-----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, AzLOY1i6ZyZsnGoYynC8XpeU6+hdxoi9XfVvOtlQMLahnL50VIv6DY5QyszVt111 zvq+KET5epBL8I3Isu8Otw== 0000040493-96-000003.txt : 19960129 0000040493-96-000003.hdr.sgml : 19960129 ACCESSION NUMBER: 0000040493-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951031 FILED AS OF DATE: 19960126 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARCOURT GENERAL INC CENTRAL INDEX KEY: 0000040493 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 041619609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04925 FILM NUMBER: 96507660 BUSINESS ADDRESS: STREET 1: 27 BOYLSTON ST / BOX 1000 CITY: CHESTNUT HILL STATE: MA ZIP: 02167 BUSINESS PHONE: 6172328200 MAIL ADDRESS: STREET 1: 27 BOYLSTON ST STREET 2: BOX 1000 CITY: CHESTNUT HILL STATE: MA ZIP: 02167 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL CINEMA CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MID WEST DRIVE IN THEATRES INC DATE OF NAME CHANGE: 19660907 10-K 1 HARCOURT GENERAL, INC. FORM 10K FOR FISCAL 1995 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, 1995 Commission File Number 1-4925 HARCOURT GENERAL, INC. (Exact name of registrant as specified in its charter) Delaware 04-1619609 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 27 Boylston Street, Chestnut Hill, Massachusetts 02167 (Address of principal executive offices) (Zip Code) Registrant's telephone number and area code: 617-232-8200 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered Common Stock, $1.00 par value New York Stock Exchange Series A Cumulative Convertible New York Stock Exchange Stock, $1.00 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] [page] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,970,203,170 on January 19, 1996. There were 52,050,717 shares of Common Stock, 20,802,108 shares of Class B Stock and 1,199,072 shares of Series A Cumulative Convertible Stock outstanding as of January 19, 1996. ______________________ Documents Incorporated by Reference Portions of the Company's 1995 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 8, 1996 are incorporated by reference in Part III of this Report. [page] HARCOURT GENERAL, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995 TABLE OF CONTENTS PART I Page No. Item 1. Business 1 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security 6 Holders PART II Item 5. Market for the Registrant's Common Equity 6 and Related Stockholder Matters Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of 7 Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 7 Item 9. Changes in and Disagreements with Accountants 7 on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant 7 Item 11. Executive Compensation 10 Item 12. Security Ownership of Certain Beneficial 10 Owners and Management Item 13. Certain Relationships and Related Transactions 10 PART IV Item 14. Exhibits, Financial Statement Schedules 10 and Reports on Form 8-K Signatures 12 [page] PART I ITEM 1. BUSINESS GENERAL The principal businesses of Harcourt General, Inc., a Delaware corporation formed in 1950 (the "Company"), are publishing and specialty retailing. The Company also has operations in career transition and related professional services. The Company sold its insurance business in October 1994. In addition, the Company's subsidiary, The Neiman Marcus Group, Inc., sold its Contempo Casuals business in June 1995. In December 1993 the Company completed the spinoff of its motion picture exhibition business to the shareholders of the Company. See "Discontinued Operations" below for additional information about these discontinued operations. A. PUBLISHING Harcourt Brace & Company ("Harcourt Brace") is among the world's largest publishing houses, publishing books, scholarly journals and related materials in both print and electronic media for the educational, scientific, technical, medical, professional and trade markets. Most of the operations of Harcourt Brace are in the United States, but Harcourt Brace also has international publishing operations in London, Tokyo, Sydney, Toronto and Montreal. EDUCATIONAL PUBLISHING. The educational publishing group includes the operations of Harcourt Brace School; Holt, Rinehart and Winston; Harcourt Brace College and The Psychological Corporation. Harcourt Brace School publishes textbooks and related instructional materials for the elementary grades. Holt, Rinehart and Winston publishes instructional materials for grades 7 through 12. Harcourt Brace College publishes books and other materials for the college and university market under the Harcourt Brace, Saunders and Dryden Press imprints. The Psychological Corporation provides tests and related products and services for educational, psychological, clinical and professional assessment and, through its subsidiary Assessment Systems, which was acquired in May 1995, provides computerized tests for business and professional credentialing and licensing. SCIENTIFIC, TECHNICAL, MEDICAL AND PROFESSIONAL PUBLISHING. The scientific, technical, medical and professional publishing group includes the operations of Academic Press, W.B. Saunders, Harcourt Brace Professional Publishing and Harcourt Brace Legal and Professional Publishing. Academic Press publishes scholarly books and journals in the life, physical, social and computer sciences, which are sold in the United States and abroad. W.B. Saunders publishes books and periodicals in the health sciences, which are sold in the United States and abroad. Harcourt Brace Professional Publishing publishes reference guides and newsletters for certified public accountants and tax professionals. Harcourt Brace Legal and Professional Publishing conducts review courses for individuals preparing for bar examinations under the BAR/BRI name, as well as review courses for CPA accreditation and graduate school entrance examinations. [page] TRADE PUBLISHING. The Harcourt Brace trade division publishes children's books, general adult fiction and nonfiction hardcover books, and trade paperbacks under the Harvest imprint. COMPETITION Numerous companies compete in all of the markets in which the Harcourt Brace businesses operate. The Company believes that the principal competitive factors for its publishing operations are the quality of its publications and customer service. The principal competitive factors in obtaining the publishing rights which are the foundation for the quality of its publications are the reputation of the Company and its financial resources, editorial and marketing skills and distribution capabilities. B. SPECIALTY RETAILING The Company owns approximately 67% of the outstanding equity, on a fully-converted basis, of The Neiman Marcus Group, Inc. ("NMG"), which operates Neiman Marcus, Bergdorf Goodman and NM Direct. NMG is a separate public company which is listed on the New York Stock Exchange and is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). On October 26, 1995, NMG filed an Annual Report on Form 10-K with respect to its fiscal year ended July 29, 1995. Following is a brief description of the businesses of NMG. For further information with respect to NMG, reference may be made to the NMG Annual Report on Form 10-K and to subsequent reports and other information which may be filed by NMG from time to time with the Securities and Exchange Commission (the "SEC"). NEIMAN MARCUS STORES Neiman Marcus is a high fashion, specialty retailer which offers high quality women's and men's apparel, fashion accessories, precious jewelry, decorative home accessories, fine china, crystal, silver and epicurean products. As of October 31, 1995, Neiman Marcus operated 28 stores in 25 cities. The average Neiman Marcus store size is 141,000 gross square feet and the stores range in size from 90,000 gross square feet to 269,000 gross square feet. In August 1995, Neiman Marcus opened a new store in Short Hills, New Jersey. Neiman Marcus plans to open new stores in King of Prussia, Pennsylvania, and Paramus, New Jersey, in 1996, and in Honolulu, Hawaii, in 1999. In addition, Neiman Marcus recently opened a new 464,000 square foot national service and distribution center located in Longview, Texas. [page] 2 BERGDORF GOODMAN Bergdorf Goodman is a high fashion, exclusive retailer of high quality women's and men's apparel, fashion accessories, precious jewelry, decorative home accessories, fine china, crystal and silver. It operates two leased stores on Fifth Avenue and 58th Street in New York City. The original store, consisting of 250,000 gross square feet, is dedicated to women's apparel and accessories, home furnishings and gifts. Bergdorf Goodman Men, which opened in August 1990, consists of 66,000 gross square feet and is dedicated to men's apparel and accessories. Bergdorf Goodman has an important direct marketing business which is operated by NM Direct. NM DIRECT NM Direct operates a state-of-the-art direct marketing business, which distributes its own catalogues as well as those of Neiman Marcus and Horchow. NM Direct offers a wide array of apparel, home furnishings and gift items to its domestic and international mail order customers. COMPETITION NMG's specialty store operations compete with numerous specialty retail stores and department stores for customers and merchandise. The Company believes that the principal competitive factors for specialty store operations are customer service, quality of merchandise, merchandise assortment, store ambience and price. The direct marketing operations of NM Direct compete with numerous other retail and direct marketing operations for both customers and merchandise. The Company believes that the principal competitive factors for NM Direct's operations are customer service, price, merchandise quality and assortment and catalogue presentation. C. PROFESSIONAL SERVICES The Company believes that Drake Beam Morin ("DBM") is the world's leading organizational and individual transition consulting firm. DBM assists organizations and individuals worldwide in outplacement, employee selection, performance evaluation, career management and transition management. The Company believes that the principal competitive factors for DBM are quality of service (including its ability to respond promptly to clients' needs for services) and price. D. DISCONTINUED OPERATIONS On June 30, 1995, NMG sold its Contempo Casuals subsidiary to The Wet Seal, Inc. for approximately 250,000 shares of Wet Seal Class A Common Stock and $100,000 in cash. [page] 3 On October 31, 1994, the Company sold its insurance operations to GNA Corporation, an affiliate of General Electric Capital Corporation, for $410.4 million in cash. For additional information with respect to this transaction, reference may be made to the Report on Form 8-K filed by the Company with the SEC on November 14, 1994. On December 15, 1993, the Company completed the spinoff of GC Companies, Inc. ("GCC") to the holders of the Company's Common Stock and Class B Stock. GCC is an independent public company which operates the "General Cinema Theatres" motion picture exhibition business formerly operated by the Company, and which is listed on the New York Stock Exchange and is subject to the reporting requirements of the Exchange Act. See Note 2 of the Notes to Consolidated Financial Statements for further information regarding certain agreements which govern the ongoing relationship between Harcourt General and GCC. E. CERTAIN ADDITIONAL INFORMATION 1. Employees
Percentage of Employees Number of Each Operating Unit Number of of Part-Time Covered by Collective Employees Employees Bargaining Agreements Harcourt Brace 4,750 90 None & Company The Neiman Marcus Group 9,800 1,250 1.3% Drake Beam Morin 550 375 None Corporate 119 1 None
The figures in the above table are approximate as of October 31, 1995. The Company believes that its relations with its employees are generally good. 2. CAPITAL EXPENDITURES; SEASONALITY; LIQUIDITY; CAPITAL RESOURCES For a review of the Company's financial results for fiscal 1995, including information on capital expenditures, seasonality, liquidity, capital resources and other financial information, reference is made to the "Management's Discussion & 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, 1995 (the "1995 Annual Report"), which information is incorporated herein. [page] 4 3. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The information set forth under the heading "Additional Financial Information" in Note 3 of the Notes to Consolidated Financial Statements on page 34 of the 1995 Annual Report is incorporated herein. ITEM 2. PROPERTIES The Company's corporate headquarters, as well as the corporate headquarters for The Neiman Marcus Group, Inc., are located in leased facilities in Chestnut Hill, Massachusetts, a suburb of Boston. The headquarters for Harcourt Brace's publishing operations are located in a leased office in Orlando, Florida. The headquarters for Drake Beam Morin are located in a leased office in New York City. At October 31, 1995, the office, warehouse and other facilities owned or leased by Harcourt Brace and its publishing affiliates were located in 27 states, the District of Columbia, Puerto Rico and five foreign countries. NMG's operating divisions are headquartered in leased or owned facilities in Dallas (Neiman Marcus), Irving, Texas (NM Direct) and New York City (Bergdorf Goodman). At October 31, 1995, the approximate square footage used in NMG's operations was as follows:
Owned Subject to Owned Ground Lease Leased Total Stores ................... 348,000 1,630,000 2,402,000 4,380,000 Distribution centers and office facilities... 585,000 94,000 765,000 1,444,000
Leases for Neiman Marcus stores, including renewal options, range from 30 to 99 years. The lease on the Bergdorf Goodman main store expires in 2050 and the lease on the Bergdorf Goodman Men's store expires in 2010, with two 10-year renewal options. Leases are generally at fixed rentals, except that certain leases provide for additional rentals based on sales in excess of predetermined levels. NMG also owns approximately 50 acres of land in Irving, Texas where its NM Direct operations are located in a 585,000 square foot facility. NMG recently opened a 464,000 square foot distribution center for Neiman Marcus Stores in Longview, Texas which replaced certain existing distribution centers. [page] 5 At October 31, 1995, Drake Beam Morin conducted its business from 82 leased offices in the United States and 81 offices in 26 countries around the world. For additional information about the properties of the Company, see Item 1 above and the information contained in Note 10 of the Notes to Consolidated Financial Statements under the heading "Leases" on page 39 of the 1995 Annual Report, which is incorporated herein. ITEM 3. LEGAL PROCEEDINGS In previous reports, the Company described certain class action cases entitled In re Harcourt Brace Jovanovich, Inc. Securities Litigation and Nivram Corp. v. Harcourt Brace Jovanovich, Inc., et. al. The allegations in these cases related to actions of Harcourt Brace Jovanovich, Inc. that occurred prior to its acquisition by the Company in 1991. The parties settled these cases during fiscal 1995. The disposition of these cases did not have a material adverse effect on the financial position or continuing operations of the Company. The Company is involved in various other suits and claims in the ordinary course of business. The Company does not believe that the disposition of any such suits or claims will have a material adverse effect on the financial position or continuing operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following information contained in the 1995 Annual Report is incorporated herein: (i) the last paragraph of Note 6 of the Notes to Consolidated Financial Statements on page 36 of the 1995 Annual Report relating to restrictions on the Company's ability to pay dividends; (ii) "Dividends per share" in Note 14 of the Notes to Consolidated Financial Statements on page 42 of the 1995 Annual Report; and [page] 6 (iii) "Stock Information" on page 46 of the 1995 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 19, 1996, there were 2,039 record holders of Class B Stock. For further information with respect to the Class B Stock, including the ownership of 99.8% of the Class B Stock by the family of Richard A. Smith (the Chairman of the Board of the Company), reference is made to the information contained in the Company's Proxy Statement for the 1996 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 1995 Annual Report under the caption "Five Year Summary" on page 44 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 1995 Annual Report under the caption "Management s Discussion & Analysis of Financial Condition and Results of Operations" on pages 23 through 26 and is incorporated herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and supplementary data set forth in Item 14 are incorporated herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A. Directors The response to this Item regarding the directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934 by the Company's officers and directors is contained in the Proxy Statement for the 1996 Annual Meeting of Stockholders under the captions "Election of Directors" and "Section 16 Reports" and is incorporated herein. [page] 7 B. Executive Officers Below is the name, age and principal occupations for the last five years of each current executive officer of the Company. All such persons have been elected to serve until the next annual election of officers and their successors are elected or until their earlier resignation or removal. Richard A. Smith - 71 Chairman of the Board of the Company and of The Neiman Marcus Group, Inc.; Chief Executive Officer of the Company and of The Neiman Marcus Group, Inc. until December 1991; Chairman of the Board, President (until November 1, 1995) and Chief Executive Officer of GC Companies, Inc. since December 1993. Director of Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Financial Companies, Inc., and Bank of Boston Corporation and its principal subsidiary, The First National Bank of Boston. Mr. Smith is the father of Robert A. Smith, a director and officer of the Company, the father-in-law of Brian J. Knez, a director and officer of the Company, and the uncle of Jeffrey R. Lurie, a nominee for director of the Company. Robert J. Tarr, Jr. - 52 President, Chief Executive Officer (since December 1991), Chief Operating Officer and Director of the Company and of The Neiman Marcus Group, Inc. John R. Cook - 54 Senior Vice President and Chief Financial Officer of the Company and of The Neiman Marcus Group, Inc. since September 1992; Senior Vice President - Finance and Administration and Chief Financial Officer of NACCO Industries prior thereto. Peter Farwell - 52 Vice President - Corporate Relations of the Company and of The Neiman Marcus Group, Inc. Eric P. Geller - 48 Senior Vice President and General Counsel of the Company and of The Neiman Marcus Group, Inc. since May 1992; Vice President and Associate General Counsel of the Company and of The Neiman Marcus Group, Inc. prior thereto; Secretary of the Company since December 1991 and of The Neiman Marcus Group, Inc. since January 1992. Paul F. Gibbons - 44 Vice President and Treasurer of the Company and of The Neiman Marcus [page] 8 Group, Inc. since August 1992; Vice President and Treasurer of GC Companies, Inc. since March 1994; Vice President - Taxation of the Company and of The Neiman Marcus Group, Inc. prior to August 1992. Gerald T. Hughes - 39 Vice President-Human Resources of the Company and of The Neiman Marcus Group, Inc. since June 1994; Associate General Counsel of the Company and The Neiman Marcus Group, Inc. with responsibility for labor and employment matters from August 1992 to June 1994; Labor Counsel of the Company and The Neiman Marcus Group, Inc. prior thereto. Brian J. Knez - 38 President and Chief Executive Officer of Harcourt Brace & Company since May 1995; President of the Scientific, Technical, Medical and Professional Group of Harcourt Brace from 1993 to May 1995; Group Vice President of the Scientific, Technical and Medical Group of Harcourt Brace from 1991 to 1993; Vice President of the Company since November 1991; Assistant to the President of the Company prior thereto. Director of the Company since March 1995. Mr. Knez is the son-in-law of Richard A. Smith, Chairman of the Board of the Company, and the brother-in-law of Robert A. Smith, a director and officer of the Company. Michael F. Panutich - 47 Vice President - General Auditor of the Company and of The Neiman Marcus Group, Inc. since June 1993; Vice President - Accounting of the Company and of The Neiman Marcus Group, Inc. prior thereto. Stephen C. Richards - 40 Vice President and Controller of the Company and of The Neiman Marcus Group, Inc. since June 1993; Vice President and Controller of GC Companies, Inc. since January 1994; Partner, Deloitte & Touche LLP, from June 1990 to May 1993. Craig B. Sawin - 39 Vice President - Planning and Analysis of the Company and of The Neiman Marcus Group, Inc. Robert A. Smith - 36 Group Vice President of the Company since December 1991 and of The Neiman Marcus Group, Inc. since January 1992; Vice President - Corporate Development of the Company prior to December 1991; Vice President - Corporate Development of The Neiman Marcus Group, Inc. prior to January 1992; President and Chief Operating Officer of GC Companies, Inc. since November 1995. Director of the Company. Mr. Smith is the son of Richard A. Smith, Chairman of the Board of the Company, the brother-in- law of Brian J. Knez, a director and officer of the Company, and the cousin of Jeffrey R. Lurie, a nominee for director of the Company. [page] 9 ITEM 11. EXECUTIVE COMPENSATION The response to this Item is contained in the Proxy Statement for the 1996 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 1996 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 1996 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 1995 Annual Report to Shareholders and are incorporated herein by reference to Item 8 hereof: Consolidated Balance Sheets - October 31, 1995 and 1994. Consolidated Statements of Earnings for the fiscal years ended October 31, 1995, 1994, and 1993. Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1995, 1994 and 1993. Consolidated Statements of Shareholders' Equity for the fiscal years ended October 31, 1995, 1994 and 1993. [page] 10 Notes to Consolidated Financial Statements. Independent Auditors' Report. 14(a)(2) Consolidated Financial Statement Schedules The document and schedule listed below are filed as part of this Form 10-K: Page In Form 10-K Independent Auditors' Report on Consolidated Financial Statement Schedule F-1 Schedule VIII - Valuation and Qualifying Accounts and Reserves F-2 All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted because the information is disclosed in the Consolidated Financial Statements or because such schedules are not required or are not applicable. 14(a)(3) Exhibits The exhibits filed as part of this Annual Report are listed in the Exhibit Index immediately preceding the exhibits. The Company has identified with an asterisk in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Form 10-K in response to Item 14(c) of Form 10-K. 14(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended October 31, 1995. [page] 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARCOURT GENERAL, INC. By: s/ Robert J. Tarr, Jr. Robert J. Tarr, Jr., President, Chief Executive Officer and Chief Operating Officer Dated: January 25, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the following capacities and on the dates indicated. Signature Title Date Principal Executive Officer: s/Robert J. Tarr, Jr. President, Chief Executive January 25, 1996 Robert J. Tarr, Jr. Officer, Chief Operating Officer and Director Principal Financial Officer: s/John R. Cook Senior Vice President and January 25, 1996 John R. Cook Chief Financial Officer Principal Accounting Officer: s/Stephen C. Richards Vice President and January 25, 1996 Stephen C. Richards Controller [page] 12 Directors: s/William F. Connell January 25, 1996 William F. Connell s/Jack M. Greenberg January 25, 1996 Jack M. Greenberg s/Herbert W. Jarvis January 25, 1996 Herbert W. Jarvis s/Brian J. Knez January 25, 1996 Brian J. Knez s/Lynn Morley Martin January 25, 1996 Lynn Morley Martin s/Maurice Segall January 25, 1996 Maurice Segall s/Richard A. Smith January 25, 1996 Richard A. Smith s/Robert A. Smith January 25, 1996 Robert A. Smith s/Paula Stern January 25, 1996 Paula Stern s/Sidney Stoneman January 25, 1996 Sidney Stoneman s/Hugo Uyterhoeven January 25, 1996 Hugo Uyterhoeven s/Clifton R. Wharton, Jr. January 25, 1996 Clifton R. Wharton, Jr. [page] 13 EXHIBIT INDEX Page No. 3.1 Restated Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993. 3.2 By-Laws of the Company, as amended, incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991. 4.1 Indenture, dated as of May 1, 1987, between the Company and Manufacturers Hanover Trust Company, as Trustee and (a) Terms Agreement, dated June 23, 1987, among the Company, The First Boston Corporation and Salomon Brothers Inc relating to the Company's 9 3/8% Subordinated Notes due 1997, incorporated herein by reference to Exhibit 4.3 to the Company's Report on Form 8-K, dated June 23, 1987, and to Exhibit 4.3 to the Company's Registration Statement on Form S-3, File No. 33-13936, and (b) Terms Agreement, dated March 16, 1988, among the Company, The First Boston Corporation and Salomon Brothers Inc relating to the Company's 9 1/2% Subordinated Notes due 2000, incorporated herein by reference to Exhibit 1 to the Company's Report on Form 8-K, dated March 16, 1988. 4.2 Indenture, dated as of April 23, 1992, between the Company and Bankers Trust Company, as Trustee, relating to the Company s 8 1/4% Senior Notes Due 2002 and the Company s 8 7/8% Senior Debentures Due 2022, incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, File No. 33-46148. 4.3 Smith-Lurie/Marks Stockholders' Agreement, dated December 29, 1986, incorporated herein by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992. *10.1 Executive Incentive Bonus Plan, as amended, incorporated herein by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1986. *10.2 1981 Stock Option Plan, as amended and restated, incorpor- ated herein by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1987. [page] 14 *10.3 1988 Stock Incentive Plan, incorporated herein by reference to Exhibit 28.1 to the Company's Registration Statement on Form S-8, File No. 33-26079. *10.4 1983 Key Executive Stock Purchase Loan Plan, as amended, incorporated herein by reference to Exhibit 10.4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1984. *10.5 Executive Medical Plan, as amended, incorporated herein by reference to Exhibit 10.5 to the Company s Annual Report on Form 10-K for the fiscal year ended October 31, 1994. *10.6(a) Supplemental Executive Retirement Plan, incorporated herein by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1988. *10.6(b) Amendment to Supplemental Executive Retirement Plan, dated October 26, 1990, incorporated herein by reference to Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1990. *10.7 Deferred Compensation and Retirement Income Plan for Non-Employee Directors, incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993. *10.8 Deferred Compensation Agreement between the Company and Herbert W. Jarvis, a director, incorporated herein by reference to Exhibit 10.12(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1981. *10.9(a) Amended and Restated Deferred Compensation Agreement, dated August 27, 1990, between the Company and Richard A. Smith, incorporated herein by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1990. *10.9(b) Deferred Compensation Agreement dated as of December 15, 1994, between the Company and Richard A. Smith. [page] 15 10.10 Intercompany Services Agreement, dated as of July 24, 1987, between the Company and NMG, incorporated herein by reference to Exhibit 10.17(c) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1987. 10.11(a)Intercompany Services Agreement, dated as of December 14, 1993, between the Company and GC Companies, Inc., incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993. 10.11(b)Amended and Restated Intercompany Services Agreement dated as of November 1, 1995, between the Company and GC Companies, Inc. 10.12 Reimbursement and Security Agreement, dated as of December 14, 1993, between the Company and GC Companies, Inc., incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993. *10.13 Split Dollar Life Insurance Agreement, dated as of June 21, 1990, by and between the Company and the Richard and Susan Smith 1990 Issue Trust, under a Declaration of Trust dated as of April 3, 1990, incorporated herein by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991. *10.14 Key Employee Deferred Compensation Plan, as amended, incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994. *10.15(a)Employment Agreement, dated as of November 15, 1991, by and between the Company and Robert J. Tarr, Jr., incorporated herein by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1991. *10.15(b)Supplemental Agreement, dated as of December 17, 1992, by and between the Company and Robert J. Tarr, Jr., incorporated herein by reference to Exhibit 10.16(b) to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992. [page] 16 11.1 Computation of Average Number of Shares Outstanding Used In Determining Primary and Fully Diluted Earnings Per Share. 13.1 1995 Annual Report to Stockholders (which is not deemed to be filed except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K). 21.1 Subsidiaries of the Company. 23.1 Consent of Deloitte & Touche LLP. 27.1 Financial Data Schedule. __________________________ * Exhibits filed pursuant to Item 14(c) of Form 10-K. [page] 17 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, 1995 and 1994, and for each of the three years in the period ended October 31, 1995, and have issued our report thereon dated December 8, 1995. Such consolidated financial statements and report are included in the Company s 1995 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Harcourt General, Inc. and its subsidiaries, listed in Item 14(a)(2). The consolidated financial statement schedule is the responsibility of the Company s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Boston, Massachusetts December 8, 1995 [page] F-1
HARCOURT GENERAL, INC. AND SUBSIDIARIES. SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS AND RESERVES THREE YEARS ENDED OCTOBER 31, 1995 (In thousands) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions Charged to Balance at Charged to Other Balance at Beginning Costs and Accounts- Deductions- End Description of Period Expenses Describe Describe of Period _________________________________________________________________________________________________________ YEAR ENDED OCTOBER 31, 1995 Allowance for doubtful accounts $26,439 32,077 - 36,030(B) $22,486 (deducted from accounts receivable) Allowance for book returns (A) $49,091 82,548 - 82,236(C) $49,403 (deducted from accounts receivable) YEAR ENDED OCTOBER 31, 1994 Allowance for doubtful accounts $20,363 32,247 - 26,171(B) $26,439 (deducted from accounts receivable) Allowance for book returns (A) $49,730 79,097 - 79,736(C) $49,091 (deducted from accounts receivable) YEAR ENDED OCTOBER 31, 1993 Allowance for doubtful accounts $12,781 23,616 - 16,034(B) $20,363 (deducted from accounts receivable) Allowance for book returns (A) $45,576 79,345 - 75,191(C) $49,730 (deducted from accounts receivable) (A) Reflects gross allowance netted against accounts receivable. Reserves for returns to inventory and recovery of royalties payable are netted directly against those balances and are not material. (B) Write-off of uncollectible accounts net of recoveries. (C) Books actually returned during the year.
[page] F-2 EX-10.9(B) 2 DEFERRED COMPENSATION AGREEMENT (RAS) DEFERRED COMPENSATION AGREEMENT AGREEMENT made as of the 15th day of December, 1994, by and between Harcourt General, Inc., a Delaware corporation (the "Company"), and Richard A. Smith (the "Executive") WHEREAS the Executive is Chairman of the Board of the Company; and WHEREAS the Executive's base salary and maximum bonus eligibility could allow the Executive to receive in excess of $1 million in compensation for the Company's Fiscal Year 1995 and succeeding Fiscal Years; and WHEREAS certain provisions of the Internal Revenue Code of 1986, in effect (the "Code"), could have the effect of disallowing a tax deduction to the Company for any compensation paid to the Executive in excess of $1 million in any Fiscal Year; and WHEREAS the Company wishes to preserve the tax deduction for the Executive's compensation and to keep the Executive whole for any current reduction in income resulting from such limit on the deductibility of compensation to the Executive. NOW, THEREFORE, it is agreed as follows: 1. The Company and the Executive hereby agree that payment of all compensation otherwise payable to the Executive for Fiscal Year 1995 and succeeding Fiscal Years which would not be deductible by the Company on account of the provisions of the Code shall be deferred (the "Deferred Compensation") until such time as the Company shall be entitled to take the tax deduction for such payment. 2. The Deferred Compensation shall be credited with interest at the same rate and in the same manner as is provided from time to time to [page] participants in the Company's Key Executive Deferred Compensation Plan. Such interest shall become part of Deferred Compensation and shall be payable in accordance with paragraph 1 above. 3. This Agreement does not amend or affect in any manner the Amended and Restated Deferred Compensation Agreement between the Company and the Executive dated August 27, 1990. 4. The Company shall not be required to set aside or segregate any of its assets of any kind to meet any of its obligations hereunder. All its obligations hereunder shall be reflected by book entries only, and the Executive shall have no rights on account of this Agreement to any specific assets of the Company. Any rights that the Executive may have on account of this Agreement shall be only those of a general unsecured creditor. 5. No benefit payable under this Agreement, and no interest or rights hereunder of the Executive or any other person, shall be subject to the claims of any creditor or to attachment, garnishment or other legal process, nor shall the Executive or any beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any interest or rights under this Agreement. 6. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Executive and his heirs, executors, administrators and legal representatives. EXECUTED UNDER SEAL on the day first above written. HARCOURT GENERAL, INC. /s/ Eric Geller By: ERIC GELLER Title: Sr. V-P & General Counsel /s/ Richard A. Smith Richard A. Smith [page] EX-10.11(B) 3 AMENDED AND RESTATED INTERCOMPANY AGT. AMENDED AND RESTATED INTERCOMPANY SERVICES AGREEMENT This Amended and Restated Intercompany Services Agreement ("Agreement"), dated as of November 1, 1995, between Harcourt General, Inc., a Delaware corporation ("Harcourt"), and GC Companies, Inc., a Delaware corporation (the "Company"). WHEREAS, Harcourt has provided corporate services to the Company pursuant to the Intercompany Services Agreement between Harcourt General and the Company dated December 14, 1993 (the "Original Agreement"); WHEREAS, Harcourt and the Company wish to terminate the Original Agreement and provide for the ongoing provision of a reduced and flexible level of Corporate Services (as defined in paragraph 1 below) by Harcourt to the Company; and NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained in this Agreement, Harcourt and the Company hereby agree as follows: 1. Corporate Services To Be Made Available. For the period provided for under paragraph 6 hereof, Harcourt agrees to make available to the Company the services of Richard A. Smith, the Company's Chairman and Chief Executive Officer, and Robert A. Smith, the Company's President and Chief Operating Officer, together with such other services as to which the respective Chief Executive Officers of Harcourt and the Company may from time to time agree (collectively the "Corporate Services"), on the terms provided herein. Harcourt and the Company will cooperate in planning the scope and timing of the Corporate Services provided by Harcourt under this Agreement in order to minimize or eliminate interference with the conduct of Harcourt's business activities. If such interference is unavoidable, Harcourt will apportion, in its sole discretion, the available services in a fair and reasonable manner. 2. Standard of Conduct. In providing Corporate Services to the Company, Harcourt's officers and employees shall conduct themselves in accordance with the Company's written policies and procedures. Harcourt will use reasonable efforts in providing the Corporate Services to the Company and will perform such services with the same degree of care, skill and prudence customarily exercised for its own operations. Notwithstanding the foregoing, in providing such Corporate Services Harcourt and its directors, officers and employees will not be responsible for and shall have no liability for the accuracy, completeness or timeliness of any advice or service or any return, report, filing or other document which it or any of them provides, prepares or assists in preparing, except to the extent that any inaccuracy, incompleteness or untimeliness arises from the gross negligence or willful misconduct of Harcourt or its directors, officers or employees. The Company shall indemnify, defend and hold harmless Harcourt and its directors, officers and [page] employees from and against any and all damage, cost, loss, liability and expense (including reasonable attorneys' fees) in connection with any and all actions or threatened actions arising out of the performance of the Corporate Services hereunder, except in circumstances where the party that would otherwise be indemnified hereunder is found by a court of competent jurisdiction to have not met the standard of care described in the preceding sentence. In no event will Harcourt or its directors, officers or employees be liable for any indirect, special or consequential damages in connection with or arising out of the performance of Corporate Services under this Agreement. 3. Cost of Services. (a) Promptly following the commencement of the term of this Agreement Harcourt and the Company shall estimate the probable level of Corporate Services to be provided under this Agreement and shall agree upon the amount of the fee to be paid to Harcourt by the Company for the Company's fiscal year ending October 31, 1996, on the assumption that such estimated level of Corporate Services will actually be provided. In determining the fee to be paid, Harcourt and the Company shall value Corporate Services based on Harcourt's direct and indirect costs allocable thereto, calculated in accordance with Harcourt's usual accounting practices. (b) The Company agrees to pay to Harcourt on the first business day of each fiscal quarter (except that the payment for the fiscal quarter beginning November 1, 1995 shall be made promptly after the initial determination of the fee in accordance with subparagraph (a)) that portion of the fee, determined initially as set forth in subparagraph (a) and subject to adjustment in accordance with subparagraph (c), attributable to the Corporate Services to be provided by Harcourt during such quarter. (c) As soon as practicable after the end of fiscal 1996, but in no event later than January 31, 1997, Harcourt and the Company shall, based on a detailed review, determine the actual level of Corporate Services rendered by Harcourt during fiscal 1996 and make such adjustments in the fee as is necessary to reflect such level. Harcourt shall cause its employees to keep records of the time they devote in providing Corporate Services to the Company, in order to facilitate such review and determination and to permit a proper adjustment to be made. With the benefit of experience, Harcourt and the Company shall estimate the level of Corporate Services to be provided for the Company's fiscal years subsequent to fiscal 1996, and shall follow the same procedures for payment, review and adjustment. (d) The Company also agrees to reimburse Harcourt, within 15 business days of presentation of invoices therefor, for all reasonable out- of-pocket expenses incurred by Harcourt in providing Corporate Services, including expenses for outside professional services incurred by Harcourt for the benefit of and with the approval of the Company. [page] 2 (e) The failure of the Company to make any payment hereunder within 30 days of the date such payment is due shall result in the Company owing Harcourt interest at the rate of 10% per annum on the amount due from the date payable to the actual payment date. 4. Requirement of Approval By Independent Directors of the Company. All determinations on behalf of the Company made pursuant to paragraphs 3 and 6 hereof must be approved by a committee consisting solely of directors of the Company who are not employed by or otherwise affiliated with Harcourt (the "Independent Committee"). In carrying out its duties pursuant to this Agreement, the Independent Committee may retain such independent accountants, lawyers and other experts as it deems necessary or prudent to retain, and the expenses of all such professionals shall be reimbursed by the Company. 5. Information and Witnesses. Harcourt shall provide to the Company and the Company shall provide to Harcourt, upon the other's written request, at reasonable times, full and complete access to, and duplication rights with respect to, any and all Information, as defined below, as the other may reasonably request and require, and Harcourt shall use its best efforts to make available to the Company, and the Company shall use its best efforts to make available to Harcourt, upon the other's written request, the officers, directors, employees and agents of Harcourt and of the Company, respectively, as witnesses to the extent that such persons may reasonably be required in connection with any legal, administrative or other proceedings in which the Company or Harcourt, as the case may be, may from time to time be a party; provided, however, that neither Harcourt nor the Company need provide any Information or make available witnesses to the other to the extent that doing so would (i) unreasonably interfere with the performance by any person of such person's duties to the party to which a request under this paragraph 5 is made or otherwise causes unreasonable burden to such party, (ii) result in a waiver of any attorney-client or work product privilege of such party or its legal counsel, (iii) require either Harcourt or the Company to provide any Information which relates to the subject matter of any legal, administrative or other proceeding in which Harcourt and the Company are adverse parties, or (iv) result in any breach of any agreement with a third party; and provided, further, that the party providing Information or making available witnesses pursuant to this paragraph 5 shall be entitled to receive from the other party, upon presentation of reasonably detailed invoices therefor, payment of its reasonable out-of-pocket costs (including reasonable attorneys fees) incurred in connection with providing Information or making witnesses available. The term Information as used in this paragraph 5 means any books, records, contracts, instruments, data, facts and other information in the possession or under the control of either Harcourt or the Company and necessary or desirable for use in legal, administrative or other proceedings or for auditing, accounting or tax purposes. 6. Term of Agreement. This Agreement shall become effective as of November 1, 1995, shall remain in effect through October 31, 1996, and shall continue in effect thereafter unless terminated as of the end of a month, with respect to the performance of Corporate Services in whole or in part, by either party upon not less than 90 days written notice. Termination of Corporate Services in part shall not result in the termination of this [page] 3 Agreement. Termination of Corporate Services in whole shall result in the termination of this Agreement except that the obligations of the parties under paragraphs 3, 5 and 9 shall continue after such termination. A final fee adjustment on the basis described in paragraph 3(c) shall be made within 90 days of the date as of which Corporate Services are terminated in whole. An appropriate revision of quarterly fees remaining to be paid shall be made following the date as of which Corporate Services are terminated in part. The Original Agreement is hereby terminated effective November 1, 1995, provided that the obligations of Harcourt and the Company in paragraphs 3, 5 and 9 of the Original Agreement shall continue and shall be subsumed into the obligations under the same numbered paragraphs of this Agreement. 7. Independence. All employees and representatives of Harcourt providing the Corporate Services to the Company will be deemed for purposes of all compensation and employee benefits to be employees or representatives of Harcourt and not employees or representatives of the Company. In performing such services such employees and representatives will be under the direction, control and supervision of Harcourt (and not of the Company) and Harcourt will have the sole right to exercise all authority with respect to the employment (including termination of employment), assignment and compensation of such employees and representatives. 8. Independent Contractor. The relationship of Harcourt to the Company which is created hereunder is that of an independent contractor. This Agreement is not intended to create and shall not be construed as creating between the Company and Harcourt the relationship of affiliate, principal and agent, joint venture, partnership, or any other similar relationship, the existence of which is hereby expressly denied. 9. Confidentiality. Any and all information which is not generally known to the public which is exchanged between the parties in connection with the performance of this Agreement, whether of a technical or business nature, shall be considered to be confidential. The parties agree that confidential information shall not be disclosed to any third party or parties without the written consent of the other party, except as permitted below. Each party shall take reasonable measures to protect against disclosure of confidential information by its officers, employees and agents. Confidential information shall not include any information (i) which is or becomes part of the public domain other than as a result of the breach of a party's obligation hereunder, (ii) which is obtained from third parties who are not bound by confidentiality obligations or (iii) which is required to be disclosed by law or the rules of any state or Federal regulatory agency or any securities exchange (including NASDAQ) on which the Company's or Harcourt's securities might be listed for trading. The provisions of this section shall survive the termination of this Agreement. [page] 4 10. Miscellaneous. (a) Nonassignability of Agreement. Except by operation of law or in connection with the sale of all or substantially all the assets of a party hereto, this Agreement shall not be assignable, in whole or in part, directly or indirectly, by either party hereto without the prior written consent of the other, and any attempt to assign any rights or obligations arising under this Agreement without such consent shall be void; provided, however, that the provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by Harcourt and the Company and their respective successors and permitted assigns. (b) Further Assurances. Subject to the provisions hereof, each of the parties hereto shall make, execute, acknowledge and deliver such other actions and documents as may be reasonably required in order to effectuate the purposes of this Agreement, and to comply with all applicable laws, regulations, orders and decrees, and obtain all required consents and approvals and make all required filings with any governmental agency, other regulatory or administrative agency, commission or similar authority, as may be necessary or desirable in this connection. (c) Waivers. No failure or delay on the part of Harcourt or the Company in exercising any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, or any abandonment or discontinuance of steps to enforce such a right, preclude any other or further exercise thereof or the exercise of any other right. No modification or waiver of any provision of this Agreement nor consent to any departure by Harcourt or the Company therefrom shall in any event be effective unless the same shall be in writing, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Any consent or waiver by the Company under this paragraph 10(c) shall be approved by the Independent Committee. (d) Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the transactions contemplated hereby. (e) Amendments. 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 and the Company without approval of or authorization by their respective Boards of Directors, 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 [page] 5 and delivered personally, by telegram or by telephonic facsimile transmission, or sent by registered mail, postage prepaid, to: The Company at: 27 Boylston Street Chestnut Hill, MA 02167 Attention: President Harcourt at: 27 Boylston Street Chestnut Hill, MA 02167 Attention: President and shall become effective upon receipt. (g) Governing Law. Despite any different result required by any conflicts of law provisions, this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. (h) Force Majeure. Anything else in this Agreement notwithstanding, Harcourt shall be excused from performance hereunder while, and to the extent that, its performance is prevented by fire, drought, explosion, flood, invasion, rebellion, earthquake, civil commotion, strike or labor disturbance, governmental or military authority, act of God, mechanical failure or any other event or casualty beyond the reasonable control of Harcourt, whether similar or dissimilar to those enumerated in this paragraph (hereafter a "Casualty"). In the event of a Casualty, the Company shall be responsible for making its own alternative arrangements with respect to the interrupted services. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. HARCOURT GENERAL, INC. /s/ R J Tarr Jr. ___________________________ Robert J. Tarr, Jr. President and Chief Executive Officer GC COMPANIES, INC. /s/ Richard A. Smith ___________________________ Richard A. Smith Chairman and Chief Executive Officer [page] 6 EX-11.1 4 COMPUTATION OF AVERAGE NUM. OF SHARES OUTSTANDING EXHIBIT 11.1
HARCOURT GENERAL, INC. AND SUBSIDIARIES OCTOBER 31, 1995 EXHIBIT TO FORM 10-K COMPUTATION OF AVERAGE NUMBER OF SHARES OUTSTANDING USED IN DETERMINING PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (In thousands) 1995 1994 1993 PRIMARY 1. Weighted average number of Common shares outstanding 75,006 77,802 76,493 2. Assumed conversion of Series A Cumulative Convertible Preferred Stock 1,480 1,677 2,736 3. Assumed exercise of certain stock options based on average market value during the year 278 330 396 4. Weighted average number of shares used in primary per share computations 76,764 79,809 79,625 FULLY DILUTED (A) 1. Weighted average number of Common shares outstanding 75,006 77,802 76,493 2. Assumed exercise of Series A Cumulative Convertible Preferred Stock 1,480 1,677 2,736 3. Assumed exercise of certain stock options based on market value at October 31 291 340 420 4. Weighted average number of shares used in primary per share computations 76,777 79,819 79,649 (A) This calculation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
[page] EX-13.1 5 1995 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.1 Harcourt General 1995 Annual Report [PICTURE - Ladies shoe displayed on books - encircled by text] HARCOURT GENERAL MANAGING TO CREATE VALUE ------------------------ As the symbolic circle on the cover of this annual report implies, Harcourt General views the task of creating value for its shareholders as a continuous process. We take this process seriously by managing our businesses aggressively for high quality earnings and cash flow; by investing the capital necessary to grow revenues, improve margins and control expenses; and by pursuing strategic acquisition opportunities. Many companies measure their performance one quarter or one year at a time. We maintain a much longer term perspective. Over time, we have delivered on our commitment to create lasting shareholder value through consistent earnings growth, stock price appreciation and 27 consecutive years of cash dividend increases. CONTENTS 1 Financial Review 2 At-A-Glance 4 Letter to Our Shareholders 9 Reinvesting in Our Future 15 Realizing Attractive Returns 21 Creating Lasting Value 22 Mission Statement 23 Financial Section 45 Directors and Officers 46 Shareholder Information FINANCIAL REVIEW (fiscal years ended October 31) (amounts in millions)
1992 1993 1994 1995 Revenues $2,471.7 $2,758.6 $2,850.8 $3,034.7 Operating Earnings (Loss) $ 198.0 $ 257.9 $ 310.1 $ 317.9 After Tax Earnings (Loss) From Continuing Operations $ 86.0 $ 127.9 $ 147.3 $ 177.6 Earnings (Loss) Per Share From Continuing Operations $ 1.09 $ 1.60 $ 1.84 $ 2.31 Cash Generated By Continuing Operations (1): Publishing $ 215.9 $ 246.8 $ 260.3 $ 297.8 Specialty Retailing $ 135.5 $ 178.8 $ 205.4 $ 210.1 Professional Services $ 26.1 $ 31.4 $ 26.1 $ 17.5 -------- -------- -------- -------- Total $ 377.5 $ 457.0 $ 491.8 $ 525.4 (1) Cash generated by continuing operations is comprised of operating earnings plus depreciation and amortization. Capital Spending Publishing $ 106.5 $ 92.9 $ 122.8 $ 122.7 Specialty Retailing $ 58.6 $ 48.5 $ 63.6 $ 92.5 Professional Services $ 2.9 $ 4.8 $ 6.9 $ 3.8 -------- -------- -------- -------- Total Capital Spending $ 168.0 $ 146.2 $ 193.3 $ 219.0 The above charts depict only four years of operating results because fiscal 1991 was affected by the following important factors: 1. Harcourt General and Harcourt Brace Jovanovich (HBJ) operated as separate companies prior to their merger, which was completed at the beginning of fiscal 1992. 2. Significant charges for write-offs and restructuring related to the merger with HBJ were recognized in 1991. 3. Substantial interest expense associated with HBJ's high debt levels was incurred in 1991, only partially offset by investment income earned from the Company's investment portfolio.
1 AT-A-GLANCE On the surface, our core businesses of publishing and specialty retailing may appear to be different. But in fact they share a number of similar characteristics. Harcourt Brace and The Neiman Marcus Group are leaders in the publishing and specialty retailing industries. Both enjoy worldwide name recognition through their prestigious franchises, trademarks and imprints. They are innovators and highly regarded for strong management practices and loyal customer relationships. Together, these businesses share a common strategic goal: To aggressively pursue opportunities to maximize returns for Harcourt General's shareholders. Their consolidated results illustrate how two diverse businesses can be managed to achieve that common goal. PUBLISHING - ---------- [logo Harcourt Brace flush left] HARCOURT BRACE SCHOOL One of the nation's leading publishers of textbooks and related instructional materials for kindergarten through grade 8. 1992 1993 1994 1995 Publishing Revenues $865,336 $944,545 $919,498 $1,017,637 Publishing Operating Earnings $124,503 $142,177 $165,436 $ 177,531
HARCOURT BRACE COLLEGE A premier publisher of instructional materials for the post-secondary educational market under the Harcourt Brace, Dryden Press and Saunders College imprints. HARCOURT BRACE INTERNATIONAL Headquartered in London with operations in Tokyo, Sydney, Toronto and Montreal, the International Group publishes locally and distributes U.S.-published product worldwide. HARCOURT BRACE PROFESSIONAL Operates the leading bar review course for law students, a CPA review course for accountants and publishes reference and engagement materials, and accounting and tax practice newsletters. HARCOURT BRACE TRADE Publishes distinguished literature for children and adults under Harcourt Brace, Harvest and several children's books imprints. [logo]HOLT, RINEHART AND WINSTON One of the most reputable imprints in the educational market, HRW publishes instructional materials for grades 7 through 12. [logo]THE PSYCHOLOGICAL CORPORATION The nation's leading publisher of tests and related products and services for educational, psychological, clinical and professional assessment and the leading provider of computerized tests for the credentialing and licensing markets. [logo]ACADEMIC PRESS One of the leading international publishers of books and scholarly journals in the life, physical and social sciences. [logo]WB SAUNDERS Since 1888, the world's leading publisher of medical books and periodicals for the health sciences. SPECIALTY RETAILING - ------------------- [logo] NEIMAN MARCUS A world-renowned franchise focusing on the high-end segment of the specialty retailing marketplace through its 28 fine stores nationwide. [logo]BERGDORF GOODMAN With a reputation of elegance and an exclusive designer showcase presentation in its two stores on Fifth Avenue in New York City, Bergdorf Goodman is a true worldwide destination shopping experience. [logo]NM Direct A state-of-the-art direct mail operation which provides a distinctive selection of merchandise coupled with convenient at-home shopping through the Neiman Marcus, Horchow and Tries catalogues. 1992 1993 1994 1995 Specialty Retailing Revenues $1,484,945 $1,667,825 $1,789,461 $1,888,249 Specialty Retailing Operating Earnings $ 90,976 $ 134,302 $ 157,713 $ 161,698
2 1995 HIGHLIGHTS -- MAJOR PUBLISHING BUSINESSES ELEMENTARY Outstanding year, with reading and mathematics products generating significant revenue and profit growth. HRW Maintained very ambitious product development calendar with introduction of new French and Spanish programs, a new edition of Adventures in Literature and three science titles. COLLEGE Higher revenues and significant cost reductions improved profitability in a challenging market. THE PSYCHOLOGICAL CORPORATION Acquired Assessment Systems, Inc., a leader in the rapidly advancing market for computerized testing services, and achieved earnings increase. ACADEMIC PRESS Established Internet presence for electronic delivery of its scientific books and journals while achieving record financial results. WB SAUNDERS Investments in nursing and health professions continued; journal expansion program maintained; revisions of medical textbooks remain on schedule for publication in 1996 and 1997. 1996 OUTLOOK -- MAJOR PUBLISHING BUSINESSES ELEMENTARY Sales outlook reduced following very strong 1995 due to limited 1996 adoption calendar; introductions of new reading and social studies programs brighten the outlook for 1997. HRW Assortment of new programs revamps product lineup, building expectations for strong 1996 sales and profit gains. COLLEGE Modest growth anticipated in a continuing difficult market environment. THE PSYCHOLOGICAL CORPORATION New product introductions, led by the popular Stanford Achievement Test - 9th edition, and integration of ASI's computerized testing business should sustain growth trends. ACADEMIC PRESS Continued growth of journal and book business expected along with increasing shift to electronic distribution. WB SAUNDERS Strong performance outlook based on key clinical book publication schedule and continued growth in nursing and allied health fields.
PUBLISHING REVENUE HISTORY (In millions) 1992 1993 1994 1995 - ------------------------------------------------------------------- Elementary $124.4 $187.4 $145.3 $ 190.0 Secondary 99.0 125.0 120.5 123.7 College 147.3 149.0 145.4 150.1 Testing 96.5 93.2 99.1 117.9 STMP 348.9 323.0 342.0 371.0 International 86.7 84.0 83.2 82.7 Trade 29.1 30.7 34.3 37.9 Elimination of intercompany sales (66.6) (47.8) (50.3) (55.7) ------------------------------------------- Total $865.3 $944.5 $919.5 $1,017.6 - -------------------------------------------------------------------
1995 HIGHLIGHTS -- SPECIALTY RETAILING THE NEIMAN MARCUS GROUP Sale of Contempo Casuals in June focuses specialty retailing businesses exclusively on the upscale market. Securitization of credit card receivables raises $246 million in cash. NEIMAN MARCUS STORES Achieved record earnings, with operating margins rising to 9.5%. Successfully opened its 28th Neiman Marcus, a 137,000 square foot store, in The Mall at Short Hills, New Jersey. Broke ground on a new 464,000 square foot national service and distribution center located in Longview, Texas, scheduled for completion in early 1996. Completed major remodels in Westchester, NY; Northbrook, IL; and NorthPark in suburban Dallas. NM DIRECT Implemented cost reduction programs in Spring Season to counteract sharply higher postage and paper costs. Consolidated distribution operations into newly expanded facility in Las Colinas, Texas. BERGDORF GOODMAN Operating margins improved to 6.9% as the Bergdorf Goodman Men store achieved profitability. 1996 OUTLOOK -- SPECIALTY RETAILING NEIMAN MARCUS STORES Operating results should benefit from two new locations: Short Hills, NJ, which opened in August, and King of Prussia, PA, scheduled to open in February 1996. Opening of new service and distribution center will consolidate distribution function from several separate facilities, generating cost savings and other efficiencies. NM DIRECT Improved financial performance expected, reflecting lower expenses as a result of a reduced number of catalogues, pages and circulation. BERGDORF GOODMAN Renovations in main store will include creation of a new world class beauty salon and spa, and expansion of the decorative home area. Bergdorf Goodman Men will gain additional space on its main floor, permitting the creation of a new central entrance on Fifth Avenue. SPECIALTY RETAILING REVENUE HISTORY
(In millions) 1992 1993 1994 1995 - ------------------------------------------------------------------- Neiman Marcus Stores $1,084.8 $1,219.0 $1,311.5 $1,398.8 Bergdorf Goodman 199.1 219.1 229.5 241.5 NM Direct 201.0 229.7 248.5 247.9 ------------------------------------------- Total $1,484.9 $1,667.8 $1,789.5 $1,888.2 - -------------------------------------------------------------------
3 HARCOURT GENERAL 1995 Annual Report LETTER TO OUR SHAREHOLDERS -------------------------- This year's annual report focuses on the management philosophy which has guided our Company during 34 years of public ownership. During this time, our goal has been, and remains today, to create lasting value for our shareholders. We believe we can best accomplish this goal by investing in and effectively managing our operating businesses to generate increasing cash flows and earnings. This in turn will lead to appreciation in the Company's stock price and a rising stream of cash dividends for our shareholders. Our two core businesses, publishing and specialty retailing, continue to grow in value. At our Harcourt Brace publishing subsidiary, we are investing heavily in new products and technologies to secure our market leadership positions into the next century. The Neiman Marcus Group has substantially completed its store remodeling program, is firmly positioned as the nation's leading upscale retailer, and is now beginning to realize attractive cash returns from significant past capital investments. We're pleased by the progress recorded against our goals in 1995, with significant achievements throughout our two core businesses as well as the completion of several corporate activities designed to enhance shareholder value. The year, however, was not without frustration as we were unable to find a significant acquisition opportunity to redeploy the Company's large cash balances and underutilized debt capacity. We continue our search for an operating business capable of generating returns higher than the relatively low rates currently being realized by our investment portfolio. We remain true to our disciplined, value-oriented approach in assessing acquisition opportunities and will be patient in the current environment of extremely high valuations, ever vigilant for the right opportunity when it becomes available. 4 RESULTS FROM CONTINUING OPERATIONS
(In millions, except for per share amounts) 1993 1994 1995 - ------------------------------------------------------------------------------------------------------- Revenues $2,758.6 $2,850.8 $3,034.7 Operating earnings $ 257.9 $ 310.1 $ 317.9 Operating margin 9.3% 10.9% 10.5% Earnings from continuing operations $ 127.9 $ 147.3 $ 177.6 Earnings per share from continuing operations $ 1.60 $ 1.84 $ 2.31 Capital expenditures $ 159.9 $ 196.2 $ 220.1 Common dividends paid per share $ 0.57 $ 0.61 $ 0.65
SHARE REPURCHASE One of the most significant corporate actions during the year was the successful "Dutch Auction" repurchase by the Company of 5.4 million common shares at $40.50 per share, for a total cost of approximately $220 million. The repurchase of shares was a judicious use of the large capital balance accumulated from the strong cash flows of our core businesses and the sale in October 1994 of the insurance business acquired with Harcourt Brace several years earlier. After this share repurchase, we still have adequate cash balances as well as ready access to other sources of capital to pursue attractive acquisition opportunities that might become available. Following the completion of the "Dutch Auction," the Board of Directors authorized an open market repurchase program for up to an additional 2.5 million shares of the Company's common stock. Between the end of our scale year and the end of December, that program resulted in the repurchase of approximately 1.1 million shares at a total price of $42.1 million, equal to an average of approximately $39.40 per share. The combined effect of the share repurchases has reduced the number of common and common equivalent shares outstanding to approximately 73.5 million. Our two core businesses performed well in 1995, leading to strong financial returns for the year. More importantly, we continue to reinvest in both businesses, strengthening their competitive positions and further enhancing their long-term outlook and value. Revenues in 1995 rose 6.5% to $3.03 billion, while operating earnings increased 2.5% to $317.9 million. After-tax earnings from continuing operations grew 20.6% to $177.6 million, while earnings per share from continuing operations, benefiting from the previously discussed share repurchase program, rose 25.5% to $2.31. PUBLISHING The Harcourt Brace publishing operations, which continue to generate the majority of our earnings, maintained their growth momentum in 1995, with revenues increasing 10.7% to just over $1 billion and operating earnings rising 7.3% to $177.5 million. We were pleased to meet our earnings targets despite unprecedented increases in paper prices during the year. This performance reflects a very strong year in the educational businesses, paced by a 34.2% revenue gain in the elementary business. Sales of elementary reading products were particularly strong, boosted by sizable market shares in the Tennessee, Alabama, West Virginia and Indiana adoptions. We were also pleased by the improved profitability of our college operations, which benefited from sales increases and from cost reduction programs undertaken to offset the continuation of a difficult, slow-growth market. Our scientific, technical, medical, professional (STMP) group had a 9.9% increase in revenues for the year. Earnings were only slightly higher, however, as a profit decline in the WB Saunders medical business offset most of the profit gains at our Academic Press scientific publisher and in our London-based publishing group. As we look to the future, we are optimistic about our publishing businesses. Our reinvestment in Harcourt Brace continues at an aggressive pace, with capital expenditures in 1995 totaling $123 million and an additional $150 million budgeted for 1996. Approximately 90% of these funds are committed to producing new and revised programs throughout our publishing businesses. As we enter the final years of this decade, our educational and STMP businesses will have strong, broad product offerings to maintain and expand upon their competitive positions. 5 HARCOURT GENERAL 1995 Annual Report [PHOTO - Richard A. Smith, sitting on left, Robert J. Tarr, Jr. standing; both at conference table. Books and Ladies shoe displayed on conference table] Our investment program at Harcourt Brace also includes the evaluation and development of a number of technology-driven opportunities for educational and STMP markets. For the past year, we have been involved in a joint venture with Edmark Corporation to develop new lines of multimedia software products for the elementary school market. That collaboration has gone well and in the coming year it will generate several important multimedia products in reading/language arts and social studies. Demand for technology products is limited in educational markets today because of the lack of installed computer systems in the classroom, inadequate teacher training and overall tight funding. Our goal is to stay abreast of technological developments, to offer our customers competitive electronic products, and to maintain a level of expertise that will enable us to respond to demand for these products as it further materializes. In the STMP area, the use of technology is much more prevalent, and we have assumed a leadership position. Last year, Academic Press was the first major publisher to announce a plan to make all of its journals available on the Internet for on-line delivery. AP is also discussing site-licensing agreements for its journals with several institutional customers. We completed an important acquisition during the year which broadens our testing business and adds a new growth element to the Company. Assessment Systems, Inc. (ASI), the nation's leading provider of computer-delivered licensing and credentialing examinations and related information services, was acquired by The Psychological Corporation in May. ASI has annual revenues of about $30 million and operates through more than 50 permanent testing centers across the country. We expect our publishing businesses to continue their steady progress in 1996. Fewer adoption opportunities will make the upcoming year difficult for the elementary business; however, our secondary business should experience strong growth from the introduction of new programs in language arts, foreign languages, mathematics and social studies. The addition of ASI and the introduction of the ninth edition of the successful Stanford Achievement Test provide the foundation for improved results at The Psychological Corporation. Our college business, though stabilized, will continue to be affected by a soft market for new textbooks. The STMP group should perform very well in 1996, with continued growth at Academic Press and a favorable outlook for WB Saunders based on its production schedule for revised editions of successful major medical books. 6 SPECIALTY RETAILING Despite a difficult retailing environment, our specialty retailing operations had excellent results in 1995. Revenues increased 5.5% to $1.89 billion, and operating earnings rose 2.5% to $161.7 million. Most importantly, in June the Contempo Casuals junior retail chain, which had been performing poorly, was sold, allowing The Neiman Marcus Group to focus exclusively on the upscale segment of the market. Financial results for the year were highlighted by strong performances by Neiman Marcus Stores and Bergdorf Goodman, both of which achieved significant gains in revenues, operating margins and earnings. NM Direct, the mail order operation, had significantly lower earnings as a result of soft demand for its women's apparel and sharply higher paper and postage costs. For the year, The Neiman Marcus Group contributed after-tax earnings from continuing operations of $64.8 million, equal to $.84 per share, to Harcourt General's results, compared to $63.1 million, equal to $.79 per share, in 1994. Including the results of the divested Contempo Casuals business, The Neiman Marcus Group contributed net earnings of $53.1 million, equal to $.69 per share, to 1995's results, compared to $13.4 million, equal to $.17 per share, in 1994. Reflecting the past years of significant investment in its stores, people and infrastructure, The Neiman Marcus Group stands today as the clear leader in the upscale retail market serving affluent customers. We believe these businesses have entered a phase where they will generate significant cash returns on those investments. Consistent with that view, in November of 1995, Harcourt General purchased 831,400 common shares of The Neiman Marcus Group from an institutional investor for $18.75 per share, or a total of $15.6 million. That purchase increased the Company's ownership in The Neiman Marcus Group to 58.6% of the outstanding common equity. PROFESSIONAL SERVICES The professional services segment, which consists of the Drake Beam Morin outplacement business, had another difficult year in 1995, with revenues falling to $128.9 million from $141.8 million in 1994. Even though demand for outplacement services is growing, the marketplace is extremely price sensitive, resulting in declining sales dollars and significant pressure on profit margins. As a result, operating earnings in 1995 fell to $13.1 million from $22.1 million in the prior year. We continue to implement cost reduction programs throughout DBM to bring expenses in line with the current pricing environment and hope to see an improvement in 1996 results. DIVIDEND INCREASE In September, the Board of Directors voted to increase the quarterly cash dividend 6.3% to 17 cents per share. This is the 27th consecutive year that the Board has increased the cash payment to shareholders and the 37th consecutive year that the Company has paid cash dividends. In May 1995, Brian J. Knez was promoted to president and chief executive officer of Harcourt Brace & Company. He had been president of the STMP group since 1993 and prior to that oversaw the University and Professional Publishing group. Brian leads an extremely talented management team at Harcourt Brace, one which adds to our confidence that these businesses will remain leaders within their market segments for many years to come. Harcourt General is strongly focused on its two core businesses of publishing and upscale specialty retailing. We will continue to reinvest in and strengthen those franchises while we patiently seek opportunities to redeploy excess cash in new operating businesses. We appreciate your support as we work diligently toward our goal of creating lasting value for our shareholders. /s/ Richard A. Smith /s/ Robert J. Tarr, Jr. Richard A. Smith Robert J. Tarr, Jr. Chairman of the Board President and Chief Executive Officer January 5, 1996 7 [PICTURE - Upright book - encircled by text] [SET IN CIRCLE - product development - new technologies - strategic partnerships - acquisitions] 8 PUBLISHING REINVESTING IN OUR FUTURE - ------------------------- By funding an aggressive, continuous investment program in new products, new technologies and new business affiliations, we have solidified the leadership position of the Harcourt Brace publishing operations in worldwide markets and are positioned to generate significant returns into the 21st century. PRODUCT DEVELOPMENT Content is the lifeblood of publishing. Throughout Harcourt Brace, investments are being made to ensure that new publishing programs become market leaders and that the strong backlist of titles is revised on a regular basis. NEW TECHNOLOGIES The electronic revolution is progressing -- faster in markets such as scientific and professional publishing and much slower in educational sectors. As a content provider, Harcourt Brace is committed to providing information in formats most valued by the end user, whether those formats be an emerging on-line electronic service or the tried and true print on paper. STRATEGIC PARTNERSHIPS Not all expertise has to be in-house. Harcourt Brace has forged strategic alliances to gain access to new technologies and distribution channels. Our value added is the content and our understanding of the educational and STMP markets. ACQUISITIONS Significant synergies exist in publishing acquisitions. We are constantly seeking opportunities to strengthen our existing businesses and to expand beyond our current horizons by acquiring other content providers. 9 [PICTURE - Cross section of information sources offered by Harcourt Brace & Company. Text in center of picture.] Content is the real currency of the information revolution. New technologies will enable us to leverage Harcourt Brace's rich library of content and enhance its value to students and professionals around the globe. 10 PRODUCT DEVELOPMENT During the four years that Harcourt Brace has been owned and managed by Harcourt General, more than $450 million has been reinvested into its publishing businesses, with approximately 90% of those dollars funding new products and the revision of backlist titles. In 1995, Harcourt Brace School introduced a new program, Science AnyTime, to complement its existing and very successful elementary reading and math programs. The Company's new reading program, Signatures, will be introduced for the important California adoption in 1997. In addition, in the upcoming year, Harcourt Brace School will introduce a new social studies program, Stories in Time, which will compete in the 1997 Texas adoption. This new program will enable Harcourt Brace School to participate in the four major segments -- reading, math, science and social studies -- that account for more than 80% of the elementary market. Holt, Rinehart and Winston is completing a very ambitious product development calendar. New programs in Spanish, French and German have been introduced to support HRW's position as the leading secondary foreign language publisher. New biology and chemistry programs have strengthened the science list, and Adventures, a newly revised classic literature program, adds to HRW's leadership in language arts. In 1996, HRW will introduce a revision of its leading integrated language arts program, Elements of Literature, as well as a new offering in mathematics, a revision of SciencePlus, and a mixed media World History program. [PICTURE - Display of the variety of products offered by Harcourt Brace & Company.] In the college market, Harcourt Brace has focused its publishing effort on humanities, social sciences, sciences, business and custom publishing. Major new titles which contributed to an improved 1995 performance include: Sternberg, In Search of the Human Mind; Porter and Norton, Financial Accounting; and Brown, Organic Chemistry. In the testing business, The Psychological Corporation has issued the ninth edition of its highly successful Stanford Achievement Test, maintaining its position in the forefront of performance assessment. Important clinical products which should benefit future sales include the Wechsler Intelligence Scale for Children, third edition; and the Wechsler Adult Intelligence Scales, third edition. In the STMP group, Academic Press is maintaining its strong publishing schedule, with more than 400 scientific and technical books released during the past year. In addition, Academic Press published 184 scholarly journals. In 1993, Academic Press introduced the AP Professional imprint to publish technical and reference books in both print and electronic format for the computer professional. This line now has more than 150 titles in print and a publication schedule of approximately 50 titles annually. WB Saunders published 178 books and 136 periodicals in 1995 for the health sciences market. Over the past five years, WB Saunders has added 36 new journals and 12 new clinics to its roster. The medical book 11 production schedule is particularly strong over the next two years, with a number of WB Saunders' very successful major clinical textbooks due for revision, including Braunwald: Heart Disease, 5th edition. The number of publications for nursing and allied health professionals also continues to grow, expanding Saunders' presence in these important, growing markets. INTERNATIONAL Harcourt Brace International was restructured last year, with the elimination of the Orlando-based export operations and the establishment of a new consolidated headquarters in London. This new organization will increase Harcourt Brace's presence in major overseas regions, including Europe, Central and South America, and the Pacific Rim. Our new organizational structure will improve our ability to explore local publishing as well as acquisitions and joint ventures. PROFESSIONAL The professional publishing group continues to expand from its solid base. More than 30,000 students completed the nation's leading bar review course, BAR/BRI, in 1995, and our growing CPA review course, [PICTURE - Display of a sampling of publications offered by Harcourt Brace & Company.] Conviser Duffy, increased enrollments approximately 25%. We also continue to expand on the highly successful GAAP, GAAS and Governmental GAAP Guides for accountants with CD-ROM versions and ancillary products. TRADE Harcourt Brace Trade had a very successful 1995. The children's business was particularly strong, led by top sellers such as Stellaluna and new titles such as Smoky Night, recipient of the prestigious Caldecott Medal award. Successful adult books included Umberto Eco's national best-seller, The Island of the Day Before and David Guterson's Snow Falling on Cedars, winner of the PEN/Faulkner award. NEW TECHNOLOGIES Harcourt Brace is developing electronic products at a pace which reflects market realities. We will let the customer determine in which format our information is most useful, and we will deliver our content in that format. Our business most affected by technological change today is Academic Press, whose information is used by scientific researchers who are highly computer literate and have access to on-line services. Academic Press has taken a leadership position by creating a comprehensive new service on the Internet, making its books and journals available for review and purchase. AP is also discussing site-licensing agreements that will allow large users such as educational institutions to access AP's journals on-line. 12 Some users of both scientific and medical journals are indicating a preference for journals in CD-ROM format. During the past year, WB Saunders' journals Blood and Journal of Clinical Oncology and AP's journal Virology were made available in this electronic format. In the educational field, the movement toward electronic product is much slower. Harcourt Brace College will publish its first true electronic stand-alone product, a chemistry CD-ROM program, in 1996. In the high school and elementary markets, we are incorporating multimedia components into all our instructional programs; however, the market has yet to fully develop, as widespread availability of multimedia equipment does not currently exist in classrooms. We are staying abreast of technological developments in our markets by utilizing third parties to gain access to technology when necessary, by maintaining a core technology group within each operating unit, and by utilizing the expertise of Archipelago Productions, our internal multimedia production firm. We have also broadened the mandate of Archipelago to become a multimedia publisher in its own right, using text and illustrative materials to produce interactive electronic products. [PICTURE - Display of a sampling of products offered by Harcourt Brace & Company.] STRATEGIC PARTNERSHIPS Last year Harcourt Brace formed an alliance with Edmark Corporation, a leading software developer, to create new multimedia products for the elementary market. During 1996 the first jointly developed products will be introduced as components of Harcourt Brace's new elementary reading program, Signatures, and the new social studies program, Stories in Time. Harcourt Brace has also entered into an exclusive license agreement with Broderbund Software to produce a Harcourt edition of The Amazing Writing Machine. This word processing software provides a rich environment for students to apply the writing skills they are developing in concert with their instructional programs. A distribution agreement with Tom Snyder Productions has also enabled Harcourt Brace School to offer programs from this award-winning company as an integrated part of Stories in Time. Last year, Harcourt Brace College joined with Merriam-Webster to publish electronic products that combine the best-selling Harbrace College Handbook with the Merriam-Webster Collegiate Dictionary. ACQUISITIONS In addition to organic growth opportunities within our publishing businesses, acquisitions represent a significant opportunity. In May 1995, The Psychological Corporation acquired Assessment Systems, Inc. (ASI), which provides computerized testing services for licensing and credentialing of professional and trade groups. ASI has a strong position in the insurance and real estate fields, and a growing presence in nurse aide and allied health markets. Last year, ASI administered more than 325,000 tests to individuals seeking licenses or credentials for a profession or trade. 13 [PICTURE - Tailor's mannequin encircled by text] [SET IN CIRCLE - upscale market focus - expansion and remodeling - outstanding customer service - effective merchandising and promotion] 14 SPECIALTY RETAILING REALIZING ATTRACTIVE RETURNS - ---------------------------- Substantial investments made to expand and enhance The Neiman Marcus Group's specialty retailing operations are generating outstanding results, with operating earnings from continuing operations growing at an average compound rate of 30% over the past five years. UPSCALE MARKET FOCUS With Neiman Marcus Stores, Bergdorf Goodman and NM Direct, we are focused exclusively on serving affluent customers with the nest merchandise and highest levels of service possible. EXPANSION AND REMODELING Since 1988, more than $500 million has been invested in stores, infrastructure and people, resulting in the most modern, attractive store base in the industry and a 23% expansion in gross square footage at Neiman Marcus Stores and Bergdorf Goodman. OUTSTANDING CUSTOMER SERVICE No stronger commitment to customer service exists in the industry than that found at The Neiman Marcus Group, where personnel at all levels are consistently trained in the art of exceeding customer expectations. EFFECTIVE MERCHANDISING AND PROMOTION Working in partnership with the world's leading designers, Neiman Marcus and Bergdorf Goodman are constantly creating new merchandising programs to capture and hold the attention of our customers. 15 [PICTURE - Montage of photos depicting products and environment offered by The Neiman Marcus Group, Inc. Text in center of picture.] We believe The Neiman Marcus Group today has the most modern and attractive stores of any national retailer, supported by a highly efficient infrastructure and extremely strong relationships with the world's leading designers of fine merchandise. 16 UPSCALE MARKET FOCUS The divestiture of the Contempo Casuals junior women's business in June 1995 permits The Neiman Marcus Group to focus exclusively on the high-end segment of the specialty retailing market that serves affluent customers across the country. The Neiman Marcus and Bergdorf Goodman customer base consists of fashion-conscious individuals with an appreciation for high quality, exclusive designer merchandise. These customers are uncompromising in their search for quality and are knowledgeable about the value of high-end, designer brand names because of the important role fashion plays in their everyday lives. Both Neiman Marcus and Bergdorf Goodman have developed strong relationships with the world's leading designer resources to ensure that our customers have access to the nest merchandise available. These designers know that our stores offer an upscale residential type environment that highlights their merchandise most effectively and that our skilled sales associates have the customer relationships and product knowledge to maximize merchandise sales. [PICTURE - Products offered by The Neiman Marcus Group, Inc.] EXPANSION AND REMODELING In the eight years we have managed The Neiman Marcus Group, more than $500 million has been reinvested in the businesses, with the bulk of those funds spent on remodeling existing stores and building new stores. More than one-half of the Neiman Marcus Store square footage today is new or has been remodeled since 1987. During this time, we have opened six new Neiman Marcus Stores: McLean, VA (outside Washington, DC); Denver; Minneapolis; Scottsdale; Troy, MI (outside Detroit); and, in August 1995, Short Hills, NJ. These new stores have increased the Neiman Marcus gross square footage by more than 20% to nearly 4 million square feet. In addition, Bergdorf Goodman opened its men's store in New York City, across Fifth Avenue from its main store, in the fall of 1990. In February 1996, a new Neiman Marcus will open in King of Prussia, PA, just outside Philadelphia; and in the fall of 1996 Neiman Marcus will open a new store in Paramus, NJ. These two new stores will add nearly 300,000 square feet to the Neiman Marcus store base. In 1999, Neiman Marcus is scheduled to o pen a 160,000 square foot store in Honolulu, Hawaii. The remodeling and expansion program has produced the most modern and attractive national store network in the industry and has enabled us to reclaim non-selling space and increase efficiencies. One of the keys to the profit margin improvement achieved by Neiman Marcus Stores has been its ability to increase 17 merchandise sales through existing real estate. The remodeling and expansion program has contributed greatly to our success in that effort, witnessed by the increase in sales per gross square foot within Neiman Marcus Stores from less than $300 in 1992 to approximately $360 in 1995. OUTSTANDING CUSTOMER SERVICE At Neiman Marcus, Bergdorf Goodman and NM Direct, our customers demand the highest levels of service, and we are committed to satisfying their demands. Therefore, we have made significant investment in this area, including the implementation of intensified training programs and increases in the overall number of sales associates within our stores. As in any service-oriented business, feedback is the vital component which measures effectiveness. We ensure our impeccable service by conducting ongoing surveys which monitor customer satisfaction. At Bergdorf Goodman Men, a clientele specialist greets customers at the door and is available to personally accompany them throughout the store if they so desire. [PICTURE - Products offered by The Neiman Marcus Group, Inc.] At Neiman Marcus Stores, an outside shopping service is employed to regularly shop each store, as well as our competitors, rating sales associates on a broad range of customer service categories. These results, which are part of our store managers' performance evaluations, consistently rank Neiman Marcus at the top of the list in customer service. EFFECTIVE MERCHANDISING AND PROMOTION Neiman Marcus Stores, Bergdorf Goodman and NM Direct realize that success in the upscale market niche they serve requires a special air in their merchandising and promotion programs. They are constantly striving to generate interest, gain attention and capture the imagination of customers. One of the most successful marketing programs in the retail industry is represented by the Neiman Marcus Christmas Catalogue, which has developed a worldwide reputation. NM Direct works all year to collect an outstanding assortment of merchandise and to produce the Christmas catalogue, which is mailed to more than 3 million individuals. The catalogue kick-off in September has become a true media event, with widespread coverage by radio, television, newspapers and magazines around the world. In 1995, the famous His and Hers gift was a full year of first class travel for two on United Airlines and the right to emblazon 18 the buyer's name on the nose of a United Boeing 777. The gift was auctioned off with any amount over $100,000 going to AmeriCares, a disaster relief organization that airlifts emergency medical supplies around the globe. The winning bid of $177,747 resulted in a charitable donation of $77,747. For the past two years, Neiman Marcus Stores has served holiday shoppers with the NM Holiday Express Train. In 1995, the train toured 10 U.S. cities from San Antonio, Texas to Cleveland, Ohio featuring fine quality merchandise. This innovative tour not only generates nationwide media coverage, but also represents a unique way to embrace customers in markets too small to support a Neiman Marcus Store. In-store events are a major vehicle to bring customers into our facilities and to highlight specific merchandise. In 1995, more than 3,000 special events ranging from trunk shows featuring specific designers, to fashion show luncheons, to special tie-ins with charitable organizations were held at Neiman Marcus Stores. [PICTURE - Array of catalogues offered by NM Direct] The opening of the Short Hills store featured a black tie charity gala to benefit three New Jersey organizations: The American Paralysis Association, the Paper Mill Playhouse and the Woman's Association of Morristown Memorial Hospital. More than 750 guests attended, supporting the three charities and gaining important exposure for the new store. Similar events will launch the new stores in King of Prussia, PA and Paramus, NJ later this year. Neiman Marcus Stores' most effective marketing is direct communication with its customers. In the coming year, a new concept, "Magalogues," will combine all store catalogues issued throughout the year into a monthly magazine format that not only promotes product but also includes customer service articles, designer profiles and other highlights. The first issue in February 1996 will be mailed to approximately 500,000 Neiman Marcus customers. These and many other merchandising activities combine to create the successful marketing efforts of Neiman Marcus and Bergdorf Goodman. 19 [PICTURE - Stack of button down shirts next to a stack of books, both encircled by text.] [SET IN CIRCLE - building on strong franchises - maintaining long-term horizon ----------------------------- ----------------------------- - - exploring new opportunities] --------------------------- 20 HARCOURT GENERAL CREATING LASTING VALUE - ---------------------- As we manage our existing core businesses, we continue to search for acquisition opportunities with a patient, disciplined approach. A healthy balance sheet and substantial borrowing capacity provide ample resources to take advantage of the right opportunity. BUILDING ON STRONG FRANCHISES The imprints of Harcourt Brace and the brands of The Neiman Marcus Group are all strong franchises within their respective marketplaces -- franchises with strong consumer identities that are associated with quality, integrity and superior customer service. Our reinvestment programs are designed to protect and build upon those franchises, adding to their value for shareholders. MAINTAINING LONG-TERM HORIZON The ability and willingness to think and act long-term is critical to our success. Corporate actions which have created substantial and lasting shareholder value, such as the sale of our soft drink bottling business in 1989 and the acquisition of Harcourt Brace in 1991, would not have been possible if quarterly or annual earnings targets took precedence over longer term value creation objectives. EXPLORING NEW OPPORTUNITIES Our search for new opportunities is active, and our horizons are wide. As owner-managers, our goals are firmly in line with our shareholders. We seek to create value, not growth for its own sake. Our approach is disciplined and value-oriented. We are patient, a particularly important virtue in the current environment of highly inflated prices. Over time, we will uncover opportunities that meet our goals. 21 OUR MISSION Harcourt General is an international operating company founded upon and committed to a fundamental economic principle: Management is responsible for generating above-average returns to the Company's shareholders on a consistent, long-term basis. Our mission, therefore, is to aggressively, yet responsibly, manage our operating businesses to create steadily appreciating value for those who invest in our Company. As we pursue this mission we are guided by the following important values: - - We will maintain an uncompromising commitment to quality and the highest levels of customer service in all our businesses and endeavors. - - We will adhere to the highest levels of integrity and ethical standards in dealing with all constituencies, including customers, suppliers and employees. - - We will aspire to achieve a leadership position in every one of our operating businesses. - - Our management decisions will emphasize long-term benefits to the value of our businesses, not short-term gains. We will employ capable, motivated people; follow sound management practices; utilize new technology efficiently; and reinvest earnings and new capital as required to grow our businesses and maintain the Corporation's financial health. - - We will strive to maximize the potential of all employees and maintain a professionally challenging work environment. - - We will be socially responsible and provide financial and human resource support for worthwhile causes, especially in those communities in which we operate. FINANCIAL CONTENTS 23 Management's Discussion & Analysis of Financial Condition and Results of Operations 27 Consolidated Statements of Earnings 28 Consolidated Balance Sheets 30 Consolidated Statements of Cash Flows 31 Consolidated Statements of Shareholders' Equity 32 Notes to Consolidated Financial Statements 43 Independent Auditors' Report 44 Five Year Summary 45 Directors and Officers 46 Shareholder Information 22 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION - --------------------------------------------------------- AND RESULTS OF OPERATIONS - ------------------------- SEGMENT OPERATING RESULTS Results have been restated to reflect the Company's insurance and theatre businesses and The Neiman Marcus Group's Contempo Casuals business as discontinued operations. The following table presents revenues and operating earnings by continuing business segment:
Years ended October 31 1995 1994 1993 - ------------------------------------------------------------------------ (In thousands) REVENUES Publishing $1,017,637 $ 919,498 $ 944,545 Specialty retailing 1,888,249 1,789,461 1,667,825 Professional services 128,850 141,818 146,252 ----------------------------------- Total revenues $3,034,736 $2,850,777 $2,758,622 ----------------------------------- OPERATING EARNINGS Publishing $ 177,531 $ 165,436 $ 142,177 Specialty retailing 161,698 157,713 134,302 Professional services 13,062 22,072 28,395 Corporate expenses (34,395) (35,081) (46,932) ----------------------------------- Total operating earnings $ 317,896 $ 310,140 $ 257,942 - ------------------------------------------------------------------------
OPERATING RESULTS 1995 VS. 1994 Earnings from continuing operations were $177.6 million or $2.31 per share in 1995 compared to $147.3 million or $1.84 per share in 1994. The improved earnings in 1995 resulted from higher publishing and specialty retailing earnings, partially offset by lower professional services earnings. Higher investment income also contributed to the earnings increase. The 1995 earnings per share amount includes the effect of the purchase of approximately 5.4 million shares of the Company's common stock through a "Dutch Auction" tender offer in April 1995. PUBLISHING Publishing revenues in 1995 increased 10.7% to $1.02 billion from $919.5 million in the previous year. Significant increases were achieved at the Company's educational and scientific, technical, medical and professional (STMP) groups. These improvements in 1995 were partially offset by lower international group revenues. Educational group revenue gains resulted primarily from sales of elementary products in reading, mathematics and science, and testing programs, while STMP revenues increased principally because of higher journal sales at both Academic Press and WB Saunders. The publishing segment had operating earnings of $177.5 million in 1995, a 7.3% increase from $165.4 million in 1994. Significant operating earnings gains at the educational group and a slight increase at the STMP group were partially offset by lower international group earnings. Overall, operating margins were negatively affected by increased costs of paper, prepublication amortization and fulfillment. SPECIALTY RETAILING Specialty retailing revenues in 1995 increased 5.5% to $1.89 billion from $1.79 billion in 1994. The higher revenues were a result of increased transaction volume and a higher average sale amount at both Neiman Marcus Stores and Bergdorf Goodman. Revenues at NM Direct were essentially at compared to 1994. Operating earnings from specialty retailing increased 2.5% to $161.7 million in 1995 from $157.7 million in 1994. Increased earnings in 1995 at Neiman Marcus Stores and Bergdorf Goodman were partially offset by lower NM Direct earnings. Both Neiman Marcus Stores and Bergdorf Goodman improved gross profit as a result of increased transaction volume and higher average sale amounts, partially offset by higher markdowns. Lower NM Direct earnings were principally due to reduced demand for apparel and higher paper and postage costs. Due to deflation in NMG's LIFO index in 1995, NMG recognized a credit of $10.4 million, which had the effect of improving gross profit. In 1994, the impact of the LIFO method of accounting reduced gross profit by $2.4 million. The securitization of NMG's credit card receivables, which was completed in March 1995, had the effect of reducing finance charge income by $7.1 million in 1995. Finance charge income in future periods will also be reduced. 23 Harcourt General, Inc. and Subsidiaries PROFESSIONAL SERVICES Revenues from the professional services segment decreased 9.1% to $128.9 million in 1995 from $141.8 million in 1994. The decrease was a result of reduced prices for outplacement services, reflecting an increasingly competitive marketplace. Operating earnings for the professional services segment decreased 40.8% to $13.1 million in 1995 compared with $22.1 million in 1994. The decrease was primarily due to lower margins that have resulted from increased competition. CORPORATE EXPENSES Corporate expenses decreased 2.0% to $34.4 million in 1995 compared to $35.1 million in 1994, primarily due to lower professional fees. INVESTMENT INCOME Investment income increased $25.7 million to $39.9 million in 1995 from $14.2 million in the previous year. The increase was due to a larger portfolio balance as a result of the sale of the Company's insurance business in October 1994 and a higher rate of return on portfolio assets. INTEREST EXPENSE Interest expense increased 2.9% to $88.7 million in 1995 from $86.2 million in 1994. The increase was primarily the result of higher interest rates on NMG bank debt. INCOME TAXES The Company's effective income tax rate was 34.0% in 1995, compared to 38.2% in 1994. The decrease in the rate was due to settlements of prior years' state and federal tax returns, and lower state and foreign taxes. DISCONTINUED OPERATIONS The loss from discontinued operations of $11.7 million in 1995 included $1.8 million of after-tax Contempo Casuals operating losses and an after-tax loss on disposal of $9.9 million. In 1994, earnings from discontinued operations included after-tax earnings of $37.1 million related to the Company's insurance business, an after-tax gain of $8.0 million on the sale of the insurance business, $35.0 million related to the settlement of certain tax matters associated with the sale of the Company's soft drink bottling business in 1989 and an after-tax loss from Contempo Casuals operations of $49.8 million, which included an after-tax restructuring charge of $28.1 million. OPERATING RESULTS 1994 VS. 1993 Earnings from continuing operations were $147.3 million or $1.84 per share in 1994 compared to $127.9 million or $1.60 per share in 1993. PUBLISHING Publishing revenues decreased 2.7% in 1994 to $919.5 million compared to $944.5 million in 1993. The anticipated decline in revenues following a strong 1993 performance was primarily the result of decreased elementary and secondary publishing orders due to state textbook purchase schedules. Offsetting the decreases in educational publishing sales were increases in scientific, technical, medical and professional (STMP) group revenues resulting from strong domestic and international sales of books and periodicals. Despite the decline in revenues, the publishing business achieved a 16.4% improvement in operating earnings. Publishing operating earnings were $165.4 million in 1994, compared to $142.2 million in 1993. Lower prepublication amortization costs and decreased marketing expenses in the educational publishing group, along with improved operating earnings from higher revenues in the STMP group, contributed to the increase. SPECIALTY RETAILING Revenues from specialty retailing increased 7.3% in 1994 to $1.79 billion from $1.67 billion in 1993. The increase resulted from comparable store increases at both Neiman Marcus Stores and Bergdorf Goodman, as well as higher revenues at NM Direct. Operating earnings from specialty retailing were $157.7 million in 1994 compared to $134.3 million in 1993. The increase was primarily due to the higher revenues. Harcourt General, Inc. and Subsidiaries 24 PROFESSIONAL SERVICES Revenues from the professional services segment decreased 3.0% to $141.8 million in 1994 from $146.3 million in 1993. The decrease was a result of lower group sales, principally attributable to two major corporate accounts that contributed significantly less revenues in 1994 compared to 1993. Operating earnings for the professional services segment were $22.1 million in 1994 compared with $28.4 million in 1993. The 22.3% decrease was the result of reduced group sales and operating expenses at levels comparable to the previous year. CORPORATE EXPENSES Corporate expenses decreased 25.3%, or $11.9 million, to $35.1 million in 1994. The decrease was the result of effective cost controls across substantially all administrative groups as well as lower employee benefit costs, professional fees and one-time charges related to corporate activities as compared to 1993. INVESTMENT INCOME Investment income remained essentially unchanged at $14.2 million, compared to $14.1 million in 1993. Slightly lower invested balances were offset by slightly higher rates of return. INTEREST EXPENSE Interest expense increased $1.6 million to $86.2 million in 1994. The increase resulted from higher interest rates and increased borrowings under the NMG credit agreements. INCOME TAXES The Company's effective income tax rate was approximately 38% in both 1994 and 1993. DISCONTINUED OPERATIONS Earnings from discontinued operations in 1994 included after-tax earnings related to the Company's insurance business of $37.1 million, an after-tax gain of $8.0 million on the sale of the insurance business, $35.0 million related to the settlement of certain tax matters associated with the sale of the Company's soft drink bottling business in 1989, and an after-tax loss from Contempo Casuals of $49.8 million. The 1993 earnings from discontinued operations included after-tax earnings from insurance of $46.0 million, after-tax theatre earnings of $5.8 million and an after-tax loss from Contempo Casuals of $8.4 million. LIQUIDITY AND CAPITAL RESOURCES The following discussion analyzes liquidity and capital resources by operating, investing and financing activities as presented in the Company's consolidated statements of cash flows. Cash provided by continuing operating activities in 1995 was $308.3 million compared to $193.5 million in 1994. The cash provided by the Company's operations was more than sufficient to fund working capital, capital expenditures and dividend requirements. The most significant changes in working capital were increases in inventories of $54.4 million and accounts receivable of $38.3 million, which were partially offset by a $26.0 million increase in accounts payable and accrued liabilities. Investing activities in 1995 included capital expenditures of $220.1 million, the purchase of $243.1 million of short-term investments and business acquisitions of $42.5 million. Publishing capital expenditures in 1995 totaled $122.7 million and were principally related to prepublication costs. Capital expenditures for the publishing business are expected to approximate $150.0 million in fiscal 1996. Specialty retailing capital expenditures in 1995 totaled $93.5 million and primarily related to the construction of three new stores and a national distribution center and the renovation of several existing stores. In August 1995, the Company opened a new Neiman Marcus store in Short Hills, New Jersey. Additionally, the Company expects to open new stores in King of Prussia, Pennsylvania in the spring of 1996 and Paramus, New Jersey in the fall of 1996. Completion of the distribution center is planned by the spring of 1996. Capital expenditures for NMG are currently estimated at $100.0 million in fiscal 1996. The Company's short-term investments are highly liquid and consist of high quality commercial paper, certificates of deposit, corporate debt securities and U.S. Government securities. Financing activities primarily reflect the purchase of approximately 5.4 million shares of the Company's common stock for $220.0 million through a "Dutch Auction" tender offer, $47.7 million of dividend payments, 25 Harcourt General, Inc. and Subsidiaries additional borrowings of $17.1 million under NMG's revolving credit agreements and a $246.0 million securitization of NMG's credit card receivables. In March 1995, NMG sold all of its Neiman Marcus credit card receivables through a subsidiary to a trust in exchange for certificates representing an undivided interest in such receivables. Certificates representing an undivided interest in $246.0 million of these receivables were sold to third parties in a public offering of $225.0 million 7.60% Class A certificates and $21.0 million 7.75% Class B certificates. NMG used the proceeds from this offering to pay down existing debt. NMG's subsidiary will retain the remaining undivided interest in the receivables not represented by the Class A and Class B certificates. A portion of that interest is subordinated to the Class A and Class B certificates. NMG will continue to service all receivables for the trust. NMG also eliminated its quarterly cash dividend on common stock beginning with its third quarter of fiscal 1995. Elimination of this dividend will conserve approximately $7.6 million of NMG's cash annually. At October 31, 1995, the Company's consolidated long-term debt totaled $959.9 million. That amount included $271.1 million of NMG debt, which is not guaranteed by Harcourt General. In addition to its funded debt, the Company has significant lease commitments which require cash outflows. Lease payments from continuing operations totaled $80.3 million in 1995, and minimum lease payments in 1996 are expected to be at comparable levels. Between October 31, 1995 and November 30, 1995, the Company purchased approximately 1.1 million shares of its common stock at an average price of approximately $39.40 per share and approximately 0.8 million shares of NMG common stock at $18.75 per share. The Company believes its financial resources are more than sufficient to meet its foreseeable cash requirements. SEASONALITY The Company's businesses are seasonal in nature. More than one-half of the Company's annual operating earnings are historically generated in the third quarter of its fiscal year since that quarter includes the important educational publishing selling season. Conversely, second quarter operating earnings have historically been minimal during a period when publishing revenues are at their lowest level, and that business segment typically reports operating losses. Those losses partially offset retail earnings, which have historically been at their highest point since the Company's second quarter includes NMG's holiday selling season. IMPACT OF INFLATION The Company's financial statements are prepared on a historical cost basis under generally accepted accounting principles. The Company uses the last-in, first-out (LIFO) method of accounting for substantially all of its inventories. Thus, the cost of goods sold approximates current cost. The Company adjusts selling prices to maintain profit levels and will continue to do so as competitive conditions permit. In general, management believes that the impact of inflation or of changing prices is not material to the financial position or results of operations of its business segments. DIVIDENDS The Company has a long-standing policy of returning a portion of its earnings and cash flow to shareholders through the payment of cash dividends. In September 1995, the Board of Directors voted to increase the quarterly cash dividend on the Common Stock to 17 cents per share. The Board also increased the quarterly cash dividend on the Series A Stock to 19.45 cents per share and on the Class B Stock to 15.30 cents per share. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 1995. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which is effective for transactions entered into in fiscal years that begin after December 15, 1995. SFAS 123 establishes a fair value based method of accounting for stock-based compensation plans. The effect of adopting both of these standards is not expected to be material to the Company's financial position or results of operations. Harcourt General, Inc. and Subsidiaries 26 CONSOLIDATED STATEMENTS OF EARNINGS - -----------------------------------
Years ended October 31 1995 1994 1993 ============================================================================================== (In thousands except for per share amounts) Revenues $3,034,736 $2,850,777 $2,758,622 Costs applicable to revenues 1,765,090 1,656,525 1,571,650 Selling, general and administrative expenses 917,355 849,031 882,098 Corporate expenses 34,395 35,081 46,932 ---------------------------------------- OPERATING EARNINGS 317,896 310,140 257,942 Investment income 39,945 14,239 14,072 Interest expense (88,735) (86,219) (84,585) Other income, net -- 18,303 ---------------------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 269,106 238,160 205,732 Income tax expense (91,496) (90,885) (77,876) ---------------------------------------- EARNINGS FROM CONTINUING OPERATIONS 177,610 147,275 127,856 EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET (11,727) 30,257 43,477 ---------------------------------------- NET EARNINGS $ 165,883 $ 177,532 $ 171,333 - ---------------------------------------------------------------------------------------------- AMOUNTS PER SHARE OF COMMON STOCK Earnings from continuing operations $ 2.31 $ 1.84 $ 1.60 Earnings (loss) from discontinued operations (.15) .38 .55 ---------------------------------------- NET EARNINGS $ 2.16 $ 2.22 $ 2.15 ==============================================================================================
See notes to consolidated financial statements 27 Harcourt General, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS - ---------------------------
October 31 1995 1994 ================================================================================ (In thousands) A S S E T S CURRENT ASSETS Cash and equivalents $ 363,750 $ 819,659 Short-term investments 243,073 -- Accounts receivable, net 372,700 578,575 Inventories 495,222 466,177 Deferred income taxes 79,083 90,501 Other current assets 55,970 66,096 ----------------------------- TOTAL CURRENT ASSETS 1,609,798 2,021,008 ============================= PROPERTY AND EQUIPMENT Land, buildings and improvements 496,660 496,424 Fixtures and equipment 330,602 328,235 ----------------------------- 827,262 824,659 Less accumulated depreciation and amortization (286,915) (302,989) ----------------------------- TOTAL PROPERTY AND EQUIPMENT, NET 540,347 521,670 ============================== OTHER ASSETS Prepublication costs, net 164,449 164,160 Intangible assets, net 442,566 422,566 Other 127,176 112,960 ----------------------------- TOTAL OTHER ASSETS 734,191 699,686 ============================= TOTAL ASSETS $2,884,336 $3,242,364 ================================================================================
See notes to consolidated financial statements Harcourt General, Inc. and Subsidiaries 28
October 31 1995 1994 ============================================================================================================= (In thousands) L I A B I L I T I E S CURRENT LIABILITIES Notes payable and current maturities of long-term liabilities $ 55,484 $ 119,529 Accounts payable 284,481 273,098 Accrued liabilities 334,479 363,333 Taxes payable 58,104 71,209 Other current liabilities 52,423 47,835 ---------------------------- TOTAL CURRENT LIABILITIES 784,971 875,004 ============================ LONG-TERM LIABILITIES Notes and debentures 749,008 915,464 Other long-term liabilities 210,846 207,877 ---------------------------- TOTAL LONG-TERM LIABILITIES 959,854 1,123,341 ============================ DEFERRED INCOME TAXES 198,398 196,664 ============================ COMMITMENTS AND CONTINGENCIES S H A R E H O L D E R S ' E Q U I T Y PREFERRED STOCK Series A Cumulative Convertible -- $1 par value Issued and outstanding -- 1,210 and 1,453 shares 1,210 1,453 COMMON STOCKS Class B Stock $1 par value Issued and outstanding -- 20,802 and 21,444 shares 20,802 21,444 Common Stock -- $1 par value Issued and outstanding -- 51,897 and 56,443 shares 51,897 56,443 PAID-IN CAPITAL 727,285 726,505 CUMULATIVE TRANSLATION ADJUSTMENTS (5,166) (4,710) RETAINED EARNINGS 145,085 246,220 ---------------------------- TOTAL SHAREHOLDERS' EQUITY 941,113 1,047,355 ============================ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,884,336 $3,242,364 =============================================================================================================
See notes to consolidated financial statements 29 Harcourt General, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------
YEARS ENDED OCTOBER 31 1995 1994 1993 ================================================================================================================= (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Earnings from continuing operations $ 177,610 $ 147,275 $ 127,856 Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities: Depreciation and amortization 175,737 149,973 154,740 Other income -- -- (20,755) Deferred income taxes 13,152 (38,909) 13,145 Other 4,183 10,932 19,566 Changes in assets and liabilities: Accounts receivable (38,259) (86,499) (105,218) Inventories (54,376) (30,291) (61,870) Other current assets 4,302 6,870 (11,746) Accounts payable and accrued liabilities 25,974 34,187 88,246 --------------------------------------- 308,323 193,538 203,964 Discontinued operating activities (3,410) (3,721) 49,799 --------------------------------------- Net cash provided by operating activities 304,913 189,817 253,763 ======================================= CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (220,053) (196,160) (159,860) Purchase of short-term investments (243,073) -- -- Proceeds from sale of insurance business -- 410,432 -- Acquisitions (42,490) (36,215) -- Other investing activities 1,441 (9,570) (2,057) --------------------------------------- (504,175) 168,487 (161,917) Discontinued operations investing activities -- -- (82,984) --------------------------------------- Net cash provided (used) by investing activities (504,175) 168,487 (244,901) ======================================= CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowing 17,065 73,800 77,200 Repayment of debt (247,431) (30,325) (6,500) Repurchase of Common Stock (224,827) -- -- Proceeds from receivables securitization 245,965 -- -- Dividends paid (47,730) (47,183) (43,997) Other equity transactions 311 (1,862) 632 --------------------------------------- Net cash provided (used) by financing activities (256,647) (5,570) 27,335 ======================================= CASH AND EQUIVALENTS Increase (decrease) during the year (455,909) 352,734 36,197 Beginning balance 819,659 466,925 430,728 --------------------------------------- ENDING BALANCE $ 363,750 $ 819,659 $ 466,925 ================================================================================================================= SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest $ 88,637 $ 82,409 $ 82,280 Income taxes $ 75,222 $ 56,821 $ 84,087 Non-cash items: Tax settlement in discontinued operations $ -- $ 35,000 $ --
See notes to consolidated financial statements Harcourt General, Inc. and Subsidiaries 30 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - -----------------------------------------------
Cumulative Common Series A Paid-in Translation Retained Stocks Stock Capital Adjustments Earnings ====================================================================================================================== (In thousands) BALANCE AT OCTOBER 31, 1992 $76,292 $2,890 $ 860,133 $(3,409) $ (11,465) Net earnings -- -- 171,333 Cash dividends paid -- -- -- -- (43,997) Conversion of Series A Stock 894 (894) -- -- -- Translation adjustments -- -- -- (2,115) -- Other equity transactions, net 121 -- 1,795 -- -- ----------------------------------------------------------------------- BALANCE AT OCTOBER 31, 1993 77,307 1,996 861,928 (5,524) 115,871 Net earnings -- -- -- -- 177,532 Cash dividends paid -- -- -- -- (47,183) Conversion of Series A Stock 543 (543) -- -- -- Translation adjustments -- -- -- 814 -- Spinoff of theatre operations -- -- (135,804) -- -- Other equity transactions, net 37 -- 381 -- -- ----------------------------------------------------------------------- BALANCE AT OCTOBER 31, 1994 77,887 1,453 726,505 (4,710) 246,220 Net earnings -- -- -- -- 165,883 Cash dividends paid -- -- -- -- (47,730) Conversion of Series A Stock 243 (243) -- -- -- Repurchase of Common Stock (5,539) -- -- -- (219,288) Translation adjustments -- -- -- (456) -- Other equity transactions, net 108 -- 780 -- -- ----------------------------------------------------------------------- BALANCE AT OCTOBER 31, 1995 $72,699 $1,210 $ 727,285 $(5,166) $ 145,085 ======================================================================================================================
See notes to consolidated financial statements 31 Harcourt General, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ /1/ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Harcourt General, Inc. (the Company or Harcourt General) and its majority-owned subsidiaries. The consolidated financial statements of The Neiman Marcus Group, Inc. (NMG) are consolidated with a lag of one fiscal quarter. All significant intercompany accounts and transactions have been eliminated. CASH AND EQUIVALENTS Cash and equivalents consisted of cash and liquid debt instruments such as commercial paper and certificates of deposit with maturities of three months or less from the date of purchase. Cash and equivalents are stated at cost plus accrued interest, which approximates market value. The Company's practice is to invest cash with financial institutions that have acceptable credit ratings and to limit the amount of credit exposure to any one financial institution. SHORT-TERM INVESTMENTS Short-term investments, which consisted of commercial paper, certificates of deposit, corporate debt securities and U.S. Government securities, are carried at cost plus accrued interest, which approximates fair value. ACCOUNTS RECEIVABLE Certain publications are sold to customers with a right of return. Revenues from such sales represent gross sales less a provision for future returns. Returned goods included in inventory are valued at estimated realizable value not exceeding cost. Accounts receivable are reported net of both an allowance for book returns of $49.4 million in 1995 and $49.1 million in 1994 and an allowance for doubtful accounts of $22.5 million in 1995 and $26.4 million in 1994. INVENTORIES Inventories are stated at the lower of cost or market. All domestic publishing inventories are valued using the last-in, first-out (LIFO) method. Substantially all retail inventories are valued using the retail method on a LIFO basis. If the FIFO method of inventory valuation had been used to value inventory, the inventories would have been $14.2 million and $24.6 million higher than reported at October 31, 1995 and October 31, 1994, respectively. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are provided using straight-line or accelerated methods over the estimated useful lives of the related assets or over the terms of the related leases, if shorter. When property and equipment are retired or have been fully depreciated, the cost and the related accumulated depreciation are eliminated from the respective accounts. Gains or losses arising from the dispositions are reported as income or expense. PREPUBLICATION COSTS Prepublication costs are amortized using the sum-of-the-years-digits method over the estimated useful lives of the publications, not exceeding five years. INTANGIBLE ASSETS Intangible assets represent trademarks and goodwill. Amortization is provided on a straight-line method over the estimated useful lives of these assets, not exceeding forty years. INCOME TAXES Income taxes are calculated in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires the asset and liability method of accounting for income taxes. RECEIVABLES AND FINANCE CHARGE INCOME NMG's credit operations generate finance charge income, which is recognized as income when earned and is recorded as a reduction of selling, general and administrative expenses. Finance charge income amounted to $55.9 million in 1995, $54.3 million in 1994 and $36.3 million in 1993. The securitization of NMG's credit card receivables, which was completed in March 1995, had the effect of reducing finance charge income by $7.1 million in 1995. Finance charge income in future periods will also be reduced (See Note 13). Credit risk with respect to trade receivables is limited due to the large number of customers to whom the Company extends credit. Collateral is not required as a condition of extending credit, but credit evaluation of customers' financial position is performed. The Company maintains reserves for potential credit losses. Harcourt General, Inc. and Subsidiaries 32 EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Earnings per common share is based upon the weighted average number of common and, when dilutive, common equivalent shares outstanding during the year. Weighted average shares outstanding amounted to 76.8 million in 1995, 79.8 million in 1994 and 79.6 million in 1993. Earnings per common and common equivalent share, assuming full dilution, have not been presented because the dilutive effect is not material. CHANGES IN PRESENTATION Certain prior year amounts have been reclassified to conform to the current year presentation and to reflect as discontinued operations the sale of Contempo Casuals in fiscal 1995, the sale of the Company's insurance operations in fiscal 1994 and the spinoff of the theatre operations in fiscal 1993. /2/ DISCONTINUED OPERATIONS Discontinued operations consisted of the following:
Years ended October 31 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- (In thousands) Loss from Contempo Casuals operations, net of income tax benefits of $1,300, $36,000 and $6,100 $ (1,854) $(49,755) $(8,402) Loss on disposal of Contempo Casuals, net of income tax benefit of $7,100 (9,873) -- -- Earnings from insurance operations, net of income taxes of $20,844 and $24,835 -- 37,056 46,036 Gain on sale of insurance operations, net of income taxes of $4,475 -- 7,956 -- Tax settlements -- 35,000 -- Earnings from theatre operations, net of income taxes of $6,958 -- -- 10,503 Theatre spinoff transaction expenses -- -- (4,660) ------- ------- ------ EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS $(11,727) $ 30,257 $43,477 ======== ======== ======= - -----------------------------------------------------------------------------------------------------
CONTEMPO CASUALS OPERATIONS On June 30, 1995, NMG sold its Contempo Casuals subsidiary to The Wet Seal, Inc. (Wet Seal) for approximately 250,000 shares of Wet Seal Class A Common Stock and $100,000 in cash. Contempo operates a chain of retail stores which sells moderately priced fashion apparel and accessories primarily for young women. Revenues related to the discontinued Contempo Casuals operations were $207.2 million in 1995, $303.4 million in 1994 and $349.1 million in 1993. INSURANCE OPERATIONS In October 1994, the Company sold its insurance businesses to an affiliate of General Electric Capital Corporation for $410.4 million in cash. Revenues applicable to discontinued insurance operations were $485.8 million in 1994 and $548.0 million in 1993. THEATRE OPERATIONS In December 1993, the Company completed the spinoff of its theatre operations in a tax-free distribution to its shareholders. Revenues applicable to discontinued theatre operations were $495.0 million in 1993. The newly created company is named GC Companies, Inc. (GCC). In connection with the distribution, GCC and Harcourt General entered into various agreements which govern their ongoing relationship, including a Reimbursement and Security Agreement, an Intercompany Services Agreement, a Tax Agreement and certain subleases. Under the Intercompany Services Agreement, Harcourt General provided certain management, accounting, financial, legal, tax and other corporate services to GCC. The fees for these services, which totaled $3.1 million in fiscal 1995 and $1.7 million in fiscal 1994, were based on Harcourt General's costs. This agreement was modified effective November 1, 1995 to reduce the level of services which Harcourt General will provide to GCC. These services will include the services of Harcourt General's Chairman and Group Vice President and such additional corporate services as the Chief Executive Officers of the Company and GCC determine. The Company's Chairman continues to serve as the Chairman and Chief Executive Officer of GCC and the Group Vice President of the Company now serves as President and Chief Operating Officer of GCC. The fees payable to Harcourt General by GCC have been and will continue to be subject to the approval of a committee of directors of GCC who are not affiliated with Harcourt General. 33 Harcourt General, Inc. and Subsidiaries TAX SETTLEMENTS The Company recognized $35.0 million of tax benefits in fiscal 1994 for various federal and state tax settlements relating to the Company's soft drink bottling business, which was sold in 1989. /3/ DESCRIPTION OF CONTINUING OPERATIONS PUBLISHING Harcourt Brace & Company (Harcourt Brace) publishes textbooks and other materials for elementary and secondary schools and colleges, as well as scientific, technical, medical and professional books and journals, fiction, non-fiction, and children's books. Harcourt Brace also publishes and scores tests that measure individual aptitude and competency and conducts bar examination and accounting accreditation review courses. SPECIALTY RETAILING NMG operates three specialty retail businesses: Neiman Marcus Stores, NM Direct and Bergdorf Goodman. Neiman Marcus Stores operates 28 stores in 15 states and the District of Columbia; Bergdorf Goodman operates two stores in New York City; and NM Direct operates NMG's mail order business, providing both apparel and home items through its various mail order catalogues. PROFESSIONAL SERVICES Drake Beam Morin provides human resources management consulting services such as career transition, outplacement and other consulting services to organizations and individuals worldwide. ADDITIONAL FINANCIAL INFORMATION
Years ended October 31 1995 1994 1993 - -------------------------------------------------------------------------------- (In thousands) REVENUES Publishing $1,017,637 $ 919,498 $ 944,545 Specialty retailing 1,888,249 1,789,461 1,667,825 Professional services 128,850 141,818 146,252 --------------------------------------- TOTAL REVENUES $3,034,736 $2,850,777 $2,758,622 ======================================= OPERATING EARNINGS Publishing $ 177,531 $ 165,436 $ 142,177 Specialty retailing 161,698 157,713 134,302 Professional services 13,062 22,072 28,395 Corporate expenses (34,395) (35,081) (46,932) --------------------------------------- TOTAL OPERATING EARNINGS $ 317,896 $ 310,140 $ 257,942 ======================================= IDENTIFIABLE ASSETS Publishing $ 922,629 $ 842,850 $ 739,746 Specialty retailing 1,191,085 1,408,238 1,362,657 Professional services 58,810 69,562 55,973 Corporate 711,812 921,714 973,031 --------------------------------------- TOTAL IDENTIFIABLE ASSETS $2,884,336 $3,242,364 $3,131,407 ======================================= CAPITAL EXPENDITURES Publishing $ 122,669 $ 122,761 $ 92,864 Specialty retailing 93,514 65,074 56,325 Professional services 3,799 6,910 4,813 Corporate 71 1,415 5,858 --------------------------------------- TOTAL CAPITAL EXPENDITURES $ 220,053 $ 196,160 $ 159,860 ======================================= DEPRECIATION AND AMORTIZATION Publishing $ 120,331 $ 94,879 $ 104,603 Specialty retailing 48,397 47,712 44,511 Professional services 4,412 4,006 3,036 Corporate 2,597 3,376 2,590 --------------------------------------- TOTAL DEPRECIATION AND AMORTIZATION $ 175,737 $ 149,973 $ 154,740 =======================================
Harcourt General, Inc. and Subsidiaries 34 /4/ INTANGIBLE ASSETS Intangible assets consisted of the following:
October 31 1995 1994 - --------------------------------------------------------------------------- (In thousands) Goodwill $ 465,500 $431,645 Trademarks 73,000 73,000 Other 15,351 17,492 ------------------------- TOTAL 553,851 522,137 Accumulated amortization (111,285) (99,571) ------------------------- TOTAL $ 442,566 $422,566 ========================= - ----------------------------------------------------------------------------
During the past two years, the Company has acquired several publishing related companies. The results of operations from these acquired entities are reflected in the Company's statements of earnings from the date of acquisition. Cash paid for acquisitions amounted to approximately $42.5 million in 1995 and $36.2 million in 1994. Amortization expense was $17.2 million in 1995, $14.5 million in 1994 and $14.0 million in 1993. /5/ THE NEIMAN MARCUS GROUP, INC. The Company owns approximately 22.3 million shares of NMG Common Stock, all 500,000 outstanding shares of NMG's 9-1/4% Cumulative Redeemable Preferred Stock (9-1/4% Preferred Stock) and all 1.0 million outstanding shares of NMG's 6% Cumulative Convertible Preferred Stock (6% Preferred Stock). In November 1995, the Company acquired an additional 831,400 shares of NMG Common Stock in a privately negotiated transaction at $18.75 per share. On a fully-converted basis, the shares presently owned by the Company represent approximately 67% of the voting power and equity of NMG. The 6% Preferred Stock is entitled to vote on all matters and is convertible on a per share basis into approximately 8.99 shares of NMG Common Stock, subject to certain antidilution adjustments. The conversion price for the 6% Preferred Stock at October 31, 1995 was approximately $41.70 per share, which was substantially above the $17.125 market price of NMG's Common Stock on October 31, 1995. The cash flows of NMG are not available to the Company, except through NMG dividend payments. The Company and NMG are parties to an agreement pursuant to which the Company provides certain management, accounting, financial, legal, tax and other corporate services to NMG. The fees for these services are charged at the Company's cost and are subject to the approval of a committee of directors of NMG who are not affiliated with the Company. This agreement may be terminated by either party on 180 days' notice. Charges to NMG were $6.5 million in 1995, $6.9 million in 1994 and $7.2 million in 1993. The Company's Chairman of the Board; President and Chief Executive Officer; Senior Vice President and Chief Financial Officer; Senior Vice President and General Counsel, as well as certain other officers of the Company, serve in similar capacities with NMG. The first two named officers also serve as directors of both companies. 35 Harcourt General, Inc. and Subsidiaries /6/ LONG-TERM LIABILITIES Long-term liabilities of Harcourt General and NMG at October 31, 1995 and 1994 were as follows:
Interest Rate Maturity 1995 1994 - -------------------------------------------------------------------------------- (In thousands) HARCOURT GENERAL Revolving credit agreement Variable Dec. 1999 $ -- $ -- Senior debt 8.25% Jun. 2002 149,358 149,291 Senior debt 8.88% Jun. 2022 147,963 147,945 Subordinated notes 9.38% Jun. 1997 124,844 124,750 Subordinated notes 9.50% Mar. 2000 124,873 124,841 Other long-term liabilities Various Various 145,385 135,775 -------------------- TOTAL HARCOURT GENERAL 692,423 682,602 NMG Revolving credit agreement Variable Apr. 2000 70,000 306,000 Senior notes 9.89% May 1996 40,000 40,000 Senior notes 9.59% Aug. 1996 52,000 52,000 Senior notes 9.24% Dec. 1996 40,000 40,000 Senior notes Variable Dec. 1996 40,000 40,000 Other long-term liabilities Various Various 80,915 82,268 -------------------- Total NMG 322,915 560,268 Less current maturities (55,484) (119,529) -------------------- TOTAL LONG-TERM LIABILITIES $959,854 $1,123,341 - -------------------------------------------------------------------------------
The Company has a revolving credit agreement with 13 banks, pursuant to which the Company may borrow up to $400 million. The agreement, which expires in December 1999, may be terminated by the Company at any time on three business days' notice. The rate of interest payable is determined according to the senior debt rating of the Company and one of four pricing options selected by the Company. Other long-term liabilities of Harcourt General consist primarily of a liability for postretirement health care benefits and provisions for other employee benefits (See Note 12). In April 1995, NMG replaced its $300 million revolving credit agreement and its six $25 million revolving credit facilities with a five year, $500 million revolving credit agreement. This agreement, which expires in April 2000, may be terminated at any time on three business days' notice. The rate of interest payable (6.2% at July 29, 1995) varies according to one of four pricing options selected by NMG. The NMG senior notes have no sinking fund requirements. All fixed rate senior notes may be redeemed at any time at a premium plus accrued interest. The variable rate note bears interest at LIBOR plus 0.7% (6.6% at July 29, 1995) and is adjusted semi-annually. Other long-term liabilities of NMG consist primarily of certain employee benefit obligations and a liability for certain scheduled rent increases. The aggregate maturities of all long-term liabilities are as follows:
Harcourt General NMG Total - -------------------------------------------------------------------------------- (In thousands) 1996 $ 3,600 $ 51,900 $ 55,500 1997 128,500 135,900 264,400 1998 4,000 4,000 8,000 1999 3,400 3,700 7,100 2000 128,200 73,700 201,900 Thereafter 424,700 53,700 478,400
Certain of Harcourt General's and NMG's loan agreements contain, among other restrictions, provisions limiting the issuance of additional debt and guarantees, the purchase of the Company's capital stock and the payment of dividends. Certain of these loan agreements also require the maintenance of a minimum net worth. Harcourt General, Inc. and Subsidiaries 36 /7/ SHAREHOLDERS' EQUITY SERIES A CUMULATIVE CONVERTIBLE STOCK Each share of Series A Stock is convertible into 1.1 shares of Common Stock and is entitled to a quarterly dividend equal to the quarterly dividend on each share of Common Stock multiplied by 1.1, plus $.0075. Each share of Series A Stock is entitled to a liquidation preference of $5.00 plus any accrued but unpaid dividends. Liquidation proceeds remaining after the satisfaction of such preference and the payment of $4.55 per share of Common Stock would be distributed ratably to the holders of Common Stock and Series A Stock. There were 10,000,000 authorized shares of Series A Stock at October 31, 1995. CLASS B STOCK AND COMMON STOCK The Class B Stock is not transferable except to family members and related entities, but is convertible at any time on a share-for-share basis into Common Stock. The holders of Class B Stock are entitled to cash dividends which are 10% lower per share than the cash dividends paid on each share of Common Stock. The Class B Stock and the Common Stock are each entitled to vote separately as a class on charter amendments, mergers, consolidations and certain extraordinary transactions which are required to be approved by shareholders under Delaware law. Under certain circumstances, the holders of Class B Stock have the right to cast 10 votes per share for the election of directors. There were 40,000,000 and 100,000,000 shares of Class B Stock and Common Stock authorized for issuance at October 31, 1995, respectively. In April 1995, the Company completed a "Dutch Auction" tender offer and repurchased approximately 5.4 million shares of the Company's Common Stock at $40.50 per share. In May 1995, the Company's Board of Directors authorized the purchase of an additional 2.5 million shares of Common Stock in the open market. From October 31, 1995 through November 30, 1995, the Company repurchased approximately 1.1 million shares at an average price of approximately $39.40 per share. COMMON STOCK INCENTIVE PLANS The Company has established stock incentive plans which provide for the granting of stock options, stock appreciation rights (SARs), restricted stock and other stock-based awards. Eligible employees have been granted 10-year options under the 1981 Stock Option Plan and the 1988 Stock Incentive Plan. No further grants may be made under the 1981 plan. There were 1.3 million authorized common shares available for future awards under the 1988 Stock Incentive Plan at October 31, 1995. Options outstanding at October 31, 1995 were granted at prices (not less than 100% of the fair market value on the date of grant) varying from $15.67 to $33.25 per share and expire between 1996 and 2005. There were 84 employees with options outstanding at October 31, 1995 with a weighted average exercise price of $18.44. There were 1.8 million shares of Common Stock reserved at October 31, 1995 for issuance upon the exercise of stock options. The Company has allowed SAR treatment in connection with the exercise of certain options. Optionees allowed SAR treatment surrender an exercisable option for an amount of cash equal to the excess of the market price of the Common Stock at the time of surrender over the option exercise price. Option activity on the Company's Common Stock was as follows:
Years ended October 31 1995 1994 1993 - -------------------------------------------------------------------------------- Options outstanding - beginning of year 755,712 919,911 918,432 Granted 80,150 107,550 105,250 Exercised (86,643) (33,805) (131,676) SAR surrenders (197,169) (68,860) (32,346) Cancelled (8,602) (169,084) (19,680) ------- ------- ------- OPTIONS OUTSTANDING - END OF YEAR 543,448 755,712 839,980 - -------------------------------------------------------------------------------- EXERCISABLE OPTIONS - END OF YEAR 285,860 422,477 452,800 - --------------------------------------------------------------------------------
The number of options outstanding and their exercise prices were adjusted pursuant to a formula as a result of the spinoff of GCC. The adjustment increased the number of options outstanding at the beginning of fiscal 1994 by approximately 80,000. 37 Harcourt General, Inc. and Subsidiaries /8/ INCOME TAXES A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
1995 1994 1993 Years ended October 31 Amount % Amount % Amount % - ----------------------------------------------------------------------------------------------------- (In thousands) Statutory tax expense $(94,188) (35) $(83,356) (35) $(72,006) (35) State income taxes, net of federal tax effect (5,932) (2) (5,853) (2) (5,837) (3) Tax credits 106 -- 193 -- 704 -- Dividends received exclusion 1,893 1 2,042 1 1,646 1 Foreign tax rate differentials 501 -- 265 -- 310 -- Permanent items (3,563) (1) (3,069) (1) (1,734) (1) Change in valuation allowance 7,187 2 -- -- -- -- Capital gains, settlements and other 2,500 1 (1,107) (1) (959) -- ----------------------------------------------------- INCOME TAX EXPENSE FROM CONTINUING OPERATIONS $(91,496) (34) $(90,885) (38) $(77,876) (38) - -----------------------------------------------------------------------------------------------------
Income tax expense was as follows:
Years ended October 31 1995 1994 1993 - -------------------------------------------------------------------------------- (In thousands) CURRENT Federal $70,696 $65,681 $68,138 State 8,249 9,329 6,304 DEFERRED Federal 11,674 16,199 2,244 State 877 (324) 1,190 -------------------------------------------- INCOME TAX EXPENSE $91,496 $90,885 $77,876 - --------------------------------------------------------------------------------
Significant components of the net deferred tax liabilities stated on a gross basis were as follows:
October 31 1995 1994 - -------------------------------------------------------------------------------- (In thousands) GROSS DEFERRED TAX ASSETS Accrued liabilities and reserves $ 85,534 $ 97,026 Employee benefits 33,871 32,278 Postretirement health care benefits 37,606 37,001 Inventories 26,387 28,225 Difference in basis of assets acquired 35,585 42,772 ------------------ Total gross deferred tax assets 218,983 237,302 Valuation allowance (18,351) (25,538) ------------------ NET DEFERRED TAX ASSETS 200,632 211,764 GROSS DEFERRED TAX LIABILITIES Property, equipment, prepublication costs and intangibles 142,625 147,170 Pension and employee benefits accrual 19,744 21,340 Difference in basis of assets acquired 124,072 124,072 Accrued liabilities and reserves 33,506 25,345 ------------------ Total gross deferred tax liabilities 319,947 317,927 ------------------ NET DEFERRED TAX LIABILITIES $119,315 $106,163
/9/ INVESTMENT AND OTHER INCOME Investment income consisted of the following:
Years ended October 31 1995 1994 1993 - -------------------------------------------------------------------------------- (In thousands) Interest income $31,492 $ 5,510 $ 7,139 Dividend income 8,453 8,729 6,933 --------------------------------- TOTAL INVESTMENT INCOME $39,945 $14,239 $14,072 - --------------------------------------------------------------------------------
Harcourt General, Inc. and Subsidiaries 38 When NMG was formed as part of the restructuring of Carter Hawley Hale Stores, Inc. (CHH) in 1987, NMG and CHH entered into a variety of agreements, including agreements regarding the allocation of taxes and the guarantee by NMG of certain CHH employee benefits. In October 1992, CHH and NMG settled all legal and tax issues between the parties. NMG paid CHH $7.7 million and was discharged as guarantor of certain CHH employee benefits. At the time of this settlement, NMG reevaluated its liabilities to CHH and recognized a gain of $20.8 million in fiscal 1993, which is included in other income. /10/ COMMITMENTS AND CONTINGENCIES LEASES The Company and NMG have long-term operating leases primarily for retail stores, distribution centers, offices, other facilities and equipment. Leases are generally for periods of up to thirty years, with renewal options at fixed rentals. Certain leases also provide for additional rentals based on revenues in excess of predetermined levels. Rent expense for continuing operations under operating leases for the years ended October 31 was as follows:
1995 1994 1993 - -------------------------------------------------------------------------------- (In thousands) Minimum rent $71,900 $72,100 $70,600 Rent based on revenues 8,400 9,100 7,900 -------------------------------------- $80,300 $81,200 $78,500 - --------------------------------------------------------------------------------
Assuming renewal options are not exercised, the future minimum rental payments will be as follows:
Harcourt General NMG Total - -------------------------------------------------------------------------------- (In thousands) 1996 $30,100 $ 30,000 $ 60,100 1997 27,600 28,500 56,100 1998 22,200 27,800 50,000 1999 18,300 26,900 45,200 2000 15,100 26,300 41,400 Thereafter 64,900 536,900 601,800
Harcourt General is secondarily liable for certain lease obligations that were transferred to and assumed by GCC in connection with the spinoff of GCC. Under the terms of the Reimbursement and Security Agreement between GCC and Harcourt General, GCC is obligated to indemnify Harcourt General against liabilities with respect to such transferred obligations. As of October 31, 1995, GCC's aggregate future rental payments due under such theatre leases amounted to approximately $700 million. LITIGATION Both Harcourt General and NMG are involved in various suits and claims in the ordinary course of business. Management does not believe that the disposition of such suits and claims will have a material adverse effect on the financial position or continuing operations of Harcourt General or NMG. LETTERS OF CREDIT NMG had approximately $3.0 million of outstanding irrevocable letters of credit relating to purchase commitments at July 29, 1995. /11/ PENSION PLANS Harcourt General and NMG each have non-contributory defined benefit pension plans covering substantially all full-time employees other than union employees. Harcourt General and NMG also sponsor unfunded supplemental executive retirement plans which provide certain employees additional pension benefits. Benefits under the plans are based on employees' years of service and compensation prior to retirement. When funding is required, the policy of Harcourt General and NMG is to contribute amounts that are deductible for federal income tax purposes. 39 Harcourt General, Inc. and Subsidiaries Net pension expense for continuing operations was as follows:
YEARS ENDED OCTOBER 31 1995 1994 1993 - ----------------------------------------------------------------------------- (In millions) Harcourt General $ 3.5 $ 3.1 $ 1.8 NMG 7.4 6.3 6.5 .......................................... NET PENSION EXPENSE $10.9 $ 9.4 $ 8.3 - -----------------------------------------------------------------------------
Net pension expense for both Harcourt General and NMG included the following components:
YEARS ENDED OCTOBER 31 1995 1994 1993 - ----------------------------------------------------------------------------------------------- (In millions) Service cost - benefits earned $ 12.8 $11.2 $ 9.5 Interest cost on projected benefit obligation 11.0 9.8 8.7 Actual return on assets (20.5) (2.8) (17.6) Net amortization and deferral 7.6 (8.8) 7.7 ............................................ NET PENSION EXPENSE $ 10.9 $ 9.4 $ 8.3 - -----------------------------------------------------------------------------------------------
The following table sets forth the plans' funded status and amounts recognized in the consolidated balance sheets at October 31:
1995 1994 Funded Unfunded Funded Unfunded Plans Plans Plans Plans - --------------------------------------------------------------------------------------------------------------- (In millions) VESTED BENEFIT OBLIGATION $ 93.7 $ 13.4 $ 92.4 $ 14.0 - --------------------------------------------------------------------------------------------------------------- ACCUMULATED BENEFIT OBLIGATION $105.4 $ 16.3 $ 96.8 $ 16.3 - --------------------------------------------------------------------------------------------------------------- Projected benefit obligation $138.4 $ 27.2 $122.9 $ 23.9 Plan assets at fair value 169.1 -- 144.9 -- .......................................................... Overfunded (underfunded) projected obligation 30.7 (27.2) 22.0 (23.9) Unrecognized net obligation at transition .2 .9 .5 2.8 Unrecognized net loss 6.6 .5 15.7 2.0 Unrecognized prior service cost (1.5) 3.8 1.5 (.2) .......................................................... PREPAID (ACCRUED) PENSION COST RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS $ 36.0 $(22.0) $ 39.7 $(19.3) - ---------------------------------------------------------------------------------------------------------------
Plan assets included $8.9 million of Harcourt General Common and Series A Stock at October 31, 1994. The plan did not hold any of the Company's Common or Series A Stock at October 31, 1995. The plans' funded status by company as of October 31 was as follows:
1995 1994 Funded Unfunded Funded Unfunded Plans Plans Plans Plans - --------------------------------------------------------------------------------------------------------------- (In millions) Harcourt General $21.6 $ (5.4) $24.4 $ (4.7) NMG 14.4 (16.6) 15.3 (14.6) .......................................................... $36.0 $(22.0) $39.7 $(19.3) - ---------------------------------------------------------------------------------------------------------------
Assumptions used in the computation of pension costs for Harcourt General and NMG were as follows:
1995 1994 1993 HG NMG HG NMG HG NMG - -------------------------------------------------------------------------------------------------------------------- Discount rate 7.5% 7.5% 7.5% 7.5% 7.5% 8.5% Long-term rate of return on plan assets 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% Rate of increases in future compensation levels 6.0% 5.0% 6.0% 5.0% 6.0% 6.0%
In addition to the pension plans, Harcourt General and NMG each have two defined contribution plans for certain employees. The savings plan of each company permits employee contributions and provides for certain matching contributions. The employee stock ownership plan of each company is non-contributory. Harcourt General, Inc. and Subsidiaries 40 /12/ POSTRETIREMENT HEALTH CARE BENEFITS The Company provides health care benefits for retired employees which are funded as claims are incurred. Retirees and active employees hired prior to March 1, 1989 are eligible for these benefits if they meet certain service and minimum age requirements. The actuarial present value of accumulated postretirement benefit obligations and the amounts recognized in the Company's consolidated balance sheets as of October 31 were as follows:
1995 1994 ============================================================================== (In millions) Retirees $38.0 $49.4 Fully eligible active plan participants 7.3 6.9 Other active plan participants 7.9 14.9 -------------- Accumulated postretirement benefit obligation 53.2 71.2 Unrecognized net gain 27.7 7.9 -------------- ACCRUED POSTRETIREMENT BENEFIT LIABILITY $80.9 $79.1 ==============================================================================
The postretirement benefit cost for continuing operations was as follows: Years ended October 31 1995 1994 1993 ============================================================================== (In thousands) Service cost $ .7 $1.3 $1.5 Interest cost on accumulated benefit obligation 3.8 5.0 6.3 Net amortization and deferral (2.1) (.1) -- ---------------------- POSTRETIREMENT BENEFIT COST $2.4 $6.2 $7.8 ==============================================================================
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 16% in 1994 and 15% in 1995, gradually declining to 5% in the year 2005. Measurement of the accumulated postretirement benefit obligation was based on an assumed 7.5% discount rate in both 1995 and 1994. An increase of 1% in the health care cost trend rate would increase the accumulated postretirement benefit obligation as of October 31, 1995 by $3.3 million and the annual expense by $.3 million. The Company paid $2.8 million in fiscal 1995, $3.7 million during fiscal 1994 and $3.0 million during fiscal 1993 for postretirement health care benefit claims. /13/ FINANCIAL INSTRUMENTS SECURITIZATION OF CREDIT CARD RECEIVABLES On March 15, 1995, NMG sold all of its Neiman Marcus credit card receivables through a subsidiary to a trust in exchange for certificates representing undivided interests in such receivables. Certificates representing an undivided interest in $246.0 million of these receivables were sold to third parties in a public offering of $225.0 million 7.60% Class A certificates and $21.0 million 7.75% Class B certificates. NMG used the proceeds from this offering to pay down existing debt. NMG's subsidiary will retain the remaining undivided interest in the receivables not represented by the Class A and the Class B certificates. A portion of that interest is subordinated to the Class A and Class B certificates. NMG will continue to service all receivables for the trust. In anticipation of the securitization, NMG entered into several forward interest rate lock agreements. The agreements allowed NMG to establish a weighted average effective rate of approximately 8.0% on the certificates issued as part of the securitization. On March 15, 1995, NMG paid $5.4 million to settle all of its interest rate lock agreements. INTEREST RATE SWAP During September 1991, NMG entered into an interest rate swap agreement having a notional principal amount of $50.0 million that effectively fixed NMG's interest rate on $50.0 million of its variable rate debt at 8.94%. The amount to be paid or received is accrued as interest rates change and is recognized over the life of the agreement. The interest rate swap matures in September 1996. The fair value of the interest rate swap is the amount at which it could be settled, based on estimates obtained from dealers. The estimated unrealized pre-tax loss on the interest rate swap was approximately $1.5 million at July 29, 1995, $2.8 million at July 30, 1994 41 Harcourt General, Inc. and Subsidiaries and $6.6 million at July 31, 1993. This amount changes during the life of the swap as a function of maturity, interest rates and the credit standing of the parties to the swap agreement. The incremental pre-tax interest expense incurred due to the interest rate swap agreement was $1.0 million in 1995, $2.3 million in 1994 and $2.4 million in 1993. LONG-TERM DEBT The fair value of Harcourt General's and NMG's senior debt and subordinated notes was $745.3 million on October 31, 1995 and was based upon comparable publicly-traded issues. /14/ COMPARATIVE QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The 1995 and 1994 comparative quarterly financial information has been restated to reflect Contempo Casuals and the Company's insurance businesses as discontinued operations.
1995 First Second Third Fourth Full Quarter Quarter Quarter Quarter Year ======================================================================================================================== (In thousands except for per share amounts) REVENUES $663.3 $774.5 $813.2 $783.7 $3,034.7 ------------------------------------------------------------------------ GROSS PROFIT $264.6 $272.7 $388.4 $343.9 $1,269.6 ------------------------------------------------------------------------ EARNINGS (LOSS) FROM Continuing operations $ 13.6 $ 12.7 $ 96.0 $ 55.3 $ 177.6 Discontinued operations (1.8) 1.5 (11.4) -- (11.7) ------------------------------------------------------------------------ NET EARNINGS $ 11.8 $ 14.2 $ 84.6 $ 55.3 $ 165.9 ------------------------------------------------------------------------ EARNINGS (LOSS) PER COMMON SHARE FROM Continuing operations $ .17 $ .16 $ 1.29 $ .74 $ 2.31 Discontinued operations (.02) .02 (.15) -- (.15) ------------------------------------------------------------------------ NET EARNINGS $ .15 $ .18 $ 1.14 $ .74 $ 2.16 ======================================================================================================================== DIVIDENDS PER SHARE Common Stock $ .16 $ .16 $ .16 $ .17 $ .65 Class B Stock $ .144 $ .144 $ .144 $ .153 $ .585 Series A Stock $.1835 $.1835 $.1835 $.1945 $ .7450 1994 First Second Third Fourth Full Quarter Quarter Quarter Quarter Year ======================================================================================================================== (In thousands except for per share amounts) REVENUES $626.0 $739.8 $742.2 $742.8 $2,850.8 ------------------------------------------------------------------------ GROSS PROFIT $249.2 $266.6 $351.0 $327.4 $1,194.2 ------------------------------------------------------------------------ EARNINGS FROM Continuing operations $ 12.1 $ 6.8 $ 77.6 $ 50.8 $ 147.3 Discontinued operations 7.8 4.5 11.6 6.3 30.2 ------------------------------------------------------------------------ Net earnings $ 19.9 $ 11.3 $ 89.2 $ 57.1 $ 177.5 ------------------------------------------------------------------------ EARNINGS PER COMMON SHARE FROM Continuing operations $ .15 $ .08 $ .97 $ .63 $ 1.84 Discontinued operations .10 .06 .15 .08 .38 Net earnings $ .25 $ .14 $ 1.12 $ .71 $ 2.22 ======================================================================================================================== DIVIDENDS PER SHARE Common Stock $ .15 $ .15 $ .15 $ .16 $ .61 Class B Stock $ .135 $ .135 $ .135 $ .144 $ .549 Series A Stock $.1725 $.1725 $.1725 $.1835 $ .7010
Harcourt General, Inc. and Subsidiaries 42 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, 1995 and 1994 and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1995. 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, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1995 in conformity with generally accepted accounting principles. /S/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP Boston, Massachusetts December 8, 1995 STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Harcourt General, Inc. and its subsidiaries is responsible for the integrity and objectivity of the financial and operating information contained in this Annual Report, including the consolidated financial statements covered by the Independent Auditors' Report. These statements were prepared in conformity with generally accepted accounting principles and include amounts that are based on the best estimates and judgments of management. The Company maintains a system of internal financial controls which provides management with reasonable assurance that transactions are recorded and executed in accordance with its authorization, that assets are properly safeguarded and accounted for, and that records are maintained so as to permit preparation of financial statements in accordance with generally accepted accounting principles. This system includes written policies and procedures, an organizational structure that segregates duties, and a comprehensive program of periodic audits by the internal auditors. The Company has policies and guidelines which require employees to maintain a high level of ethical standards. In addition, the Audit Committee of the Board of Directors, consisting solely of outside directors, meets periodically with management, the internal auditors and the independent auditors to review internal accounting controls, audit results and accounting principles and practices, and to recommend the selection of independent auditors to the Board of Directors. JOHN R. COOK Senior Vice President and Chief Financial Officer STEPHEN C. RICHARDS Vice President and Controller 43 Harcourt General, Inc. and Subsidiaries FIVE YEAR SUMMARY -- (UNAUDITED)
1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------- (In thousands except for per share amounts) REVENUES Publishing $1,017,637 $ 919,498 $ 944,545 $ 865,336 $ 807,689 Specialty retailing 1,888,249 1,789,461 1,667,825 1,484,945 1,407,170 Professional services 128,850 141,818 146,252 121,391 103,795 .......................................................................... Total $3,034,736 $2,850,777 $2,758,622 $2,471,672 $2,318,654 - -------------------------------------------------------------------------------------------------------------------------- OPERATING EARNINGS (LOSS) Publishing $ 177,531 $ 165,436 $ 142,177 $ 124,503 $ (73,792) Specialty retailing 161,698 157,713 134,302 90,976 63,580 Professional services 13,062 22,072 28,395 23,938 14,309 Corporate expenses (34,395) (35,081) (46,932) (41,501) (40,331) Merger and restructuring charges -- -- -- -- (72,777) .......................................................................... OPERATING EARNINGS (LOSS) 317,896 310,140 257,942 197,916 (109,011) Investment income 39,945 14,239 14,072 23,239 128,533 Interest expense (88,735) (86,219) (84,585) (85,442) (348,260) Other income (expense), net -- -- 18,303 8,341 (15,171) .......................................................................... EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 269,106 238,160 205,732 144,054 (343,909) Income tax (expense) benefit (91,496) (90,885) (77,876) (58,052) 65,292 .......................................................................... EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 177,610 147,275 127,856 86,002 (278,617) Discontinued operations, net (11,727) 30,257 43,477 21,868 (14,505) Extraordinary item, net -- -- -- 419,557 -- Accounting change, net -- -- -- (32,967) -- .......................................................................... NET EARNINGS (LOSS) 165,883 177,532 171,333 494,460 (293,122) Dividends on Harcourt Brace preferred stock -- -- -- -- 12,684 .......................................................................... NET EARNINGS (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ 165,883 $ 177,532 $ 171,333 $ 494,460 $ (305,806) - -------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization $ 175,737 $ 149,973 $ 154,740 $ 140,522 $ 283,393 Capital expenditures $ 220,053 $ 196,160 $ 159,860 $ 185,997 $ 164,917 Total assets $2,884,336 $3,242,364 $2,805,878 $2,675,962 $3,908,330 Total long-term liabilities $ 959,854 $1,123,341 $1,107,371 $1,086,053 $ 980,224 Weighted average number of common and common equivalent shares outstanding 76,764 79,809 79,625 79,139 78,876 AMOUNTS PER SHARE OF COMMON STOCK Earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change $ 2.31 $ 1.84 $ 1.60 $ 1.09 $ (3.53) Net earnings (loss) applicable to common shareholders $ 2.16 $ 2.22 $ 2.15 $ 6.25 $ (3.88) Dividends paid on common stock $ .65 $ .61 $ .57 $ .53 $ .49
Prior year amounts have been restated to reflect as discontinued operations the sale of Contempo Casuals in June 1995, the sale of the Company's insurance operations in October 1994 and the spinoff of the Company's theatre operations in December 1993. Harcourt General, Inc. and Subsidiaries 44 DIRECTORS AND OFFICERS - ---------------------- DIRECTORS RICHARD A. SMITH (1)(4) Chairman of the Board and Chairman of the Executive Committee SIDNEY STONEMAN (4) Vice Chairman of the Board WILLIAM F. CONNELL (3)(4) Chairman and Chief Executive Officer, Connell Limited Partnership JACK M. GREENBERG (2)(3) Vice Chairman and Chief Financial Officer, McDonald's Corporation HERBERT W. JARVIS (2)(4) Former President and Chief Executive Officer, Sybron Corporation and Director of several corporations BRIAN J. KNEZ Vice President and President and Chief Executive Officer, Harcourt Brace & Company LYNN MORLEY MARTIN (3)(4) Former U.S. Secretary of Labor and former member of U.S. House of Representatives; Davee Chair, J.L. Kellogg School of Management at Northwestern University; Advisor, Deloitte & Touche LLP and Director of several corporations MAURICE SEGALL (3) Former Chairman and Chief Executive Officer, Zayre Corp.; Senior Lecturer, M.I.T. and Director of AMR Corporation ROBERT A. SMITH (1) Group Vice President DR. PAULA STERN (2) Former Chairwoman, U.S. International Trade Commission; President, The Stern Group, Inc.; Senior Fellow, Progressive Policy Institute and Director of several corporations ROBERT J. TARR, JR. (1) President, Chief Executive Officer and Chief Operating Officer HUGO UYTERHOEVEN (2)(3)(4) Timken Professor of Business Administration, Harvard Business School DR. CLIFTON R. WHARTON, JR. (2) Former Chairman and Chief Executive Officer, TIAA-CREF; Former Deputy Secretary, U.S. Department of State and Director of several corporations EXECUTIVE OFFICERS RICHARD A. SMITH Chairman of the Board ROBERT J. TARR, JR. President, Chief Executive Officer and Chief Operating Officer JOHN R. COOK Senior Vice President and Chief Financial Officer ERIC P. GELLER Senior Vice President, General Counsel and Secretary ROBERT A. SMITH Group Vice President STAFF OFFICERS Peter Farwell Vice President, Corporate Relations PAUL F. GIBBONS Vice President and Treasurer GERALD T. HUGHES Vice President, Human Resources MICHAEL F. PANUTICH Vice President, General Auditor STEPHEN C. RICHARDS Vice President and Controller CRAIG B. SWAIN Vice President, Planning and Analysis OPERATING OFFICERS Publishing BRIAN J. KNEZ President and Chief Executive Officer, Harcourt Brace & Company Specialty Retailing BURTON TANSKY Chairman and Chief Executive Officer, Neiman Marcus Stores B.D. FEIWUS President and Chief Executive Officer, NM Direct STEPHEN C. ELKIN Chairman and Chief Executive Officer, Bergdorf Goodman Professional Services CHARLES F. ALBRECHT, JR. President and Chief Operating Officer, Drake Beam Morin (1) Executive Committee (2) Audit Committee (3) Compensation Committee (4) Nominating Committee 45 SHAREHOLDER INFORMATION - ----------------------- Requests for general information or published financial information can be made in writing to the Corporate Relations Department, Harcourt General, Inc., 27 Boylston Street, Chestnut Hill, MA 02167. Telephone: (617) 232-8200. To hear the latest Company news, including quarterly earnings releases, or to request printed financial information or leave a message for the Company's Transfer Agent, individuals may call The Shareholder Line at (800) 225-9194, Extension 2345. News and information about Harcourt General, Inc. is also available on the Internet's World Wide Web at http://www.irin.com/H. AUTOMATIC DIVIDEND REINVESTMENT AND CASH STOCK PURCHASE PLAN The Plan provides stockholders with a convenient way to purchase Common shares by reinvesting their Common and Series A cash dividends and/or by investing additional cash amounts. The Company will absorb all brokerage and agency fees for stock purchased in connection with the Plan. For further information, please call The Shareholder Line or write to: Harcourt General, Inc., c/o The First National Bank of Boston, Automatic Dividend Reinvestment Plan, Post Office Box 1681, Boston, MA 02105. TRANSFER AGENT AND REGISTRAR FOR COMMON, SERIES A AND CLASS B STOCK The First National Bank of Boston Shareholder Services Division Mail Stop 45-01-05 Post Office Box 644 Boston, MA 02102-0644 (800) 442-2001 FORM 10-K The Company's Form 10-K as led 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 Stockholders will be held on Friday, March 8, 1996 at 10:00 a.m. at The First National Bank of Boston, 100 Federal Street, Boston, Massachusetts. STOCK INFORMATION Harcourt General's Common Stock and Series A Cumulative Convertible Stock are traded on the New York Stock Exchange under the symbols H and HPRA, respectively. The following table indicates the quarterly price range of the Common Stock and Series A Stock for the past two fiscal years. The "high" price for the first quarter of fiscal 1994 is prior to the tax-free distribution of shares in GC Companies, Inc., which was effective on December 15, 1993.
COMMON STOCK 1995 1994 Quarter High Low High Low - ---------------------------------------------------------------------------------------------- First $37.38 $32.13 $44.00 $32.00 Second $40.88 $32.88 $37.88 $30.25 Third $45.75 $40.00 $39.50 $32.25 Fourth $44.75 $38.00 $38.00 $31.25
SERIES A STOCK 1995 1994 Quarter High Low High Low - ---------------------------------------------------------------------------------------------- First $40.00 $36.50 $42.00 $35.00 Second $44.00 $37.38 $40.25 $34.88 Third $49.13 $44.75 $41.75 $37.50 Fourth $48.13 $45.63 $40.25 $35.25
Harcourt General had 8,694 and 12,803 Common shareholders of record at October 31, 1995 and 1994, respectively, and 627 and 691 Series A shareholders of record at October 31, 1995 and 1994, respectively. Each share of Series A Stock is convertible into 1.1 shares of Common Stock at any time. CORPORATE ADDRESS Harcourt General, Inc. 27 Boylston Street Chestnut Hill, MA 02167 (617) 232-8200 Harcourt General is an Equal Opportunity Employer. 46 Design: Belk Mignogna Associates, New York Photography: Charles Purvis, Amos Chan Harcourt General, Inc. * 27 Boylston Street * Chestnut Hill, MA 02167 EX-21.1 6 SUBSIDIARIES OF HARCOURT GENERAL, INC. EXHIBIT 21.1
HARCOURT GENERAL, INC. SUBSIDIARIES & AFFILIATES (includes Harcourt Brace, NMG and DBM companies) JURISDICTION OF SUBSIDIARY/AFFILIATE INCORPORATION STOCKHOLDER 1471-3184 Quebec Inc. Quebec Harcourt Brace & Company Canada Ltd. Academic Press, Inc. New York Harcourt Brace & Company Academic Press Limited England Harcourt Brace & Company Limited (99%) Harcourt Brace & Company (1%) Alison Licensing, Inc. Delaware Assessment Systems, Inc. Assessment Systems, Inc. Delaware The Psychological Corporation Bailliere Tindall Limited England Harcourt Brace & Company Limited (99%) Harcourt Brace & Company (1%) Bergdorf Goodman, Inc. New York Neiman Marcus Holdings, Inc. Bergdorf Graphics, Inc. New York Bergdorf Goodman, Inc. Books for Professionals, Inc. Delaware Harcourt Brace & Company Broadcasters, Inc. Texas Neiman Marcus Holdings, Inc. C.C. Group Limited Hong Kong The Neiman Marcus Group, Inc. (50%) Contempo Casuals (50%) Career Care, Inc. Delaware Drake Beam Morin, Inc. Coronado Publishers, Inc. Delaware Academic Press, Inc. DBM Australia Limited Delaware Drake Beam Morin, Inc. DBM de Mexico, S.A. de C.V. Mexico Drake Beam Morin, Inc. (99%) DBM International, Inc. (1%) DBM France, S.A. France Drake Beam Morin, Inc. (99%) DBM International, Inc. Delaware Drake Beam Morin, Inc. DBM Training and Consulting, Inc. Delaware Drake Beam Morin, Inc. [page] -2- Devices for Learning, Inc. Delaware Harcourt Brace & Company Drake Beam Morin-Canada, Inc. Ontario Drake Beam Morin, Inc. Drake Beam Morin, Inc. Delaware SIFTCO, Inc. Drake Beam Morin plc England and Drake Beam Morin, Inc. Wales Educalivres Group Inc. - Group Quebec Harcourt Brace & Company Canada, Ltd. Educalivres Inc. Jean-Guy Blanchette Emcor, Inc. Delaware Harcourt General, Inc. Ermine Trading Corporation California The Neiman Marcus Group, Inc. Executive In Residence, Inc. New York Drake Beam Morin, Inc. Foundation for Marine Animal Husbandry, Florida Harcourt Brace & Company Inc. GCC Films, Inc. Delaware Harcourt General, Inc. GMN, INC. Delaware Harcourt General, Inc. General Cinema Broadcasting, Inc. Delaware Harcourt General, Inc. Grune & Stratton, Inc. New York Harcourt Brace & Company Grune & Stratton Limited England Harcourt Brace & Company Limited (50%) Harcourt Brace & Company (50%) HG Land Co., Inc. Delaware Harcourt General, Inc. HGI Investment Trust Massachusetts Hammond Pond Investments, Inc. (50%) Emcor, Inc. (50%) HRW and WBS Canada Corporation, Inc. New York Harcourt Brace & Company HRW Distributors, Inc. Delaware Harcourt Brace & Company Hammond Pond Investments, Inc. Massachusetts SIFTCO, Inc. Harcourt Brace & Company Delaware SIFTCO, Inc. Harcourt Brace & Company Australia Harcourt Brace & Company (99%) Australia Pty. Limited Harcourt Brace & Company Canada, Ltd. Ontario HRW and WBS Canada Corporation, Inc. Dennis Ho Hing Jean-Guy Blanchette Harcourt Brace & Company Limited England Academic Press, Inc. (99%) Harcourt Brace & Company (1%) Harcourt Brace & Company New Zealand Australia Harcourt Brace & Company Australia Pty. Limited Pty. Limited Harcourt Brace FSC, Inc. U.S. Virgin Harcourt Brace & Company Islands [page] HARCOURT GENERAL, INC. SUBSIDIARIES & AFFILIATES (continued) JURISDICTION OF SUBSIDIARY/AFFILIATE INCORPORATION STOCKHOLDER Harcourt Brace Japan, Inc. Japan Harcourt Brace & Company (99.17%) Harcourt Brace Legal and Delaware SIFTCO, Inc. Professional Publications, Inc. Harcourt General Charitable Foundation, Massachusetts Harcourt General, Inc. Inc. Harcourt General Services, Inc. Delaware Harcourt General, Inc. Health Careers Academy New Jersey Holt, Rinehart and Winston, Inc. Delaware Harcourt Brace & Company Holt, Rinehart and Winston Limited England W. B. Saunders Company Limited (99%) Harcourt Brace & Company (1%) Holt, Rinehart & Winston Publishing Asia Hong Kong Harcourt Brace & Company (99%) Limited Harcourt Brace & Company Australia Pty. Limited (1%) Human Nature, Inc. Delaware Harcourt Brace & Company (83%) Innovation Research, Inc. Delaware Harcourt Brace & Company Johnson Reprint Company Limited England Harcourt Brace & Company Limited (99%) Harcourt Brace & Company (1%) KO Corporation Delaware HGI Investment Trust Last Call, Inc. New Jersey The Neiman Marcus Group, Inc. Lauriate Canada Inc. Ontario HRW and WBS Canada Corporation, Inc. Learned & Tested, Inc., The Education Delaware Harcourt Brace & Company Company Louisiana CPR Review, Inc. Delaware Miller Comprehensive CPA Review, Inc. MSRD, Inc. New York The Psychological Corporation Miller Accounting Publications, Inc. Delaware Harcourt Brace & Company Miller Comprehensive CPA Review, Inc. Delaware Legal and Professional Publications, Inc. [page] -- HARCOURT GENERAL, INC. SUBSIDIARIES & AFFILIATES (continued) JURISDICTION OF SUBSIDIARY/AFFILIATE INCORPORATION STOCKHOLDER NM Direct de Mexico, S.A. de C.V. Mexico The Neiman Marcus Group, Inc. (99%) Neiman Marcus Holdings, Inc. (1%) Neiman Marcus Holdings, Inc. California The Neiman Marcus Group, Inc. Neiman Marcus Holiday Express, Inc. Delaware The Neiman Marcus Group, Inc. Neiman Marcus Funding Corporation Delaware The Neiman Marcus Group, Inc. Pastille By Mail, Inc. Delaware The Neiman Marcus Group, Inc. SIFTCO, Inc. Massachusetts Harcourt General, Inc. T & A D Poyser Limited England Harcourt Brace & Company Limited (50%) Harcourt Brace & Company (50%) The Marine Research Center at Sea World, Florida Inc. The Neiman Marcus Group, Inc. Delaware Harcourt General, Inc. (65%) The Psychological Corporation New York Harcourt Brace & Company The Psychological Corporation Limited England Harcourt Brace & Company Limited (99%) Harcourt Brace & Company (1%) W. B. Saunders Company Delaware Harcourt Brace & Company W. B. Saunders Company Limited England Harcourt Brace & Company Limited (99%) Harcourt Brace & Company (1%) -4-
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 and 33-46148) and Form S-8 (No. 33-26079) of our reports dated December 8, 1995, appearing in and incorporated by reference in the Annual Report on Form 10-K of Harcourt General, Inc. for the year ended October 31, 1995. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Boston, Massachusetts January 24, 1996 [page] EX-27.1 8 FDS
5 This schedule contains a summary of financial information extracted from the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Operations and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS OCT-31-1995 OCT-31-1995 363750 243073 395186 22486 495222 1609798 827262 286915 2884336 784971 749008 0 1210 72699 867204 2884336 3034736 3034736 1765090 2716840 0 32077 88735 269106 91496 177610 (11727) 0 0 165883 2.16 2.16
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