UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-1023
THE McGRAW-HILL COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
New York 13-1026995
- ---------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 Avenue of the Americas, New York, N.Y. 10020
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 512-2000
------------------
Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
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[ ]
On July 26, 1996 there were approximately 99.4 million shares of Common
Stock (par value $1.00 per share) outstanding.
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
TABLE OF CONTENTS
-----------------
Page Number
-----------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
-------
Consolidated Statement of Income for
the three and six month periods ended
June 30, 1996 and 1995 3
Consolidated Balance Sheet at June 30, 1996,
December 31, 1995 and June 30, 1995 4-5
Consolidated Statement of Cash Flows for the six
months ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Operating
------- Results and Financial Condition 10-14
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 15
-------
Item 4. Submission of Matters to a Vote of Security Holders 15-16
-------
Item 5. Other Information 16
-------
Item 6. Exhibits and Reports on Form 8-K 17-19
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-2-
<PAGE>
PART I
Financial Information
Item 1. Financial Statements
--------------------
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
--------------------------------
Periods Ended June 30, 1996 and 1995
------------------------------------
<CAPTION>
Three Months Six Months
-------------------- ----------------------
1996 1995 1996 1995
--------- --------- ---------- ----------
(In thousands, except per-share data)
<S> <C> <C> <C> <C>
Operating revenue $ 710,934 $ 712,782 $1,294,785 $1,281,330
Expenses:
Operating 327,076 324,339 620,265 605,639
Selling and general 226,302 230,000 442,902 445,063
Depreciation and amortization 53,632 57,686 94,258 98,723
--------- --------- ---------- ----------
Total expenses 607,010 612,025 1,157,425 1,149,425
Other income - net 4,728 5,396 9,970 10,765
--------- --------- ---------- ----------
Income from operations 108,652 106,153 147,330 142,670
Interest expense - net 12,412 16,289 23,831 29,079
--------- --------- ---------- ----------
Income before taxes on income 96,240 89,864 123,499 113,591
Provision for taxes on income 39,074 37,023 50,141 46,799
--------- --------- ---------- ----------
Net income $ 57,166 $ 52,841 $ 73,358 $ 66,792
========= ========= ========== ==========
Earnings per common share (Note 1) $ 0.57 $ 0.53 $ 0.73 $ 0.67
========= ========= ========== ==========
Average number of common
shares outstanding (Note 1) 100,311 99,660 100,447 99,538
</TABLE>
-3-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
June 30, Dec. 31, June 30,
1996 1995 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 4,828 $ 10,250 $ 19,031
Accounts receivable (net of allowance
for doubtful accounts) (Note 3) 785,912 855,372 781,359
Receivable from broker-dealers and
dealer banks (Note 4) 7,388 9,674 17,461
Inventories (Note 3) 294,239 238,030 295,727
Prepaid income taxes 71,775 67,128 70,171
Prepaid and other current assets 75,865 59,351 62,602
---------- ---------- ----------
Total current assets 1,240,007 1,239,805 1,246,351
---------- ---------- ----------
Prepublication costs (net of accumulated
amortization) (Note 3) 315,257 268,200 277,994
Investments and other assets:
Investment in Rock-McGraw, Inc. - at
equity 64,275 61,797 59,875
Prepaid pension expense 101,414 98,177 91,515
Other 156,452 141,861 151,239
---------- ---------- ----------
Total investments and other assets 322,141 301,835 302,629
---------- ---------- ----------
Property and equipment - at cost 839,370 827,307 808,978
Less - accumulated depreciation 518,829 491,178 474,346
---------- ---------- ----------
Net property and equipment 320,541 336,129 334,632
Goodwill and other intangible assets - at
cost (net of accumulated amortization) 948,945 958,420 973,051
---------- ---------- ----------
$3,146,891 $3,104,389 $3,134,657
========== ========== ==========
</TABLE>
-4-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
June 30, Dec. 31, June 30,
1996 1995 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 238,860 $ 71,299 $ 286,493
Accounts payable 185,443 215,179 172,611
Payable to broker-dealers and dealer
banks (Note 4) 6,834 7,469 16,846
Accrued liabilities 145,304 188,382 137,146
Income taxes currently payable 103,474 70,405 79,412
Unearned revenue 238,978 241,816 229,389
Other current liabilities 202,615 251,909 191,274
---------- ---------- ----------
Total current liabilities 1,121,508 1,046,459 1,113,171
---------- ---------- ----------
Other liabilities:
Long-term debt (Note 5) 556,734 557,365 657,705
Deferred income taxes 138,965 140,531 125,115
Accrued postretirement healthcare and
other benefits 204,722 200,100 201,324
Other non-current liabilities 128,668 124,868 110,559
---------- ---------- ----------
Total other liabilities 1,029,089 1,022,864 1,094,703
---------- ---------- ----------
Total liabilities 2,150,597 2,069,323 2,207,874
---------- ---------- ----------
Shareholders' equity (Notes 1 and 6):
Capital stock 102,933 102,933 102,933
Additional paid-in capital 37,411 26,740 23,653
Retained income 1,037,916 1,030,526 930,064
Foreign currency translation adjustments (58,355) (56,247) (49,964)
---------- ---------- ----------
1,119,905 1,103,952 1,006,686
Less - common stock in treasury-at cost 111,256 60,778 68,285
unearned compensation on
restricted stock 12,355 8,108 11,618
---------- ---------- ----------
Total shareholders' equity 996,294 1,035,066 926,783
---------- ---------- ----------
$3,146,891 $3,104,389 $3,134,657
========== ========== ==========
</TABLE>
-5-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Cash Flows
------------------------------------
For The Six Months Ended June 30, 1996 And 1995
-----------------------------------------------
<CAPTION>
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net income $ 73,358 $ 66,792
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 35,175 32,847
Amortization of goodwill and intangibles 18,054 18,891
Amortization of prepublication costs 41,029 46,985
Provision for losses on accounts receivable 35,287 32,896
Other 603 354
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Decrease/(increase) in accounts receivable 30,930 (38,062)
Increase in inventories (51,680) (84,103)
Increase in prepaid and other current assets (19,052) (11,210)
Decrease in accounts payable and accrued expenses (74,521) (45,051)
Decrease in unearned revenue (2,820) (10,598)
Decrease in other current liabilities (48,903) (45,530)
Increase in interest and income taxes currently payable 34,074 24,968
(Decrease)/increase in prepaid/deferred income taxes (1,505) 456
Net change in other assets and liabilities (4,179) (5,433)
- --------------------------------------------------- --------- ---------
Cash provided by/(used for) operating activities 65,850 (15,798)
- --------------------------------------------------- --------- ---------
Investing activities
- --------------------
Investment in prepublication costs (83,801) (57,261)
Purchases of property and equipment (19,990) (21,525)
Acquisition of businesses (25,809) (24,264)
Disposition of businesses 6,335 429
Other 861 880
- --------------------------------------------------- --------- ---------
Cash used for investing activities (122,404) (101,741)
- --------------------------------------------------- --------- ---------
Financing activities
- --------------------
Dividends paid to shareholders (65,968) (59,780)
Additions to short-term debt - net 167,821 181,230
Repurchase of treasury shares (62,117) -
Exercise of stock options 14,846 8,522
Other (3,450) (1,458)
- --------------------------------------------------- --------- ---------
Cash provided by financing activities 51,132 128,514
- --------------------------------------------------- --------- ---------
Net change in cash and equivalents (5,422) 10,975
Cash and equivalents at beginning of period 10,250 8,056
- --------------------------------------------------- --------- ---------
Cash and equivalents at end of period $ 4,828 $ 19,031
========= =========
</TABLE>
-6-
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
1. The financial information in this report has not been audited, but in the
opinion of management all adjustments (consisting only of normal recurring
adjustments) considered necessary to present fairly such information have
been included. The operating results for the three and six month periods
ended June 30, 1996 and 1995 are not necessarily indicative of results to
be expected for the full year due to the seasonal nature of some of the
company's businesses. The financial statements included herein should be
read in conjunction with the financial statements and notes included in the
company's Annual Report on Form 10-K for the year ended December 31, 1995.
On January 31, 1996, the Board of Directors declared a two-for-one stock
split of the company's common stock which was distributed on April 26, 1996
to all shareholders of record on March 28, 1996. Accordingly, all
references to common share data in the financial statements and notes have
been restated to reflect the split.
Certain prior year amounts have been reclassified for comparability
purposes.
<TABLE>
2. Operating profit by segment is total operating revenue less expenses which
are deemed to be related to the unit's operating revenue. A summary of
operating results by segment for the three months and six months ended
June 30, 1996 and 1995 follows:
<CAPTION>
1996 1995
-------------------- ---------------------
Operating Operating
Revenue Profit Revenue Profit
--------- --------- --------- ---------
(In thousands)
Three Months
------------
<S> <C> <C> <C> <C>
Educational and Professional
Publishing $277,580 $ 26,443 $301,610 $ 31,220
Financial Services 207,088 63,603 192,075 55,975
Information and Media Services 226,266 31,984 219,097 32,497
-------------------------------- -------- -------- -------- --------
Total operating segments 710,934 122,030 712,782 119,692
General corporate expense - (13,378) - (13,539)
Interest expense - net - (12,412) - (16,289)
-------------------------------- -------- -------- -------- --------
Total company $710,934 $ 96,240* $712,782 $ 89,864*
======== ======== ======== ========
<FN>
*Income before taxes on income.
</FN>
</TABLE>
-7-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
<CAPTION>
1996 1995
-------------------- ---------------------
Operating Operating
Revenue Profit Revenue Profit
---------- --------- ---------- ---------
Six Months (In thousands)
----------
<S> <C> <C> <C> <C>
Educational and Professional
Publishing $ 443,484 $ (4,978) $ 472,906 $ 1,849
Financial Services 420,195 129,780 391,441 115,276
Information and Media Services 431,106 48,989 416,983 51,940
----------------------------- ---------- -------- ---------- --------
Total operating segments 1,294,785 173,791 1,281,330 169,065
General corporate expense - (26,461) - (26,395)
Interest expense - net - (23,831) - (29,079)
----------------------------- ---------- -------- ---------- --------
Total company $1,294,785 $123,499* $1,281,330 $113,591*
========== ======== ========== ========
<FN>
*Income before taxes on income.
</FN>
</TABLE>
<TABLE>
3. The allowance for doubtful accounts, the components of inventory and the
accumulated amortization of prepublication costs were as follows:
<CAPTION>
June 30, Dec. 31, June 30,
1996 1995 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Allowance for doubtful accounts $ 81,432 $ 79,980 $ 79,958
========= ========= =========
Inventories:
Finished goods $ 228,008 $ 185,608 $ 222,321
Work-in-process 34,628 15,675 36,423
Paper and other materials 31,603 36,747 36,983
--------- --------- ---------
Total inventories $ 294,239 $ 238,030 $ 295,727
========= ========= =========
Accumulated amortization of
prepublication costs $ 398,426 $ 391,384 $ 354,248
========= ========= =========
</TABLE>
-8-
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
4. A subsidiary of J.J. Kenny Co. acts as an undisclosed agent in the purchase
and sale of municipal securities for broker-dealers and dealer banks and
the company had $409 million of matched purchase and sale commitments at
June 30, 1996. Only those transactions not closed at the settlement date
are reflected in the balance sheet as receivables and payables.
<TABLE>
5. A summary of long-term debt follows:
<CAPTION>
June 30, Dec. 31, June 30,
1996 1995 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
9.43% senior notes due 2000 $ 250,000 $ 250,000 $ 250,000
Commercial paper supported by
bank revolving credit agreement 300,000 300,000 400,000
Other 6,734 7,365 7,705
--------- --------- ---------
Total long-term debt $ 556,734 $ 557,365 $ 657,705
========= ========= =========
</TABLE>
<TABLE>
6. Common shares approved for issuance for conversions and stock based awards
were as follows:
<CAPTION>
June 30, Dec. 31, June 30,
1996 1995 1995
--------- --------- ---------
<S> <C> <C> <C>
$1.20 convertible preference stock
at the rate of 6.6 shares for each
share of preference stock 9,346 9,346 9,346
Stock based awards 6,541,202 7,245,226 7,609,148
--------- --------- ---------
6,550,548 7,254,572 7,618,494
========= ========= =========
</TABLE>
<TABLE>
7. Cash dividends per share declared during the periods were as follows:
<CAPTION>
Three Months Six Months
------------- -----------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock $.33 $.30 $.66 $.60
Preference stock .30 .30 .60 .60
</TABLE>
-9-
<PAGE>
Item 2. Management's Discussion and Analysis of Operating
-------------------------------------------------
Results and Financial Condition
-------------------------------
Operating Results - Comparing Periods Ended June 30, 1996 and 1995
- ------------------------------------------------------------------
Three Months
- ------------
Consolidated Review
- -------------------
Net income for the quarter increased $4.3 million, or 8.2%, over the 1995 second
quarter. Revenues declined $1.8 million, or 0.3%, reflecting volume declines
due to an off-adoption year in school publishing following 1995's strong
adoption year. Revenues in the Financial Services segment improved due to
strong new issuance volume and expanded global operations and in Information and
Media Services, primarily due to Business Week. Net income improved over the
prior year due to cost controls in school publishing, expanded profit margins in
Financial Services and lower interest expense. Earnings per share were 57 cents
compared to 53 cents for the second quarter in 1995.
All references to common share data, including earnings per share, reflect the
two-for-one stock split of the company's common stock that was distributed to
shareholders on April 26, 1996.
Total expenses declined $5.0 million, or 0.8%, reflecting cost controls in
Educational and Professional Publishing due to the off-adoption year which
offset volume-related expense increases in Financial Services and Information
and Media Services.
Net interest expense declined $3.9 million, or 23.8%, resulting from a decline
in average commercial paper interest rates from 6.2% in 1995 to 5.3% in 1996 and
reduced average commercial paper borrowing levels from the prior year, due to
paydowns from the company's operating cash flow.
The provision for taxes as a percentage of income before taxes was 40.6% in 1996
compared to 41.2% in 1995. The reduction in the effective tax rate reflects the
declining impact of non-deductible goodwill amortization on higher pre-tax
earnings as well as favorable settlement of state tax audits.
On July 3, The McGraw-Hill Companies signed an agreement to exchange its
Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher
Education Group and other consideration, including cash. This transaction is
expected to be completed in the third quarter after obtaining necessary
government approvals required under the Hart-Scott-Rodino Act. The final
valuation of the properties being exchanged will be based on independent
appraisals; the company estimates that this transaction will result in a pre-tax
gain, net of one-time charges, of more than $300 million.
-10-
<PAGE>
Segment Review
- --------------
Educational and Professional Publishing revenue declined $24.0 million, or 8.0%,
to $277.6 million. The decline reflects the 1996 off-adoption year for the
school publishing industry. In 1995, there were strong sales in the key
adoption states of California and Texas where early ordering benefited the
second quarter. Second quarter sales in Texas declined from $44 million in 1995
to $8 million in 1996. The revenue variance was also affected by reduced
revenues at Shepard's/McGraw-Hill, due to the December divestiture of Shepard's
topical publishing business. Partially offsetting the expected decline in
school publishing were improved revenues in College publishing and international
operations, including Mexico, while business at The Continuing Education Center
was soft. The segment also benefited from the 1996 first quarter acquisition of
Open Court Publishing. Despite the decline in revenue, operating profit for the
segment declined only $4.8 million, or 15.3%, to $26.4 million, due to strong
cost controls partially offset by development costs for the McGraw-Hill Home
Interactive division, which will offer multimedia education titles in the
consumer market later this year.
Financial Services' revenue grew $15.0 million, or 7.8%, to $207.1 million while
operating profit improved $7.6 million, or 13.6%, to $63.6 million. Standard &
Poor's Ratings Services' revenue and profits improved reflecting expanded global
operations, increased new issuance volume in the U.S. bond market and non-
traditional ratings products, net of continuing investments. Second quarter new
issuance volume was particularly strong in Eurobonds, high-yield corporates and
asset-backed securities. Revenue and profit for the Financial Information
Services Group also improved from the prior year reflecting good results at
Compustat and greater distribution of global products over third-party networks,
particularly MMS International and Platt's. These results offset weakness in
municipal securities services and consulting revenues at DRI/McGraw-Hill.
Information and Media Services' revenue increased $7.2 million, or 3.3%, to
$226.3 million and operating profit declined $0.5 million, or 1.6%, to $32.0
million. Business Week advertising pages increased 1% over last year's second
quarter, a significant improvement from the first quarter comparison. Business
Week revenues grew at a greater rate than the page gain as revenue per
advertising page increased. Revenues also improved for the Construction
Information Group due to new electronic products and some improvement in
advertising. Revenues at the computer magazines declined, partly offset by
increases at the healthcare publications, while Broadcasting revenues were flat.
The decline in segment operating profit reflects the impact of the revenue
declines at the computer magazines, the costs of launching tele.com magazine and
reduced profits in Broadcasting due to soft market conditions in San Diego.
-11-
<PAGE>
Six Months
- ----------
Consolidated Review
- -------------------
For the first half of the year, net income increased $6.6 million, or 9.8%, to
$73.4 million. Operating revenue increased $13.5 million, or 1.1%, to $1,295
million. The relatively flat revenues reflect an off-adoption year in
school publishing, offset by strong growth in financial services. Total
expenses increased $8.0 million, or 0.7%, reflecting the revenue growth and
development expenses for new businesses net of cost controls in school
publishing. Earnings per share were 73 cents versus 67 cents last year.
Net interest expense decreased $5.2 million, or 18.0%, reflecting a decline in
average commercial paper interest rates from 6.2% in 1995 to 5.4% in 1996 and
reduced average commercial paper borrowing levels from the prior year, due to
paydowns from the company's operating cash flow.
The provision for taxes as a percentage of income before taxes was 40.6% in 1996
compared to 41.2% in 1995. The reduction in the effective tax rate reflects the
declining impact of non-deductible goodwill amortization on higher pre-tax
earnings as well as favorable settlement of state tax audits.
Segment Review
- --------------
Educational and Professional revenue declined $29.4 million, or 6.2%, to $443.5
million. The decline reflects the off-adoption year for the school publishing
industry. The revenue decline also reflects reduced revenues at
Shepard's/McGraw-Hill, due to the December 1995 divestiture of Shepard's topical
publishing business. Partially offsetting the expected decline in school
publishing, revenues increased in international publishing and the segment
benefited from the first quarter acquisition of Open Court Publishing. The
segment had an operating loss of $5.0 million, compared to operating profit of
$1.8 million last year. This decline in profits reflects the revenue decline,
partially offset by cost controls. Operating profit compared to last year was
also impacted by development costs for the McGraw-Hill Home Interactive
division.
Financial Services' revenue increased $28.8 million, or 7.3%, to $420.2 million.
Operating profit improved $14.5 million, or 12.6%, to $129.8 million. Standard
& Poor's Ratings Services' revenue and profits increased reflecting expanded
global operations, increased new issuance volume in the U.S. bond market and
non-traditional ratings products, net of continuing investments. Revenue and
profit for the Financial Information Services Group also improved from the prior
year reflecting good results from greater distribution of global products over
third-party networks, particularly MMS International and Platt's. These results
offset weakness in municipal securities services.
-12-
<PAGE>
Information and Media Services' revenue increased $14.1 million, or 3.4%, to
$431.1 million. Operating profit declined $3.0 million, or 5.7%, to $49.0
million. The revenue increase reflects improved advertising revenues at
Business Week as an advertising rate increase offset a decline in advertising
pages. The Tower Group International acquisition of UCB Canada and the
acquisition of Hospital Practice magazine also contributed to the revenue
increase. Revenues for the Construction Information Group improved while
revenue at the computer magazines declined and Broadcasting was flat. The
decline in segment operating profit reflects the impact of the revenue declines
at the computer magazines, the costs of launching tele.com magazine, which
debuted in March, and Broadcasting's softer market conditions in San Diego and
last year's higher margin Super Bowl broadcast.
Financial Condition - June 30, 1996 versus December 31, 1995
- ------------------------------------------------------------
The company continues to maintain a strong financial position. Cash generated
by operating activities totaled $65.8 million compared to cash used in
operations last year of $15.8 million. This year-to-year improvement in cash
flow from operations largely reflects reduced working capital requirements due
to the 1996 off-adoption year in school publishing. Total debt was $795.6
million, an increase of $166.9 million from year-end. The increase in debt
reflects the seasonal spending for inventory and sampling costs for 1996 school
publishing adoptions, prepublication spending for 1997 school adoption programs,
the acquisition of Open Court and borrowings to finance the repurchase by the
company of 1.3 million common shares in the second quarter. The company's
strong presence in school publishing significantly impacts the seasonality of
its earnings and borrowing patterns during the year, with the company borrowing
during the first half of the fiscal year and generating cash in the second half
of the year. Borrowing patterns will be further impacted in 1996 from the
company's spending for the 1997 strong adoption year. The company's borrowings
will also be impacted by the transaction exchanging Shepard's/McGraw-Hill for
the Times Mirror Higher Education Group later this year, entailing a tax payment
in December on a pre-tax gain, net of one-time charges, estimated to exceed $300
million.
In January, the company's Board of Directors approved a share repurchase program
authorizing the purchase of up to 4 million shares of the company's common
stock. In the second quarter, the company bought 1.3 million shares at a cost
of $62.1 million. The repurchased shares will be used for general corporate
purposes, including the issuance of shares for the exercise of employee stock
options. The company continued to repurchase shares in August; future purchases
under the program may be made from time to time dependent on market conditions.
In the fourth quarter of 1995, the company implemented a best practices program
to improve the efficiency and effectiveness of the company's operations. The
program included the review of major systems and processes, including certain
administrative functions and related technology. The program encompasses the
elimination of approximately 750 positions. At the end of the second quarter of
1996, approximately 450 positions had been eliminated and the company has
undertaken various technology initiatives. Cash expenditures related to the
best practices program in the first half of 1996 did not have a significant
impact on the company's liquidity.
-13-
<PAGE>
Commercial paper borrowings at June 30, 1996 totaled $531.5 million, an increase
of $163.0 million from December 31, 1995. These borrowings are supported by an
$800 million revolving credit agreement with a group of banks terminating in
November 1999, and $300 million is classified as long-term. There are no
amounts outstanding under this agreement.
Under a shelf registration which became effective with the Securities and
Exchange Commission in mid-1990, the company can issue an additional $250
million of debt securities. The new debt could be used to replace a portion of
the commercial paper borrowings with longer term securities, when and if
interest rates are attractive and markets are favorable.
Accounts receivable before reserves of $867.3 million decreased $68.0 million
from the end of 1995 due primarily to the seasonal nature of some of the
company's businesses. Inventories increased $56.2 million to $294.2 million
from the end of 1995 due primarily to the seasonal requirements for school
publishing and the seasonal buildup for the annual Sweet's files.
Net prepublication costs at June 30 increased $47.1 million from the end of 1995
to $315.3 million due to additional spending for 1997 adoption year programs and
new college and professional publishing titles. Prepublication cost spending in
the first half of 1996 totaled $83.8 million compared to $57.3 million in 1995.
Purchases of property and equipment of $20 million were slightly less than the
comparable period last year; the purchases were primarily for computer
equipment.
-14-
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
-----------------
A Complaint was filed on June 11, 1996 in United States Bankruptcy
Court, Central District of California, in an action captioned County
------
of Orange v. McGraw-Hill Companies, Inc., d/b/a Standard & Poor's.
-------------------------------------------------------------------
Case No. SA 94-22272 JR; Adversary No. SA 96-01624. In the Complaint,
Orange County, California makes claims against Standard & Poor's for
breach of contract, professional negligence and for aiding and
abetting breaches of fiduciary duty arising out of ratings services
provided by Standard & Poor's to Orange County in 1993-94 and prior to
Orange County's filing for bankruptcy protection under chapter 9 on
December 6, 1994. The Complaint alleges that Standard & Poor's caused
Orange County to sustain losses in excess of $500 million. The
Registrant believes that the allegations of the Complaint lack merit
and intends to vigorously contest the action.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The 1996 Annual Meeting of Shareholders of the Registrant was held on
April 24, 1996.
(b) The following nominees, having received the FOR votes set forth
opposite their respective names, constituting a plurality of the votes
cast at the Annual Meeting for the election of Directors, were duly
elected a director of the Registrant for two-year terms:
DIRECTOR FOR WITHHOLD AUTHORITY
-------- --- ------------------
Pedro Aspe 43,747,126 158,273
Robert P. McGraw 43,750,375 155,024
The following nominees having received the FOR votes set forth
opposite their respective names, constituting a plurality of the votes
cast at the Annual Meeting for the election of Directors, were duly
elected Directors of the Registrant for three-year terms:
DIRECTOR FOR WITHHOLD AUTHORITY
-------- --- ------------------
Joseph L. Dionne 43,749,454 155,945
Don Johnston 43,746,915 158,484
Linda Koch Lorimer 43,752,652 152,747
Harold W. McGraw III 43,752,604 152,795
Alva O. Way 43,748,516 156,883
-15-
<PAGE>
The terms of office of the following directors continued after the
meeting: Vartan Gregorian; John T. Hartley; Peter O. Lawson-Johnston;
Paul J. Rizzo; James H. Ross; George B. Harvey; Richard H. Jenrette;
and Lois Dickson Rice.
(c) (i) Shareholders approved the 1996 Key Executive Short-Term Incentive
Compensation Plan. The vote was 42,522,119 shares FOR and 1,011,253
shares AGAINST, with 372,027 shares abstaining and no broker nonvotes.
(ii) Shareholders approved the Director Deferred Stock Ownership Plan. The
vote was 41,813,698 shares FOR and 1,317,242 shares AGAINST, with
353,391 shares abstaining and 421,068 broker nonvotes.
(iii) Shareholders ratified the appointment of Ernst & Young as independent
auditors for the Registrant and its subsidiaries for 1996. The vote
was 43,728,492 shares FOR and 115,332 shares AGAINST , with 61,575
shares abstaining and no broker nonvotes.
(iv) Shareholders did not approve the shareholder proposal to eliminate the
election of directors by classes. The vote was 13,954,427 shares FOR
and 26,810,734 shares AGAINST, with 24,725 shares abstaining and
2,898,514 broker nonvotes.
Item 5. Other Information
-----------------
On July 3, 1996 the Registrant, The Times Mirror Company ("Times
Mirror") and Mosby-Year Book, Inc., a wholly owned subsidiary of Times
Mirror ("Mosby"), entered into an Exchange Agreement pursuant to which
the Registrant has agreed to sell all of the outstanding shares of the
capital stock of its subsidiary, Shepard's/McGraw-Hill Inc., to Times
Mirror in exchange for (i) the stock of Times Mirror Higher Education
Group, Inc., (ii) the assets and related liabilities of Mosby
relating to Mosby's college-level life and physical science text
business, (iii) certain assets and liabilities of Times Mirror
International Publishers - U.S., Inc. and affiliated entities
relating to Times Mirror's college business and (iv) a cash payment
and other consideration. The transaction is subject to approval
pursuant to the Hart-Scott-Rodino Antitrust Improvements Acts of 1976,
as amended, and to other closing conditions. It is anticipated that
the transaction will close during the third quarter of 1996.
-16-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K Page Number
-------------------------------- -----------
(a) Exhibits
(10)* Director Deferred Stock Ownership Plan, incorporated by
reference from Registrant's Proxy Statement, dated
March 21, 1996.
(10)* 1996 Key Executive Short-Term Incentive Compensation Plan,
incorporated by reference from Registrant's Proxy Statement,
dated March 21, 1996.
(12) Computation of Ratio of Earnings to Fixed Charges. 18
(27) Financial Data Schedule. 19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE McGRAW-HILL COMPANIES, INC.
-------------------------------
Date: 08/13/96 By Robert J. Bahash
------------------ -------------------------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer
Date: 08/08/96 By Thomas J. Kilkenny
------------------ -------------------------------
Thomas J. Kilkenny
Vice President and Controller
Date: 08/09/96 By Kenneth M. Vittor
------------------ -------------------------------
Kenneth M. Vittor
Senior Vice President
and General Counsel
-17-
<PAGE>
<TABLE>
Exhibit (12)
The McGraw-Hill Companies, Inc.
-------------------------------
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
Periods Ended June 30, 1996
---------------------------
<CAPTION>
Six Twelve
Months Months
--------- ---------
(In thousands)
<S> <C> <C>
Earnings
Earnings from continuing operations
before income tax expense (Note)...... $ 121,021 $ 391,778
Fixed charges........................... 40,395 86,600
Capitalized interest.................... - (188)
--------- ---------
Total Earnings....................... $ 161,416 $ 478,190
========= =========
Fixed Charges (Note)
Interest expense........................ $ 25,515 $ 57,938
Portion of rental payments deemed to be
interest.............................. 14,880 28,662
--------- ---------
Total Fixed Charges.................. $ 40,395 $ 86,600
========= =========
Ratio of Earnings to Fixed Charges 4.0x 5.5x
<FN>
(Note) For purposes of computing the ratio of earnings to fixed charges,
"earnings from continuing operations before income taxes" excludes
undistributed equity in income of less than 50%-owned companies. "Fixed
charges" consist of (1) interest on debt and capital leases, and (2) the
portion of the company's rental expense deemed representative of the
interest factor in rental expense.
</FN>
</TABLE>
-18-
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,828
<SECURITIES> 0
<RECEIVABLES> 867,344
<ALLOWANCES> 81,432
<INVENTORY> 294,239
<CURRENT-ASSETS> 1,240,007
<PP&E> 839,370
<DEPRECIATION> 518,829
<TOTAL-ASSETS> 3,146,891
<CURRENT-LIABILITIES> 1,121,508
<BONDS> 0
<COMMON> 102,919
14
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,146,891
<SALES> 1,294,785
<TOTAL-REVENUES> 1,294,785
<CGS> 1,157,425
<TOTAL-COSTS> 1,157,425
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 35,287
<INTEREST-EXPENSE> 23,831
<INCOME-PRETAX> 123,499
<INCOME-TAX> 50,141
<INCOME-CONTINUING> 73,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73,358
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.73
</TABLE>
