination of the number of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock (whether with or without par value) shall not be deemed to be a reclassification of the Common Stock of the Corporation for the purposes of this paragraph (iv). (v) For the purpose of any computation under paragraphs (ii) and (iii) of this subsection 4(b), the current market price per share of Common Stock on any record date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing forty-five business days before such date. The closing price for each day shall be the last sale price (regular way) or, in case no such sale takes place on such day, the average of the closing bid and asked prices (regular way), in either case on the composite tape, or, if the Common Stock is not quoted on the composite tape, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which the Common Stock is listed or admitted to trading, or if it is not listed or admitted to trading on any such securities exchange, the average of the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose. (vi) No adjustment in the conversion rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (vi), would require an increase or decrease of at least one percent in such rate; provided, however, that any adjustments which by reason of this paragraph (vi) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 4 shall be made to the nearest cent or to the nearest 1/l00th of a share, as the case may be. (vii) Upon occurrence of any of the events described in paragraphs (i) through (iv) above, the Corporation shall promptly (A) file with the transfer agent or agents for the Series A Stock a statement signed by the President or one of the Vice Presidents of the Corporation and by its Treasurer or Assistant Treasurer, disclosing the nature of such event, the conversion rate in effect immediately thereafter and the kind and amount of stock or other securities or property into which Series A Stock shall be convertible after such event, and (B) cause a notice containing a summary of the information set forth in said statement to be mailed to the holders of record of Series A Stock. Where appropriate, such notice may be given in advance and included as a part of a notice required to be mailed under the provisions of subsection 4(c) hereof. (viii) In any case in which this subsection 4(b) shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event (A) issuing to the holder of Series A Stock converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder an amount in cash in lieu of a fractional share pursuant to subsection 4(f) hereof; provided, however, the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares of Common Stock (or other securities or property, as the case may be), and such cash, upon the occurrence of the event requiring such adjustment. (ix) Except as otherwise expressly provided in this subsection 4(b), no adjustment in the conversion rate shall be made by reason of the issuance or sale, in exchange for cash, property or services, of shares of Common Stock and/or Class B Stock, or any securities convertible into or exchangeable for shares of Common Stock and/or Class B Stock, or securities carrying the right to purchase any of the foregoing. (x) Any determination as to fair market value or as to whether an adjustment in the conversion rate in effect hereunder is required pursuant to paragraphs (i) through (iv) of this subsection 4(b), or as to the amount of any such adjustment, if required, shall be binding upon the holders of Series A Stock and the Corporation if made in good faith by the Board of Directors. (xi) In the event that at any time, as a result of an adjustment made pursuant to paragraph (i) or paragraph (iv) of this subsection 4(b), the holder of any shares of Series A Stock thereafter surrendered for conversion shall become entitled to receive any shares of capital stock of the Corporation other than shares of Common Stock, thereafter the number of such other shares so receivable upon conversion of any shares of Series A Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in paragraphs (i) through (x) above, and the provisions of subsections (a) and (c) through (h) of this Section 4 with respect to the Common Stock shall apply on like terms to any such other shares. (c) Advance Notice of Certain Events. In case at any time: (i) the Corporation shall authorize the issuance to all holders of its Common Stock of rights, warrants or options to subscribe for or purchase shares of its Common Stock or of any other subscription rights, warrants or options; or (ii) the Corporation shall authorize the distribution to all holders of its Common Stock of evidences of its indebtedness or assets (other than dividends paid in, or distributions of, cash to the extent permitted by law); or (iii) there is any consolidation or merger to which the Corporation is a party and for which approval of any shareholders of the Corporation is required, or a conveyance or transfer of all or substantially all of the properties and assets of the Corporation, or a tender offer for at least a majority of the Common Stock which has been recommended by the Board of Directors as being in the best interests of the holders of the Common Stock; or (iv) there is a total voluntary or involuntary dissolution, liquidation or winding up of the Corporation; or (v) the Corporation proposes to take any action (other than actions of the character described in paragraph (i) of subsection 4(b) above) which would require an adjustment of the conversion rate pursuant to subsection 4(b) above; then the Corporation shall cause to be filed with the transfer agent or agents for the Series A Stock, and shall cause to be mailed to the holders of record of the outstanding Series A Stock, at least twenty days (or ten days in any case specified in clause (i) or (ii) above or in the case of a recommended tender offer as specified in clause (iii) above) prior to the applicable record date (or effective date if there shall be no record date) hereinafter specified, a notice stating (A) the date as of which the holders of Common Stock of record to be entitled to receive any such rights, warrants, options or distribution are to be determined, or (B) the date on which any such consolidation, merger, conveyance, transfer, tender offer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such distribution, right, warrant, option, consolidation, merger, conveyance, transfer, tender offer, dissolution, liquidation or winding up. The failure to give the notice required by this subsection 4(c) or any defect therein shall not affect the legality or validity of any distribution, right, warrant, option, consolidation, merger, conveyance, transfer, tender offer, dissolution, liquidation, or winding up, or the vote upon any such action. (d) Status of Stock Converted. All shares of Series A Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the right, if any, to receive notices and to vote, shall forthwith cease and terminate except only the right of the holders thereof to receive Common Stock in exchange therefor. (e) Shares Reserved for Conversion. The Corporation shall at all times reserve and keep available, out of its authorized and unissued stock, solely for the purpose of effecting the conversion of Series A Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series A Stock from time to time outstanding. (f) Fractions Upon Conversion. No fractional shares of Common Stock are to be issued upon conversion, but in lieu thereof the Corporation will pay therefor a cash adjustment (computed to the nearest cent) in an amount equal to such fraction of the market price per share of Common Stock computed on the basis of the last reported sale price (regular way) on the business day which next precedes the date of conversion, or, in case no such sale takes place on such day, the average of the closing bid and asked prices (regular way) of Common Stock, in either case on the composite tape, or, if the Common Stock is not quoted on the composite tape, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which the Common Stock is listed or admitted to trading, or if the Common Stock is not listed or admitted to trading on any such securities exchange, the average of the closing bid and asked prices on said last trading day as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose. (g) Taxes Upon Conversion. The Corporation will pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of Series A Stock pursuant to this Section 4. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Stock in a name other than that in which the Series A Stock so converted was registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid. (h) Affidavit of Mailing. An affidavit of the transfer agent or transfer agents for the Series A Stock or of the Secretary of the Corporation to the effect that any notice provided for in this Section 4 has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 5. Voting Rights. (a) Except as set forth in this Section 5 and as required by applicable law, the holders of Series A Stock shall not be entitled to vote. (b) If and whenever accrued dividends on Series A Stock shall not have been paid or declared and a sum sufficient for the payment thereof set aside, in an amount equivalent to six quarterly dividends on all shares of Series A Stock at the time outstanding, then and in such event the holders of Series A Stock and each other series of Preferred Stock now or hereafter issued which shall be accorded such class voting right by the Board of Directors and which shall have the right to elect two directors as the result of a prior or subsequent default in payment of dividends on such series (each such other series being hereinafter called "Other Series of Preferred Stock"), voting separately as a class without regard to series, shall be entitled to elect two directors, and the holders of all shares otherwise entitled to vote for directors, voting separately as a class, shall be entitled to elect the remaining members of the Board of Directors. Such special voting rights of the holders of Series A Stock may be exercised until all dividends in default on the Series A Stock shall have been paid in full or declared and funds sufficient therefor set aside, and when so paid or provided for such special voting rights of the holders of Series A Stock shall cease, but subject always to the same provisions for the vesting of such special voting rights in the case of any such future dividend default or defaults. At any time after such special voting rights shall have so vested in the holders of Series A Stock, the Secretary of the Corporation may, and upon the written request of the holders of record of ten percent or more in number of shares of Series A Stock and each Other Series of Preferred Stock then outstanding addressed to him at the principal executive office of the Corporation shall, call a special meeting of the holders of Preferred Stock so entitled to vote, for the election of the directors to be elected by them as herein provided to be held within fifty days after such call and at such place and upon such notice provided by law and in the bylaws for the holding of meetings of shareholders; provided, however, that the Secretary shall not be required to call such special meeting in the case of any such request received less than ninety days before the date fixed for any annual meeting of shareholders, and if in such case such special meeting is not called, the holders of Preferred Stock so entitled to vote shall be entitled to exercise the special voting rights provided in this paragraph at such annual meeting. If any such special meeting required to be called as above provided shall not be called by the Secretary within thirty days after receipt of any such request, then the holders of record of ten percent or more in number of shares of Series A Stock and each Other Series of Preferred Stock then outstanding may designate in writing one of their number to call such meeting, and the person so designated may, at the expense of the Corporation, call such meeting to be held at the place and upon the notice above provided, and for that purpose shall have access to the stock books of the Corporation. No such special meeting and no adjournment thereof shall be held on a date later than thirty days before the annual meeting of the shareholders or a special meeting held in place thereof next succeeding the time when the holders of Series A Stock become entitled to elect directors as above provided. If, at any meeting so called or at any annual meeting held while the holders of shares of Series A Stock have the special voting rights provided for in this paragraph, the holders of not less than forty percent of the then outstanding shares of Series A Stock and each Other Series of Preferred Stock are present in person or by proxy, which percentage shall be sufficient to constitute a quorum for the election of additional directors as herein provided, the then authorized number of directors of the Corporation shall be increased by two, as of the time of such special meeting or the time of the first such annual meeting held while such holders have said special voting rights and such quorum is present, and the holders of the Series A Stock and each Other Series of Preferred Stock, voting as a class, shall be entitled to elect the additional directors so provided for. If the directors of the Corporation are then divided into classes under provisions of the Amended and Restated Certificate of Incorporation, as amended, or the bylaws, the two additional directors shall be members of those respective classes of directors in which a vacancy is created as a result of such increase in the authorized number of directors. Upon the election at such meeting by the holders of the shares of Series A Stock and each Other Series of Preferred Stock, voting as a class for the two directors they are entitled so to elect, the persons so elected, together with such persons as may be or may have been elected as directors by the holders of all shares otherwise entitled to vote for directors, shall constitute the duly elected directors of the Corporation. The additional directors so elected by holders of Series A Stock and each Other Series of Preferred Stock, voting as a class, shall serve until the next annual meeting or until their respective successors shall be elected and qualified, or if any such director is a member of a class of directors under provisions dividing the directors into classes as aforesaid, each such director shall serve until the annual meeting at which the term of office of his class shall expire or until his successor shall be elected and shall qualify, and at each subsequent meeting of shareholders at which the directorship of any director elected by the vote of holders of Series A Stock and each Other Series of Preferred Stock under the special voting rights set forth in this paragraph is up for election said special voting rights shall apply in the re-election of such director or in the election of his successor, provided, however, that whenever the holders of Series A Stock and each Other Series of Preferred Stock shall be divested of the special rights to elect two directors as above provided, the terms of office of all persons elected as directors by the holders of Series A Stock and each Other Series of Preferred Stock, voting as a class, or elected to fill any vacancies resulting from the death, resignation, or removal of directors so elected by the holders of Series A Stock and each Other Series of Preferred Stock, shall forthwith terminate and the authorized number of directors shall be reduced accordingly. If, at any time after a special meeting of shareholders or an annual meeting of shareholders at which the holders of Series A Stock and each Other Series of Preferred Stock have elected additional directors as provided above, and while the holders of Series A Stock and each Other Series of Preferred Stock shall be entitled to elect two directors, the number of directors who have been elected by the holders of Series A Stock and each Other Series of Preferred Stock (or who by reason of one or more resignations, deaths or removals have succeeded any directors so elected) shall by reason of resignation, death or removal be less than two but at least one, the vacancy in the directors elected by the holders of the Series A Stock and each Other Series of Preferred Stock may be filled by the remaining director elected by such holders, and failing such election within thirty days after such vacancy arises, or if there shall not be incumbent at least one director elected by such holders, the Secretary of the Corporation may, and upon the written request of the holders of record of ten percent or more in number of shares of Series A Stock and each Other Series of Preferred Stock then outstanding addressed to him at the principal office of the Corporation shall, call a special meeting of the holders of Preferred Stock so entitled to vote, for an election to fill such vacancy or vacancies, to be held within fifty days after such call and at the place and upon the notice provided by law and in the bylaws for the holding of meetings of shareholders; provided, however, that the Secretary shall not be required to call such special meeting in the case of any such request received less than ninety days before the date fixed for any annual meeting of shareholders, and if in such case such special meeting is not called, the holders of Preferred Stock so entitled to vote shall be entitled to fill such vacancy or vacancies at such annual meeting. If any such special meeting required to be called as above provided shall not be called by the Secretary within thirty days after receipt of any such request, then the holders of record of ten percent or more in number of shares of Series A Stock and each Other Series of Preferred Stock then outstanding may designate in writing one of their number to call such meeting, and the person so designated may, at the expense of the Corporation, call such meeting to be held at the place and upon the notice above provided, and for that purpose shall have access to the stock books of the Corporation; no such special meeting and no adjournment thereof shall be held on a date later than thirty days before the annual meeting of the shareholders or a special meeting held in place thereof next succeeding the time when the holders of Series A Stock and each Other Series of Preferred Stock become entitled to elect directors as above provided. (c) So long as any shares of Series A Stock shall be outstanding, the Corporation shall not, without the affirmative vote or written consent of the holders of a majority of the number of shares of Series A Stock at the time outstanding, amend the Amended and Restated Certificate of Incorporation to increase the authorized number of shares of Preferred Stock. (d) So long as any shares of Series A Stock shall be outstanding, the Corporation shall not, without the affirmative vote or written consent of the holders of two-thirds of the number of shares of Series A Stock at the time outstanding, amend the Amended and Restated Certificate of Incorporation to: (i) change the designations, preferences, limitations or other relevant rights of the Series A Stock; (ii) effect an exchange, reclassification or cancellation of all or part of the Series A Stock; (iii) effect an exchange or create a right of exchange of another class or series into Series A Stock; (iv) change the Series A Stock into the same or a different number of shares of the same or another class or series; or (v) cancel or otherwise affect dividends on the shares of Series A Stock which have accrued but have not been declared. C. Authorized Shares of Capital Stock. Except as may be provided in the terms and conditions fixed by the Board of Directors for any series of Preferred Stock, the number of authorized shares of any class or classes of stock of the Corporation may be increased or decreased by the affirmative vote of the holders of a majority of the outstanding shares of stock of the Corporation entitled to vote. D. Preemptive or Preferential Rights of Stockholders. No stockholder of this Corporation shall have any preemptive or preferential right to purchase or subscribe to any shares of any class of this Corporation now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of any class, now or hereafter to be authorized, whether or not the issue of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights of such stockholder, other than such rights, if any, as the Board of Directors in its discretion from time to time may grant, and at such price as the Board of Directors in its discretion may fix; and the Board of Directors may issue shares of any class of this Corporation, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of any class, without offering any such shares or securities, either in whole or in part, to the existing stockholders of any class. FIFTH: The minimum amount of capital with which the Corporation will commence business is One Thousand Dollars ($1,000.00). SIXTH: The Corporation is to have perpetual existence. SEVENTH: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. EIGHTH: The following provisions are inserted for the regulation and conduct of the affairs of the Corporation, and it is expressly provided that they are intended to be in furtherance and not in limitation or exclusion of the powers elsewhere conferred herein or in the by-laws or conferred by law: (a) The Board of Directors may at any time set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may at any time reduce or abolish any such reserve. (b) Except as may be otherwise expressly required by law or by other provisions of this Amended and Restated Certificate of Incorporation or the by-laws, the Board of Directors shall have and may exercise, transact, manage, promote and carry on all of the powers, authorities, businesses, objects and purposes of the Corporation, provided, however, that the directors may not effect or consummate: (1) any merger or consolidation of the Corporation or any Subsidiary with or into any other corporation; (2) any sale, lease, exchange or other disposition of all or substantially all of the assets of the Corporation to or with any other person; or (3) any issuance or transfer by the Corporation or any Subsidiary of any voting securities of the Corporation or any Subsidiary to any other person except for voting securities issued pursuant to stock option, purchase, bonus or other plans for natural persons who are directors, employees, consultants and/or agents of the Corporation and its Subsidiaries; unless and until such transaction is authorized by the affirmative vote of the holders of at least 66 2/3% of the outstanding stock of the Corporation entitled to vote generally in the election of directors considered for the purposes of this Article Eighth as one class, but the foregoing requirement shall not apply, and the provisions of Delaware law relating to the percentage of stockholder approval, if any, shall apply to (i) any merger or other transaction described in the preceding subparagraphs (1), (2) and (3) if the other party to the merger or other transaction is a Subsidiary of the Corporation, or (ii) any merger or other transaction described in the preceding subparagraphs (1), (2) and (3) if at any time prior to its consummation the transaction has been approved by a resolution adopted by not less than two-thirds of all of the directors then in office. For purposes of this Article Eighth a "Subsidiary" is any corporation more than 50% of the voting securities of which are owned directly or indirectly by the Corporation; and a "person" is any individual, partnership, corporation or entity. (c) The election of directors need not be by ballot unless the by-laws so require and no director need be a stockholder. (d) By-laws not inconsistent with the Certificate of Incorporation may be made, and by-laws may be altered, amended or repealed in the manner therein specified provided (1) that no inconsistency with the Certificate of Incorporation results from such alteration or repeal, (2) that the Board of Directors shall not alter, amend or repeal Sections 3.1 to 3.4 inclusive and Section 13 of the by-laws as amended at the 1978 Annual Meeting of Stockholders without the approval of the holders of at least 66 2/3% of the outstanding stock of the Corporation entitled to vote generally in the election of directors, considered for the purposes of this paragraph (d) as one class, and (3) that no change of the time or place of the meeting for the election of directors shall be made within 60 days next before the day on which such meeting is to be held, and that in case of any change of such time or place, notice thereof shall be given to each stockholder in person or by letter mailed to his last known post- office address at least 20 days before the meeting is held. (e) The Board of Directors may from time to time determine whether and to what extent and at what times and places and under what conditions and regulations the accounts and books and papers of the Corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account, book or document of the Corporation, except as and to the extent expressly provided by law with reference to the right of stockholders to examine the original or duplicate stock ledger, or otherwise expressly provided by law, or except as expressly authorized by resolution of the Board of Directors. (f) A director of this Corporation shall not, in the absence of fraud, be disqualified by his office from dealing or contracting with the Corporation, either as vendor, vendee or otherwise, nor in the absence of fraud, shall any contract or other transaction of the Corporation be void or voidable or otherwise affected by reason of the fact that any director, or any firm or association in which any director is a member, or any corporation of which any director is an officer, director or stockholder, or any trust of which any director is a trustee or beneficiary, is in any way pecuniarily interested in such contract or transaction, provided that at the meeting of the Board of Directors or of any committee thereof having authority in the premises, authorizing or confirming said contract or transaction, the interest of such director, firm, association, corporation, or trust and in the case of a firm, association, corporation, or trust, the relation of such director thereto, is disclosed or made known to the meeting; nor shall any director be liable to account to the Corporation for any profit realized by him from or through any such contract or transaction of this Corporation, by reason of the fact that he or any firm or association of which he is a member, or any corporation of which he is an officer, director or stockholder, or any trust of which he is a trustee or beneficiary, was pecuniarily interested in such transaction or contract. Directors so interested may be counted when present at meetings of the Board of Directors or of any such committee for the purpose of determining the existence of a quorum. No such interested director shall vote to authorize or confirm any such contract or transaction, and if he does so vote his vote shall be disregarded; but in respect of any contract or transaction with any wholly-owned subsidiary of the Corporation, or with any corporation in which such director is interested only by virtue of being a director or officer or both, and not as a stockholder, such director may vote and act as freely as though his interests in such corporation did not exist. Any contract, transaction or act of the Corporation or of the Board of Directors or of any committee thereof, or of any officer, which shall be ratified by a majority in interest of stockholders having voting power, at any annual meeting or at a special meeting called for the purpose, shall be as valid and as binding as though ratified by every stockholder of the Corporation. In any situation in which a director should disclose his pecuniary interest in a contract or transaction as provided for in this section, it shall not be necessary for him to disclose the extent or the details of such pecuniary interest. (g) The Board of Directors may issue all or any part of the authorized stock of the Corporation at such times and on such lawful conditions as it may from time to time determine; and no stockholders shall have any preemptive right to subscribe for any issue of the Corporation's stock or of any other securities. (h) To the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of the foregoing sentence by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. NINTH: Meetings may be held without the State of Delaware if the by-laws so provide. The books of the Corporation may be kept (subject to any provisions contained in the statute) outside of the State of Delaware at such place or places as may be from time to time designated by the Board of Directors or in the by- laws of the Corporation. No action required or permitted to be taken by the stockholders of the Corporation may be taken except at the annual meeting of the stockholders or at a special meeting of the stockholders duly called for as provided by the by-laws of the Corporation. The stockholders entitled to vote generally in the election of directors, considered for the purposes of this Article Ninth as one class, shall have the authority to remove any director of the Corporation with or without cause as provided in the by-laws of the Corporation. TENTH: The Corporation reserves the right to modify, revise, alter, amend, change, repeal, or rescind any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this reservation, provided, however, that the provisions of Paragraphs (b), (c) and (d) of Article Eighth, and the provisions of Articles Ninth and Tenth of this Amended and Restated Certificate of Incorporation shall not be modified, revised, altered or amended, repealed or rescinded, in whole or in part, except by the affirmative vote of the holders of not less than 66 2/3% of the outstanding stock entitled to vote generally in the election of directors considered for the purposes of this Article Tenth as one class. IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which restates and integrates but does not further amend the provisions of the Amended and Restated Certificate of Incorporation of the Corporation as heretofore amended or supplemented, and which has been duly adopted by the Board of Directors and the stockholders of the Corporation in accordance with the provisions of Section 242 and 245 of the Delaware General Corporation Law, has been duly executed by an authorized officer of the Corporation on this 14th day of December, 1999. HARCOURT GENERAL, INC. By: /s/ Eric P. Geller Name: Eric P. Geller Office: Senior Vice President, General Counsel and Secretary Incorporates amendments and other charter documents dated: March 14, 1986 March 13, 1987 March 15, 1993 March 14, 1997 September 15, 1999 EX-3.2 3 BY-LAWS OF THE COMPANY, AS AMENDED EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF HARCOURT GENERAL, INC. (As amended through June 18, 1999) Section 1. GENERAL These by-laws shall be subject to all requirements and provisions of law applicable to the corporation, including, without limitation, the General Corporation Law of the State of Delaware ("the GCL") and to all requirements and provisions of the Company's Restated Certificate of Incorporation, as amended from time to time (the "Certificate of Incorporation"). Section 2. STOCKHOLDERS 2.1. Annual Meeting. The annual meeting of stockholders shall be held at such date, place and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which they shall elect directors in the manner provided in the Certificate of Incorporation and in these by-laws and transact such other business as may be required by law or by these by-laws or as may be specified by the chairman of the board or by a majority of the directors then in office or by vote of the board of directors and of which notice was given in the notice of the meeting. 2.2. Special Meetings. Except as otherwise provided in the Certificate of Incorporation, a special meeting of the stockholders entitled to vote at such meeting may be called at any time by the chairman of the board, by a majority of the directors then in office or by vote of the board of directors, and a special meeting of the stockholders entitled to vote at such meeting shall be called by the secretary, or in the case of the death, absence, incapacity or refusal of the secretary, by any assistant secretary or some other officer, upon written application of one or more stockholders who are entitled in the aggregate to cast at least 30% of the total number of votes represented by shares of capital stock issued and outstanding and entitled to vote at the meeting. Any such call shall state the time, place and purposes of the meeting. 2.3. Place of Meetings. Except as otherwise provided in the Certificate of Incorporation, all meetings of the stockholders entitled to vote thereat shall be held at such place within the United States as shall be designated by the chairman of the board, by a majority of the directors then in office or by vote of the board of directors. Any adjourned session of any meeting of such stockholders shall be held at the place designated in the vote of adjournment. 2.4. Notice of Meetings. Except as otherwise provided by law or by the Certificate of Incorporation and subject to Section 6 hereof, a written notice of each meeting of stockholders, stating the place, date and hour and the purpose or purposes of the meeting, shall be given not less than ten nor more than fifty days before the meeting to each stockholder entitled to vote thereat, and to each stockholder who, by law, by the Certificate of Incorporation or by these by-laws is entitled to notice, by leaving such notice with him or at his residence or usual place of business or by depositing such notice in the United States mail, postage prepaid, addressed to such stockholder at his address as it appears on the records of the corporation. Such notice shall be given by the secretary or an assistant secretary or by an officer designated by the board of directors. If a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken, except that if the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.5. Voting and Proxies. Subject to Section 7 of these by- laws, each stockholder of record of Common Stock and Class B Stock shall, at every meeting of stockholders, have one vote for each share of capital stock held by him which is entitled to be voted at said meeting and each holder of record of Class C Stock shall, at every meeting of stockholders, have one-tenth of one vote for each share of capital stock held by him which is entitled to be voted at said meeting, except that each share of Class B Stock will entitle the holder thereof to ten votes on the election of directors at any stockholders' meeting under the circumstances described in the Certificate of Incorporation. 2.6. List of Stockholders. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder so entitled and the number of shares of each class or series entitled to be voted at said meeting, registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 2.7. Quorum of Stockholders. Except as otherwise provided by law, the Certificate of Incorporation or these by-laws, at any meeting of the stockholders a quorum shall consist of the holders of stock representing a majority of the voting power of all classes of stock issued and outstanding and entitled to vote at the meeting physically present or represented by proxy. Any stock of the corporation belonging to the corporation at the time of any meeting or any adjourned session thereof shall neither be entitled to vote nor counted for quorum purposes; provided, however, that this sentence shall not be construed as limiting the right of the corporation to vote its own stock held by it in a fiduciary capacity. Any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present. 2.8. Action by Vote. When a quorum is present at any meeting, all elections of directors shall be determined by a plurality of the shares present in person or represented by proxy and entitled to vote on the election of directors and, as to any other matter, the vote of a majority of shares present in person or represented by proxy and entitled to be cast on such matter shall decide any such matter brought before such meeting, unless the question is one upon which, by express provisions of the GCL or of the Certificate of Incorporation or of these by-laws, a different vote is required, in which case such express provision shall govern and control the decision of such matter. 2.9. Voting Power Counted. For the avoidance of doubt, every reference in these by-laws to a majority or other proportion of shares of stock shall refer to such majority or other proportion of the votes of such shares of stock, provided that this Section 2.9 shall be deemed inapplicable to Section 3.5 of these by-laws to the extent that the application of this Section 2.9 would alter, amend or repeal such Section 3.5. Section 3. BOARD OF DIRECTORS 3.1. Number, Classification and Composition of Board of Directors. The number of members of the whole board of directors shall consist of not more than eighteen nor less than six. The exact number of directors within the maximum and minimum limitations specified herein may be fixed from time to time by resolution of a majority of the board of directors or by the stockholders at the annual meeting. The directors shall be elected at the annual meeting of stockholders, except as provided in this Section 3.1 and in Section 3.3. The directors shall be divided into three classes, designated Class A, Class B and Class C, respectively, such classes to be as nearly equal in size as possible. At the 1978 Annual Meeting of Stockholders, Class A directors shall be elected to hold office until the 1979 Annual Meeting of Stockholders, Class B directors to hold office until the 1980 Annual Meeting of Stockholders and Class C directors to hold office until the 1981 Annual Meeting of Stockholders. At each annual election of directors after the 1978 Annual Meeting of Stockholders, the successors to the directors of the class whose term shall expire in that year shall be elected to hold office for a term to expire at the third Annual Meeting of Stockholders following the annual meeting at which such directors were elected. In case of any decrease or increase in the number of directors, the increase or decrease shall be distributed among the several classes as equally as possible, as shall be determined by the affirmative vote of a majority of the directors at the time of such increase or decrease. The number of members of the board of directors may be decreased at any time or from time to time by action of the directors to any number not less than three, but only to eliminate vacancies existing by reason of the death, resignation or removal of one or more directors. No director need be a stockholder. 3.2. Tenure. Each director of each class shall hold office until the earlier to occur of the following: (a) the date on which a director of the same class succeeding him is elected and qualified, (b) the date of any meeting of stockholders at which directors of his class are elected, if his election has not been recommended by the directors pursuant to the provisions of Section 3.5(b), whether by reason of a reduction in the number of directors of the corporation, or otherwise, or (c) the date of his resignation, removal or death. 3.3. Vacancies. Vacancies and any newly created directorships resulting from any increase in the authorized number of directors may be filled by vote of a majority of the directors then in office though less than a quorum and each director so chosen shall hold office subject to the provisions of these by-laws, until the expiration of the term of the class to which he has been chosen or until his successor is duly elected and qualified. When one or more directors shall resign from the board effective at a future date a majority of the directors then in office shall have power to fill such a vacancy or vacancies, the vote or action by writing thereon to take effect when such resignation or resignations shall become effective. 3.4. Removal of Directors. Any director or the entire board of directors may be removed with or without cause by the affirmative vote of the holders of not less than 66 2/3% of the outstanding stock of the corporation entitled to vote in the election of directors, considered for this purpose as one class, taking such action at an annual meeting of stockholders or at a special meeting of stockholders duly called for such purpose. 3.5. Committees. (a) There shall at all times exist the following committees of the board of directors: Nominating Committee, Audit Committee, Compensation Committee and Executive Committee. Nominating Committee. The functions of the Nominating Committee shall include consideration of the composition of the board of directors and recommendation of individuals for election as directors of the corporation. The Nominating Committee shall also make recommendations to the board of directors concerning the structure and membership of the various committees of the board of directors, consult with the chief executive officer of the corporation on questions of management, organization and succession, and provide the board of directors with such guidance on these matters as the board may seek from time to time. Audit Committee. The functions of the Audit Committee shall include the review of the scope of the services of the corporation's independent auditors and the responsibilities of the corporation's internal audit department and a continuing review of the corporation's internal procedures and controls. The Audit Committee shall annually review the corporation's audited financial statements, consider the qualifications and fees of the independent auditors of the corporation and make recommendations to the board of directors as to the selection of the auditors and the scope of their audit services. Compensation Committee. The functions of the Compensation Committee shall include the review or determination of salaries, benefits and other compensation for officers and key employees of the corporation and its subsidiaries and the administration of the corporation's stock option plans. Executive Committee. The Executive Committee shall have the authority to manage the affairs of the corporation in the intervals between meetings of the board, except that the Executive Committee may not (a) declare a dividend or authorize the issuance or repurchase of stock or other securities of the corporation, (b) amend the Certificate of Incorporation, (c) adopt an agreement of merger or consolidation, (d) impose a lien on substantially all the assets of the corporation, (e) recommend to the stockholders any action requiring their approval, (f) amend these by-laws, (g) rescind any action taken by the board, (h) change the membership of any committee of the board at any time, (i) fill vacancies of the board, or (j) discharge any committee of the board at any time. The board of directors may, by resolution adopted by a majority of the whole board, establish or terminate the existence of any additional committees which may consist of individuals who are not members of the board of directors, which committees may be standing committees or ad hoc committees, for the purpose of making recommendations to the board of directors and otherwise assisting it in the furtherance of its duties. Except as the directors may otherwise determine, any committee may make rules for the conduct of its business. In addition to the committees referred to above and those other committees of the board of directors which may be established by the board of directors pursuant to the GCL, the board may appoint one or more directors to serve with one or more officers or employees of the corporation as a committee, which shall not have any of the powers of the board of directors in the management of the business and affairs of the corporation but which, unless otherwise provided by the board, shall administer any employee benefit programs instituted by the corporation. (b) The Nominating Committee shall not recommend to the board of directors any individual or individuals for election to the board of directors or for appointment to the Nominating Committee, the Audit Committee or the Compensation Committee, if, after such election or appointment, a majority of the board of directors or any such Committee, as the case may be, shall not consist of "independent directors" (as defined below). The board of directors shall nominate individuals for election to the board of directors by the stockholders, may elect individuals to the board of directors to fill any vacancies which may occur, and shall appoint individuals to the Nominating Committee, the Audit Committee, the Compensation Committee and the Executive Committee, and in the case of the Executive Committee may appoint one or more alternates, provided that it shall not make any such nomination or appointment if it has not been recommended by the Nominating Committee. The board of directors may remove any individual, with or without cause, from the Nominating Committee, the Audit Committee or the Compensation Committee, provided that, following such removal, a majority of such Committee shall consist of "independent directors" (as defined below), and may remove any individual, with or without cause, from the Executive Committee. "Independent directors" are directors (a) who are not the lineal descendants (whether by blood or adoption) of Philip Smith, the deceased founder of the corporation, (b) who are not the spouses of such lineal descendants, (c) who are not at the time of determination, and shall not have been at any time preceding such time, officers, or, within ten years preceding such time, employees of the corporation or any of its subsidiaries or affiliates, (d) who are not at the time of determination the beneficial owners of more than 5% of the issued and outstanding stock of any class of the corporation's stock, and (e) who are not officers, employees, directors or partners of any person who at the time of determination is a holder of more than 5% of the issued and outstanding shares of any class of the corporation's stock. The Nominating Committee will carefully consider all suggestions timely received from any stockholder of nominees for director of the corporation where the nominee has confirmed in writing to the Nominating Committee his or her desire to serve as a director of the corporation and where the credentials of the nominee meet the standards generally applied by the Nominating Committee, that is, such credentials are of the highest order and demonstrate a background and competence in business and financial matters related to the business of the corporation. The proxy statement for each annual meeting will contain a notice, in the then appropriate form, of this provision of the by-laws. (c) Neither the provisions of Section 3.5(b) of the by-laws, nor of this Section 3.5(c), shall be altered, amended or repealed except by a vote of not less than a majority of the outstanding shares of Common Stock and Class B Stock, each voting separately as a class. 3.6. Regular Meetings. Regular meetings of the board of directors may be held without call or notice at such places and at such times as the board may from time to time determine, provided that notice of the first regular meeting following any such determination shall be given to absent directors. A regular meeting of the directors may be held without call or notice immediately after and at the same place as the annual meeting of the stockholders. 3.7. Special Meetings. Special meetings of the board of directors may be called by the chairman of the board or by two or more directors and may be held at any time and at any place designated in the call of the meeting, reasonable notice thereof being given to each director by the secretary or an assistant secretary or by the chairman of the board or one of the directors calling the meeting. 3.8. Notice. It shall be reasonable notice to a director to send notice by mail at least forty-eight hours or by telegram or facsimile transmission at least twenty-four hours before the meeting addressed to him at his usual or last known business or residence address or to give notice to him in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any director who waives notice as provided in Section 6. Notice of a meeting need not specify the purposes of the meeting. 3.9. Quorum. Except as may be otherwise provided by law, the Certificate of Incorporation or these by-laws, at any meeting of the directors a majority of the directors then in office shall constitute a quorum; a quorum shall not in any case be less than one-third of the total number of directors nor less than two directors. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. 3.10. Action by Vote. Except as may be otherwise provided by law, the Certificate of Incorporation or these by-laws, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. 3.11. Participation in Meeting. Members of the board of directors or any committee designated by such board may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 3.11 shall constitute presence in person at such meeting. 3.12. Action by Writing. Any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board or of such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of the proceedings of the board or of such committee. Section 4. OFFICERS AND AGENTS 4.1. Enumeration; Qualification. The officers of the corporation shall be a chairman of the board, a vice chairman of the board, a president, a treasurer, a secretary, and such other officers, if any, as the board of directors may in its discretion elect or choose, including one or more vice presidents, with or without some special designation. The corporation may also have such agents, if any, as the board of directors may in its discretion choose. Any number of offices may be held by the same person. If the office of any officer becomes vacant, the board of directors may elect or choose a successor. Any officer may be required by the directors to give bond for the faithful performance of his duties to the corporation in such amount and with such sureties as the directors may determine. 4.2. Powers. Subject to law, each officer shall have, in addition to the duties and powers set forth in these by-laws, such duties and powers as are commonly incident to his office and such duties and powers as the board of directors may from time to time designate. 4.3. Election. The officers may be elected or chosen by the board of directors at their first meeting following the annual meeting of the stockholders or at any other time. 4.4. Tenure. Each officer shall hold office until the first meeting of the board of directors following the next annual meeting of the stockholders and until his successor is chosen and qualified, unless a shorter period shall have been specified by the terms of his election or appointment, or until he sooner dies, resigns, is removed or becomes disqualified. Each agent shall retain his authority at the pleasure of the board of directors. 4.5. Chairman of the Board; President and Chief Executive Officer; Vice Chairman; Vice Presidents. The chairman of the board shall preside at all meetings of the stockholders and of the board of directors at which he is present. In the absence of the chairman of the board, the president and chief executive officer shall preside at all meetings of the stockholders and of the board of directors at which he is present. The chairman of the board, the vice chairman, the president and any vice presidents shall have such duties and powers as shall be designated from time to time by the board of directors. 4.6. Treasurer. The treasurer shall be in charge of the corporation's funds. He shall have such other duties and powers as may be designated from time to time by the board of directors or the chairman or the vice chairman of the board. 4.7. Secretary. The secretary shall record all the proceedings of the meetings of the stockholders, of the board of directors and of committees of the board of directors. In his absence from any such meeting a temporary secretary chosen at the meeting shall record the proceedings thereof. The secretary shall have charge of the stock ledger (which may, however, be kept by any transfer agent or agents of the corporation). He shall have such other duties and powers as may be designated from time to time by the board of directors or the chairman of the board. Section 5. RESIGNATIONS AND REMOVALS Any director or officer may resign at any time by delivering his resignation in writing to the chairman of the board or the secretary or to the board of directors. Such resignation shall take effect at the time stated therein, or if no time be so stated then upon its delivery, and without in either case the necessity of its being accepted unless the resignation shall so state. The board of directors may at any time remove from office any officer either with or without cause. The board of directors may at any time terminate or modify the authority of any agent. Section 6. WAIVER OF NOTICE Whenever any notice is required to be given by law or under the provisions of the Certificate of Incorporation or of these by- laws, a written waiver thereof, signed by the person or persons entitled to such notice, whether before or after the time stated therein or otherwise fixed for the meeting or other event for which notice is waived, shall be deemed equivalent to such notice. Attendance of a person at a meeting shall constitute a waiver of such notice of such meeting, except as otherwise provided in the GCL. Neither the business to be transacted at, nor the purpose of, any meeting or such other event need be specified in any written waiver of notice. Section 7. TRANSFER OF SHARES OF STOCK AND RECORD DATE 7.1. Transfer on Books. The transfer of stock of the corporation and the certificates which represent the stock shall be governed by the GCL. Except as may be otherwise required by law or by the provisions of Section 7.2 of these by-laws, the corporation shall be entitled to treat the record holder of stock as shown on its stock ledger as the owner of such stock for all purposes until the shares have been properly transferred on the stock ledger of the corporation. 7.2. Record Date. Except as otherwise provided in the Certificate of Incorporation: (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days (or such longer period as may be required by law) before the date of such meeting, nor more than sixty days prior to any other action; (b) If no record date is fixed (1) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto; (c) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. Section 8. STOCK CERTIFICATES Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of, the corporation by the chairman or vice chairman of the board, or the president or a vice president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation certifying the number of shares owned by him in the corporation. If such certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or (2) by a registrar other than the corporation or its employee, the signatures of the officers of the corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of issue. Certificates of stock shall be in such form as shall, in conformity with law, be prescribed from time to time by the board of directors. In the case of the alleged loss or destruction or the mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms in conformity with law as the board of directors may prescribe. Section 9. INDEMNIFICATION (a) Subject to paragraph (d) of this Section 9 the corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or competed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director or officer of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under paragraphs (a) and (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceedings, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Notwithstanding anything contained in the Section 9 to the contrary, the corporation shall not be required to indemnify any person against any liability, cost or expense (including attorneys' fees) incurred by such person in connection with any action, suit or proceeding voluntarily initiated or prosecuted by such person unless the initiation or prosecution of such action, suit, or proceeding by such person was authorized by a majority of the full board of directors, provided, however, that a majority of the full board of directors may, after any such action, suit or proceeding has been initiated or prosecuted, in its discretion, indemnify any such person against any such liability, cost or expense. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the board of directors upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Section 9. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (f) The indemnification provided by this Section 9 shall not be exclusive of any other rights of indemnification, to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and nothing contained in this Section 9 shall be deemed to limit the right of the corporation, acting pursuant to a vote of the stockholders or disinterested directors, to provide indemnification and advancement of expenses to employees and agents of this corporation to the same extent as such indemnification and advancement of expenses may be provided to directors and officers of the corporation, provided that any such indemnification shall be provided to such employees and agents on an individual basis. The indemnification and advancement of expenses authorized by this Section 9 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) To the extent obtainable, the corporation may purchase and maintain insurance with reasonable limits on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 9 or otherwise. (h) Each person who is or becomes a director or officer as aforesaid shall be deemed to have served or to have continued to serve in such capacity in reliance upon the indemnity herein provided for in this Section 9. (i) For purposes of this Section 9, reference to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Section 9 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (j) For purposes of this Section 9, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any services as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Section 9. Section 10. CORPORATE SEAL The seal of the corporation shall, subject to alteration by the directors, consist of a flat-faced circular die with the word "Delaware", together with the name of the corporation and the year of its organization, cut or engraved thereon. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 11. EXECUTION OF PAPERS Except as the board of directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, mortgages, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the corporation shall be signed by the chairman or the vice chairman of the board, by the president or by one of the vice presidents or by the treasurer. Section 12. FISCAL YEAR Except as from time to time otherwise provided by the board of directors, the fiscal year of the corporation shall end on October 31. Section 13. AMENDMENTS Except as set forth in Section 3.5(c), these by-laws may be made, altered, amended or repealed by vote of a majority of the directors in office or by vote of the holders of a majority of the outstanding stock entitled to vote, provided that the provisions of Sections 3.1 to 3.4 inclusive of the by-laws and of this Section 13 shall not be altered, amended or repealed except by a vote of not less than 66 2/3% of the stock outstanding and entitled to vote in the election of directors, considered for this purpose as one class. EX-10.10 4 AMENDED & RESTATED INTERCOMPANY SERVICES EXHIBIT 10.10 AMENDED AND RESTATED INTERCOMPANY SERVICES AGREEMENT This Amended and Restated Intercompany Services Agreement ("Agreement"), dated as of November 1, 1999, between Harcourt General, Inc., a Delaware corporation ("Harcourt General"), and The Neiman Marcus Group, Inc., a Delaware corporation (the "Company"). WHEREAS, Harcourt General has provided corporate services to the Company pursuant to the Intercompany Services Agreement between Harcourt General (formerly known as General Cinema Corporation) and the Company dated July 24, 1987 (the "Original Agreement"); WHEREAS, as of the date hereof and, in connection with a recapitalization of the Company, Harcourt General has distributed all of the Company's Class B Common Stock to the holders of record of Harcourt General's Common Stock and Class B Stock; WHEREAS, the Company wishes to continue to achieve cost-savings where possible through centralized purchasing of certain corporate services; WHEREAS, to achieve such cost-savings, Harcourt General and the Company wish to amend and restate the Original Agreement and provide for the ongoing provision of Corporate Services (as defined in paragraph 1 below) by Harcourt General to the Company; and NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained in this Agreement, Harcourt General and the Company hereby agree as follows: 1. Corporate Services To Be Made Available. (a) For the period provided for under paragraph 6 hereof, Harcourt General agrees to make available to the Company such services (collectively, the "Corporate Services") as to which the respective Chief Executive Officers of Harcourt General and the Company may from time to time agree, on the terms provided herein. If either or both parties have co-Chief Executive Officers, any one co-Chief Executive Officer of a party may act singly hereunder on behalf of that party. (b) Without limiting the generality or flexibility of paragraph 1(a), the Corporate Services shall initially consist of the following services (the "Initial Services"): (i) the management advice and services of Harcourt General's Chairman, President and Co-Chief Executive Officers, Chief Financial Officer, General Counsel, and their respective staffs, it being understood that any such officer may hold corresponding offices with both Harcourt General and the Company; (ii) strategic planning advice and services, to be provided by Harcourt General's strategy and business planning staff; (iii) financial advice and services, including, without limitation, assistance with respect to the raising of capital, investment analysis, cash and treasury management, and risk management services, to be provided by Harcourt General's treasury staff; (iv) corporate investor and public relations advice and services, to be provided by Harcourt General's corporate relations staff; (v) accounting advice and services, including, without limitation, financial reporting and the preparation of financial statements and disclosure documents required under the federal securities laws, to be provided by Harcourt General's controller's staff; (vi) accounting, payroll, and bookkeeping advice and services, to be provided by Harcourt General's accounting staff; (vii) internal auditing advice and services, to be provided by Harcourt General's internal auditing staff; (viii) personnel advice and services, including, without limitation, the administration of employee insurance plans, pension plans, supplemental executive retirement plan, and other employee benefits plans, to be provided by Harcourt General's human resources staff; (ix) legal advice and services, including, without limitation, assistance with respect to claims which may be or have been asserted or are the subject of litigation, the preparation and review of documents involving loans, financing transactions, real estate matters, contractual documents and disclosure documents relating to reporting requirements under the federal securities laws, consultation related to legal and administrative proceedings, and compliance with applicable laws and regulations, to be provided by Harcourt General's internal legal staff; (x) tax advice and services, including, without limitation, the preparation of federal, state and local tax returns, to be provided by Harcourt General's internal tax staff; (xi) assistance in organizational matters associated with shareholders meetings and meetings of the board of directors and the committees of the board, assistance in preparation of certain public documents, including, without limitation, preparation of annual and quarterly reports and proxy statements, and in the administration of the Company's cash and equity incentive plans, to be provided by Harcourt General's corporate staff; (xii) real estate advice and services, including, without limitation, evaluation, development and negotiation activities, and lease administration, to be provided by Harcourt General's corporate staff; (xiii) purchasing advice and services, including, without limitation, assistance in the preparation and evaluation of supply contracts and communications contracts, to be provided by Harcourt General's corporate staff; and (xiv) such other services, not specified above, which are of the type normally performed by the corporate staffs of public corporations, to be provided by Harcourt General's corporate staff. (c) For purposes of the avoidance of doubt, the Initial Services shall constitute the Corporate Services unless and until modified in accordance with the provisions of paragraph 1(a) or 6(a) of this Agreement. 2. Standard of Conduct. (a) In providing Corporate Services to the Company, Harcourt General's officers and employees shall conduct themselves in accordance with the Company's written policies and procedures and, shall provide the Corporate Services with the same degree of care, skill and prudence customarily exercised by such officers and employees for the benefit of Harcourt General in connection with Harcourt General's operations. Notwithstanding the foregoing, in providing the Corporate Services, Harcourt General and its directors, officers and employees will not be responsible for, and shall have no liability for, any Losses arising out of the performance by Harcourt General of the Corporate Services, except to the extent arising out of the gross negligence or willful misconduct of Harcourt General or its directors, officers or employees. Harcourt General shall indemnify, defend and hold harmless the Company, its affiliates, and their respective directors, officers and employees from and against any and all Losses incurred by the Company arising as a result of the gross negligence or willful misconduct of Harcourt General or its directors, officers or employees in connection with the performance of the Corporate Services hereunder, except in circumstances where the party that would otherwise be indemnified hereunder is found by a court of competent jurisdiction to have acted with gross negligence or to have engaged in willful misconduct. (b) The Company shall indemnify, defend and hold harmless Harcourt General, its affiliates, and their respective directors, officers and employees from and against any and all Losses incurred by Harcourt General arising as a result of Harcourt General having provided Corporate Services, except in circumstances where the party that would otherwise be indemnified hereunder is found by a court of competent jurisdiction to have acted with gross negligence or to have engaged in willful misconduct. (c) In no event shall Harcourt General, the Company, their respective affiliates, or their respective directors, officers or employees be liable for any indirect, special or consequential damages in connection with or arising out of this Agreement. (d) For purposes of this paragraph, the term "Losses" shall mean any and all losses, liabilities, demands, claims, actions or causes of action, assessments, losses, fines, penalties, costs, damages and/or expenses (including, without limitation, the reasonable fees and expenses of attorneys and other professionals). 3. Cost of Services. (a) The parties hereby ratify the previously made determination of the probable level of corporate services to be provided by Harcourt General under the Original Agreement for the Company's current fiscal year, and the estimated fee and payment schedule therefor. The parties agree that such estimated fee shall be subject to adjustment in accordance with paragraph 3(b) of this Agreement. (b) Not less than thirty (30) days prior to each successive fiscal year of the Company, Harcourt General and the Company shall estimate the probable level of Corporate Services to be provided under this Agreement for the fiscal year in question, and shall budget the estimated amount of the fee to be paid by the Company to Harcourt General therefor on the assumption that such estimated level of Corporate Services will actually be provided. In determining each such estimate and subsequent adjustment, Harcourt General and the Company shall value Corporate Services based on Harcourt General's direct and indirect costs allocable thereto, calculated in accordance with Harcourt General's usual accounting practices. As soon as practicable after the end of each of the Company's fiscal quarters (including the Company's current fiscal quarter), Harcourt General and the Company shall, based on a detailed review, determine the actual level of Corporate Services rendered by Harcourt General during such fiscal quarter, and the Company shall pay Harcourt General the applicable adjusted fee within 15 business days of presentation of a statement therefor. Harcourt General shall cause its employees to record or otherwise apportion the time they devote in providing Corporate Services to the Company, in order to facilitate such review and determination and to permit a proper adjustment to be made. (c) The Company also agrees to reimburse Harcourt General, within 15 business days of presentation of invoices therefor, for all reasonable out-of- pocket expenses incurred by Harcourt General in providing Corporate Services, including reasonable expenses for outside professional services incurred by Harcourt General for the benefit of the Company. (d) The failure of the Company to make any payment to Harcourt General hereunder within 30 days of the date such payment is due shall result in the Company owing Harcourt General interest at the rate of 10% per annum on the amount due from the date payable to the actual payment date. 4. Requirement of Approval By Independent Directors of the Company. All determinations on behalf of the Company made pursuant to paragraphs 3 and 6 hereof must be approved by a committee consisting solely of directors of the Company who are not employed by or otherwise affiliated with Harcourt General (the "Independent Committee"). In carrying out its duties pursuant to this Agreement, the Independent Committee may retain such independent accountants, lawyers and other experts as it deems necessary or prudent to retain, and the expenses of all such professionals shall be reimbursed by the Company. 5. Information and Witnesses. Harcourt General shall provide to the Company and the Company shall provide to Harcourt General, upon the other's written request, at reasonable times, full and complete access to, and duplication rights with respect to, any and all Information, as defined below, as the other may reasonably request and require, and Harcourt General shall use its best efforts to make available to the Company, and the Company shall use its best efforts to make available to Harcourt General, upon the other's written request, the officers, directors, employees and agents of Harcourt General and of the Company, respectively, as witnesses to the extent that such persons may reasonably be required in connection with any legal, administrative or other proceedings in which the Company or Harcourt General, as the case may be, may from time to time be a party; provided, however, that neither Harcourt General nor the Company need provide any Information or make available witnesses to the other to the extent that doing so would (i) unreasonably interfere with the performance by any person of such person's duties to the party to which a request under this paragraph 5 is made or otherwise cause unreasonable burden to such party, (ii) result in a waiver of any attorney-client or work product privilege of such party or its legal counsel, (iii) require either Harcourt General or the Company to provide any Information which relates to the subject matter of any legal, administrative or other proceeding in which Harcourt General and the Company are adverse parties, or (iv) result in any breach of any agreement with a third party; and provided, further, that the party providing Information or making available witnesses pursuant to this paragraph 5 shall be entitled to receive from the other party, upon presentation of reasonably detailed invoices therefor, payment of its reasonable out-of-pocket costs (including, without limitation, the reasonable fees and expenses of attorneys and other professionals) incurred in connection with providing Information or making witnesses available. The term Information as used in this paragraph 5 means any books, records, contracts, instruments, data, facts and other information in the possession or under the control of either Harcourt General or the Company and necessary or desirable for use in legal, administrative or other proceedings or for auditing, accounting or tax purposes. 6. Term of Agreement. (a) This Agreement shall become effective as of the date hereof, and shall continue in effect thereafter unless terminated with respect to the performance of Corporate Services in whole or in part by either party upon not less than 180 days written notice. Termination of Corporate Services in part shall not result in the termination of this Agreement. Termination of Corporate Services in whole shall result in the termination of this Agreement except that the obligations of the parties under paragraphs 2, 3, 4, 5, 6, 8 and 9 shall continue after such termination. (b) Notwithstanding the foregoing, Harcourt General shall have the right (but not the obligation) to terminate this Agreement immediately and without the requirement of notice at any time upon the first to occur of the date on which (i) the Company sells, or enters into a definitive agreement to sell, all or substantially all of its assets to any one or more persons (other than Harcourt General), (ii) the Company merges, or enters into a definitive agreement to merge, with any person other than Harcourt General, or (iii) any person or group of persons acquires the right (as a consequence of share ownership, contractual right or otherwise) to elect or designate a majority of the board of directors of the Company. (c) Upon termination of this Agreement in part, an appropriate revision of fees shall be made. (d) Upon termination of this Agreement in whole, a final fee adjustment on the basis described in paragraph 3(b) shall be made within 90 days. (e) Notwithstanding the fact that this Agreement amends and restates the Original Agreement, (i) the obligations of Harcourt General and the Company in paragraph 2 of the Original Agreement shall continue to the extent relating to periods prior to the date hereof, and (ii) the obligations of Harcourt General and the Company in paragraph 4 of the Original Agreement shall continue and shall be subsumed into the obligations under paragraph 5 of this Agreement. 7. Independence. All employees and representatives of Harcourt General providing the Corporate Services to the Company will be deemed for purposes of all compensation and employee benefits to be employees or representatives of Harcourt General and not employees or representatives of the Company. Except to the extent such employees and representatives are elected officers of the Company, in performing such services such employees and representatives will be under the direction, control and supervision of Harcourt General (and not of the Company) and Harcourt General will have the sole right to exercise all authority with respect to the employment (including termination of employment), assignment and compensation of such employees and representatives. 8. Independent Contractor. The relationship of Harcourt General to the Company which is created hereunder is that of an independent contractor. This Agreement is not intended to create and shall not be construed as creating between the Company and Harcourt General the relationship of affiliate, principal and agent, joint venture, partnership, or any other similar relationship, the existence of which is hereby expressly denied. 9. Confidentiality. Any and all information which is not generally known to the public which is exchanged between the parties in connection with the performance of this Agreement, whether of a technical or business nature, shall be considered to be confidential. The parties agree that confidential information shall not be disclosed to any third party or parties without the written consent of the other party, except as permitted below. Each party shall take reasonable measures to protect against disclosure of confidential information by its officers, employees and agents. Confidential information shall not include any information (i) which is or becomes part of the public domain other than as a result of the breach of a party's obligation hereunder, (ii) which is obtained from third parties who are not bound by confidentiality obligations or (iii) which is required to be disclosed by law, under compulsion of legal process, or by the rules of any state or Federal regulatory agency or any securities exchange (including NASDAQ) on which the Company's or Harcourt General's securities might be listed for trading. The provisions of this paragraph shall survive the termination of this Agreement. 10. Miscellaneous. (a) Nonassignability of Agreement. This Agreement shall not be assignable, in whole or in part, directly or indirectly, whether by operation of law or otherwise, by either party hereto without the prior written consent of the other (which consent may be withheld in the sole discretion of the party whose consent is required), and any attempt to assign any rights or obligations arising under this Agreement without such consent shall be void; provided, however, that the provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by Harcourt General and the Company and their respective successors and permitted assigns. (b) Further Assurances. Subject to the provisions hereof, each of the parties hereto shall make, execute, acknowledge and deliver such other actions and documents as may be reasonably required in order to effectuate the purposes of this Agreement, and to comply with all applicable laws, regulations, orders and decrees, and obtain all required consents and approvals and make all required filings with any governmental agency, other regulatory or administrative agency, commission or similar authority, as may be reasonably necessary or desirable in this connection. (c) Waivers. No failure or delay on the part of Harcourt General or the Company in exercising any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, or any abandonment or discontinuance of steps to enforce such a right, preclude any other or further exercise thereof or the exercise of any other right. No modification or waiver of any provision of this Agreement nor consent to any departure by Harcourt General or the Company therefrom shall in any event be effective unless the same shall be in writing, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Any consent or waiver by the Company under this paragraph 10(c) must be approved by the Independent Committee. (d) Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the transactions contemplated hereby. (e) Amendments. Except as provided in paragraph 1 with respect to changes in the level of Corporate Services which may be agreed by the respective Chief Executive Officers of Harcourt General and the Company without approval of or authorization by their respective Boards of Directors and Section 6(a) with respect to the termination of the provision of Corporate Services in whole or in part by the Company, this Agreement may be amended or supplemented only in writing executed by the parties hereto under authorization by their respective Boards of Directors (including, in the case of the Company, the approval of the Independent Committee). (f) Notices. All notices, approvals and other communications provided for herein shall be validly given, made or served, if in writing and delivered personally, by telegram or be telephonic facsimile transmission, or sent by registered mail, postage prepaid, to: The Company at: 27 Boylston Street Chestnut Hill, MA 02467 Attention: Chief Executive Officer and to: The Independent Directors of the Company c/o The Secretary of the Company 27 Boylston Street Chestnut Hill, MA 02467 Harcourt General at: 27 Boylston Street Chestnut Hill, MA 02467 Attention: Chief Executive Officer and shall become effective upon receipt. (g) Governing Law. Despite any different result required by any conflicts of law provisions, this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. (h) Force Majeure. Anything else in this Agreement notwithstanding, Harcourt General shall be excused from performance hereunder while, and to the extent that, its performance is prevented by fire, drought, explosion, flood, invasion, rebellion, earthquake, civil commotion, strike or labor disturbance, governmental or military authority, act of God, mechanical failure or any other event or casualty beyond the reasonable control of Harcourt General, whether similar or dissimilar to those enumerated in this paragraph. In the event of any of the foregoing occurrences, the Company shall be responsible for making its own alternative arrangements with respect to the interrupted services. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. HARCOURT GENERAL, INC. THE NEIMAN MARCUS GROUP, INC. By: /s/ John R. Cook By: /s/ Eric P. Geller John R. Cook, Senior Vice President Eric P. Geller, Senior Vice President, and Chief Financial Officer General Counsel and Secretary EX-13.1 5 SECTIONS OF THE ANNUAL REPORT EXHIBIT 13.1 [START PAGE 23] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS > >OPERATING RESULTS FROM CONTINUING OPERATIONS The following table presents revenues and operating earnings by business:
Years ended October 31 (in thousands) 1999 1998 1997 >REVENUES Education Group $ 581,465 $ 563,533 $ 478,044 Higher Education Group 365,996 354,759 260,287 Corporate and Professional Services Group 497,573 416,610 292,127 Worldwide STM Group 697,588 527,005 451,290 ----------------------------------- Total revenues $2,142,622 $1,861,907 $1,481,748 ----------------------------------- >OPERATING EARNINGS (LOSS) Education Group $ 105,401 $ 92,255 $ 58,226 Higher Education Group 43,985 23,633 (22,090) Corporate and Professional Services Group 34,046 15,896 (16,929) Worldwide STM Group 117,537 100,875 93,712 Purchased in-process research and development and other charges - - (277,227) Corporate expenses (21,320) (18,109) (19,631) ----------------------------------- Total operating earnings (loss) $ 279,649 $ 214,550 ($ 183,939) -----------------------------------
>OPERATING RESULTS FROM CONTINUING OPERATIONS > Education Group Revenues from the Education Group increased $17.9 million, or 3.2%, in 1999; and $85.5 million, or 17.9%, in 1998. The 1999 increase is primarily attributable to higher elementary math and social studies program sales, offset in part by lower secondary school publishing sales in comparison to the prior year. The 1998 increase reflected primarily the acquisition of the Steck-Vaughn supplemental educational publishing business, as well as higher secondary publishing sales. Operating earnings from the Education Group increased $13.1 million, or 14.2%, in 1999; and $34.0 million, or 58.4%, in 1998. The 1999 increase resulted primarily from the increased elementary sales, offset by higher plate amortization costs, as well as lower amortization of intangible assets at Steck- Vaughn. The 1998 increase resulted primarily from higher revenues, higher profits and lower amortization costs at Steck- Vaughn, and excluded $59.5 million of purchased research and development and other charges incurred in the 1997 period concurrently with the acquisition of NEC. [END PAGE 23] [START PAGE 24] > Higher Education Group Revenues from the Higher Education Group increased $11.2 million, or 3.2%, in 1999; and $94.5 million, or 36.3%, in 1998. The 1999 increase is primarily due to higher sales of college titles and professional education revenues, offset by a decrease in sales at Harcourt Learning Direct, the Company's distance learning operations. In 1998, revenues increased significantly compared to 1997 due primarily to the inclusion of revenues for the full fiscal year from Harcourt Learning Direct, acquired in June 1997. Operating earnings from the Higher Education Group increased $20.4 million, or 86.1%, in 1999; and $45.7 million, to earnings of $23.6 million in 1998 compared to a loss in 1997. The 1999 increase is primarily attributable to higher sales, lower amortization of intangible assets at Harcourt Learning Direct, and to a lesser extent, lower marketing costs. The 1998 increase resulted primarily from the inclusion of Harcourt Learning Direct and lower amortization costs, and excluded $23.6 million of non-recurring charges incurred in the 1997 period concurrently with the acquisition of NEC. > Corporate and Professional Services Group Revenues from the Corporate and Professional Services Group increased $81.0 million, or 19.4%, in 1999; and $124.5 million, or 42.6%, in 1998. The 1999 increase is primarily attributable to higher sales at Drake Beam Morin (DBM), the Group's professional services and outplacement business, higher sales at NETg, the Group's technology-based training business, as well as higher sales from the test administration and scoring businesses. In 1998 revenues increased significantly compared to 1997 due primarily to the inclusion of revenues for the full fiscal year from NETg, as well as from higher test scoring and administration revenues. Operating earnings from the Corporate and Professional Services Group increased $18.2 million, or 114.2%, in 1999; and $32.8 million, to earnings of $15.9 million in 1998 compared to a loss in 1997. The 1998 increase resulted primarily from higher sales at DBM and the Group's professional education business, and excluded $173.6 million of purchased research and development and other charges incurred in the 1997 period concurrently with the acquisition of NEC. > Worldwide Scientific, Technical and Medical (STM) Group Revenues from the Worldwide STM Group increased $170.6 million, or 32.4%, in 1999; and $75.7 million, or 16.8%, in 1998. The 1999 increase represents primarily the inclusion of revenues of Mosby, acquired in October 1998, which were included for the full fiscal year in 1999. The 1998 increase is attributable to the acquisition of Churchill Livingstone in September 1997, as well as to higher book and journal subscription revenues at Academic Press, the Group's scientific publishing company. Operating earnings from the Worldwide STM Group increased $16.7 million, or 16.5%, in 1999; and $7.2 million, or 7.6%, in 1998. The 1999 increase is primarily due to the inclusion of the results of Mosby, offset by amortization of acquisition costs. The 1998 increase resulted primarily from inclusion of results of Churchill Livingstone for the full fiscal year, higher revenues at Academic Press, and excluded $20.6 million of purchased research and development and other charges incurred in the 1997 period concurrently with the acquisition of NEC. > Corporate expenses Corporate expenses increased $3.2 million, or 17.7%, in 1999; and decreased $1.5 million, or 7.8%, in 1998. The increase in 1999 resulted primarily from higher salaries and professional service fees. The decrease in 1998 was primarily due to the compensation expense recognized in 1997 in connection with the resignation of the Company's former chief executive officer. > Investment and other income Investment and other income increased $7.9 million to $12.8 million in fiscal 1999. The increase resulted primarily from a gain of $6.4 million on the sale of the Conviser CPA Review Course, as well as a gain of $3.0 million from the sale of securities. Investment and other income decreased $24.1 million to $4.9 million in fiscal 1998, compared to $29.0 million in fiscal 1997. The Company liquidated its investment portfolio in June 1997 to partially fund the acquisition of NEC. > Interest expense Interest expense increased $20.8 million, or 24.0%, in 1999; and increased $18.4 million, or 27.1%, in 1998. The increase in 1999 is primarily due to interest on borrowings under the Company's revolving credit facility, which was used to fund the acquisition of Mosby in October 1998. The increase in interest expense in 1998 was primarily due to the interest incurred on fixed-rate debt issued by the Company in August 1997, the proceeds from which were used to partially fund the acquisitions of NEC and Churchill Livingstone. [END PAGE 24] [START PAGE 25] > LIQUIDITY AND CAPITAL RESOURCES The following discussion analyzes liquidity and capital resources by operating, investing and financing activities as presented in the Company's consolidated statements of cash flows. Cash provided by operating activities in 1999 was $358.6 million compared to $269.3 million in 1998. Cash provided by the Company's operations and borrowings under its revolving credit facility was sufficient to fund working capital, capital expenditures, acquisitions and dividend requirements. The most significant change in working capital was an increase in accounts receivable of $47.5 million, which was primarily due to higher sales. Cash flows used by investing activities were $248.1 million in 1999 and consisted primarily of expenditures for prepublication costs. In October 1998, the Company paid approximately $413.7 million to acquire Mosby, Inc., a professional health sciences publisher; the purchase price was funded with borrowings under the Company's revolving credit facility. The Company expects capital expenditures to approximate $230.0 million in fiscal 2000. The Company repaid $105.0 million under its revolving credit facility in 1999. This facility is used to fund working capital requirements, capital expenditures and dividend requirements as needed. At October 31, 1999, the Company had $380.0 million available under its $750.0 million revolving credit facility, which expires in July 2002. The Company expects to use this facility to repay subordinated notes of $125 million that mature in March 2000. Additionally, a subsidiary of the Company borrowed $19.6 million under a term loan which matures in October 2004. The Company believes its cash on hand, cash generated from operations and its current and future debt capacity will be sufficient to fund its planned capital expenditures, as well as its operating and dividend requirements. > Quantitative and qualitative disclosures about market risk The market risk inherent in the Company's financial instruments and position represents the potential loss arising from adverse changes in interest rates. The Company does not enter into financial instruments for trading purposes. At October 31, 1999 and 1998 the fair value of the Company's fixed-rate debt was estimated at $927.7 million and $983.7 million, respectively, using quoted market prices and comparable publicly-traded issues. Such fair values were less than carrying value by approximately $39.5 million at October 31, 1999 and greater than the carrying value by approximately $13.9 million at October 31, 1998. Market risk is estimated as the potential change in fair value resulting from a hypothetical 10% adverse change in interest rates, and amounted to approximately $50.7 million at October 31, 1999. At October 31, 1999 and 1998 the Company had approximately $389.6 million and $475.0 million, respectively, of variable rate borrowings outstanding under its revolving credit facilities and a term loan, which approximated fair value. A hypothetical 10% adverse change in interest rates for this variable rate debt would have an approximate $2.1 million negative effect on the Company's pre-tax earnings and cash flows. At October 31, 1999 and 1998 the carrying value of the put option issued in connection with the acquisition of GartnerLearning was $20.0 million, which approximated fair value. Market risk is estimated as the potential change in market value of the put option resulting from a hypothetical 10% adverse change in the value of NETg, and would have an approximately $2.8 million negative effect on the Company's earnings. > Impact of inflation The Company adjusts selling prices to maintain profit levels and will continue to do so as competitive conditions permit. In general, management believes that the impact of inflation or of changing prices is not material to the financial position or results of operations of its business segments. > Year 2000 date conversion The Company has completed its assessment of its hardware and software systems, including the embedded systems in the Company's buildings, property and equipment, and has implemented plans to ensure that the operations of such systems will not be adversely affected by the Year 2000 date change. As of the date of this report, the Company has not experienced any significant problems with its hardware and software systems related to the Year 2000 date change. [END PAGE 25] [START PAGE 26] The Company has established an ongoing program to communicate with its significant suppliers and vendors to determine the extent to which the Company's systems and operations are vulnerable to those third parties' failure to rectify their own Year 2000 issues. The Company is not presently aware of any significant exposure arising from potential third-party failures. However, there can be no assurance that the systems of other companies on which the Company's systems or operations rely have been successfully converted or that any failure of such parties to achieve Year 2000 compliance would not have an adverse effect on the Company's results of operations. > 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, operating losses have historically been reported in the first and second quarters during a period when publishing revenues are at their lowest levels. > Dividends The Company has a long-standing practice of returning a portion of its earnings and cash flows to shareholders through the payment of cash dividends. In October 1999, the Board of Directors voted to increase the quarterly cash dividend on the Common Stock to 21 cents per share. The Board also increased the quarterly cash dividend on the Series A Stock to 23.85 cents per share and on the Class B Stock to 18.9 cents per share. Following the Company's spin-off of its specialty retail operations, the dividend on the Series A Stock was increased to 28.26 cents per share for the first quarter of fiscal 2000, in accordance with the Company's charter. > RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company is currently evaluating the effect of implementing SFAS 133, which will be effective for fiscal 2001. > FORWARD-LOOKING STATEMENTS Statements in this report referring to the expected future plans and performance of the Company are forward-looking statements. Actual future results may differ materially from such statements. Factors that could affect future performance in the Company's businesses include, but are not limited to: the Company's ability to develop and market its products and services; the relative success of the products and services offered by competitors; integration of acquired businesses; the seasonal and cyclical nature of the markets for the Company's products and services; failure of the Company or third parties to be Year 2000 compliant; changes in domestic or international economic conditions; changes in public funding for the Company's educational products and services; and changes in purchasing patterns in the Company's markets. [END PAGE 26] [START PAGE 27] CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended October 31 (in thousands except for per share amounts) 1999 1998 1997 Revenues $2,142,622 $1,861,907 $1,481,748 Costs applicable to revenues 697,278 628,495 586,568 Selling, general and administrative expenses 1,144,375 1,000,753 885,488 Purchased in-process research and development expense - - 174,000 Corporate expenses 21,320 18,109 19,631 ----------------------------------- OPERATING EARNINGS (LOSS) 279,649 214,550 (183,939) Investment and other income 12,791 4,880 28,984 Interest expense (107,210) (86,436) (67,989) ----------------------------------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST 185,230 132,994 (222,944) Income tax benefit (expense) (68,535) (45,952) 25,169 ----------------------------------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 116,695 87,042 (197,775) Minority interest in net losses of subsidiaries 3,653 559 - ----------------------------------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS 120,348 87,601 (197,775) Earnings from discontinued specialty retail operations, net of income taxes of $42,364, $37,838 and $33,612 63,482 54,015 82,653 ----------------------------------- NET EARNINGS (LOSS) $183,830 $141,616 ($115,122) ----------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic 71,103 70,837 70,812 ----------------------------------- Diluted 72,168 72,141 70,812 ----------------------------------- BASIC AMOUNTS PER COMMON SHARE: Continuing operations $1.68 $1.22 ($2.81) Discontinued specialty retail operations .89 .77 1.17 ----------------------------------- Basic net earnings (loss) $2.57 $1.99 ($1.64) ----------------------------------- DILUTED AMOUNTS PER COMMON SHARE: Continuing operations $1.67 $1.21 ($2.81) Discontinued specialty retail operations .88 .75 1.17 ----------------------------------- Diluted net earnings (loss) $2.55 $1.96 ($1.64) ----------------------------------- See Notes to Consolidated Financial Statements.
[END PAGE 27] [START PAGE 28] CONSOLIDATED BALANCE SHEETS
October 31 (in thousands) 1999 1998 >ASSETS CURRENT ASSETS Cash and equivalents $ 24,144 $ 58,556 Accounts receivable, net 473,577 425,998 Inventories 212,771 207,518 Deferred income taxes 80,716 90,736 Other current assets 39,549 32,836 --------------------------- Total current assets 830,757 815,644 --------------------------- PROPERTY AND EQUIPMENT Land, buildings and improvements 94,512 100,034 Fixtures and equipment 218,038 226,150 --------------------------- 312,550 326,184 Less accumulated depreciation and amortization (183,746) (175,877) --------------------------- Total property and equipment, net 128,804 150,307 --------------------------- OTHER ASSETS Prepublication costs, net 322,346 281,068 Investment in The Neiman Marcus Group, Inc. 119,414 - Goodwill, net 1,409,485 1,535,811 Other intangible assets, net 52,538 69,042 Other 86,761 75,265 --------------------------- Total other assets 1,990,544 1,961,186 --------------------------- Net assets of discontinued specialty retail operations - 462,741 --------------------------- Total assets $2,950,105 $3,389,878 --------------------------- See Notes to Consolidated Financial Statements.
[END PAGE 28] [START PAGE 29] CONSOLIDATED BALANCE SHEETS
October 31 (in thousands) 1999 1998 >LIABILITIES CURRENT LIABILITIES Notes payable and current maturities of long-term liabilities $ 6,868 $ 4,050 Accounts payable 203,521 192,308 Other current liabilities 483,168 540,622 ---------- ---------- Total current liabilities 693,557 736,980 ---------- ---------- LONG-TERM LIABILITIES Notes and debentures 1,356,804 1,444,842 Other long-term liabilities 182,842 178,565 Deferred income taxes 55,946 81,023 ---------- ---------- Total long-term liabilities 1,595,592 1,704,430 ---------- ---------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 19,093 22,746 >SHAREHOLDERS' EQUITY PREFERRED STOCK Series A Cumulative Convertible - $1 par value; issued and outstanding - 863 and 914 shares 863 914 COMMON STOCKS Class B Stock - $1 par value; issued and outstanding - 20,021 shares 20,021 20,021 Common Stock - $1 par value; issued and outstanding - 51,146 and 51,008 shares 51,146 51,008 PAID-IN CAPITAL 317,037 745,679 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 2,269 (15,407) RETAINED EARNINGS 250,527 123,507 ---------- ---------- Total shareholders' equity 641,863 925,722 ---------- ---------- Total liabilities and shareholders' equity $2,950,105 $3,389,878 ---------- ---------- See Notes to Consolidated Financial Statements.
[END PAGE 29] [START PAGE 30] CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended October 31 (in thousands) 1999 1998 1997 >CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $183,830 $141,616 ($115,122) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Discontinued specialty retail operations (63,482) (54,015) (82,653) Amortization of prepublication costs 136,582 123,849 154,247 Depreciation and other amortization 118,909 119,272 127,271 Minority interest (3,653) (559) - Purchased in-process research and development - - 174,000 Deferred income taxes 39,503 39,734 (72,465) Other 3,890 5,698 (15,790) Changes in assets and liabilities: Accounts receivable (47,507) (64,934) (46,299) Inventories (5,643) 19,961 (2,685) Other current assets 186 12,340 28,735 Accounts payable and other current liabilities (4,053) (73,638) 10,309 ----------------------------------- Net cash provided by operating activities 358,562 269,324 159,548 ----------------------------------- >CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (226,549) (194,137) (142,002) Purchases of available-for-sale investments - - (408,304) Sales of available-for-sale investments - - 325,767 Maturities of available-for-sale investments - - 324,591 Acquisition of NEC, net of cash acquired - (40,512) (839,620) Acquisition of Mosby, net of cash acquired - (413,733) - Acquisition of Churchill Livingstone, net of cash acquired - - (92,500) Other acquisitions and investing activities (21,596) (27,139) (7,184) ----------------------------------- Net cash used for investing activities (248,145) (675,521) (839,252) ----------------------------------- >CASH FLOWS FROM FINANCING ACTIVITIES Proceeds (repayments) of revolving credit facilities, net (105,000) 460,722 - Proceeds from borrowings 19,630 - 514,000 Repayment of debt (2,845) (5,949) (214,772) Repurchase of Common Stock - - (20,139) Cash dividends paid (56,810) (53,948) (51,149) Other financing activities 196 (1,855) (2,656) ---------------------------------- Net cash provided by (used for) financing activities (144,829) 398,970 225,284 >CASH AND EQUIVALENTS Decrease during the year (34,412) (7,227) (454,420) Beginning balance 58,556 65,783 520,203 ----------------------------------- Ending balance $24,144 $58,556 $65,783 ----------------------------------- >SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments (refunds) for: Interest $106,701 $84,461 $59,880 ----------------------------------- Income taxes ($ 7,460) $13,379 $119,900 ----------------------------------- See Notes to Consolidated Financial Statements.
[END PAGE 30] [START PAGE 31] CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Other Comprehensive Common Series A Paid-in Income Retained (in thousands) Stocks Stock Capital (Loss) Earnings Total Balance at November 1, 1996 $71,119 $1,152 $743,947 ($4,493) $221,807 $1,033,532 Net loss - - - - (115,122) (115,122) Other comprehensive loss, net of tax, including foreign currency translation and other - - - (2,620) - (2,620) ---------- Comprehensive loss (117,742) Cash dividends paid - - - - (51,149) (51,149) Conversion of Series A Stock 29 (27) (2) - - - Repurchase of Common Stock (442) - - - (19,697) (20,139) Other equity transactions, net 49 - 987 - - 1,036 ---------------------------------------------------------------- Balance at October 31, 1997 70,755 1,125 744,932 (7,113) 35,839 845,538 Net earnings - - - - 141,616 141,616 Other comprehensive loss, net of tax, including foreign currency translation and other - - - (8,294) - (8,294) ------- Comprehensive income 133,322 Cash dividends paid - - - - (53,948) (53,948) Conversion of Series A Stock 232 (211) (21) - - - Other equity transactions, net 42 - 768 - - 810 ---------------------------------------------------------------- Balance at October 31, 1998 71,029 914 745,679 (15,407) 123,507 925,722 Net earnings - - - - 183,830 183,830 Other comprehensive income, net of tax: Net unrealized investment gains - - - 16,750 - 16,750 Foreign currency translation and other - - - 926 - 926 ------- Comprehensive income 201,506 Spin-off of specialty retail operations - - (431,214) - - (431,214) Cash dividends paid - - - - (56,810) (56,810) Conversion of Series A Stock 58 (51) (7) - - - Other equity transactions, net 80 - 2,579 - - 2,659 ---------------------------------------------------------------- Balance at October 31, 1999 $71,167 $863 $317,037 $2,269 $250,527 $641,863 ---------------------------------------------------------------- See Notes to Consolidated Financial Statements.
[END PAGE 31] [START PAGE 32] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS >NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES > Principles of consolidation The consolidated financial statements include the accounts of Harcourt General, Inc. (the Company or Harcourt General) and its majority-owned subsidiaries. Harcourt General is a leading global multiple-media publisher and service provider for the educational, assessment, training and professional information markets. All significant intercompany accounts and transactions are eliminated. Except as indicated, amounts reflected in the consolidated financial statements or disclosed in the notes to the consolidated financial statements relate to the Company's continuing operations, and prior year amounts have been restated and reclassified to conform with the current presentation. > Cash and equivalents Cash and equivalents consist of cash in banks and money market accounts. Cash and equivalents are stated at cost plus accrued interest, which approximates fair value. The Company's practice is to invest cash with financial institutions that have acceptable credit ratings and to limit the amount of credit exposure to any one financial institution. > Short-term investments In May 1997, all of the Company's short-term investments were sold to partially fund the acquisition of National Education Corporation, resulting in a realized loss of $.4 million in fiscal 1997. > Inventories Inventories, consisting primarily of finished goods, are stated at the lower of cost or market. Substantially all inventories are valued using the last-in, first-out (LIFO) method. > 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 or amortized, the cost and the related accumulated depreciation and amortization are eliminated from the respective accounts. Gains or losses arising from the dispositions are reported as income or expense. Maintenance and repair costs are charged to expense as incurred, and renewals and improvements that extend the useful lives of assets are capitalized. > Prepublication costs Prepublication costs are amortized primarily using the sum-of- the-years-digits method over the estimated useful lives of the publications, ranging from one to five years. > Investment in The Neiman Marcus Group, Inc. The investment in The Neiman Marcus Group, Inc. (the investment) consisted of approximately 10 percent of the outstanding common equity of The Neiman Marcus Group, Inc. as of October 31, 1999 and is accounted for as an available-for- sale security. This investment is marked to market on a quarterly basis and is classified as long-term as the Company intends to hold it for at least one year. At October 31, 1999 the gross unrealized gain on the investment was $19.1 million. > Goodwill and other intangible assets Amortization of goodwill and publishing rights is recorded using the straight-line method over their estimated useful lives, ranging from 10 to 40 years. Other intangible assets consist of course libraries, customer leads and contracts, and existing technology, and are amortized using accelerated methods over their estimated useful lives, ranging from one to five years. [END PAGE 32] [START PAGE 33] > Long-lived assets Upon occurrence of an event or a change in circumstances which indicates that the carrying amount of an asset may not be recoverable, the Company compares the carrying value of its long-lived assets against projected undiscounted cash flows to determine any impairment and to evaluate the reasonableness of the depreciation or amortization periods. Should an impairment be identified, the long-lived assets are then written down to their fair value. > Other long-term liabilities Other long-term liabilities of the Company consist primarily of a liability for postretirement health care benefits and provisions for other employee benefits. > Derivatives The Company uses treasury lock agreements (a derivative) as a means of managing interest-rate risk associated with anticipated debt transactions. The differentials to be received or paid under these contracts designated as hedges are deferred and amortized to interest expense over the remaining life of the associated debt. Derivative financial instruments are not held for trading purposes. > Income taxes Income taxes are calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS 109 requires the asset and liability method of accounting for income taxes. > Revenue recognition The Company recognizes revenues principally upon shipment of products. Subscription revenues are generally collected in advance and are deferred and recognized pro-rata upon fulfillment. Contract revenues are recognized as services are provided. Certain publications are sold to customers with a right of return. Revenues are recorded net of a provision for future returns. Returned goods included in inventory are valued at estimated realizable value not exceeding cost. Accounts receivable are reported net of allowances for book returns of $94.1 million in 1999 and $71.2 million in 1998 and for doubtful accounts of $39.8 million in 1999 and $40.3 million in 1998. > Comprehensive income In 1999, the Company adopted SFAS 130, "Reporting Comprehensive Income." This statement established new rules for the reporting and display of comprehensive income and its components. The Company reclassified certain amounts to conform to the requirements of SFAS 130. The adoption of SFAS 130 had no impact on the Company's net earnings or shareholders' equity. Comprehensive income differs from net earnings primarily due to foreign currency translation adjustments, unrealized gains or losses on the Company's available-for-sale securities, less reclassification for realized gains or losses included in net earnings. For the years ended October 31, 1999, 1998 and 1997, reclassification adjustments totaled $1.9 million, $0, and $.4 million, respectively. > Advertising costs Advertising costs are expensed in the period incurred. Advertising expenses were $98.5 million, $95.9 million and $64.7 million in 1999, 1998 and 1997, respectively. > Earnings per common and common equivalent share In 1998, the Company adopted SFAS 128, "Earnings Per Share." All earnings per share amounts for all periods presented have been restated both to conform to the requirements of SFAS 128 and to reflect the spin-off of the specialty retail operations. > Significant estimates In the process of preparing its consolidated financial statements, the Company estimates the appropriate carrying values of certain assets and liabilities which are not readily apparent from other sources. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances. The primary estimates underlying the Company's consolidated financial statements include allowances for returns and doubtful accounts, valuation of inventories and prepublication costs, and accruals for self-insurance, pension and postretirement benefits. Actual results could differ from these estimates. > Recent accounting pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company is currently evaluating the effect of implementing SFAS 133, which will be effective for fiscal 2001. [END PAGE 33] [START PAGE 34] >NOTE 2. DISCONTINUED OPERATIONS The Company's specialty retail operations, which consisted of its 54 percent ownership of The Neiman Marcus Group, Inc. (NMG), was spun off on October 22, 1999 in a tax-free distribution to the Company's shareholders. The Company distributed 21,440,960 shares of its 26,429,502 shares of NMG common stock. The Company retained 4,988,542 shares of NMG Class A Common Stock, which are accounted for as available-for- sale securities. The Company has agreed to vote the retained shares on all matters in proportion to the votes cast affirmatively or negatively by all other holders of NMG Class A Common Stock. Each common shareholder of the Company received .3013 of a share of Class B Common Stock of NMG for every share of Harcourt General Common Stock and Class B Stock held on October 12, 1999, which was the record date for the distribution. The Company's consolidated financial statements have been restated to reflect the specialty retail operations as a discontinued operation. Prior to the spin-off, the financial statements of NMG were consolidated with a lag of one fiscal quarter. Consequently, the 1999 results of NMG presented as discontinued operations include the results of NMG for its fiscal year ended July 31, 1999, which totaled $47.7 million, and the results of its operations from August 1, 1999 through October 22, 1999, the distribution date, which totaled $18.0 million. Under an amended intercompany services agreement, the Company provides certain management, accounting, financial, legal, tax and other corporate services to NMG. The fees for these services are an allocation of 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 $6.2 million in 1999, $5.4 million in 1998 and $5.7 million in 1997. Most of the officers of the Company serve in similar capacities with NMG. Three such officers serve as directors of both companies. >NOTE 3. DESCRIPTION OF CONTINUING OPERATIONS AND SEGMENT INFORMATION In 1999, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," which established reporting and disclosure standards for an enterprise's operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by the Company's senior management. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company's senior management evaluates the performance of the Company's assets on a consolidated basis; therefore, separate financial information for the Company's assets on a segment basis is not presented. In applying SFAS 131, the Company identified the following four reportable segments: Education Group, Higher Education Group, Corporate and Professional Services Group and Worldwide Scientific, Technical and Medical (STM) Group. The Education Group consists of the Company's K-12 and supplemental and trade publishing operations. The Higher Education Group includes college, distance learning and graduate test preparation businesses. The Corporate and Professional Services Group is comprised of testing and related services, career counseling and technology-based IT and human resources training. The Worldwide STM Group includes the Company's scientific, technical and medical publishing businesses and its international publishing and distribution operations. Other includes unallocated corporate items. [END PAGE 34] [START PAGE 35] The following tables set forth the information for the Company's reportable segments for the years ended October 31:
(in thousands) 1999 1998 1997 >REVENUES: Education Group $ 581,465 $ 563,533 $ 478,044 Higher Education Group 365,996 354,759 260,287 Corporate and Professional Services Group 497,573 416,610 292,127 Worldwide STM Group 697,588 527,005 451,290 ---------------------------------------- Total $2,142,622 $1,861,907 $1,481,748 ---------------------------------------- >OPERATING EARNINGS (LOSS): Education Group $ 105,401 $ 92,255 ($ 1,241) Higher Education Group 43,985 23,633 (45,715) Corporate and Professional Services Group 34,046 15,896 (190,492) Worldwide STM Group 117,537 100,875 73,140 Other (21,320) (18,109) (19,631) ---------------------------------------- Total $ 279,649 $ 214,550 ($ 183,939) ---------------------------------------- >DEPRECIATION AND AMORTIZATION: Education Group $ 83,640 $ 81,827 $ 102,932 Higher Education Group 40,903 51,161 86,710 Corporate and Professional Services Group 54,498 54,715 55,060 Worldwide STM Group 74,002 53,588 34,469 Other 2,448 1,830 2,347 ---------------------------------------- Total $ 255,491 $ 243,121 $ 281,518 ---------------------------------------- >CAPITAL EXPENDITURES: Education Group $ 110,065 $ 93,752 $ 65,840 Higher Education Group 34,023 29,763 28,637 Corporate and Professional Services Group 24,423 22,791 13,276 Worldwide STM Group 55,475 46,941 33,037 Other 2,563 890 1,212 ---------------------------------------- Total $ 226,549 $ 194,137 $ 142,002 ---------------------------------------- The following is a schedule of revenues by geographic location: (in thousands) 1999 1998 1997 >REVENUES: North America $1,698,263 $1,433,359 $1,157,219 Rest of world 444,359 428,548 324,529 ---------------------------------------- Total $2,142,622 $1,861,907 $1,481,748 ----------------------------------------
>NOTE 4. ACQUISITIONS > Mosby On October 9, 1998, the Company completed the acquisition of Mosby, Inc. for approximately $415 million in cash. Mosby is a publisher of books, periodicals and electronic products and services in professional health sciences, including nursing, allied health and medicine, and is included in the Worldwide STM Group. The purchase price was funded with borrowings under the Company's revolving credit facility. [END PAGE 35] [START PAGE 36] The Mosby acquisition has been accounted for under the purchase method of accounting and, accordingly, the results of operations of Mosby for the period from October 9, 1998 are included in the accompanying consolidated financial statements. The $388.6 million excess of cost over the estimated fair value of net assets acquired was allocated to goodwill which is amortized over 30 years. Assets acquired and liabilities assumed have been recorded at their estimated fair values and useful lives. In the fourth quarter of fiscal 1999, the Company completed its final purchase price allocation of Mosby, resulting in a net reduction of goodwill and other current liabilities of $26.0 million from the amounts initially recorded. Acquisition liabilities were $81.9 million at October 31, 1998. In 1999, approximately $31.4 million representing primarily severance and employee benefit costs was charged against acquisition liabilities. At October 31, 1999, $24.5 million is included in other current liabilities representing facility exit costs of $10.5 million, severance (related to employees terminated prior to October 31, 1999) and employee benefit obligations of $8.3 million, and other obligations of $5.7 million. > GartnerLearning On August 31, 1998, the Company completed the acquisition of GartnerLearning, the technology-based IT training operation of Gartner Group. GartnerLearning was merged with the operations of NETg, a subsidiary of the Company, which provides self-paced multimedia training courseware for IT professionals. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of GartnerLearning for the period from August 31, 1998 are included in the accompanying consolidated financial statements. The purchase price for GartnerLearning consisted of $5.0 million in cash and eight percent of the newly combined company, known as NETg, valued at approximately $28.0 million. Additionally, under the terms of the investor agreement, Gartner Group was granted a put option exercisable at any time between the fourth and sixth anniversary of the acquisition to require the Company to purchase the minority interest at the higher of either fair value of eight percent of NETg or $48.0 million, subject to certain provisions. The Company has a call option to repurchase Gartner Group's interest in NETg on similar terms. The Company recorded a liability for the difference between the fair value of eight percent of NETg and the put option exercise price of $48.0 million. This liability is adjusted to reflect changes in the fair value of NETg, with the offset reported as a gain or loss in the consolidated statement of operations. The $61.9 million excess of cost over estimated fair value of net assets acquired was allocated to goodwill, which is amortized on a straight-line basis over 25 years. In the fourth quarter of fiscal 1999, the Company completed its final purchase price allocation of GartnerLearning. The final purchase price allocation resulted in a net reduction of goodwill and other current liabilities of $3.8 million from the amounts initially recorded. Acquisition liabilities were $12.7 million at October 31, 1998. In 1999, approximately $7.4 million was charged against acquisition liabilities and at October 31, 1999, $1.5 million is included in other current liabilities consisting of unfulfilled contractual obligations of $1.1 million and other obligations of $.4 million. > National Education Corporation In June 1997, the Company completed the acquisition of National Education Corporation (NEC) for a cash purchase price of approximately $854.4 million. The NEC acquisition has been accounted for under the purchase method of accounting and, accordingly, the results of operations of NEC for the period from June 5, 1997 are included in the accompanying consolidated financial statements. Based on an independent appraisal, approximately $174 million of the purchase price was allocated to purchased in-process research and development. Accordingly, the Company recorded a non-recurring charge for this purchased in-process research and development at the date of acquisition. Through NEC, the Company initially acquired approximately 82 percent of the issued and outstanding shares of Steck-Vaughn Publishing Corporation (Steck-Vaughn). On January 30, 1998, the Company completed its acquisition of the minority interest in Steck-Vaughn for $14.75 per share, or approximately $40.5 million. The transaction had the effect of increasing goodwill by $29.6 million and decreasing the Company's minority interest by $10.9 million on the consolidated balance sheet. In the third quarter of fiscal 1998, the Company completed its final purchase price allocation of NEC, resulting in a net reduction of goodwill and other current liabilities of $25.4 million from the amounts initially recorded. The $680.4 million excess of cost over the estimated fair value of net assets acquired was allocated to goodwill, of which $265.4 million is amortized on a straight-line basis over 25 years. The remaining goodwill is amortized on a straight-line basis over 40 years. Acquisition liabilities were $52.7 million and $116.7 million at October 31, 1998 and 1997, respectively. In 1999 and 1998 approximately $22.3 million and $38.6 million were charged against acquisition liabilities related to the NEC acquisition, respectively; at October 31, 1999, $30.4 million is included in other current liabilities consisting primarily of facility and other related exit costs of $21.5 million, unfulfilled contractual obligations of $5.0 million and other obligations of $3.9 million. [END PAGE 36] [START PAGE 37] > Pro forma information The following unaudited pro forma information presents the results of operations of the Company as if the acquisitions of Mosby and GartnerLearning had taken place as of the beginning of the period presented:
Year ended October 31 (in thousands, except per share amounts) 1998 Revenues $2,081,212 Earnings from continuing operations $ 44,620 Diluted earnings per share from continuing operations $ .62
These pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future. > Other acquisitions In the periods presented, the Company has acquired several small publishing and educational services related companies. The results of operations from these acquired entities are reflected in the Company's statements of operations from the date of acquisition. These acquisitions did not materially impact consolidated results, and therefore no pro forma information is provided. >NOTE 5. OTHER CHARGES In connection with the acquisition of NEC and the integration of the NEC businesses into the Company, the Company recorded a charge of $81.7 million in fiscal 1997, which is included in costs applicable to revenues ($24.6 million) and selling, general and administrative expenses ($57.1 million). The charge reflects costs the Company incurred in connection with the realignment, consolidation and reorganization of its existing businesses. These costs consisted primarily of severance and related employee benefit obligations, consolidation of facilities and impairment of certain existing assets. At October 31, 1999, substantially all of the Company's obligations relative to the integration have been satisfied. >NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets consisted of the following:
October 31 (in thousands) 1999 1998 Goodwill $1,616,900 $1,687,115 Accumulated amortization (207,415) (151,304) --------------------------- Goodwill, net $1,409,485 $1,535,811 --------------------------- Publishing rights $ 238,861 $ 233,775 Acquired intangible assets 96,400 96,400 --------------------------- 335,261 330,175 Accumulated amortization (282,723) (261,133) --------------------------- Other intangibles, net $ 52,538 $ 69,042 ---------------------------
As of October 31, 1999, goodwill consists of approximately $739.9 million amortized over 40 years, $388.6 million over 30 years and $488.4 million over periods of 25 years or less. As of October 31, 1998, goodwill consists of approximately $776.9 million amortized over 40 years, $414.6 million over 30 years and $495.6 million over periods of 25 years or less. Amortization expense was $76.0 million in 1999, $76.8 million in 1998 and $82.9 million in 1997. [END PAGE 37] [START PAGE 38] >NOTE 7. OTHER CURRENT LIABILITIES Other current liabilities consisted of the following:
October 31 (in thousands) 1999 1998 Accrued salaries and related charges $ 82,676 $103,291 Self-insurance reserves 27,119 29,458 Unearned subscription income 87,080 84,357 Accrued real estate and related charges 54,426 68,829 Accrued interest 26,561 26,003 Other 205,306 228,684 ------------------------- Total $483,168 $540,622 -------------------------
>NOTE 8. NOTES AND DEBENTURES Notes and debentures of Harcourt General at October 31, 1999 and 1998 were as follows:
(in thousands) Interest Rate Maturity 1999 1998 Convertible subordinated debentures 6.5% May 2011 $ 45,795 $ 48,640 Revolving credit facility Variable Jul. 2002 370,000 475,000 Senior debt 8.25% Jun. 2002 149,626 149,560 Senior debt 6.7% Jul. 2007 149,676 149,634 Senior debt 8.88% Jun. 2022 148,037 148,018 Senior debt 7.2% Jul. 2027 199,597 199,582 Senior debt 7.3% Jul. 2097 149,443 149,437 Subordinated notes 9.5% Mar. 2000 125,000 124,971 Term bank loan Variable Oct. 2004 19,630 - -------------------------------------------------- Total notes and debentures $1,356,804 $1,444,842 --------------------------------------------------
In connection with the acquisition of NEC, the Company unconditionally assumed all of the obligations of NEC under its 6.5% Convertible Subordinated Debentures due 2011 and the related Indenture dated May 15, 1986, as amended. The NEC Debentures are subject to a mandatory annual redemption of $2.9 million in principal and, as a result of the acquisition of NEC by the Company, are convertible at the option of the holder into $21.00 for every $25.00 in principal of NEC Debentures. The Company has a revolving credit facility with 18 banks, pursuant to which the Company may borrow up to $750 million. The facility, which expires in July 2002, may be terminated by the Company at any time on three business days' notice. The rate of interest payable (5.7% at October 31, 1999) is determined according to the senior debt rating of the Company and one of four pricing options selected by the Company. At October 31, 1999, $370.0 million in borrowings were outstanding under the facility. The revolving facility contains covenants which require the Company to maintain certain leverage and interest coverage ratios. The subordinated notes with a maturity date of March 2000 have been classified as long-term, because the Company has the intent and ability to refinance these obligations using the revolving credit facility. In October 1999, a subsidiary of the Company entered into a Canadian dollar denominated term bank loan in the amount of US $19.6 million that bears interest according to one of two pricing options selected by the Company (6.2% at October 31, 1999). The loan is guaranteed by the Company and may be prepaid at any time upon three business days' notice without penalty or premium. In anticipation of the Company's August 1997 debt offering, the Company entered into several forward interest rate lock agreements which established weighted-average effective interest rates of 6.83% for the 10-year notes, 7.29% for the 30- year debentures and 7.40% for the 100-year debentures. In August 1997, the Company paid $20.5 million to settle such agreements, which is being amortized over the terms of the respective debt. The aggregate maturities of notes and debentures are as follows: fiscal 2000 - $125.0 million; fiscal 2001 - $2.9 million; fiscal 2002 - $522.5 million; fiscal 2003 - $2.9 million; fiscal 2004 - $22.5 million; all years thereafter - $681.0 million. [END PAGE 38] [START PAGE 39] >NOTE 9. SHAREHOLDERS' EQUITY > Series A Cumulative Convertible Stock As of October 13, 1999, each share of Series A Stock is convertible into 1.31 shares of Common Stock and is entitled to a quarterly dividend equal to the quarterly dividend on each share of Common Stock multiplied by 1.31, plus $.0075. Each share of Series A Stock is non-voting and 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 million authorized shares of Series A Stock at October 31, 1999. > 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 percent lower per share than the cash dividends paid on each share of Common Stock. The Class B Stock and the Common Stock are each entitled to vote separately as a class on charter amendments, mergers, consolidations and certain extraordinary transactions which are required to be approved by shareholders under Delaware law. Under certain circumstances, the holders of Class B Stock have the right to cast 10 votes per share for the election of directors. There were 80 million and 150 million shares of Class B Stock and Common Stock authorized for issuance at October 31, 1999, respectively. > Class C Stock On September 15, 1999, the shareholders voted to authorize a new class of common stock, Class C Stock, which is entitled to one-tenth (1/10) of one vote per share on all matters and to cash dividends equal to any cash dividends payable on the Common Stock. There were 100 million authorized shares of Class C Stock at October 31, 1999, none of which has been issued. > Common stock incentive plans The Company has established common stock incentive plans allowing for the granting of stock options, restricted stock and other stock-based awards to its employees. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. The Company has adopted the disclosure-only provision of SFAS 123, "Accounting for Stock-Based Compensation." Had compensation cost for the Company's common stock incentive plans been determined based on the fair value at the grant dates for awards under the plans consistent with the method of SFAS 123, the Company's earnings (loss) from continuing operations and earnings (loss) per share from continuing operations for the years ended October 31, 1999, 1998 and 1997 would have been as follows:
(in thousands except for per share amounts) 1999 1998 1997 Earnings (loss) from continuing operations: As reported $120,348 $87,601 ($197,775) Pro forma $116,380 $86,655 ($198,160) Basic earnings (loss) per share from continuing operations: As reported $ 1.68 $ 1.22 ($ 2.81) Pro forma $ 1.63 $ 1.21 ($ 2.81) Diluted earnings (loss) per share from continuing operations: As reported $ 1.67 $ 1.21 ($ 2.81) Pro forma $ 1.61 $ 1.20 ($ 2.81)
The effects on pro forma net earnings (loss) and earnings (loss) per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net earnings (loss) for future years due to such factors as the vesting period of the stock options and the potential for issuance of additional stock options in future years. In addition, the disclosure requirements of SFAS 123 are presently applicable only to options granted subsequent to October 30, 1995. Options outstanding at October 31, 1999 were granted at prices (not less than 100 percent of the fair market value on the date of the grant) varying from $13.35 to $46.24. In conjunction with the spin-off of the specialty retail operations on October 22, 1999, the number of shares and the exercise price of each option outstanding were modified so that the aggregate fair value of the options before the spin-off was preserved as of the date of the spin-off. Accordingly, no charge was recorded in the consolidated financial statements [END PAGE 39] [START PAGE 40] relative to this modification. Options generally vest ratably over five years and expire after ten years. There were 224 employees with options outstanding at October 31, 1999. For all outstanding options at October 31, 1999, the weighted-average exercise price was $38.61 and the weighted-average remaining contractual life was approximately 7.2 years. At October 31, 1999, there were 3.9 million shares of Common Stock available for issuance under the plan. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1999, 1998 and 1997, respectively:
1999 1998 1997 Expected life (years) 7 7 7 Expected dividend yield 2.2% 1.7% 1.5% Expected volatility 26.74% 24.24% 22.16% Risk-free interest rate 6.0% 5.5% 7.0%
A summary of the status of the Company's stock options as of October 31, 1999, 1998, and 1997 and changes during the years ended on those dates is as follows:
1999 1998 1997 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Options outstanding at beginning of year 722,552 $41.66 492,494 $34.08 447,186 $28.84 Granted 383,500 50.57 264,900 54.25 107,350 48.13 SAR Surrenders - - (13,205) 29.24 (5,917) 32.29 Exercised (46,777) 27.43 (14,457) 23.50 (51,522) 17.55 Canceled (37,840) 51.17 (7,180) 45.34 (4,603) 39.77 Adjustment for spin-off of specialty retail operations 176,958 N/A - - - - -------------------- ----------------- ----------------- Options outstanding at end of year 1,198,393 $38.61 722,552 $41.66 492,494 $34.08 -------------------- ----------------- ----------------- Options exercisable at end of year 416,283 $29.98 287,922 $29.58 236,151 $26.32 -------------------- ----------------- -----------------
The weighted-average fair value of options granted in 1999, 1998 and 1997 was $15.52, $17.09 and $17.51, respectively. The following table summarizes information about the Company's stock options as of October 31, 1999:
Options Outstanding Options Exercisable Range of Shares Weighted-Average Weighted-Average Shares Weighted-Average Exercise Outstanding Remaining Contractual Exercise Outstanding Exercise Prices at 10/31/99 Life Price at 10/31/99 Price $13.35-$19.94 87,197 1.6 $15.90 87,197 $15.90 $24.48-$28.34 191,427 4.3 $27.19 175,266 $27.09 $35.69-$40.97 108,352 6.9 $36.77 49,711 $35.69 $41.02 115,561 7.1 $41.02 46,151 $41.02 $43.26 409,817 9.1 $43.26 - - $46.24 286,039 8.1 $46.24 57,958 $46.24 - ----------------------------------------------------------------------- ----------------------------- $13.35-$46.24 1,198,393 7.2 $38.61 416,283 $29.98 - ----------------------------------------------------------------------- -----------------------------
[END PAGE 40] [START PAGE 41] >NOTE 10. INCOME TAXES A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
Years ended October 31 (in thousands) 1999 1998 1997 Amount % Amount % Amount % Statutory tax expense (benefit) $64,831 35 $46,547 35 ($78,030) (35) State income taxes, net of federal tax effect 2,031 1 1,381 1 1,381 1 In-process research and development - - - - 60,900 28 Dividends received exclusion (754) (1) - - (1,232) (1) Other permanent items 2,427 2 5,034 4 (1,122) (1) Change in valuation allowance - - (7,010) (5) (7,066) (3) --------------------------------------------------------- Income tax expense (benefit) from continuing operations $68,535 37 $45,952 35 ($25,169) (11) ---------------------------------------------------------
Income tax expense (benefit) was as follows:
Years ended October 31 (in thousands) 1999 1998 1997 CURRENT Federal $19,646 $2,308 $40,013 State 3,125 (4,998) 2,125 Foreign 6,261 8,906 5,158 DEFERRED Federal 38,923 37,237 (66,844) State 580 2,499 (5,621) --------------------------- Income tax expense (benefit) $68,535 $45,952 ($25,169) ---------------------------
Significant components of the net deferred tax assets stated on a gross basis were as follows:
October 31 (in thousands) 1999 1998 GROSS DEFERRED TAX ASSETS Loss and credit carry forwards $ 33,062 $ 71,212 Accrued liabilities and reserves 57,518 84,451 Employee benefits 21,807 24,452 Postretirement health care benefits 32,892 34,726 Inventories 43,468 36,059 Difference in basis of assets acquired 6,652 14,508 ------------------- Total gross deferred tax assets 195,399 265,408 Valuation allowance (5,824) (60,384) ------------------- Deferred tax assets, net of allowance $ 189,575 $ 205,024 ------------------- GROSS DEFERRED TAX LIABILITIES Property, equipment, prepublication costs and intangibles $ 70,013 $ 83,036 Pension and employee benefits accrual 10,710 14,133 Difference in basis of assets acquired 64,233 77,395 Accrued liabilities and reserves 19,849 20,747 ------------------- Total gross deferred tax liabilities 164,805 195,311 ------------------- Net deferred tax assets $ 24,770 $ 9,713 -------------------
[END PAGE 41] [START PAGE 42] The Company has recorded a valuation allowance for certain temporary differences for which it is likely, at this time, that the Company will not receive future tax benefit. During the third quarter of fiscal 1999, the Company reduced its valuation allowance attributable to acquired net operating losses and tax credit carryforwards. The change resulted in an increase in the deferred tax asset and a reduction of goodwill of approximately $54.6 million because of tax strategies which became available in the third quarter and the resultant potential for taxable income in the carry forward periods. Realization of the remaining deferred tax assets is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that the remaining net deferred tax assets will be realized. At October 31, 1999, the Company had federal and foreign net operating loss carry forwards of approximately $90.0 million expiring at various dates through 2011. In addition, the Company had available $1.3 million of tax credit carry forwards, with no expiration date, which may be utilized to offset future regular tax liabilities. >NOTE 11. INVESTMENT AND OTHER INCOME Investment and other income consisted of the following:
Years ended October 31 (in thousands) 1999 1998 1997 Interest income $ 2,957 $ 4,880 $24,746 Dividend income - - 4,238 Other income 9,834 - - --------------------------- Total investment and other income $12,791 $ 4,880 $28,984 ---------------------------
Other income in 1999 includes a gain of $3.0 million from the sale of securities and a gain of $6.4 million from the sale of the Conviser CPA Review Course. > NOTE 12. COMMITMENTS AND CONTINGENCIES > Leases The Company has long-term operating leases primarily for offices, distribution centers, other facilities and equipment. Leases are generally for periods of up to 30 years, with renewal options at fixed rentals. Rent expense under operating leases for the years ended October 31 was $78.5 million in 1999, $60.4 million in 1998 and $52.3 million in 1997. Assuming renewal options are not exercised, the future minimum rental payments are as follows: fiscal 2000 - $73.5 million; fiscal 2001 - $58.2 million; fiscal 2002 - $45.5 million; fiscal 2003 - $30.9 million; fiscal 2004 - $22.4 million; all years thereafter - $88.4 million. > Theatre operations In December 1993, the Company spun off its theatre operations to GC Companies, Inc. (GCC), which is listed on the New York Stock Exchange under the symbol GCX. In connection with the distribution, GCC and Harcourt General entered into various agreements which govern their ongoing relationship. Under the Reimbursement and Security Agreement, GCC granted to Harcourt General a security interest in the stock of certain of its theatre subsidiaries in order to secure GCC's obligation to indemnify Harcourt General from any losses which Harcourt General may incur due to its secondary liability on theatre leases which were transferred to GCC as part of the spin-off. In addition, GCC has agreed to certain financial covenants designed to protect Harcourt General from incurring such losses. As of October 31, 1999, GCC's aggregate future rental payments due under such theatre leases amounted to approximately $402.5 million. >Litigation The Company is 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 its financial position or operations. [END PAGE 42] [START PAGE 43] >NOTE 13. PENSION PLANS AND POSTRETIREMENT HEALTH CARE BENEFITS In fiscal 1999, the Company adopted SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The provisions of SFAS 132 provide new disclosure requirements for pensions and other postretirement benefit plans, but do not change the measurement or recognition of these plans. SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable and requires additional information on the changes in benefit obligations and fair values of plan assets. The Company has a noncontributory defined benefit pension plan covering substantially all full-time employees. The Company also sponsors an unfunded supplemental executive retirement plan which provides certain employees additional pension benefits. Benefits under the plans are based on the employees' years of service and compensation over defined periods of employment. When funding is required, the Company's policy is to contribute amounts that are deductible for federal income tax purposes. Pension plan assets consist primarily of equity and fixed income securities. Retirees and active employees hired prior to March 1, 1989 are eligible for certain limited postretirement health care benefits if they have met certain service and minimum age requirements. The cost of these benefits is accrued during the years in which an employee provides services. Components of net pension expense were as follows:
Years ended October 31 (in thousands) 1999 1998 1997 Service cost $12,515 $ 8,053 $ 7,490 Interest cost on projected benefit obligation 7,589 5,930 5,022 Expected return on assets (9,745) (8,171) (7,140) Net amortization and deferral (540) (584) (585) --------------------------- Net pension expense $ 9,819 $ 5,228 $ 4,787 --------------------------- The periodic postretirement health care benefit cost was as follows: Years ended October 31 (in thousands) 1999 1998 1997 Service cost $ 425 $ 405 $ 377 Interest cost on accumulated benefit obligation 2,293 2,199 2,157 Net amortization and deferral (1,399) (1,694) (1,810) --------------------------- Net periodic cost $ 1,319 $ 910 $ 724 ---------------------------
The changes in the benefit obligations and the reconciliations of the funded status of the Company's plans to the consolidated balance sheets were as follows:
Pension Benefits Postretirement Benefits October 31 (in thousands) 1999 1998 1999 1998 Change in benefit obligations: Benefit obligations at beginning of year $ 93,562 $ 71,485 $ 33,490 $ 29,896 Service cost 12,515 8,053 425 405 Interest 7,589 5,930 2,293 2,199 Acquisitions 12,719 - - - Benefits paid (3,775) (4,011) (2,593) (2,356) Actuarial loss (gain) (8,432) 12,105 (3,541) 3,346 ----------------------------------------- Benefit obligation at end of year $114,178 $ 93,562 $ 30,074 $ 33,490 -----------------------------------------
[END PAGE 43] [START PAGE 44] Change in plan assets:
(in thousands) Pension Plans 1999 1998 Fair value of plan assets at beginning of year $111,264 $105,756 Actual return on assets 11,697 9,446 Company contributions 86 73 Acquisitions 9,758 - Benefits paid (3,775) (4,011) ------------------- Fair value of plan assets at end of year $129,030 $111,264 -------------------
Funded status: (in thousands) Pension Plans Postretirement Plans 1999 1998 1999 1998 Fair value of plan assets greater (less) than benefit obligation $ 14,852 $ 17,702 ($ 30,074) ($33,490) Unrecognized net actuarial gain (27,795) (17,336) (41,274) (39,283) Unrecognized prior service cost 583 597 (150) - Unrecognized net obligation at transition (627) (1,255) - - ----------------------------------------------- Liability recognized in the consolidated balance sheets ( $12,987) ($ 292) ($ 71,498)($ 72,773) -----------------------------------------------
Weighted-average assumptions:
Pension Benefits 1999 1998 Discount rate 7.5% 7.0% Expected long-term rate of return on plan assets 9.0% 9.0% Rate of future compensation increases 6.0% 6.0%
The weighted-average assumptions for postretirement health care benefits included a discount rate of 7.5 percent in 1999 and 7.0 percent in 1998. For measurement purposes, a 7.0 percent annual rate of increase in the per capita cost of covered care benefits was assumed for fiscal 2000. The rate was assumed to decrease gradually to 5.0 percent in fiscal 2002 and remain at that level thereafter. If the health care trend rate were increased one percentage point, postretirement health care benefit costs for the year ended October 31, 1999 would have been $.2 million higher, and the accumulated postretirement benefit obligation as of October 31, 1999 would have been $2.4 million higher. If the health care trend rate was decreased one percentage point, postretirement health care benefit costs for the year ended October 31, 1999 would have been $.2 million lower, and the accumulated postretirement benefit obligation as of October 31, 1999 would have been $2.1 million lower. The Company has a qualified defined contribution 401(k) plan which covers substantially all employees. Employees make contributions to the plan, the Company matches 25 percent of an employee's contribution up to a maximum of six percent of the employee's compensation. Company contributions for the years ended October 31, 1999, 1998 and 1997 were $7.0 million, $5.9 million and $4.6 million, respectively. The Company also has an employee stock ownership plan which is non-contributory. [END PAGE 44] [START PAGE 45] >NOTE 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. > Debt The fair values of the Company's senior debt, subordinated notes and convertible subordinated debentures were $927.7 million and $983.7 million on October 31, 1999 and 1998, respectively, and were based upon quoted prices and comparable publicly-traded issues. The corresponding book values of the Company's senior debt, subordinated notes and convertible subordinated debentures were $967.2 million and $969.8 million on October 31, 1999 and 1998, respectively. > NOTE 15. EARNINGS PER SHARE Pursuant to the provisions of SFAS 128, "Earnings per Share," the earnings (loss) from continuing operations and the number of weighted-average shares used in computing basic and diluted earnings (loss) per share (EPS) are as follows:
Years ended October 31 (in thousands) 1999 1998 1997 Earnings (loss) from continuing operations $ 120,348 $87,601 ($ 197,775) Less: dividends on Series A Cumulative Convertible Stock (816) (881) (944) ------------------------------ Earnings (loss) from continuing operations for computation of basic EPS 119,532 86,720 (198,719) Add: dividends on assumed conversion of Series A Cumulative Convertible Stock 816 881 - ------------------------------ Earnings (loss) from continuing operations for computation of diluted EPS $ 120,348 $87,601 ($198,719) ------------------------------ Shares for computation of basic EPS from continuing operations 71,103 70,837 70,812 Add: assumed conversion of Series A Cumulative Convertible Stock 987 1,182 - Add: effect of assumed option exercises 78 122 - ------------------------------ Shares for computation of diluted EPS from continuing operations 72,168 72,141 70,812 ------------------------------
For the year ended October 31, 1999, options to purchase 831,329 shares of common stock were not included in the computation of diluted EPS because the exercise price of those options was greater than the average market price of those shares. For the year ended October 31, 1998, options to purchase 262,800 shares of common stock were not included in the computation of diluted EPS because the exercise price of those options was greater than the average market price of those shares. For the year ended October 31, 1997, options to purchase 492,000 shares of common stock and the assumed conversion of 1,125,000 shares of Series A Cumulative Convertible Stock were not included in the computation diluted EPS because of the net loss in that year. [END PAGE 45] [START PAGE 46] > NOTE 16. COMPARATIVE QUARTERLY FINANCIAL INFORMATION (UNAUDITED) 1999
(in millions except for per share data) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year Revenues $ 387.6 $ 378.4 $ 693.0 $ 683.6 $ 2,142.6 ------------------------------------------------- Gross profit $ 244.0 $ 235.7 $ 505.4 $ 460.2 $ 1,445.3 ------------------------------------------------- Earnings (loss) from continuing operations ($ 32.3) ($ 39.4) $ 122.2 $ 69.8 $ 120.3 Earnings from discontinued specialty retail operations 12.8 15.8 18.3 16.6 63.5 ------------------------------------------------- Net earnings (loss) ($ 19.5) ($ 23.6) $ 140.5 $ 86.4 $ 183.8 ------------------------------------------------- Basic amounts per share Continuing operations ($ .46) ($ .55) $ 1.71 $ .98 $ 1.68 Discontinued specialty retail operations .18 .22 .26 .23 .89 ------------------------------------------------- Basic amounts per share ($ .28) ($ .33) $ 1.97 $ 1.21 $ 2.57 ------------------------------------------------- Diluted amounts per share Continuing operations ($ .46) ($ .55) $ 1.70 $ .97 $ 1.67 Discontinued specialty retail operations .18 .22 .25 .23 .88 ------------------------------------------------- Diluted amounts per share ($ .28) ($ .33) $ 1.95 $ 1.20 $ 2.55 ------------------------------------------------- Dividends per share Common Stock $ .20 $ .20 $ .20 $ .21 $ .81 ------------------------------------------------- Class B Stock $ .18 $ .18 $ .18 $ .189 $ .729 ------------------------------------------------- Series A Stock $.2275 $ .2275 $ .2275 $ .2385 $ .9210 ------------------------------------------------- 1998 (in millions except for per share data) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year Revenues $320.1 $ 328.4 $ 613.9 $ 599.5 $1,861.9 ------------------------------------------------- Gross profit $194.1 $ 199.2 $ 423.3 $ 416.8 $1,233.4 ------------------------------------------------- Earnings (loss) from continuing operations ($ 31.0) ($ 34.4) $ 98.8 $ 54.2 $ 87.6 Earnings from discontinued specialty retail operations 16.6 17.2 12.0 8.2 54.0 ------------------------------------------------- Net earnings (loss) ($ 14.4) ($ 17.2) $ 110.8 $ 62.4 $141.6 ------------------------------------------------- Basic amounts per share Continuing operations ($ .44) ($ .49) $ 1.39 $ .76 $ 1.22 Discontinued specialty retail operations .23 .24 .17 .12 .77 ------------------------------------------------- Basic amounts per share ($ .21) ($ .25) $ 1.56 $ .88 $ 1.99 ------------------------------------------------- Diluted amounts per share Continuing operations ($ .44) ($ .49) $ 1.37 $ .75 $ 1.21 Discontinued specialty retail operations .23 .24 .17 .12 .75 ------------------------------------------------- Diluted amounts per share ($ .21) ($ .25) $ 1.54 $ .87 $ 1.96 Dividends per share Common Stock $ .19 $ .19 $ .19 $ .20 $ .77 ------------------------------------------------- Class B Stock $ .171 $ .171 $ .171 $ .18 $ .693 ------------------------------------------------- Series A Stock $.2165 $ .2165 $ .2165 $ .2275 $.8770 -------------------------------------------------
[END PAGE 46] [START PAGE 47] INDEPENDENT AUDITORS' REPORT BOARD OF DIRECTORS AND SHAREHOLDERS Harcourt General, Inc. Chestnut Hill, Massachusetts We have audited the consolidated balance sheets of Harcourt General, Inc. and its subsidiaries as of October 31, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1999. 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, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1999 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts December 9, 1999 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/ Catherine N. Janowski Catherine N. Janowski Vice President and Controller [END PAGE 47] [START PAGE 48} FIVE YEAR SUMMARY (UNAUDITED)
(in thousands except for per share amounts) 1999 1998 1997 1996 1995 REVENUES $2,142,622 $1,861,907 $1,481,748 $1,214,916 $1,146,487 OPERATING EARNINGS (LOSS) $ 279,649 $ 214,550($ 183,939) $ 188,448 $ 171,771 Investment and other income 12,791 4,880 28,984 27,329 39,945 Interest expense (107,210) (86,436) (67,989) (54,654) (54,777) --------------------------------------------------------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST 185,230 132,994 (222,944) 161,123 156,939 Income tax benefit (expense) (68,535) (45,952) 25,169 (44,516) (44,124) Minority interest in net losses of subsidiaries 3,653 559 - - - --------------------------------------------------------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS 120,348 87,601 (197,775) 116,607 112,815 Discontinued specialty retail operations, net 63,482 54,015 82,653 74,244 53,068 --------------------------------------------------------- NET EARNINGS (LOSS) $ 183,830 $ 141,616($ 115,122) $ 190,851 $ 165,883 --------------------------------------------------------- Depreciation and amortization $ 255,491 $ 243,121 $ 281,518 $ 120,014 $ 126,650 Capital expenditures $ 226,549 $ 194,137 $ 142,002 $ 156,919 $ 126,539 Total assets $2,950,105 $3,389,878 $2,816,107 $2,315,184 $2,188,409 Total long-term liabilities $1,595,592 $1,704,430 $1,186,018 $ 567,263 $ 678,031 BASIC AMOUNTS PER COMMON SHARE: Continuing operations $ 1.68 $ 1.22($ 2.81) $ 1.62 $ 1.49 Discontinued specialty retail operations 0.89 0.77 1.17 1.04 0.71 --------------------------------------------------------- Basic net earnings (loss) $ 2.57 $ 1.99($ 1.64) $ 2.66 $ 2.20 --------------------------------------------------------- DILUTED AMOUNTS PER COMMON SHARE: Continuing operations $ 1.67 $ 1.21($ 2.81) $ 1.60 $ 1.47 Discontinued specialty retail operations 0.88 0.75 1.17 1.02 0.69 --------------------------------------------------------- Diluted net earnings (loss) $ 2.55 $ 1.96($ 1.64) $ 2.62 $ 2.16 --------------------------------------------------------- Dividends paid on common stock $ .81 $ .77 $ .73 $ .69 $ .65 ---------------------------------------------------------
[END PAGE 48] [START PAGE 50] SHAREHOLDER INFORMATION Requests for general information or published financial information can be made in writing to the Corporate Relations Department, Harcourt General, Inc., 27 Boylston Street, Chestnut Hill, MA 02467. Telephone: (617) 232-8200. To request printed financial information or leave a message for the Company's Transfer Agent, individuals may call The Shareholder Line at (800) 225-9194, Extension 2345. News and information about Harcourt General, Inc. is also available on the Internet's World Wide Web at www.harcourtgeneral.com. Automatic dividend reinvestment and cash stock purchase plan The Plan provides shareholders with a convenient way to purchase Common shares by reinvesting their Common and Series A cash dividends and/or by investing additional cash amounts. The Company will absorb all brokerage and agency fees for stock purchased in connection with the Plan. For further information, please call The Shareholder Line or write to: Harcourt General, Inc., c/o BankBoston, N.A., Automatic Dividend Reinvestment Plan, Post Office Box 8040, Boston, MA 02266. Transfer agent and registrar for Common, Series A and Class B stock BankBoston, N.A. c/o EquiServe Limited Partnership Shareholder Services Division Post Office Box 8040 Mail Stop 45-01-05 Boston, MA 02266-8040 (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 10, 2000 at 10:00 a.m. at the Company's Corporate Headquarters, 27 Boylston Street, Chestnut Hill, 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. Following an adjustment related to the spin-off of The Neiman Marcus Group, the Series A Shares are convertible into Common Stock on a 1:1.31 basis.
Common Stock* 1999 1998 Quarter High Low High Low First $54.94 $47.63 $55.38 $50.75 Second $50.00 $43.94 $56.88 $50.88 Third $54.00 $46.31 $61.69 $52.00 Fourth $47.13 $36.75 $56.13 $42.56 Series A Stock 1999 1998 Quarter High Low High Low First $60.00 $55.00 $61.00 $55.75 Second $51.25 $48.13 $61.00 $59.00 Third $56.75 $49.75 $67.50 $56.50 Fourth $52.00 $45.00 $61.25 $45.00 *-With the exception of the fourth quarter "low" price in fiscal 1999, these stock prices are prior to the tax-free distribution of shares in The Neiman Marcus Group, which was effective on October 22, 1999.
Harcourt General had 7,121 and 7,555 Common shareholders of record at October 31, 1999 and 1998, respectively, and 435 and 494 Series A shareholders of record at October 31, 1999 and 1998, respectively. Each share of Series A Stock is convertible into 1.31 shares of Common Stock at any time. Corporate Address Harcourt General, Inc. 27 Boylston Street Chestnut Hill, MA 02467 (617) 232-8200 Harcourt General is an Equal Opportunity Employer [END PAGE 50] EX-21.1 6 SUBSIDIARIES OF THE COMPANY EXHIBIT 21.1 HARCOURT GENERAL, INC. SUBSIDIARIES JURISDICTION OF SUBSIDIARY INCORPORATION A.K.R. Conseil France A.S.I. (UK) Ltd. United Kingdom Academic Press Limited England Alison Licensing, Inc. Delaware Assessment Systems, Inc. Delaware Bailliere Tindall Limited England California College for Health Sciences California Career Care, Inc. Delaware Cyberna Ltee Montreal DBM Australia Limited Delaware DBM Belgium Belgium DBM Career Management (Singapore) Pte Ltd Singapore DBM France, S.A. France DBM International, Inc. Delaware DBM New Zealand Limited New Zealand DBM Training and Consulting, Inc. Delaware Deltak Ges.m.b.H Austria Drake Beam Morin-Canada, Inc. Ontario Drake Beam Morin Career Management Limited Hong Kong Drake Beam Morin, Inc. Delaware Drake Beam Morin Montreal, Inc. Montreal Drake Beam Morin plc England and Wales Educalivres Group Inc. - Group Educalivres Inc. Quebec Educatief B.V. Netherlands Edunetics Corporation Delaware Edunetics International B.V. Netherlands Edunetics Limited Israel English Language Institute, Inc. Delaware Eurodidakt B.V. Netherlands Eurodidakt Holding B.V. Netherlands Executive In Residence, Inc. New York Foundation for Marine Animal Husbandry, Inc. Florida GMN, Inc. Delaware Grune & Stratton Limited England HG Land Co., Inc. Delaware HGI Investment Trust Massachusetts HGI Securities Corp. Massachusetts HRW and WBS Canada Corporation, Inc. New York HRW Distributors, Inc. Delaware Harcourt, Inc. Delaware Harcourt Anytime Anywhere Learning Pty Ltd England Harcourt Asia Pte Ltd Singapore Harcourt Australia Pty Limited Australia Harcourt Brace Andina, S.A. Columbia Harcourt Brace Argentina, S.A. Argentina Harcourt Brace de Espana, S.A. Spain Harcourt Brace de Mexico, S.A. de C.V. Mexico Harcourt Brace de Venezuela, C.A. Venezuela Harcourt Brace & Company India Pvt. Ltd. India Harcourt Canada, Ltd. Ontario Harcourt FSC, Inc. US Virgin Islands Harcourt Hong Kong Limited Hong Kong Harcourt India Pvt Ltd India Harcourt Learning Direct (Australasia) Pty Ltd Australia Harcourt New Zealand Pty Limited Australia Harcourt Publishers Limited England Harcourt Japan, Inc. Japan Harcourt Professional Education Group, Inc. Delaware Harcourt Publishers International, Inc. Delaware Harcourt General Charitable Foundation, Inc. Massachusetts Harcourt General Services, Inc. Delaware Harcourt Learning Direct, Inc. Massachusetts Holt, Rinehart and Winston Limited England Human Nature, Inc. Delaware ICS Acquisition Company Florida ICS Intangibles Holding Company California ICS Learning Systems, Inc. Delaware Innovation Research, Inc. Delaware International Correspondence Schools, Inc. Pennsylvania International Correspondence Schools Limited England International Correspondence Schools New Zealand (New Zealand) Limited International Correspondence Schools England (Overseas) Limited Intertext Group Limited England Intext International Sales Corp. Delaware James Martin Insight, Inc. Illinois KO Corporation Delaware Kentucky School of Technology, Inc. Delaware Knowledge Communication, Inc. Delaware Laureate Canada Inc. Ontario Louisiana CPA Review, Inc. Delaware M-Mash, Inc. Colorado Miller Comprehensive CPA Review, Inc. Delaware Morgan Kaufmann Publishers, Incorporated California Mosby Holdings Corp. Delaware Mosby, Inc. Missouri Mosby International Limited United Kingdom Mosby Italia Srl Italy Mosby Parent Corp. Delaware Mosby Publishers Australia Pty Limited Australia NBD Incorporated Delaware NETG Applied Learning GmbH Germany NETG Applied Learning GmbH Austria NETG Direct, Inc. Delaware NETG Harcourt AB Sweden NETG Holding, Inc. Delaware NETg, Inc. Delaware NETG Limited United Kingdom NETG S.A. France N.T.I. Nederlands Talen Instituut B.V. Netherlands National Education Centers, Inc. California National Education Corporation Delaware National Education Credit Corporation California National Education Enterprises, Inc. California National Education International Corp. California National Education Payroll Corp. California National Education Training Group, Inc. Nevada National Learning Systems, Inc. Delaware SV Distribution Company Delaware Spring Merger Corporation Delaware Spectrum Interactive Incorporated Delaware Steck-Vaughn Company Delaware Steck-Vaughn Publishing Corporation Delaware T & A D Poyser Limited England The Family Education Company Delaware The Neiman Marcus Group, Inc. Delaware The Psychological Corporation New York The Psychological Corporation Limited England The School of Accountancy Limited Scotland W. B. Saunders Company Limited England Wolfe Medical Publications Limited United Kingdom EX-23.1 7 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements of Harcourt General, Inc. on Form S-3 (Nos. 33-13936, 33-46148, and 333-30621) and Form S-8 (Nos. 33-26079 and 333- 42349) of our report dated December 9,1999, appearing in and incorporated by reference in the Annual Report on Form 10-K of Harcourt General, Inc. for the year ended October 31, 1999. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts January 27, 2000 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 This schedule contains a summary of financial information extracted from the Consolidated Balance Sheet and Consolidated Statement of Operations and is qualified in its entirety by reference to such financial statements. 1000 YEAR OCT-31-1999 OCT-31-1999 24,144 0 513,399 39,822 212,771 830,757 312,550 183,746 2,950,105 693,557 1,356,804 0 863 71,167 569,833 2,950,105 2,142,622 2,142,622 697,278 1,862,973 0 180,304 107,210 185,230 68,535 120,348 63,348 0 0 183,830 2.57 2.55
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