<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from---------------to---------------
Commission File Number 1-1023
THE McGRAW-HILL COMPANIES, INC.
----------------------------------------------------------
(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
------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 512-2000
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common stock - $1 par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
----------------
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 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
amendment to this Form 10-K. X
---
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
--- ---
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of February 28, 1997, was $5,149,580,214.
The number of shares of common stock of the registrant outstanding as
of February 28, 1997 was 99,872,292 shares.
Part I, Part II and Part IV incorporate information by reference from
the Annual Report to Shareholders for the year ended December 31, 1996. Part III
incorporates information by reference from the definitive proxy statement mailed
to shareholders March 25, 1997 for the annual meeting of shareholders to be held
on April 30, 1997.
<PAGE> 2
TABLE OF CONTENTS
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PART I
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<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
1. Business..................................................... 1
2. Properties................................................... 2 - 4
3. Legal proceedings............................................ 5
4. Submission of matters to a vote of security holders ......... 5
Executive officers of the registrant.............................. 6
PART II
-----------
5. Market for the registrant's common stock and related
stockholder matters.......................................... 7
6. Selected financial data...................................... 7
7. Management's discussion and analysis of financial
condition and results of operations.......................... 7
8. Consolidated financial statements and supplementary
data......................................................... 7
9. Changes in and disagreements with accountants on accounting
and financial disclosure..................................... 7
PART III
-----------
10. Directors and executive officers of the registrant........... 8
11. Executive compensation....................................... 8
12. Security ownership of certain beneficial owners
and management............................................... 8
13. Certain relationships and related transactions............... 8
PART IV
----------
14. Exhibits, financial statement schedules, and
reports on Form 8-K.......................................... 9 - 12
Signatures ....................................................... 13 - 15
Exhibits..................................................... 16 - 72
Consent of Independent Auditors - Ernst & Young LLP............... 73
Financial Data Schedule........................................... 74
Supplementary schedule............................................ 75
</TABLE>
<PAGE> 3
PART I
Item 1. Business
- ------- --------
The Registrant, incorporated in December 1925, serves business, professional and
educational markets around the world with information products and services. Key
markets include finance, business, education, construction, medical and health,
computers and communications, aerospace and defense. As a multimedia publishing
and information company, the Registrant employs a broad range of media,
including books, magazines, newsletters, software, on-line data services,
CD-ROMs, facsimile and television broadcasting. Most of the Registrant's
products and services face substantial competition from a variety of sources.
The Registrant's 16,220 employees are located worldwide. They perform the vital
functions of analyzing the nature of changing demands for information and of
channeling the resources necessary to fill those demands. By virtue of the
numerous copyrights and licensing, trade, and other agreements, which are
essential to such a business, the Registrant is able to collect, compile, and
disseminate this information. All book manufacturing and magazine printing is
handled through a number of independent contractors. The Registrant's principal
raw material is paper, and the Registrant has assured sources of supply, at
competitive prices, adequate for its business needs.
Descriptions of the company's principal products, broad services and markets,
and significant achievements are hereby incorporated by reference from Exhibit
(13), pages 4 to 21 and pages 24 to 25 (textual material) of the Registrant's
1996 Annual Report to Shareholders.
Information as to Industry Segments
- -----------------------------------
The relative contribution of the industry segments of the Registrant and its
subsidiaries to operating revenue and operating profit and geographic
information for the three years ended December 31, 1996 and the identifiable
assets of each segment at the end of each year, are included in Exhibit (13), on
pages 39 to 40 in the Registrant's 1996 Annual Report to Shareholders and is
hereby incorporated by reference.
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<PAGE> 4
Item 2. Properties
- ------- ----------
The Registrant leases office facilities at 389 locations: 290 are in the United
States. In addition, the Registrant owns real property at 25 locations: 22 are
in the United States. The principal facilities of the Registrant are as follows:
<TABLE>
<CAPTION>
Owned Square
or Feet
Domestic Leased (thousands) Business Unit
- -------- ------ ----------- -------------
<S> <C> <C> <C>
New York, NY leased 1,538 See Explanation Below
New York, NY leased 504 Financial Services
owned 346 Financial Services
New York, NY leased 64 Various Publishing Units
Hightstown, NJ owned See Explanation Below
Office and Data Ctr. 490
Warehouse 412 100% Leased to Non-
McGraw-Hill Tenant
Delran, NJ leased 106 Datapro
Denver, CO owned 88 Broadcasting
San Diego, CA owned 43 Broadcasting
Indianapolis, IN leased 54 Broadcasting
Englewood, CO owned 133 Financial Services
Lexington, MA owned 53 Partially Vacant with
Non-McGraw-Hill Tenant
leased 122 Various Operating Units
and Non-McGraw-Hill
Subtenants
Blue Ridge Summit, PA owned Vacant
Office 52
Book Dist. Ctr. 106
Peterborough, NH owned 51 Byte
Chicago, IL leased 68 Various Operating Units
and Non-McGraw-Hill
Subtenants
Washington, DC leased 73 Various Operating Units
Kent, WA leased Tower Group International
Warehouse/Dist. Ctr. 79
Office 6
</TABLE>
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<PAGE> 5
<TABLE>
<CAPTION>
Owned Square
or Feet
Domestic (Cont.) Leased (thousands) Business Unit
- ---------------- ------ ----------- -------------
<S> <C> <C> <C>
Redondo Beach, CA leased 50 Tower Group International
Burr Ridge, IL leased 115 Various Publishing Units
See Explanation Below
Dubuque, IA owned Higher Education
Office 107
Warehouse 279
Monterey, CA owned 270 CTB/McGraw-Hill School
Systems
Blacklick (Gahanna), OH owned Various Operating Units
Book Dist. Ctr. 558
Office 73
Westerville, OH owned 59 Glencoe
Grove City, OH
Warehouse leased 160 School
Dallas, TX leased School
Assembly Plant 148
Warehouse 72
Desoto, TX
Book Dist. Ctr. leased 382 School
Foreign
- -------
Whitby, Canada owned McGraw-Hill Ryerson Ltd./
Office 80 Non-McGraw-Hill Tenant
Book Dist. Ctr. 80
Maidenhead, England leased 85 McGraw-Hill International
(U.K.) Ltd.
</TABLE>
The Registrant's major lease covers space in its headquarters building in New
York City. The building is owned by Rock-McGraw, Inc., a corporation in which
the Registrant and Rockefeller Group, Inc. are the sole shareholders. The
Registrant occupies approximately 830,000 square feet of the rentable space
under a 30-year lease expiring June 30, 2002, which includes renewal options for
two additional 15-year periods. In addition, the Registrant subleases for its
own account approximately 708,000 square feet of space for periods up to 25
years.
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<PAGE> 6
The largest complex owned by the Registrant is located in Hightstown, NJ which
houses the offices for accounting operations, data processing services, other
service departments and a warehouse. The Registrant has consolidated its
domestic book distribution operations by consolidating the distribution
operations in Blue Ridge Summit, PA and Hightstown, NJ to Westerville and
Blacklick, OH. The company also has a warehouse in Dubuque, IA that was acquired
with the Times Mirror Higher Education Group in October 1996. The warehouse in
Hightstown, NJ is leased to a tenant. The warehouse in Blue Ridge Summit, PA is
vacant.
The Registrant leases approximately 75 percent of a building in Burr Ridge,
Illinois. The building is owned by Burr Ridge Parkway Limited Partnership, in
which the Registrant has a 50 percent ownership interest. The leased space is
occupied by the higher education business that was acquired by the Registrant in
October, 1996 from Times Mirror. The Registrant has the option to sell its
interest in the limited partnership in January 1998 to Times Mirror for $10.5
million.
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<PAGE> 7
PART II
Other Information
Item 3. Legal Proceedings
- ------- -----------------
In Item 1 of Part II of Registrant's Form 10-Q for the quarter ended
June 30, 1996, Registrant reported that a Complaint had been filed on
June 11, 1996 in the 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- JR). The Complaint alleges that Standard & Poor's breached
its contracts with Orange County, was professionally negligent and
aided and abetted the County's officers in breaching their fiduciary
duty by, inter alia,
----- ----
assigning unduly high ratings to debt instruments issued by the County
and by failing to advise the County's Board of Supervisors of the
illegal acts being committed by the County's officers. On October 17,
1996, the United States District Court, Central District of California,
granted Registrant's motion to withdraw the Bankruptcy Court reference.
The action was transferred to the United States District Court for the
Central District of California (Case No. SA CV 96-765-GLT) upon the
filing on December 4, 1996 of the Bankruptcy Court's ruling on
Registrant's motion to dismiss the Complaint. In that ruling, the
Bankruptcy Court granted Registrant's motion to dismiss the County's
aiding and abetting claim, but denied it as to the breach of contract
and professional negligence claims. The Bankruptcy Court's ruling will
be reviewed de novo by the District Court. The
-- ----
Registrant continues to believe 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
- ------- ---------------------------------------------------
No matters were submitted to a vote of Registrant's security holders
during the last quarter of the period covered by this Report.
-5-
<PAGE> 8
Executive Officers of Registrant
--------------------------------
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Joseph L. Dionne 63 Chairman and Chief Executive Officer
Harold McGraw III 48 President and Chief Operating Officer
Robert J. Bahash 51 Executive Vice President and
Chief Financial Officer
Jeffrey Williams 45 Executive Vice President, Global
Markets and Strategic Development
Scott L. Bennett 47 Senior Vice President, Secretary
and Associate General Counsel
Frank J. Kaufman 52 Senior Vice President, Taxes
Barbara B. Maddock 46 Senior Vice President, Human Resources
Barbara A. Munder 51 Senior Vice President, Corporate Affairs
Frank D. Penglase 56 Senior Vice President, Treasury
Operations
Kenneth M. Vittor 47 Senior Vice President and General
Counsel
Thomas J. Kilkenny 38 Vice President and Controller
</TABLE>
All of the above executive officers of the Registrant have been full-time
employees of the Registrant for more than five years except for Barbara B.
Maddock and Jeffrey Williams.
Ms. Maddock, prior to her becoming an officer of the Registrant on August 1,
1994, was Senior Vice President, Human Resources for Cigna Healthcare from July
1993 through July 1994. Previously, she was with Philip Morris Companies, Inc.
where she held a number of Human Resources positions from 1980 through 1993.
Mr. Williams, prior to his becoming an officer of the Registrant on September
25, 1996, was with Morgan Stanley for 17 years where he held numerous senior
management positions, most recently in the Investment Banking Department as
Managing Director, Global Telecommunications and Media since 1991.
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<PAGE> 9
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
- ------- ------------------------------------------------------------------------
The approximate number of holders of the Company's common stock as of February
28, 1997 was 5,655.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Dividends per share of common stock:
$.33 per quarter in 1996 $1.32
$.30 per quarter in 1995 $1.20
</TABLE>
Note: The dividends per share of common stock reflect a 2-for-1 stock split
approved by the Board of Directors on January 31, 1996. All prior periods have
been restated to reflect the split.
Information concerning other matters is incorporated herein by reference from
Exhibit (13), from page 48 of the 1996 Annual Report to Shareholders.
Item 6. Selected Financial Data
- ------- -----------------------
Incorporated herein by reference from Exhibit (13), from the 1996 Annual Report
to Shareholders, page 46 and page 47.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Incorporated herein by reference from Exhibit (13), from the 1996 Annual Report
to Shareholders, pages 26 to 32.
Item 8. Consolidated Financial Statements and Supplementary Data
- ------- --------------------------------------------------------
Incorporated herein by reference from Exhibit (13), from the 1996 Annual Report
to Shareholders, pages 33 to 44 and page 48.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None
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<PAGE> 10
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Information concerning directors is incorporated herein by reference from the
Registrant's definitive proxy statement dated March 25, 1997 for the annual
meeting of shareholders to be held on April 30, 1997.
Item 11. Executive Compensation
- -------- ----------------------
Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 25, 1997 for the annual meeting of shareholders to be held
on April 30, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 25, 1997 for the annual meeting of shareholders to be held
April 30, 1997.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 25, 1997 for the annual meeting of shareholders to be held
April 30, 1997.
-8-
<PAGE> 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------- -----------------------------------------------------------------
(a) 1. Financial Statements.
---------------------
2. Financial Statement Schedules.
------------------------------
The McGraw-Hill Companies
Index to Financial Statements
And Financial Statement Schedules
<TABLE>
<CAPTION>
Reference
------------------------
Annual Report
Form to Share-
10-K holders (page)
---- --------------
<S> <C>
Data incorporated by reference from Annual Report to Shareholders:
Report of Independent Auditors..................... 45
Consolidated balance sheet at
December 31, 1996 and 1995...................... 34-35
Consolidated statement of income
for each of the three years in
the period ended December 31, 1996.............. 33
Consolidated statement of cash flows
for each of the three years in the
period ended December 31, 1996.................. 36
Consolidated statement of shareholders'
equity for each of the three years in
the period ended December 31, 1996.............. 37
Notes to consolidated financial
statements...................................... 38-44
Quarterly financial information.................... 48
Consent of Independent Auditors.................... 73
Consolidated schedule for each of the three years
in the period ended December 31, 1996:
II - Reserves for doubtful accounts
and sales returns........................ 75
</TABLE>
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<PAGE> 12
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
The financial statements listed in the above index which are included in the
Annual Report to Shareholders for the year ended December 31, 1996 are hereby
incorporated by reference in Exhibit (13). With the exception of the pages
listed in the above index, the 1996 Annual Report to Shareholders is not to be
deemed filed as part of Item 14 (a)(1).
(a) (3)Exhibits.
(2) Exchange Agreement dated as of July 3, 1996 between The Times Mirror
Company, Mosby-Year Book, Inc., and The McGraw-Hill Companies, Inc., as
amended as of October 15, 1996, incorporated by reference from
Registrant's Form 8-K filed October 29, 1996.
(3) Articles of Incorporation of Registrant incorporated by reference from
Registrant's Form 10-K for the year ended December 31, 1995.
(3) By-laws of Registrant.
(4) Indenture dated as of June 15, 1990 between the Registrant, as issuer, and
the Bank of New York, as trustee, incorporated by reference from
registrant's Form SE filed August 3, 1990 in connection with Registrant's
Form 10-Q for the quarter ended June 30, 1990.
(4) Instrument defining the rights of security holders, certificate setting
forth the terms of the Registrant's 9.43% Notes due 2000, incorporated by
reference from Registrant's Form SE filed August 3, 1990 in connection
with Registrant's Form 10-Q for the quarter ended June 30, 1990.
(4) Instrument defining the rights of security holders, certificate setting
forth the terms of the Registrant's Medium-Term Notes, Series A,
incorporated by reference from Registrant's Form SE filed November 15,
1990 in connection with Registrant's Form 10-Q for the quarter ended
September 30, 1990.
(10) Rights Agreement dated as of October 25, 1989 between Registrant and
Manufacturers Hanover Trust Company, incorporated by reference from
Registrant's Form SE dated October 26, 1989 in connection with
Registrant's Form 8-A.
(10)* Restricted Stock Award Agreement dated December 4, 1987 incorporated by
reference from Registrant's Form SE filed March 30, 1988 in connection
with Registrant's Form 10-K for the year ended December 31, 1987.
(10)* Restricted Performance Share Award dated January 2, 1997.
(10) Indemnification Agreements between Registrant and each of its directors
and certain of its executive officers relating to said directors' and
executive officers' services to the Registrant, incorporated by reference
from Registrant's Form SE filed March 27, 1987 in connection with
Registrant's Form 10-K for the year ended December 31, 1986.
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<PAGE> 13
(10)* Registrant's 1983 Stock Option Plan for Officers and Key Employees,
incorporated by reference from Registrant's Form SE filed March 29, 1990
in connection with Registrant's Form 10-K for the year ended December 31,
1989.
(10)* Registrant's 1987 Key Employee Stock Incentive Plan, incorporated by
reference from Registrant's Form 10-K for the year ended December 31,
1993.
(10)* Registrant's 1993 Key Employee Stock Incentive Plan, incorporated by
reference from Registrant's Form 10-K for the year ended December 31,
1993.
(10)* Registrant's 1996 Key Executive Short Term Incentive Compensation Plan,
incorporated by reference from Registrant's Proxy Statement dated
March 21, l996.
(10)* Registrant's Key Executive Short-Term Incentive Deferred Compensation
Plan.
(10)* Registrant's Executive Deferred Compensation Plan, incorporated by
reference from Registrant's Form SE filed March 28, 1991 in connection
with Registrant's Form 10-K for the year ended December 31, 1990.
(10)* Registrant's Senior Executive Severance Plan, incorporated by reference
from Registrant's Form SE filed March 29, 1989 in connection with
Registrant's Form 10-K for the year ended December 31, 1988.
(10) Credit Agreement dated as of February 13, 1997 among the Registrant, the
Banks' signatory thereto, and The Chase Manhattan Bank, as administrative
agent incorporated by reference from Registrant's Form 8-K filed February
19, 1997.
(10)* Registrant's Employee Retirement Account Plan Supplement, incorporated by
reference from Registrant's Form SE filed March 28, 1991 in connection
with Registrant's Form 10-K for the year ended December 31, 1990.
(10)* Registrant's Employee Retirement Plan Supplement, incorporated by
reference from Registrant's Form SE filed March 28, 1991 in connection
with Registrant's Form 10-K for the year ended December 31, 1990.
(10)* Registrant's Savings Incentive Plan Supplement, incorporated by reference
from Registrant's Form SE filed March 28, 1991 in connection with
Registrant's Form 10-K for the year ended December 31, 1990.
(10)* Registrant's Senior Executive Supplemental Death, Disability & Retirement
Benefits Plan, incorporated by reference from Registrant's Form SE filed
March 26, 1992 in connection with Registrant's Form 10-K for the year
ended December 31, 1991.
(10)* Registrant's 1993 Stock Payment Plan for Directors, incorporated by
reference from Registrant's Proxy Statement dated March 21, 1993.
(10)* Resolutions Terminating Registrant's 1993 Stock Payment Plan for
Directors, as adopted on January 31, 1996.
(10)* Registrant's Director Retirement Plan, incorporated by reference from
Registrant's Form SE filed March 29, 1990 in connection with Registrant's
Form 10-K for the year ended December 31, 1989.
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<PAGE> 14
(10)* Resolutions Freezing Existing Benefits and Terminating Additional Benefits
under Registrant's Directors Retirement Plan, as adopted on January 31,
1996.
(10)* Registrant's Director Deferred Compensation Plan, incorporated by
reference from Registrant's Form 10-K for the year ended December 31,
1993.
(10)* Director Deferred Stock Ownership Plan, incorporated by reference from
Registrant's Proxy Statement dated March 21, 1996.
(12) Computation of ratio of earnings to fixed charges.
(13) Registrant's 1996 Annual Report to Shareholders. Such Report, except for
those portions thereof which are expressly incorporated by reference in
this Form 10-K, is furnished for the information of the Commission and is
not deemed "filed" as part of this Form 10-K.
(21) Subsidiaries of the Registrant.
(23) Consent of Ernst & Young LLP, Independent Auditors.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the Registrant on October 29, 1996. Item
2 and Item 7 were reported in said report on Form 8-K.
----------------
* These exhibits relate to management contracts or compensatory plan
arrangements.
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<PAGE> 15
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
The McGraw-Hill Companies, Inc.
- -------------------------------
Registrant
By: /s/ Kenneth M. Vittor
------------------------------------------
Kenneth M. Vittor
Senior Vice President and General Counsel
March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 26, 1997 on behalf of Registrant by the following
persons who signed in the capacities as set forth below under their respective
names. Registrant's board of directors is comprised of sixteen members and the
signatures set forth below of individual board members, constitute at least a
majority of such board.
/s/ Joseph L. Dionne
------------------------------------------
Joseph L. Dionne
Chairman and Chief Executive Officer
Director
/s/ Harold McGraw III
------------------------------------------
Harold McGraw III
President and Chief Operating Officer
Director
/s/ Robert J. Bahash
------------------------------------------
Robert J. Bahash
Executive Vice President and
Chief Financial Officer
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<PAGE> 16
/s/ Thomas J. Kilkenny
------------------------------------------
Thomas J. Kilkenny
Vice President and Controller
/s/ Pedro Aspe
------------------------------------------
Pedro Aspe
Director
/s/ Vartan Gregorian
-------------------------------------------
Vartan Gregorian
Director
/s/ John T. Hartley
-------------------------------------------
John T. Hartley
Director
/s/ George B. Harvey
-------------------------------------------
George B. Harvey
Director
/s/ Richard H. Jenrette
-------------------------------------------
Richard H. Jenrette
Director
/s/ Don Johnston
-------------------------------------------
Don Johnston
Director
/s/ Peter O. Lawson-Johnston
-------------------------------------------
Peter O. Lawson-Johnston
Director
/s/ Linda Koch Lorimer
-------------------------------------------
Linda Koch Lorimer
Director
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<PAGE> 17
/s/ Robert P. McGraw
--------------------------------------------
Robert P. McGraw
Director
/s/ Lois D. Rice
--------------------------------------------
Lois D. Rice
Director
/s/ Paul J. Rizzo
--------------------------------------------
Paul J. Rizzo
Director
/s/ James H. Ross
--------------------------------------------
James H. Ross
Director
/s/ Sidney Taurel
--------------------------------------------
Sidney Taurel
Director
/s/ Alva O. Way
--------------------------------------------
Alva O. Way
Director
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<PAGE> 18
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
EXHIBITS AND FINANCIAL STATEMENTS
TO
ANNUAL REPORT FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------------
THE McGRAW-HILL COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE> 19
Table of Contents
-----------------
EXHIBITS AND FINANCIAL STATEMENTS
----------------------------------
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
(3) Amendment to By-Laws of Registrant................................ 16-39
(10) Restricted Perfomance Share Award dated January 2, 1997 .......... 40-51
(10) Registrant's Key Executive Short-Term Incentive Deferred
Compensation Plan................................................. 52-66
(10) Resolutions Terminating 1993 Stock Payment for Directors.......... 67
(10) Resolutions Freezing Existing Benefits and Terminating Additional
Benefits Under The McGraw-Hill Companies, Inc. Directors
Retirement Plan................................................... 68
(12) Computation of Ratio of Earnings to Fixed Charges................. 69-70
(13) Registrant's 1996 Annual Report to Shareholders................... -
(21) Subsidiaries of Registrant........................................ 71-72
(23) Consent of Ernst & Young LLP Independent Auditors................. 73
(27) Financial Data Schedule........................................... 74
Schedule II Reserves for Doubtful Accounts and Sales Returns................ 75
</TABLE>
<PAGE> 1
Exhibit (3)
THE McGRAW-HILL COMPANIES, INC.
BY-LAWS
-------
(As amended October 30,1996)
--------------------------
ARTICLE I
---------
STOCKHOLDERS
------------
1. A meeting of the stockholders shall be held annually, wheresoever
designated by the Board of Directors on the last Wednesday in April of each year
or on such other date as a resolution of the Board of Directors may designate,
for the purpose of electing directors, hearing the reports of officers and
directors, and for the transaction of such other business required or authorized
to be transacted by the stockholders. Any previously scheduled annual or special
meeting of stockholders may be postponed by resolution of the Board of
Directors, upon public notice given prior to the date scheduled for such
meeting.
2. Unless waived in writing by all stockholders, notice of the time,
place and object of such meeting shall be given by mailing, at least ten days
previous to such meeting, postage prepaid, a copy of such notice, addressed to
each stockholder at his address as the same appears on the books of the Company.
3. Special meetings of stockholders for whatsoever purpose shall be
held at the principal office of the Company or at such other place as may be
designated by a
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<PAGE> 2
resolution of the Board of Directors and may only be called pursuant to a
resolution approved by a majority of the Board of Directors.
4. Notice of each special meeting, except where otherwise expressly
provided by statute, and unless waived in writing by every stockholder entitled
to vote, stating the time, place and in general terms the purpose or purposes
thereof, shall be mailed not less than thirty nor more than fifty days prior to
the meeting to each stockholder at his address as the same appears on the books
of the Company.
5. At a meeting of stockholders the holders of a majority of the
shares entitled to vote, being present in person or represented by proxy, shall
be a quorum for all purposes, except where otherwise provided by statute or by
the certificate of incorporation.
6. If at any meeting a quorum shall fail to attend in person or by
proxy, a majority in interest of stockholders entitled to vote present or
represented by proxy at such meeting may adjourn the meeting from time to time
without further notice until a quorum shall attend and thereupon any business
may be transacted which might have been transacted at the meeting as originally
called had the same been then held. The Chairman of a meeting of stockholders
may adjourn such meeting from time to time, whether or not there is a quorum of
stockholders at such meeting.
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<PAGE> 3
7. The Chairman of the Board, and in his absence the President, and in
his absence a Chairman appointed by the Board of Directors, shall call meetings
of the stockholders to order and shall act as Chairman thereof.
8. The Secretary of the Company shall act as Secretary at all meetings
of the stockholders and in his absence the Chairman of the meeting may appoint
any person to act as Secretary.
9. At each meeting of stockholders every stockholder entitled to vote
may vote in person or by proxy, and shall have one vote for each share of stock
registered in his name. The Board of Directors may fix a day not more than fifty
days prior to the day of holding any meeting of the stockholders as the day as
of which stockholders entitled to notice of and to vote at such meeting shall be
determined, and all persons who shall be holders of record of voting stock at
such time and no other shall be entitled to notice of and to vote at such
meeting.
10. At all elections of directors the polls shall be opened and closed,
the proxies shall be received and taken in charge and all ballots shall be
received and counted by two inspectors who shall be appointed by the Board. If
any inspector shall fail to attend or refuse to act, the vacancy may be filled
at the meeting by the
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<PAGE> 4
Chairman of the meeting. No candidate for election as director shall be
appointed an inspector.
11. The inspectors shall, before entering upon the discharge of their
duties, be sworn to faithfully execute the duties of inspector at such meeting
with strict impartiality and according to the best of their ability.
ARTICLE I-A
-----------
NOMINATION OF DIRECTORS AND PRESENTATION
----------------------------------------
OF BUSINESS AT STOCKHOLDER MEETINGS
----------------------------------------
1. Nominations of persons for election to the Board of Directors of
the Company and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the Company's
notice of meeting, (ii) by or at the direction of the Board of Directors or
(iii) by any stockholder of the Company who was a stockholder of record at the
time of giving of notice provided for in this Article I-A, who is entitled to
vote at the meeting and who complied with the notice procedures set forth in
this Article I-A.
2. For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of Section 1 of this
Article I-A, the stockholder must have given timely notice thereof in writing to
the Secretary of the
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<PAGE> 5
Company. To be timely, a stockholder's notice shall be delivered to the
Secretary at the principal executive offices of the Company not less than 60
days nor more than 90 days prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60 days
from such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made. Such stockholder's notice shall set
forth (i) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (ii) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; (iii) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(a)
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<PAGE> 6
the name and address of such stockholder, as they appear on the Company's
books, and of such beneficial owner and (b) the class and number of shares of
the Company which are owned beneficially and of record by such stockholder and
such beneficial owner.
Notwithstanding anything in the second sentence of this
Section 2 to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Company is increased and there is no
public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Company at least 70 days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive offices of the Company not
later than the close of business on the 10th day following the day on which such
public announcement is first made by the Company.
3. Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Company's notice of meeting. Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which directors
are to be elected pursuant to the Company's notice of meeting (A) by or at the
direction of
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<PAGE> 7
the Board of Directors or (B) provided that the Board of Directors has
determined that directors shall be elected at such special meeting, by any
stockholder of the Company who is a stockholder of record at the time of giving
of notice provided for in this Article I-A, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in this Article
I-A. In the event the Company calls a special meeting of stockholders for the
purpose of electing one or more directors to the Board, any such stockholder may
nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Company's notice of meeting, if the
stockholder's notice required by Section 2 of this Article I-A shall be
delivered to the Secretary at the principal executive offices of the Company not
earlier than the 90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such special meeting or
the 10th day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.
4. Only such persons who are nominated in accordance with the
procedures set forth in this Article I-A shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Article I-A. The Chairman of the meeting of stockholders shall have the
power and duty to determine whether a nomination or any business proposed to be
brought before the
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<PAGE> 8
meeting was made in accordance with the procedures set forth in this Article I-A
and, if any proposed nomination or business is not in compliance with this
Article I-A, to declare that such defective nominations or proposal shall be
disregarded.
5. For purposes of this Article I-A, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Company with the Securities and Exchange Commission pursuant to Sections 13, 14
or 15(d) of the Exchange Act.
6. Notwithstanding the foregoing provisions of this Article I-A, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Article I-A. Nothing in this Article I-A shall be deemed to affect
any rights of stockholders to request inclusion of proposals in the Company's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
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<PAGE> 9
ARTICLE II
----------
BOARD OF DIRECTORS
------------------
1. The business and affairs of the corporation shall be managed under
the direction of the Board of Directors. Unless and until changed as provided in
this Section 1 of this Article II, the number of directors constituting the
Board of Directors shall be sixteen (16). The Board of Directors shall have
power from time to time and at any time, by vote of a majority of the total
number of directors which the corporation would have if there were no vacancies
on the Board, to increase or reduce the number of directors constituting the
Board of Directors to such number (subject to any limits contained in the
certificate of incorporation) as the Board of Directors shall determine, but in
no event to less than twelve (12) or more than twenty-five (25). Subject to the
express terms and conditions of the certificate of incorporation and these
By-Laws, the directors shall have the usual and customary powers and duties of
directors of a corporation; also any and all powers given and permitted by law;
and also power to exercise any and all powers of the corporation, and to do any
and all acts without any prior action taken or consent given by the
stockholders, unless required by law, or the certificate of incorporation, or by
these By-Laws; the directors may exercise all powers, and do all acts and things
which are not, by statute or by the certificate of incorporation or these
By-Laws, expressly directed or required to be exercised or done by the
stockholders.
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<PAGE> 10
2. Without prejudice to the general powers conferred by the last
preceding section, and the other powers conferred by the certificate of
incorporation and by these By-Laws, it is hereby expressly declared that the
Board of Directors shall have the following powers, that is to say:
FIRST: From time to time to make and change rules and regulations, not
-----
inconsistent with these By-Laws, for the management of the Company's
business and affairs.
SECOND: To purchase or otherwise acquire for the Company and property,
------
rights or privileges which the Company is authorized to acquire, at
such price and on such terms and conditions, and for such
consideration, as they shall, from time to time, see fit.
THIRD: At their discretion to pay for any property or rights acquired
-----
by the Company, either wholly or partly, in money or in stocks, bonds,
debentures or other securities of the Company.
FOURTH: To appoint and at their discretion remove or suspend such
------
subordinate officers, agents or servants, permanently or temporarily,
as they may, from time to time, think fit, and to determine their
duties, and fix, and, from time to time, change their salaries or
emoluments, and to require security in such instance and in such
amounts as they think fit.
FIFTH: To confer by resolution upon any elected or appointed officer of
-----
the Company the power to choose, remove or suspend subordinate
officers, agents or servants.
SIXTH: To appoint any person or persons to accept and hold in trust for
-----
the Company any property belonging to the Company, or in which it is
interested, or for any other purpose, and to execute and do all such
duties and things as may be requisite in relation to any such trust.
SEVENTH: To determine who shall be authorized on the Company's behalf,
-------
to sign bills, notes, receipts, acceptances, endorsements, checks,
releases, contracts and documents.
-25-
<PAGE> 11
EIGHTH: From time to time to provide for the management of the affairs
------
of the Company, at home or abroad, in such manner as they see fit, and
in particular, from time to time, to delegate any of the powers of the
Board of Directors in the course of the current business of the
Company, to any special or standing committee or to any officer or
agent, and to appoint any persons to be the agents of the Company, with
such powers (including the power to sub-delegate), and upon such terms,
as may be thought fit.
NINTH: To appoint an Executive Committee of three or more directors and
-----
such other persons as may be added thereto by specific resolution of
the Board, who may meet at stated times, or on notice to all by any of
their own number; who shall generally perform such duties and exercise
such powers as may be directed or delegated by the Board of Directors
from time to time. The Board may delegate to such Committee authority
to exercise the powers of the Board while the Board is not in session,
except as otherwise provided by law. The Executive Committee shall keep
regular minutes of its proceedings and report the same to the Board
when required.
3. Each director shall serve for the term for which he shall be
elected and until his successor shall be chosen and shall accept his election,
but any director may resign at any time.
4. The directors may hold their meetings and may have an office and
keep the books of the Company at such place or places as the Board from time to
time may determine.
5. A regular meeting of the Board of Directors shall be held each
year, either immediately following adjournment of the Annual Meeting of
Stockholders or at such other time as may be fixed by the Chairman of the Board
or the President but on a
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<PAGE> 12
date no later than 60 days following the adjournment of the Annual Meeting of
Stockholders, for the purpose of electing officers, members of the Executive
Committee, members of the other committees of the Board, and to organize the
Board for the ensuing year. Regular meetings of the Board of Directors shall
also be held monthly at such time and place as may be fixed by the Chairman of
the Board, or the President. Notice shall be given to each director of the date
of each regular meeting by the Secretary in the same manner as provided in
Article II, Section 7, of these By-Laws for notice of special meetings of
directors.
6. Special meetings of the Board shall be held whenever called by the
Chairman, or by the President, or by the Secretary upon receiving the written
request of a majority of the directors of the Board then in office. If so
specified in the notice thereof, any and all business may be transacted by a
special meeting.
7. The Secretary shall give notice to each director of each special
meeting by mailing the same, at least two days before the meeting, or by
telegraphing or telephoning not later than the day before the meeting. If every
director shall be present at any meeting any business may be transacted without
previous notice.
8. A majority of the entire Board of Directors shall constitute a
quorum for the transaction of business, except where otherwise provided by
statute or by the
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<PAGE> 13
certificate of incorporation or by these By-Laws, and a majority of those
present at the time and place of any regular or special meeting may adjourn the
same from time to time without notice.
9. Any one or more members of the Board may participate in a meeting
of the Board by means of a conference telephone or similar communications
equipment allowing all persons participating in the meeting to hear each other
at the same time. Participation by such means shall constitute presence in
person at a meeting.
ARTICLE III
-----------
COMMITTEES
----------
1. The Board may appoint such committees, as it may deem advisable.
Committees so appointed shall have such powers and duties as may be specified in
the resolution of appointment.
2. Each committee shall keep regular minutes of its proceedings and
report the same to the Board when required.
3. Any one or more members of any such committee may participate in a
meeting of such committee by means of a conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear
-28-
<PAGE> 14
each other at the same time. Participation by such means shall constitute
presence in person at a meeting.
4. Any action required or permitted to be taken at any meeting of any
committee may be taken without a meeting, if all members of the committee
consent in writing to the adoption of a resolution authorizing the action and if
the resolution and the written consent thereto are filed with the proceedings of
the committee.
ARTICLE IV
----------
OFFICERS
--------
1. The elective officers of the Corporation other than directors shall
be a Chairman of the Board of Directors, a President, one or more
Vice-Presidents, a Secretary and a Treasurer. Any two of the aforesaid offices
may be filled by the same person. For purposes of these By-Laws the office of
Vice-President also may include one or more Executive Vice-Presidents and one or
more Senior Vice-Presidents. The term of office of each of said officers shall
continue until the next annual election of directors and the selection of his
successor by the Board of Directors. Any officer may, at any time, with or
without cause, be suspended or removed from office by the affirmative vote of a
majority of the entire Board at a meeting thereof. The Chairman of the Board and
the President shall be chosen from among the directors.
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<PAGE> 15
2. The Chairman of the Board when present shall preside at all
meetings of the Board of Directors and at all meetings of the stockholders. He
shall perform all duties incident to the office of the Chairman of the Board.
The Chairman also shall be the Chief Executive Officer of the Corporation and
shall be responsible for the general and active supervision and direction of the
business, policies and activities of the Corporation, subject to the control of
the Board of Directors. He may execute on behalf of the Corporation all
authorized deeds, bonds, mortgages, contracts, documents and papers and may
affix thereto the corporate seal when required. He shall have power to sign
debentures and certificates of stock of the Corporation.
3. The President shall be the Chief Operating Officer of the
Corporation and shall have general responsibility for directing, administering
and coordinating the operational phases of the Corporation's business, subject
to the control of the Chairman and Chief Executive Officer. He shall have such
duties as the Board may from time to time determine or as may be prescribed by
these By-Laws. He shall be responsible for seeing that the orders and
resolutions of the Board are carried into effect. He may execute on behalf of
the Corporation all authorized deeds, bonds, mortgages, contracts, documents and
papers and may affix thereto the corporate seal when required. He shall have
power to sign debentures and certificates of stock of the Corporation.
-30-
<PAGE> 16
If the office of the Chairman of the Board shall be vacant, or
if the person holding that office shall be absent, the President shall preside
at meetings of stockholders and of the Board of Directors.
4. In the absence or inability to act of both the Chairman and the
President, the Board may designate any senior corporate officer to perform the
duties of temporary Chairman which shall include presiding at meetings of
stockholders and of the Board of Directors.
5. The Board may elect or appoint one or more Vice-Presidents. Each
Vice-President shall have such powers and shall perform such duties as may be
assigned to him by the Board or by the President. In case of the absence or
disability of the President the duties of that office shall be performed by
whomever the Board shall determine by resolution.
6. The Secretary shall be sworn to the faithful discharge of his
duties; he shall attend all meetings of the directors and stockholders, and
shall record all the proceedings of such meetings in a book to be kept for that
purpose, and shall perform like duties for standing committees when required. He
shall have charge of the giving of notice of meetings of stockholders and
directors, and perform all the duties assigned to him by the Board of Directors,
or usual for the Secretary of a Corporation
-31-
<PAGE> 17
to perform. He, or the Treasurer shall, with the Chairman or President sign all
debentures and stock certificates of the Company.
7. The Treasurer shall keep or cause to be kept full and true books of
account and records of all receipts and disbursements, property, assets and
liabilities of the Corporation, in books belonging to the Company, and shall
deposit all moneys, securities, and valuables of the Corporation in the name of
and to the credit of the Corporation, in such depositories as shall be
designated by the Board of Directors. He shall disburse funds of the Company as
ordered by the Board, taking proper vouchers therefor and shall render to the
President and the Board of Directors, at regular meetings or whenever required,
an account of all financial transactions of the Company. He shall also have
power to sign debentures and certificates of stock of the Company, checks,
notes, bills of exchange or other negotiable instruments for and in the name of
the Company. He shall perform all other duties incident to the position of
Treasurer, subject to the control of the Board.
8. The Board of Directors shall have power to appoint one or more
Assistant Treasurers, Assistant Secretaries, Controller or Assistant Controllers
who shall have such powers and perform such duties as may be designated by the
Board.
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<PAGE> 18
9. The amount of salaries, wages, or other compensation to be paid to
the officers, employees and agents of the Company shall be determined from time
to time by the Board or by an Executive Officer or Committee to whom this work
shall be delegated. No officer shall be incapacitated to receive a regular
salary or fixed compensation by reason of being a director of the Corporation.
ARTICLE IV-A
------------
1. Bank Accounts, Deposits, Checks, Drafts and Orders Issued in the
Company's Name. Any two of the following officers: the Chairman, President, any
Vice-President, and the Treasurer, Secretary or Controller may from time to time
(1) open and keep in the name and on behalf of the Company, with such banks,
trust companies or other depositories as they may designate, general and special
bank accounts for the funds of the Company, and (2) terminate any such bank
accounts. Any such action by two of the officers as specified above shall be
made by an instrument in writing signed by such two officers and filed with the
Secretary. A copy of such instrument, certified by the Secretary or an Assistant
Secretary, shall be evidence to all concerned that the designations or
terminations therein contained are duly authorized on behalf of the Company at
the time of the certification.
All funds and securities of the Company shall be deposited in such
banks, trust companies or other depositories as are designated by the Board of
Directors or
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<PAGE> 19
by the aforesaid officers in the manner hereinabove provided, and
for the purpose of such deposits, the Chairman, President, any Vice-President,
the Secretary, the Controller, the Treasurer or an Assistant Treasurer, and each
of them, or any other person or persons authorized by the Board of Directors,
may endorse, assign and deliver checks, notes, drafts, and other orders for the
payment of money which are payable to the Company.
All checks, drafts, or orders for the payment of money, drawn in the
name of the Company, may be signed by the Chairman, President, any
Vice-President, the Secretary, the Treasurer or any Assistant Treasurer, or by
any other officer or any employee of the Company who shall from time to time be
designated to sign checks, drafts, or orders on all accounts or on any specific
account of the Company by an "instrument of designation" signed by any two of
the following officers: The Chairman, President, any Vice-President, and the
Treasurer, and filed with the Secretary. The Secretary or any Assistant
Secretary shall make certified copies of such instruments of designation and
such certified copies shall be evidence to all concerned of the authority of the
persons designated therein at the time of the certification. An instrument of
designation may provide for (1) the facsimile signature of any person authorized
to sign by such instrument or by this Section , or (2) the revocation of
authority of any person (other than an officer named in this Section ) to sign
checks, drafts or orders drawn in the name of the Company.
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<PAGE> 20
ARTICLE IV-B
------------
INDEMNIFICATION
---------------
1. Any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that such person or
such person's testator or intestate is or was a director, officer or employee of
the Corporation or serves or served any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise in any capacity at the
request of the Corporation shall be indemnified by the Corporation, and the
Corporation may advance such person's related expenses, to the full extent
permitted by law.
For purposes of this section, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and
employees, so that any person who is or was a director, officer or employee of
such constituent corporation, or is or was serving at the request of such
constituent corporation any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity at the request
of the Corporation, shall stand in the same position under the provisions of
this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its separate
existence had continued.
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<PAGE> 21
ARTICLE V
---------
CAPITAL STOCK
-------------
2. The instruments of debentures, certificate of shares of the
preferred, preference and common capital stock of the Company shall be in such
form as shall be approved by the Board of Directors. The certificates shall be
signed by the Chairman of the Board or the President and also by the Secretary
or the Treasurer. The seal of the Corporation shall be affixed to all
certificates. The signatures of the officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or registered
by a registrar other than the Corporation itself or its employee.
2. All certificates shall be consecutively numbered, and the names of
the owners, the number of shares and the date of issue, shall be entered in the
Company's books.
3. The Company or its duly authorized stock transfer agent shall keep
a book to be known as the stock book, containing the names, alphabetically
arranged, of all persons who are stockholders of the Corporation, showing their
places of residence, the number of shares of preferred, preference and common
stock held by each respectively, and the time when each became the owner
thereof, also entries showing from and to whom such shares shall be transferred,
and the number and
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<PAGE> 22
denomination of all revenue stamps used to evidence the payment of the stock
transfer tax as required by the laws of the State of New York, which books shall
be open daily, during usual business hours, for inspection by any person who
shall have been a stockholder of record in such Corporation for a least six
months immediately preceding his demand; or by any person holding or thereunto
in writing authorized by the holders of at least five per centum of any class of
its outstanding shares, upon at least five days written demand. Persons so
entitled to inspect stock books may make extracts therefrom.
4. Shares shall be transferred only on the books of the Corporation by
the holder thereof in person or by his attorney upon the surrender and
cancellation of certificates for a like number of shares, and upon tender of
stock transfer stamps or the equivalent in money sufficient to satisfy all legal
requirements.
5. The Board may make such rules and regulations as it may deem
expedient concerning the issue, transfer and registration of certificates of
stock of the Company.
6. Certificates for shares of stock or for debentures in the
Corporation may be issued in lieu of certificates alleged to have been lost,
stolen, destroyed, mutilated, or abandoned, upon the receipt of (1) such
evidence of loss, theft, destruction or
-37-
<PAGE> 23
mutilation and a bond of indemnity in such amount, upon such terms and with such
surety, if any, as the Board of Directors may require in each specific case, or
(2) a request by an appropriate governmental agency or representative for the
reissuance of a stock certificate claimed to be abandoned or escheated in
accordance with the abandoned property or similar law of the state, or (3) in
accordance with general resolutions.
ARTICLE VI
----------
SEAL
----
1. The Board shall provide a suitable seal, containing the name of the
Corporation, the year of its creation, and the words "Corporate Seal, N.Y." or
other appropriate words, which seal shall be in charge of the Secretary, to be
used as directed by the Board.
ARTICLE VII
-----------
FISCAL YEAR
-----------
1. The fiscal year of the Corporation shall begin the first business
day in January.
-38-
<PAGE> 24
ARTICLE VIII
------------
NOTICE AND WAIVER OF NOTICE
---------------------------
1. Any notice required to be given by these By-Laws may be given by
mailing the same addressed to the person entitled thereto at his address as
shown on the Company's books, and such notice shall be deemed to be given at the
time of such mailing.
2. Any stockholder, director or officer may waive any notice required
to be given by these By-Laws.
ARTICLE IX
----------
AMENDMENTS
----------
1. Subject to the terms and conditions of the certificate of
incorporation, the Board of Directors shall have power to make, amend, and
repeal the By-Laws of the corporation, by a vote of the majority of all the
directors present at any regular or special meeting of the Board, provided a
quorum is in attendance and provided further that notice of intention to make,
amend or repeal the By-Laws in whole or in part at such meeting shall have been
previously given to each member of the Board.
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<PAGE> 1
Exhibit (10)
TERMS AND CONDITIONS OF RESTRICTED PERFORMANCE SHARE AWARD
----------------------------------------------------------
EPS GOAL
--------
Restricted Performance Share Award made as of the second day of
January 1997, (the "Award Date") by The McGraw-Hill Companies, Inc., a New York
corporation (the "Company").
WHEREAS, the Board of Directors of the Company has designated the
Compensation Committee of the Board (the "Committee") to administer the 1993 Key
Employee Stock Incentive Plan (the "Plan") with respect to certain executives of
the Company; and
WHEREAS, capitalized terms not otherwise defined herein shall have
the meanings set forth for such terms in the Plan.
WHEREAS, the Committee has determined that the Employee should be
granted a Restricted Performance Share Award under the Plan for the number of
shares as specified in the Employee's Restricted Performance Share Award
Document.
WHEREAS, Employee is accepting the Restricted Performance Share
Award subject to the terms and conditions set forth below:
1. Grant of Awards. (a) The grant of the Restricted Performance
Share Award (the "Award") is subject to the terms and conditions hereinafter set
forth with respect to the Restricted Performance shares of Common Stock, $1.00
par value, of the Company ("Stock").
-40-
<PAGE> 2
(b) Subject to the terms and conditions of Section 10
hereof, the Employee shall be issued a stock certificate in respect of the
Restricted Performance Shares of Stock covered by this Award. Such stock
certificate shall be registered in the name of the Employee, and shall bear an
appropriate legend referring to the terms, conditions and restrictions
applicable to this Award, substantially in the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of The McGraw-Hill Companies, Inc. 1993 Key Employee Stock
Incentive Plan, the Terms and Conditions and the Award Document dated
as of January 2, 1997. Copies of the above mentioned documents are on
file in the offices of The McGraw-Hill Companies, Inc., 1221 Avenue of
the Americas, New York, New York 10020."
The stock certificate evidencing such shares shall be held in custody by the
Company until the restrictions thereon shall have lapsed, and, as a condition of
this Award, the Employee shall deliver to the Company a duly signed stock power,
endorsed in blank, relating to the Restricted Performance Shares of Stock
covered by this Award.
With respect to the procedures set forth in this paragraph (b), the Company may,
in its sole discretion, provide for the book entry on behalf of the Employee of
the Restricted Performance Shares of Stock covered by this Award with the
Company's Registrar and Transfer Agent in lieu of the issuance of a stock
certificate to the Employee for all or a portion of the period extending from
the date hereof until the lapse of
-41-
<PAGE> 3
restrictions upon such shares; provided, that such shares represented by said
book-entry shall be (i) deemed to be held in custody by the Company until the
restrictions thereon shall have lapsed, (ii) subject to the terms and conditions
(including forfeiture) of The McGraw-Hill Companies, Inc. 1993 Key Employee
Stock Incentive Plan, and (iii) the terms and conditions of this Award.
2. Performance Goals. The achievement of this Award shall be
measured against a schedule of an Earnings Per Share (EPS) goal established by
the Committee. This schedule will govern the determination of the Restricted
Performance Shares payable on the date the Award matures. If EPS growth equals
the targeted EPS growth goal, the Restricted Performance Share Award will be
fully earned out, and the Employee shall receive 100% of the shares. For EPS
growth between the zero payout level as established by the Committee and the
targeted growth goal, the Employee shall receive a pro rata portion of the
shares. For growth between the targeted goal and the 150% payout level, as
established by the Committee, the Employee shall receive 100% of the shares at
the targeted EPS growth plus a pro rata portion of the shares between the 100%
and 150% payout levels. For EPS growth which equals or exceeds the 150% payout
level, as established by the Committee, the Employee shall receive 150% of the
shares payable at the 100% payout level. For growth at or below the zero payout
level, all Restricted Performance Share Awards will be forfeited by the
Employee.
For purposes of this Award, EPS means earnings per share as shown on the
Consolidated Statement of Income in the Company's Annual Report adjusted to
exclude the following items:
1. Discontinued Operations,
2. Extraordinary Items of loss or expense and any other unusual or
non-recurring items of loss or expense,
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3. The cumulative effect of changes in Accounting Principles,
4. The effect of changes in Federal Tax Rates, and
5. Any one-time charge, or dilution caused by seasonal impact or other
factors, resulting from any acquisition or divestiture.
The items in 1. through 3. above shall be taken into account as adjustments to
EPS for purposes of calculating the amount of the Award earned by an Employee
only to the extent that they are separately identified on the Consolidated
Statement of Income in the Company's Annual Report. Item 5 shall be taken into
account only if separately quantified in the acquisition or divestiture footnote
to the Company's Annual Report. Notwithstanding anything contained herein, the
Committee, in its sole discretion, reserves the right: (i) with respect to any
Employee who is, in the year such Award becomes deductible by the Company, a
"covered employee" within the meaning of Section 162(m)(3) of the Internal
Revenue Code of 1986, to exclude from the computation of EPS all or any part of
any item of extraordinary, unusual, non-recurring or special gain or income (but
not any item of loss or expense), whether or not shown separately on the
Consolidated Statement of Income, that the Committee considers appropriate to so
exclude, (ii) with respect to any Employee, to exclude less than all of an item
of loss or expense described in 1. through 5. above, and (iii) with respect to
any Employee who is not, in the year such Award becomes deductible by the
Company, a "covered employee" (or who is a "covered employee" but whose
aggregate compensation, including this Award, is less than $1 million) within
the meaning of Section 162(m)(3) of the Internal Revenue Code of 1986, to
exclude from the computation of EPS all or any part of any item of
extraordinary, unusual, non-recurring or special gain, income, loss or expense,
whether or not shown separately on the Consolidated Statement of Income, that
the Committee considers appropriate to so exclude.
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It is the intention of the Company that the share Award shall satisfy the
requirements for "other performance based compensation" within the meaning of
Section 162(m)(4)(C) of the Internal Revenue Code of 1986 and the Regulations
thereunder. Such "other performance based compensation" is deductible by the
Company notwithstanding the provisions of Section 162(m)(l) disallowing
deductions for annual compensation in excess of $1 million paid or accrued to or
for a "covered employee". In view of the present lack of clear and definitive
legal guidance regarding the requirements for "other performance based
compensation", the Company reserves the right, in the event that any share Award
otherwise payable hereunder to a "covered employee" is ineligible for treatment
as "other performance based compensation" and if, but only if, such
ineligibility would result in the loss of tax deductions to the Company, to
defer, in whole or in part, the Employee's receipt of such Award under the terms
of the following paragraph.
Under the circumstances described in the preceding paragraph, (a) the Employee
will, but only to the extent necessary to avoid a deduction disallowance to the
Company, forfeit all rights to Restricted Performance Shares covered by this
Award and (b) the Company shall credit to the Employee's Deferred Account under
The McGraw-Hill Companies, Inc. Key Executive Short-Term Incentive Deferred
Compensation Plan an amount equal to the fair market value of such forfeited
Shares as of the date such Shares are valued for other Employees. Said amount
credited to the Employee's Deferred Account shall be paid in a lump sum on
January 15 following the year the Employee is no longer a "covered employee"
within the meaning of said Section 162(m) of the Internal Revenue Code.
3. Maturity Date. The maturity date of this Restricted Performance
Share award will be December 31, in the third consecutive year of the cycle
including, for this purpose, the year in which the restricted performance shares
were awarded.
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4. Distribution Following Maturity Date of Award.
If the Employee remains an employee of the Company through the Payment Date, as
hereinafter defined, for the Award and the EPS objective is achieved in
accordance with the payout schedule established by the Committee, the Restricted
Performance Shares covered by such Award shall be earned out, and a share
certificate for such shares shall be delivered to the Employee by March 15 of
the year following the Maturity Date (the "Payment Date"). If applicable in
accord with Section 1(b), the restrictive legend shall be removed from the
certificate for such shares at the time of delivery to the Employee.
Before the certificate is delivered to the Employee, the Company must withhold
all applicable Federal, state and local income taxes. The Company will hold back
a sufficient number of the unrestricted shares which would otherwise be
delivered to the Employee to satisfy the required withholding obligation unless
the Employee notifies the Company in writing on or before October 15 in the year
the award matures that the Employee will submit a check to satisfy the tax
obligation.
5. Termination of Employment Prior to Payment Date of Award.
In the event of the termination of the Employee's employment with the Company
prior to the Maturity Date for the Award due to Normal Retirement, Early
Retirement, or Disability under the Company's or one of its subsidiaries'
retirement or disability plans; death; or, with the approval of the Committee,
in connection with a "no fault" termination as provided in the Corporation's
policies and procedures (for example, a reduction in force or a change in job
requirements), the Employee shall be eligible to receive a pro rata portion of
the Restricted Performance Shares covered by such Award.
In the event an Employee voluntarily resigns his employment with the Company or
is involuntarily
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terminated by the Company for Cause (as defined in the Plan) prior to the
Maturity Date for the Award, or following the Maturity Date but prior to the
Payment Date for such Award, the Employee shall forfeit the right to the shares
of stock covered by such Award.
a) Determination of Pro Rata Award Opportunity.
The pro rata portion of the shares to be earned out by the Employee if he or she
terminates because of Normal Retirement, Early Retirement, or Disability under
the Company's or one of its subsidiaries' retirement or disability plans; or
death, shall be determined (a) first, by multiplying the number of restricted
performance shares awarded by a fraction, the numerator of which is the number
of years completed during the performance period (counting the year of
termination as a completed year) and the denominator of which is the total
number of years in the performance period; (b) second, by measuring the
cumulative compound growth from the Award cycle base year through the end of the
year in which termination occurs; and (C) by awarding the number of shares
determined in (a) based on the degree to which the cumulative compound growth
calculated in (b) achieves the cumulative compound growth goals established for
the Award, subject to the limits set forth in the goal and payout schedule
established for this Award and to the provisions of Section 2 hereof.
The pro rata portion of the shares to be earned out by the Employee, with the
approval of the Committee, in connection with a "no fault" termination, shall be
determined (a) first, by multiplying the number of restricted performance shares
awarded by a fraction, the numerator of which is the number of full months
during the performance period in which Employee participated and the denominator
of which is 36 months; (b) second, by measuring the cumulative compound growth
from the Award cycle base year through the end of the year in which termination
occurs; and (c) by awarding the number of shares determined in (a) based
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on the degree to which the cumulative compound growth calculated in (b) achieves
the cumulative compound growth goals established for the Award, subject to the
limits set forth in the goal and payout schedule established for this Award and
to the provisions of Section 2 hereof.
6. Voting and Dividend Rights. Subject to the terms and conditions
of Section 10 hereof, the Employee shall have the right to vote any Restricted
Performance Shares of stock covered by this Award and to receive any dividends
with respect to such shares.
7. Transfer Restrictions. This Award and the shares of Restricted
Performance Stock which have not yet become unrestricted and earned out are
nontransferable (other than by will or by the laws of descent and distribution),
and may not be transferred, sold, assigned, pledged or hypothecated and shall
not be subject to execution, attachment or similar process. Any attempt to
effect any of the foregoing shall be null and void.
8. Miscellaneous. The terms of this Award document (a) shall be
binding upon and inure to the benefit of any successor of the Company, (b) shall
be governed by the laws of the State of New York, and any applicable laws of the
United States, and (c) may not be amended without the written consent of both
the Company and the Employee. No contract or right of employment shall be
implied by this Award document. If the Award is assumed or a new award is
substituted therefor in any corporate reorganization (including, but not limited
to, any transaction of the type referred to in Section 425(a) of the Internal
Revenue Code of 1986, as amended), employment by such assuming or substituting
corporation or by a parent corporation or subsidiary thereof shall be considered
for all purposes of this Award to be employment by the Company.
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9. Change in Control. In the event of a Change in Control, as
defined in the Plan, the following shall apply:
a) The target EPS goal hereunder shall be deemed to have
been 100% achieved for the outstanding Restricted
Performance Share Award.
b) (i) The restrictions applicable to the Restricted
Performance Shares shall lapse and a pro rata portion
of the restricted shares as determined in 9(b)(ii)
below shall be distributed immediately to the Employee
in the form of unrestricted shares.
(ii) Calculation of the pro rata unrestricted shares to
be distributed to the Employee hereunder shall be
determined solely by multiplying the number of shares
in the Restricted Performance Share Award by a
fraction, (x) the numerator of which is the number of
calendar quarters of the 12 quarter cycle for the award
which have occurred from the date hereof up to and
including the calendar quarter in which the Change in
Control occurred and (y) the denominator of which is 12
quarters.
c) (i) The other restricted shares not distributed to the
Employee as unrestricted shares pursuant to Section
9(b)(i) above will be converted into cash by the
Company as of the date such Change in Control is
determined to have occurred. The converted cash amount
for each restricted share shall be the Change in
Control Price.
For purposes of this paragraph, the "Change in Control
Price" means the highest cash
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price per share paid by an acquirer related to a Change
in Control for the Company's common stock in any
transaction reported on the New York Stock Exchange
Composite Index, or paid or offered in any bona fide
transaction related to a Change in Control of the
Company at any time during the preceding sixty-day
period as determined by the Committee. Such cash
amounts for these restricted shares will be retained by
the Company for the benefit of the Employee and
thereafter will be distributed by the Company to the
Employee following the Maturity Date of the award.
(ii) If the payment to the shareholders of The
McGraw-Hill Companies in connection with the
transaction giving rise to a Change in Control is in
the form of securities, either in whole or in part,
then for the purpose of determining the Change in
Control Price such securities will be deemed converted
immediately by the Company into a cash equivalent
amount as of the date of the Change in Control. The
determination of such cash equivalent amount for such
securities shall be made by an independent investment
banking firm selected by the Company. The determination
of the cash equivalent amount by this independent
investment banking firm shall be conclusive. All fees
incurred in retaining this investment banking firm will
be paid for by the Company. These cash amounts so
determined as a cash equivalent in the manner provided
herein, together with the cash derived from converting
the unrestricted shares into cash under 9(c)(i) above,
will be retained by the Company for the benefit of the
Employee and thereafter will be distributed by the
Company to the Employee following the Maturity Date of
the award.
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(iii) Notwithstanding anything herein to the contrary
in 9(c)(i) and 9(c)(ii) above, if in connection with a
Change in Control the Company elects to fund other
payments due senior executives of the Company pursuant
to various management and benefit plans by effecting
payments to the "rabbi trust" for which the Bank of New
York acts as trustee or through some other comparable
vehicle in order to protect these payments for the
benefit of the senior executives, the Company in such
instance will immediately fund the cash payments
referred to herein on the same basis, for example,
using a rabbi trust or other comparable vehicle, that
are provided for other payments due senior executives
of the Company.
(iv) If Employee is terminated involuntarily (except
for Cause) prior to the Maturity Date of the Award,
Employee shall receive a cash payment computed as
provided in Section 9(c)(i), (ii) and (iii) with
respect to the Restricted Shares which were not
converted into common stock and distributed to the
Employee pursuant to Section 9(a) and (b)(i) calculated
as of the date such Change in Control is determined to
have occurred, upon such termination.
(v) If the employment of Employee is terminated
voluntarily and Employee receives severance in
accordance with any of the provisions of the severance
plan in which Employee participates at the time of a
Change in Control, Employee shall receive a cash
payment computed as provided in Section 9(c)(i), (ii)
and (iii) with respect to the Restricted Shares which
were not converted into common stock and distributed to
the Employee pursuant to Section 9(a) and (b)(i)
calculated as of the date such Change in
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Control is determined to have occurred, upon such
termination.
(vi) If the employment of Employee is terminated due to
death, or Retirement or Disability under the Company's
or one of its subsidiaries' retirement or disability
plans prior to the Maturity Date of the Award, Employee
shall receive a cash payment computed as provided in
Section 9(c)(i), (ii) and (iii) with respect to the
Restricted Shares which were not converted into common
stock and distributed to the Employee pursuant to
Section 9(a) and (b)(i) calculated as of the date such
Change in Control is determined to have occurred, upon
such termination.
d) If in the event of a Change in Control no listing or
registration statement is in effect pursuant to Section
10 below, the Company shall distribute to the Employee
a cash equivalent amount representing the shares of
common stock to be distributed to the Employee.
10. Securities Law Requirements. The Company shall not be required
to issue shares of common stock pursuant to this Award unless and until (a) such
shares have been duly listed upon each stock exchange on which the Company's
Common Stock is then registered; and (b) a registration statement under the
Securities Act of 1933 with respect to such shares is then effective.
11. Incorporation of Plan Provisions. This Award is made pursuant
to the Plan except where specifically noted as if the same were fully set forth
herein. Capitalized terms not otherwise defined herein shall have the meanings
set forth for such terms in the Plan.
51
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Exhibit (10)
THE MCGRAW-HILL COMPANIES, INC.
KEY EXECUTIVE SHORT-TERM INCENTIVE
DEFERRED COMPENSATION PLAN
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ARTICLE I
PURPOSE
The purpose of The McGraw-Hill Companies, Inc. Key Executive Short-Term
Incentive Deferred Compensation Plan (hereinafter referred to as the "Plan") is
to provide funds for retirement or other expenses for executive employees (and
their beneficiaries) of The McGraw-Hill Companies, Inc. and its subsidiaries. It
is intended that the Plan will aid in retaining and attracting employees by
providing such employees with a means to defer receipt of short-term incentive
compensation to a future date.
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ARTICLE II
DEFINITIONS
For the purposes of this Plan, the following words and phrases shall
have the meanings indicated, unless the context clearly indicates otherwise:
Section 2.01 BENEFICIARY. "Beneficiary" means the person, persons or
entity designated by the Participant to receive any benefits payable under the
Plan. Any Participant Beneficiary designation shall be made in a written
instrument filed with the Company and shall become effective only when received,
accepted and acknowledged in writing by the Company.
Section 2.02 BOARD. "Board" means the Board of Directors of
McGraw-Hill, Inc.
Section 2.03 CHANGE OF CONTROL. For purposes of this Plan, the term
"Change of Control" shall mean any of the following:
(i) The acquisition (other than from the Company) by any person,
entity or "group", within the meaning of Section 13(d) (3) or 14(d) (2) of the
Securities Exchange Act of 1934 (the "Exchange Act"), (excluding, for this
purpose, the Company or its subsidiaries, or any employee benefit plan of the
Company or its subsidiaries) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of either the then
outstanding shares of common stock or the combined voting power of the Company's
then outstanding voting securities entitled to vote generally in the election of
directors; or
(ii) During any period of two consecutive years, individuals who at
the beginning of such period constitute the Board (the "Incumbent Board") cease
for any reason to constitute at least a majority of the Board, provided that any
person becoming a director during such period whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened
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election contest relating to the election of the Directors of the Company, as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) shall be, for purposes of this Plan, considered as though such
person were a member of the Incumbent Board; or
(iii) Approval by the stockholders of the Company of a
reorganization, merger, or consolidation, in each case, with respect to which
persons who were the stockholders of the Company immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own,
directly or indirectly, more than 50% of the combined voting power entitled to
vote generally in the election of directors of the reorganized, merged or
consolidated company's then outstanding voting securities, or a liquidation or
dissolution of the Company or of the sale of all or substantially all of the
assets of the Company.
Section 2.04 COMMITTEE. "Committee" means the Compensation Committee
of the Board.
Section 2.05 COMPANY. "Company" means The McGraw-Hill Companies,
Inc., its successors, any subsidiary or affiliated organizations authorized by
the Board of Directors of The McGraw-Hill Companies, Inc. or the Committee to
participate in the Plan and any organization into which or with which the
Company may merge or consolidate or to which all or substantially all of its
assets may be transferred.
Section 2.06 DEFERRED ACCOUNT. "Deferred Account" means the account
maintained on the books of account of the Company for each Participant pursuant
to Article VI. Separate Deferred Accounts shall be maintained for each
Participant. More than one Deferred Account may be maintained for each
Participant as necessary to reflect (a) various interest credits and/or (b)
separate year deferral elections. A Participant's Deferred Account shall be
utilized solely as a device for the measurement and determination of the amounts
to be paid to the Participant pursuant to this Plan. A Participant's Deferred
Account shall not constitute or be treated as a trust fund of any kind.
Section 2.07 DETERMINATION DATE. "Determination Date" means the date
on which the amount of a Participant's Deferred Account is determined as
provided in Article VI hereof. The last day of each calendar month shall be a
Determination Date.
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Section 2.08 DISABILITY. "Disability" or "Disabled Participant" means
eligibility for disability benefits under the terms of the Company's Long-Term
Disability Plan in effect at the time the Participant becomes disabled.
Section 2.09 INCENTIVE COMPENSATION. "Incentive Compensation" means
any short-term incentive compensation cash award payable by the Company to a
Participant in a Plan Year pursuant to the provisions of the The McGraw-Hill
Companies, Inc. Key Executive Short-Term Incentive Compensation Plans.
Section 2.10 PARTICIPANT. "Participant" means any individual who is
designated by the Committee to participate in this Plan and who elects to
participate by filing a Participation Agreement as provided in Article IV.
Section 2.11 PARTICIPATION AGREEMENT. "Participation Agreement" means
the agreement filed by a Participant prior to the beginning of the first period
for which the Participant's Incentive Compensation is to be deferred pursuant to
the Plan and the Participation Agreement. Notwithstanding the foregoing
sentence, the Participation Agreement for the first Plan Year of the Plan may be
filed no later than August 31, 1990. A new Participation Agreement shall be
filed by the Participant for each separate Incentive Compensation deferral
election.
Section 2.12 PLAN ADMINISTRATOR. "Plan Administrator" means the
Senior Vice President, Human Resources of The McGraw-Hill Companies, Inc. or a
designee.
Section 2.13 PLAN YEAR. "Plan Year" means a twelve month period
commencing January 1 and ending the following December 31. The first Plan Year
shall commence on January 1, 1990.
Section 2.14 RETIREMENT DATE. "Retirement Date" means the date on
which the Participant actually terminates employment due to retirement on or
after the first day of the month coincident with or next following a
Participant's attainment of age fifty-five (55).
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ARTICLE III
ADMINISTRATION
Section 3.01 PLAN ADMINISTRATOR; COMMITTEE; DUTIES.
This Plan shall be administered by the Plan Administrator. Decisions of the Plan
Administrator shall be reviewable by the Committee. The Committee shall also
have the authority to make, amend, interpret, and enforce all appropriate rules
and regulations for the administration of this Plan and decide or resolve any
and all questions, including interpretations of this Plan, as may arise in
connection with the Plan.
Section 3.02 BINDING EFFECT OF DECISIONS. The decision or action of
the Committee in respect to any question arising out of or in connection with
the administration, interpretation and application of the Plan and the rules and
regulations promulgated hereunder shall be final, conclusive and binding upon
all persons having any interest in the Plan, unless a written appeal is received
by the Committee within sixty days of the disputed action. The appeal will be
reviewed by the Committee and the decision of the Committee shall be final,
conclusive and binding on the Participant and all persons claiming by, through
or under the Participant.
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ARTICLE IV
PARTICIPATION
Section 4.01 PARTICIPATION. Participation in the Plan shall be
limited to executives selected by the Committee who elect to participate in the
Plan by filing a Participation Agreement with the Company. Except as provided
below, a Participation Agreement must be filed prior to December 15th
immediately preceding the Plan Year in which the Participant's participation
under the Agreement will commence, and the election to participate shall be
effective on the first day following receipt by the Company of a properly
completed and executed Participation Agreement. The Participation Agreement for
the first Plan Year of the Plan must be filed no later than August 31, 1990.
Section 4.02 DEFERRAL AMOUNT. A Participant may elect in any
Participation Agreement to defer all or a portion of his Incentive Compensation.
Section 4.02 (a) With respect to Incentive Compensation deferrals,
the deferral selected in each Participation Agreement shall apply only to the
Participant's Incentive Compensation paid for the Plan Year for which the
respective Participation Agreement is applicable.
Section 4.02 (b) From time to time, the Committee may increase or
decrease the period for which the deferrals are effective by giving reasonable
written notice to the affected Participants. Such changes shall be effective for
all Participation Agreements filed thereafter.
Section 4.02 (c) A Participant's election to defer his Incentive
Compensation shall be irrevocable upon the filing of the respective
Participation Agreement; provided, however, that the deferral under any
Participation Agreement may be terminated or amended as provided in paragraphs
9.01 and 9.02.
Section 4.02 (d) With respect to Incentive Compensation deferrals, to
the extent the Participant participates in the Company's qualified Employee
Retirement Plan (ERP), Employee Retirement Account Plan (ERAP), and Savings
Incentive Plan (SIP), such deferrals will be credited with Company contributions
under non-qualified accounts for the ERP, ERAP and SIP Plans.
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Section 4.03 ADDITIONAL PARTICIPATION AGREEMENT. A Participant may
enter into additional Participation Agreements if authorized to do so by the
Committee by filing a Participation Agreement with the Company prior to December
15th of any calendar year, stating the amount that the Participant elects to
have deferred for the next Plan Year. Such additional agreements shall be
effective as to Incentive Compensation paid in the Plan Year beginning after the
last day of the Plan Year in which the respective agreement is filed with the
Company.
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ARTICLE V
DEFERRED INCENTIVE COMPENSATION
Section 5.01 ELECTIVE DEFERRED INCENTIVE COMPENSATION. The amount of
Incentive Compensation that a Participant elects to defer in the Participation
Agreement executed by the Participant, with respect to each Plan Year of
participation in the Plan, shall be credited by the Company to the Participant's
Deferred Account. To the extent that the Company is required to withhold any
taxes or other amounts from the employee's deferred wages pursuant to any state,
Federal or local law, such amounts shall be taken out of the portion of the
Participant's Incentive Compensation which is not deferred under this Plan, or
the Participant's base salary.
Section 5.02 VESTING OF DEFERRED ACCOUNT. A Participant shall be 100%
vested in his/her Deferred Account at all times.
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ARTICLE VI
DEFERRED ACCOUNT
Section 6.01 DETERMINATION OF ACCOUNT. Each Participant's Deferred
Account, as of each Determination Date, shall consist of the balance of the
Participant's Deferred Account as of the immediately preceding Determination
Date. The Deferred Account of each Participant shall be reduced by the amount of
all distributions, if any, made from such Deferred Account since the preceding
Determination Date.
Section 6.02 INTEREST CREDIT. As of each Determination Date, the
Participant's Deferred Account shall be increased by the amount of interest
earned since the preceding Determination Date. Interest shall be credited at a
rate determined to be in effect for each Plan Year, as determined by the
Committee based on the interest rate payable on the Company's long-term debt
securities. Notwithstanding the foregoing, if a Participant's Deferred Account
is paid in installments, interest shall be credited, (i) for retired
Participants, at the rate determined to be in effect during the Plan Year in
which the Participant retires, and (ii) for all other installment payments, at
the rate determined to be in effect during the Plan Year in which such payments
commence.
Section 6.03 STATEMENT OF ACCOUNTS. The Company shall submit to each
Participant, by July 1 following the close of each Plan Year, a statement in
such form as the Company deems desirable, setting forth the balance to the
credit of such Participant in his Deferred Account as of the last day of the
preceding Plan Year.
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ARTICLE VII
BENEFITS
Section 7.01 TIME OF PAYMENT. A Participant may elect in any
Participation Agreement whether payment of the balance to the credit of his
Deferred Account shall be paid or commence to be paid (i) on a date specified by
the Participant, or (ii) upon the earlier of the Participant's (A) Retirement
Date or (B) termination of employment other than death, disability, or
retirement. In either case, the Participant shall be entitled to the balance to
the credit of his Deferred Account determined under Section 6.01, which shall be
payable under Section 7.04 as of the Determination Date coincident with or
immediately following such date or event. No change in a Participant's election
shall be valid unless it is made in a Participation Agreement which is filed
with the Committee prior to the Plan Year preceding the Plan Year in which
payment of the Participant's Deferred Account would otherwise have been made or
commenced.
Section 7.02 DEATH. If a Participant dies after the commencement of
payments of his Deferred Account, or if a Participant while employed dies prior
to any payments of his Deferred Account, his Beneficiary shall receive a
lump-sum payment equal to his Deferred Account as of the Determination Date
coincident with or immediately following such death.
Section 7.03 DISABILITY. In the event of Disability prior to
retirement or termination of employment, the Disabled Participant, unless he
otherwise elects under this paragraph, shall have payment of his Deferred
Account made or commenced in accordance with the Participation Agreement filed
by the Participant. Before payments commence or are made under the preceding
sentence, a Disabled Participant may elect, subject to Committee approval upon
good cause shown, to have payments (i) made as soon as practicable in a lump
sum, or (ii) commence as soon as practicable in equal annual installments over a
period not in excess of 15 years.
Section 7.04 FORM OF PAYMENT. Upon the happening of the date or event
described in Sections 7.01 or 7.03, the Company shall pay to the Participant the
balance to the credit of his Deferred Account in a lump sum or in equal annual
installments as elected in the Participation Agreement filed by the Participant.
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If a Participant elects to receive payments in installments, payment of the
Deferred Account shall be in an amount which amortizes the Deferred Account
balance in equal annual payments of principal and interest over a period not to
exceed 15 years. For purposes of determining the amount of the annual payment,
the assumed rate of interest shall be the rate under the terms of Section 6.02.
No change in a Participant's election shall be valid unless it is made in a
Participation Agreement which is filed with the Committee prior to the Plan Year
preceding the Plan Year in which payment of the Participant's Deferred Account
would otherwise have been made or commenced.
Section 7.05 LUMP-SUM PAYMENT. Notwithstanding Section 7.04, in its
sole discretion the Committee may direct that the Company make a lump-sum
payment of the balance credited to a Participant's Deferred Account.
Section 7.06 WITHHOLDING OF TAXES. To the extent required by the law
in effect at the time payments are made, the Company shall withhold from
payments made hereunder any taxes required to be withheld from an employee's
wages for the Federal or any state or local government.
Section 7.07 COMMENCEMENT OF PAYMENTS. Commencement of payments under
this Plan shall be made following the earlier of (i) the date specified in the
Participation Agreement filed by the Participant or (ii) receipt of notice by
the Plan Administrator of the event which entitles a Participant (or a
Beneficiary) to payments under this Plan. All payments shall be made as of the
first day of the month.
Section 7.08 PAYMENTS IN CONNECTION WITH CHANGE OF CONTROL.
Notwithstanding anything contained in the Plan to the contrary, in the event of
a Change of Control of the Corporation the company shall immediately pay to each
Participant in a lump sum the then remaining balance in his/her Deferred
Account.
The terms of sections 9.01 and 9.02 shall not be applicable following
a Change of Control of the Corporation.
The reasonable legal fees incurred by any Participant to enforce
his/her valid rights hereunder shall be paid for by the Company to the
Participant in addition to sums otherwise due hereunder, whether or not the
Participant is successful in enforcing his/her rights or whether or not the
matter is settled.
-63-
<PAGE> 13
ARTICLE VIII
BENEFICIARY DESIGNATION
Section 8.01 BENEFICIARY DESIGNATION. Each Participant shall have the
right, at any time, to designate any person, persons or entity as his
Beneficiary or Beneficiaries (both principal as well as contingent) to whom
payment under this Plan shall be paid in the event of his death prior to
complete distribution to the Participant of the benefits due him under the Plan.
Section 8.02 AMENDMENTS. Any Beneficiary designation may be changed
by a Participant by the written filing of such change on a form prescribed by
the Company. The filing of a new Beneficiary designation form will cancel all
Beneficiary designations previously filed.
Section 8.03 NO BENEFICIARY DESIGNATION. If a Participant fails to
designate a Beneficiary as provided above, or if all designated Beneficiaries
predecease the Participant, then any amounts to be paid to the Participant's
Beneficiary shall be paid to the Participant's estate.
Section 8.04 EFFECT OF PAYMENT. The payment to the deemed Beneficiary
shall completely discharge the Company's obligations under this Plan with
respect to the Participant.
-64-
<PAGE> 14
ARTICLE IX
AMENDMENT AND TERMINATION OF PLAN
Section 9.01 AMENDMENT. The Board or the Committee may at any time
amend the Plan in whole or in part, provided, however, that no amendment shall
be effective to decrease or restrict any Deferred Account at the time of such
amendment.
Section 9.02 COMPANY'S RIGHT TO TERMINATE. The Board or the Committee
may at any time terminate the Plan with respect to new elections to defer if, in
its judgment, the continuance of the Plan, the tax, accounting, or other effects
thereof, or potential payments thereunder would not be in the best interests of
the Company. The Board or the Committee may also terminate the Plan in its
entirety at any time, and upon any such termination, the Company shall
immediately pay to each Participant in a lump sum the then remaining balance in
his Deferred Account.
-65-
<PAGE> 15
ARTICLE X
MISCELLANEOUS
Section 10.01 UNSECURED GENERAL CREDITOR. Participants and their
Beneficiaries shall have no legal or equitable rights, interest or claims in any
property or assets of the Company. Any and all of the Company's assets shall be,
and remain, the general, unpledged, unrestricted assets of the Company. The
Company's obligation under the Plan shall be merely that of an unfunded and
unsecured promise of the Company to pay money in the future.
Section 10.02 NONASSIGNABILITY. Neither a Participant nor any other
person shall have any right to commute, sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in
advance of actual receipt the amounts, if any, payable hereunder, or any part
thereof, which are, and all rights to which are, expressly declared to be
unassignable and non-transferable. No part of the amounts payable shall, prior
to actual payment, be subject to seizure or sequestration for the payment of any
debts, judgments, alimony or separate maintenance owed by a Participant or any
other person, nor be transferable by operation of law in the event of a
Participant's or any other person's bankruptcy or insolvency.
Section 10.03 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions
of this Plan shall not be deemed to constitute a contract of employment between
the Company and the Participant, and the Participant (or his Beneficiary) shall
have no rights against the Company except as may otherwise be specifically
provided herein. Moreover, nothing in this Plan shall be deemed to give a
Participant the right to be retained in the service of the Company or to
interfere with the right of the Company to discipline or discharge him at any
time.
Section 10.04 PROTECTIVE PROVISIONS. A Participant will cooperate
with the Company by furnishing any and all information requested by the Company,
in order to facilitate the payment of benefits hereunder, and by taking such
physical examinations as the Company may deem necessary and taking such other
action as may be requested by the Company.
As amended: October 27, 1993
January 25, 1995
July 31, 1996
-66-
<PAGE> 1
EXHIBIT (10)
RESOLUTIONS TERMINATING 1993
STOCK PAYMENT PLAN FOR DIRECTORS
RESOLVED: That the 1993 McGraw-Hill Stock Payment Plan for
Directors (the "Plan") is hereby terminated as of June 30,
1996, subject to the approval by the shareholders at the
annual meeting to be held on April 24, 1996 of the Director
Deferred Stock Ownership Plan; and it is
FURTHER RESOLVED: That in connection with the foregoing
termination, the period from January 1 through June 30, 1996
shall be deemed to be a plan year pursuant to the Plan and all
payments under the Plan shall be accordingly pro rated for
such period, with shares payable thereunder to be distributed
on August 15; and it is
FURTHER RESOLVED: That the officers of the Corporation be, and
each of them hereby is, authorized and directed to do or cause
to be done any and all such further acts and things, to
provide appropriate notices, and to execute and deliver any
and all such documents, papers and instruments, with the
advice of counsel, as they may deem necessary or desirable in
order to carry into effect the purpose and intent of the
foregoing resolutions.
-67-
<PAGE> 1
EXHIBIT (10)
RESOLUTIONS FREEZING EXISTING BENEFITS
AND TERMINATING ADDITIONAL BENEFITS UNDER
THE MCGRAW-HILL COMPANIES, INC. DIRECTORS RETIREMENT PLAN
RESOLVED: That, effective June 30, 1996, current members of
the Board of Directors of the Corporation participating in The
McGraw-Hill Companies, Inc. Directors Retirement Plan (the
"Plan") shall not accrue additional benefits thereunder for
subsequent years of Service, as defined in the Plan, and the
Retainer, as defined in the Plan, shall be the Retainer in
effect on June 30, 1996; and it is
FURTHER RESOLVED: That future members of the Board of
Directors of the Corporation shall not be participants in the
Plan; and it is
FURTHER RESOLVED: That the officers of the Corporation be, and
each of them hereby is, authorized and directed to do or cause
to be done any and all such further acts and things, to
provide appropriate notices, and to execute and deliver any
and all such documents, papers and instruments, with the
advice of counsel, as they may deem necessary or desirable in
order to carry into effect the purpose and intent of the
foregoing resolutions.
-68-
<PAGE> 1
Exhibit (12)
THE McGRAW-HILL COMPANIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Earnings
Earnings from continuing operations
before income tax expense,
cumulative effect on
prior years of changes in
accounting in 1992, unusual
charges in 1993 and 1996, and
gain on exchange of Shepard's/
McGraw-Hill in 1996
(a)(b)(c)(d) $415,974 $ 382,126 $ 341,816 $ 293,243 $ 264,877
Fixed charges 77,563 90,382 83,219 75,930 81,724
Capitalized interest -- (421) (353) (536) (836)
-------- --------- --------- --------- ---------
Total Earnings $493,537 $ 472,087 $ 424,682 $ 368,637 $ 345,765
======== ========= ========= ========= =========
Earnings from continuing operations
before income tax expense and
cumulative effect on prior years
of changes in accounting in
1992 (c)(d) $809,705 $ 382,126 $ 341,816 $ 63,443 $ 264,877
Fixed charges 77,563 90,382 83,219 75,930 81,724
Capitalized interest -- (421) (353) (536) (836)
-------- --------- --------- --------- ---------
Total Earnings $887,268 $ 472,087 $ 424,682 $ 138,837 $ 345,765
======== ========= ========= ========= =========
Fixed Charges(c)
Interest expense $ 51,347 $ 63,832 $ 55,650 $ 46,998 $ 49,935
Portion of rental payments
deemed to be interest 26,216 26,550 27,569 28,932 31,789
-------- --------- --------- --------- ---------
Total Fixed Charges $ 77,563 $ 90,382 $ 83,219 $ 75,930 $ 81,724
======== ========= ========= ========= =========
Ratio of Earnings to Fixed charges:
Before unusual charges, gain on
exchange of Shepard's/McGraw-
Hill and cumulative adjustment 6.4x 5.2x 5.1x 4.9x 4.2x
After unusual charges, gain on
exchange of Shepard's/McGraw-
Hill but before cumulative
adjustment 11.4x 5.2x 5.1x 1.8x 4.2x
</TABLE>
- ---------------
(a) On October 15, 1996, the company completed the exchange of its
Shepard's/ McGraw-Hill legal publishing unit for the Times Mirror
Higher Education Group. The exchange resulted in a pre-tax gain of
$418.7 million and a one- time charge of $25 million for costs of
integrating the company's College division with the acquired higher
education business.
-69-
<PAGE> 2
(b) Unusual charges in 1993 totaled $229.8 million before taxes in
connection with the purchase of the remaining 50% interest in the
Macmillan/McGraw-Hill School Publishing Company previously owned by
Macmillan for $337.5 million in cash. The unusual charges consisted of
$199.8 million primarily to adjust the company's original investment to
values established in the purchase transaction. The charge was
allocated primarily to goodwill and intangibles. The company also
recorded a provision of $30 million relating to the consolidation of
certain functions of Macmillan/McGraw-Hill and the company's book
publishing operations.
(c) 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, (2) the
portion of the company's rental expense deemed representative of the
interest factor in rental expense, and (3) the company's proportionate
share of such fixed charges of the Macmillan/McGraw-Hill joint venture
through September 30, 1993. Effective October 1, 1993,
Macmillan/McGraw-Hill's results are consolidated in the company's
results.
(d) The cumulative adjustment in 1992 reflects the adoption of FAS 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions", $183.5 million pretax, and FAS 112, "Employers' Accounting
for Postemployment Benefits", $25.3 million pretax.
-70-
<PAGE> 1
<TABLE>
<CAPTION>
PAGE IN
ANNUAL REPORT
-------------
<S> <C>
Business (Textual Material) 4 through 20
24 and 25
Management's Discussion and Analysis 26 to 32
Consoldiated Statement of Income 33
Consolidated Balance Sheet 34 and 35
Consolidated Statement of Cash Flow 36
Consolidated Statement of Shareholders' Equity 37
Notes to Consolidated Financial Statements 38 to 44
Report of Management 45
Report of Independent Auditors 45
Eleven-Year Financial Review 46 and 47
Supplemental Financial Information 48
</TABLE>
<PAGE> 2
[GRAPHIC]
THREE CORE BUSINESSES WITH
THREE STRATEGIC THRUSTS
4
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5
[#3 LOGO]
In the 1990s the relative impact of our three core businesses on overall results
has changed dramatically, reflecting both the transformation of The McGraw-Hill
Companies and an array of external factors.
In 1996 Financial Services produced 49% of our operating profit compared
with 34% in 1990, and Educational and Professional Publishing generated 29%
versus 19% six years ago. Understandably, the contribution from Information and
Media Services has declined to 22% from 47%. The 1996 percentages exclude the
net gain from the Shepard's/Times Mirror Higher Education exchange transaction.
Growth is projected in each business segment but at differing increments.
While strategies vary, they share a common foundation. Over the past two years
three words have dominated discussions of our progress and plans: global,
innovation, management. Each capsulizes a driving force underlying our actions:
GLOBAL - to extend our international reach, with particular emphasis on growth
stemming from opportunities in financial services and publishing;
INNOVATION - to use our assets more creatively and make them work more
productively;
MANAGEMENT - to nurture talent, expand capabilities and execute our initiatives
still more effectively.
This annual report is structured around those themes, evident in the
performance of each of our business segments in 1996. (A detailed discussion of
1996 results is presented in the Financial Review and Analysis on pages 26 -
32.)
<PAGE> 3
FINANCIAL SERVICES: SPEARHEADING OUR GROWTH. Up 13.5%, operating profit again
reached a record high, even though new issue dollar volume in the U.S. bond
market has not returned to its 1993 peak.
Standard & Poor's Ratings Services, continuing to reduce its reliance on
new issue volume, contributed significantly to the gain. Its strong performance
stemmed from robust growth in global markets, continued success with new
products in nontraditional markets, increased market share in the public finance
market, a strong structured finance business and the increased issuance of
high-yield bonds.
At Standard & Poor's Financial Information Services the continuing global
expansion of financial data services and growing sales in retail and
institutional sectors helped produce improved results. Operating with new
leadership and a new framework based on five core customer groups, Financial
Information Services added "Standard & Poor's" to its name and those of most of
its units. The move capitalizes on the brand's longstanding power in the
financial marketplace.
EDUCATIONAL AND PROFESSIONAL PUBLISHING:A GOOD YEAR. In a period of decreased
state adoption activity at the elementary grade level, this business segment
nearly matched 1995's earnings excluding special items. Operating profit in 1996
excluding special items was down only 1.3%. Results reflected gains in
educational publishing and higher education offset by a decline in professional
publishing's domestic operations and the impact of development costs for
McGraw-Hill Home Interactive.
Comparative results don't tell the year's real story, however. Our
Shepard's legal publishing operations, which we swapped last fall for the Times
Mirror Higher Education Group, had annualized sales of less than $80 million
compared with the $220 million of the Times Mirror operations, and only 11 weeks
of those results (dating from the October 15 completion of the agreement) are
included in our 1996 financial reporting.
The added operations, which provide a near-perfect complement to our
existing higher education offerings, have much better growth prospects than we
envisioned at Shepard's and provide an opportunity to increase the operating
profit margin and global reach of our higher education business.
INFORMATION AND MEDIA SERVICES:A STRONG FINISH. Operating profit rose 1.5% as a
fourth-quarter rebound counteracted the year's disappointing start.
The Business Week Group and Tower Group International again posted banner
years, while electronic products and cost reductions contributed to gains at the
McGraw-Hill Construction Information Group.
Results in the Publication Services Group were mixed, with advances in the
aviation and healthcare sectors but a decline in the science and technology
category. Our information technology and communications publications and Datapro
groups are adjusting to an industry-wide shakeout.
Our Broadcasting Group experienced a downturn due to a softer San Diego
market and lower ABC ratings, which were adversely affected by NBC's primetime
success and the draw of the Olympics.
AND NOW A CONSUMER DIMENSION
The stature of The McGraw-Hill Companies is built on the respect we have earned
within the business, financial and education marketplaces. Now we're taking our
trusted name and brands into the homes of consumers as well.
In time for the 1996 holiday season McGraw-Hill Home Interactive launched
its first four multimedia CD-ROM titles, targeted to children ages 8 to 14. They
were praised in trade publications and recognized for their outstanding quality
and entertainment value by The National Parenting Center, The Family Channel and
ComputEd Learning Lab.
For children ages 10 and up the unit also introduced a World Wide Web site
that allows information to be tailored to personal tastes.
For adult consumers we plan to introduce a Standard & Poor's investor
network in mid-1997 on the Internet. This product serves rapidly growing demand
for information as individuals take a more active role in decisions affecting
their retirement income. A full-scale, subscription-based consumer service, the
Standard & Poor's investor network will provide financial planning guidance,
investment information and research, help in facilitating transactions, and
ongoing portfolio monitoring and maintenance.
A broader consumer market sector is now using the Business Week Online
product, which is available via America Online and on the Internet. This service
has helped extend the publication's consumer audience in the U.S. and globally.
<PAGE> 4
[GRAPHIC]
GLOBAL GROWTH
GROWTH IN
INTERNATIONAL MARKETS
OUTSTRIPS OUR
GAINS IN THE U.S., AND WE
EXPECT THAT PATTERN
TO CONTINUE.
The climate has never been better for global growth. World financial markets
continue to expand robustly, and emerging nations increasingly recognize they
need thoroughly trained executives and better educated work forces for long-term
success.
We're building our international presence aggressively. To our corporate
staff we've added a new management team and structure specifically to identify
opportunities and direct our global expansion. It includes an executive vice
president of global markets and strategic development and roles for three
regional directors - for Asia, Europe and Latin America. Strategies vary,
reflecting differences in market characteristics and national business
environments.
Meanwhile, Standard & Poor's Financial Information Services has centered
overall direction of global business development in a new post and appointed a
veteran company executive with extensive experience outside the U.S. to fill it.
Expansion in Southeast Asia and Europe are immediate priorities.
In 1996 revenue from international sources, which includes international
sales by our U.S. operations, rose 10.8% compared with a U.S. gain of 3.5%.
International markets now account for 18.5% of total revenue.
THIRTY PERCENT OF REVENUE from international sources by 2000 is among the
primary goals of Standard & Poor's Ratings Services. International markets
provide a buffer against peaks and valleys in domestic sales.
While stressing the enhancement of technological capabilities, Standard &
Poor's Ratings Services believes that direct customer contact is equally
important - as a mark of accessibility and to encourage a free flow of
information.
In addition to its 11 offices and 300 employees outside the U.S., the
division continues to expand its network of affiliations with well-regarded
ratings services in emerging market countries. In 1996 it announced
relationships in Argentina, Chile, India and Indonesia. It expects to establish
similar collaborations in other countries in 1997.
OVER 60 COUNTRIES ARE ON THE LIST of sovereign ratings issued by Standard &
Poor's Ratings Services. The unit also sees substantial opportunities in the
private sector in emerging markets. As in the U.S., many corporations and
financial institutions in other countries have begun to use ratings not only to
assess credit quality but also to benchmark their overall financial performance.
Such market influences inspired the consolidation of 15-year-old
CreditWeek and 12-year-old CreditWeek International into "the first and only
weekly publication produced by a rating agency that is dedicated to covering the
global credit markets." The new CreditWeek provides expanded editorial content,
structured to increase readability.
<PAGE> 5
GLOBAL GROWTH
8
- ------------
9
THE 23 PUBLISHING CENTERS our Professional Publishing Group operates outside the
U.S., either directly or through co-publishing agreements, produce titles in 16
languages. Overall, we sell more books in more languages than any of our
competitors. International markets typically account for nearly two-thirds of
the group's sales.
Asia-Pacific is the geographic territory with the strongest potential for
growth. We also have groups in Canada, Europe (including Eastern Europe and
Russia) and Latin America. We expect to bring additional subsidiaries into our
network in Asia, Eastern Europe and South America as conditions merit such
action.
A new avenue to growth opened when the Times Mirror Higher Education Group
was acquired. It is strong in business and science - subjects that sell well in
global markets. Our traditional strength in international college sales will
quickly extend the reach of the former Times Mirror titles.
ONE HUNDRED FIFTY THOUSAND CIRCULATION (of 1,025,000 in total) is now the
international rate base Business Week guarantees to advertisers, topping any
other U.S.-based business publication. Business Week has the largest global
business circulation of any periodical. Its ongoing global expansion is visible
in other ways as well. For example, the Asia edition of Business Week
International, one of three English-language regional versions, began printing
in Singapore to enable further customizing of editorial content.
<PAGE> 6
BETTER AND BROADER INFORMATION on companies and financial markets outside
the U.S. are priorities on Standard & Poor's Financial Information
Services' agenda.
- - Standard & Poor's Compustat (financial databases and advanced PC-based
software for financial analysis) initiated direct compilation of key
financial data on 12,000 international companies, further enhancing its
level of trust and reliability among its customers. It also substantially
updated its popular PC Plus software, adding several new features,
including real-time prices and market data as well as value-added input
from other Standard & Poor's units.
- - Standard & Poor's MMS (information on debt and currency markets) now
provides market analysis and economic forecasts covering 16 markets in
Europe, Asia and Latin America - the fastest, most extensive such service
available. It also launched a daily faxed newsletter called Global Markets
Today.
- - Standard & Poor's Platt's (market intelligence and pricing for commodities
traders in the energy, chemicals and metals markets) launched two new
services focusing on shipping and the recently deregulated electricity
market. The electricity product is a joint venture with The McGraw-Hill
Companies' Energy and Business Newsletters.
Three of the group's other units also extended their global scope:
Standard & Poor's ComStock launched a new quote and news service with a
Dutch financial information company, DRI/McGraw-Hill joined a Hong
Kong-based company in the exclusive distribution of an economic and
financial database covering 12 Asian countries, and Standard & Poor's
Equity Services opened participation in its corporate information program
to companies based in Australia.
<PAGE> 7
[GRAPHIC]
INCREASING INNOVATION
INCREASING
INNOVATION IS BOTH
AN OVERARCHING
GOAL AND AN APT DESCRIPTION
OF THE PERFORMANCE
WE'RE SEEING
IN OUR OPERATIONS.
Tapping creativity more deeply, doing more with the resources we have and
augmenting our capabilities have helped speed the pace and broaden the
dimensions of innovation at The McGraw-Hill Companies.
We've launched a concerted drive to strengthen our technological expertise
measurably. We're staffing and equipping ourselves to take full advantage of
digital-based product opportunities.
Innovation is evident in new alliances and partnerships, new ventures, new
customer relationships, and entry into markets we haven't served before. It's
reflected in an array of changes in managerial systems and procedures and
increased collaboration among our units.
The flow of new products, product enhancements and product extensions has
increased - most visibly in our expanding family of Web sites, other online
services and CD-ROM titles. Transformation of traditional print content into
digitally-based information has opened new sales channels.
IN AN INNOVATIVE PUBLIC-PRIVATE collaboration, DRI/McGraw-Hill (global provider
of economic analysis and industry reports) along with Standard & Poor's Equity
Services and the McGraw-Hill Professional Book Group will begin publishing in
mid-1997 the U.S. Industrial Outlook, the U.S. Department of Commerce's
definitive outlook report. DRI has also launched electronic versions of its most
popular forecast publications, delivered via corporate networks.
Standard & Poor's Equity Services (information and analysis focused on
U.S. equity markets) introduced a new system of industry groups for its four
principal indexes, the S&P 500, S&P MidCap 400, S&P SmallCap 600 and S&P 1500
SuperComposite. Indexed mutual funds based on the S&P 500 experienced explosive
growth in 1996. In 1997, Equity Services will premiere the Standard & Poor's
Bank Investment Center, which will supply information to banks providing
investment services to retail customers.
Standard &Poor's J.J. Kenny (information on fixed-income securities and
inter-dealer municipal bond trading) made The Blue List, the primary monitor of
municipal and corporate bond offerings in the U.S., available on the Internet,
along with Standard & Poor's J.J. Kenny Drake Market Data (monitoring the
secondary municipal bond market). Both are subscription-based services.
<PAGE> 8
INCREASING INNOVATION
12
- -------------
13
IN JUST 100 DAYS from start to finish the McGraw-Hill Construction
Information Group (CIG) developed a Windows version of Dodge DataLine
(online information on construction projects and activity). Aggressive
promotion led to instant success. It was the latest innovation for CIG,
the world's leading provider of industry-specific information and
analysis, available in print and electronic form and customized to meet
clients' needs.
Meanwhile, F.W. Dodge centralized at one location (Orlando)
information compilation formerly dispersed among 22 sites. Such steps
helped spark revenue and productivity gains at the unit for the first time
in several years.
- - Sweet's (information to assist product selection) sustained its earnings
growth with the help of new products such as Design Blocks, a notable 1996
introduction. Developed with software leader Autodesk, the CD-ROM provides
building product CAD drawings that can be incorporated directly into
architectural plans. Streamlining its operations as well, Sweet's has
eliminated 17 field offices by equipping its sales force with laptop
computers.
- - Engineering News-Record and Architectural Record unveiled redesigns that
raised the quality and volume of information provided. AR introduced its
new look as it became the official publication of the American Institute
of Architects in January 1997. That alliance, which nearly doubled AR's
circulation, is one of several currently evolving with both national and
regional trade associations. Among the newest is an agreement with the
Construction Specification Institute focused primarily on professional
education programs.
- - Online inquiries to the Sweet's Web site from architects around the world
have dramatically exceeded expectations, and ENR's Web site, introduced
early in 1996, began generating profits in September.
<PAGE> 9
MORE THAN 2,000 CREDIT RATINGS of financial institutions, plus detailed reports
on more than 600 banks in 50 nations and analysis of national banking systems,
are offered through the Bank Ratings Service, introduced by Standard & Poor's
Ratings Services in March 1996. Available in print, via fax, on CD-ROM and
online, its information covers emerging and developed nations, organized by
region.
Standard & Poor's Ratings Services wants to double the contribution from such
nontraditional services to 25% of total revenues within four years. Given its
leadership status, it is well-positioned to reach this goal. The nontraditional
category already includes ratings of insurance companies, mutual funds, project
financings, derivative products and corporate credit ratings. Because these
ratings aren't tied to capital markets, they aren't driven by interest rates or
new issue volume, and they're growing at significant rates - higher than the
traditional business of U.S. corporate and municipal bond ratings.
<PAGE> 10
INCREASING INNOVATION
14
- ------------
15
[VLS LOGO] DEVELOPING PRODUCTS for emerging curriculum trends and instructional
approaches is a cornerstone strength of our education operations - as
demonstrated by our Versatile Learning System (VLS).
Combining resources of The McGraw-Hill Companies, VLS is a comprehensive
learning system that integrates print and electronic materials in a balanced
multimedia presentation easy for teachers to use on a daily basis. As they
become familiar with the new systems, teachers discover how much value
multimedia can add to their students' learning experience. As a result, VLS has
assumed a significant role in advancing the acceptance of technology - and the
leadership of our brands - among teachers in U.S. schools.
AN ELECTRONIC COMMERCE SYSTEM developed by Tower Group International allows
FedEx International Priority shipments to clear through U.S. Customs at the
sprawling FedEx hub in Indianapolis without traditional paperwork. The system,
the first of its kind and designed in collaboration with the U.S. Customs
Service and FedEx, uses document imaging technology to enable computer screen
review of required information, significantly speeding the movement of packages.
Tower Group International is one of the leading providers of logistics
management and trade information management services in North America.
<PAGE> 11
[GRAPHIC]
MULTIDIMENSIONAL LEADERSHIP
THE MANAGEMENT TEAM
LEADING OUR TRANSFORMATION IS TRANSFORMING ITSELF
AS WELL. IT'S PREPARED TO
BROADEN OUR
MARKET LEADERSHIP INTO NEW
TERRITORIES - AROUND THE
GLOBE AND ACROSS
THE MEDIA SPECTRUM.
No management mission is more important than guiding change effectively - and we
think that is happening throughout The McGraw-Hill Companies. It is evident
every February and March when we present our annual Excellence in Management
Awards and Corporate Achievement Awards. The men and women who receive those
honors demonstrate leadership in what they do, and help build the leadership
positions we hold in so many of our markets.
Reinforcing and expanding management strengths - throughout our business
units - has been a special emphasis. There has been a wealth of new appointments
over the past three years, drawing from talent both inside and outside our
organization. More than 60% of our top 120 executive positions are in new hands.
Our management team is a good blend of company veterans and newcomers.
The leadership we see is multidimensional. Some examples follow.
BREAKAWAY GLOBAL LEADERSHIP in risk evaluations is one goal of Standard & Poor's
Ratings Services - with a target date of 2000. Already the world's leading
credit rating agency, it is widening the gap not only through international
initiatives and innovation but also through multifaceted training programs.
Similar efforts are under way at other business units.
In April, Standard & Poor's Ratings Services inaugurated a customized
three-week management development program at the University of Virginia's Darden
School of Business Administration. Thirty key managers from its worldwide branch
network participated in the first three sessions. Standard & Poor's Financial
Information Services will begin a similar program in 1997.
LEADERSHIP POSITIONS WERE EXPANDED by Standard & Poor's Financial Information
Services' units in 1996. Standard & Poor's ComStock (up-to-the-minute quotes and
other information delivered online) completed agreements with America Online and
Time Warner's Pathfinder service and three popular financial news Web sites
(joining arrangements with Prodigy and CNN). Now the leading provider of
financial data on the Internet, it also introduced its own fee-based Internet
service.
ACQUISITIONS in business books and trade magazine publishing augment our product
development opportunities and our ability to track innovations in the dynamic
arenas of business, finance and healthcare.
The combination of Irwin Professional Publishing (acquired with the Times
Mirror Higher Education Group) and Business/McGraw-Hill gives us clear-cut
market leadership in business books. We have particularly strong lists in
professional and consumer financial and investment books. The Publication
Services Group now has five healthcare publications and has become a leader in
serving the information needs of the industry. In 1996 it acquired Healthcare
Informatics and InfoCare, which cover the use of information technology in
healthcare.
WINNING THE MOST PRESTIGIOUS AWARD in magazine publishing further validates the
leadership in journalism long associated with Business Week. Last April, for the
second time in three years, it received the National Magazine Award for General
Excellence in the one million-plus circulation category. Revenue gains have
accompanied editorial achievement. Advertising volume and circulation are up,
and advertising and subscription rate increases are charted for 1997.
<PAGE> 12
MULTIDIMENSIONAL LEADERSHIP
18
- ------------
19
[#1 LOGO] STATUS AS THE "BIBLE" of an industry is another indicator of
leadership, and Aviation Week & Space Technology clearly holds that position,
alongside other members of the Publication Services Group.
The Aviation Week Group has taken a variety of actions to propel its
success higher. During 1996 it introduced a new annual industry reference in
print and CD-ROM editions, gave its flagship magazine a new look during that
publication's 80th anniversary, spun off an editorial section into a separate
magazine (Overhaul and Maintenance), launched the first cable-TV program devoted
to aerospace news, and expanded its ambitious conference schedule by
co-producing the first executive symposium on information management in
aerospace.
NUMBER ONE IN EDUCATIONAL PUBLISHING became our ranking worldwide when we
acquired the Times Mirror Higher Education Group in 1996 as a synergistic
companion to our own College Division. We merged two companies that had more
than 1,700 employees and arrived at a combined group - McGraw-Hill Higher
Education - with approximately 1,200 employees. We now hold leadership positions
in 12 higher education disciplines, including accounting, biology, economics,
finance and psychology. We brought our global marketing strength to the
domestically oriented Times Mirror operations.
New strategic alliances and multimedia products are also contributing
significantly to rising higher education sales. For example, with the Graduate
Management Admissions Council we are developing and marketing interactive CD-ROM
programs designed for students pursuing a master's degree in business
administration.
<PAGE> 13
DELIVERING LOCAL NEWS IN NONTRADITIONAL TIME PERIODS and on added channels
is a key Broadcasting Group strategy to reach more viewers, who
increasingly want local news on demand. The group expects to attain
long-term goals through leadership in local news and its affiliation with
ABC.
- - In San Diego, KGTV joined Cox Cable to launch the first local TV news
service airing 24 hours a day. The service will reach 648,000 cable
households by mid-1997.
- - In Denver, KMGH-TV plans to expand its local newscasts to the 4-5 p.m.
time period.
- - In Indianapolis, WRTV collaborated with five Indiana PBS stations to air
continuous election night coverage from 7 to 9:30 p.m. and recently
launched a local weekend newscast on its own channel.
- - In addition, KGTV became the exclusive local TV news provider for a new
America Online service called Digital City San Diego.
<PAGE> 14
MULTIDIMENSIONAL LEADERSHIP
20
- ------------
21
[#1 LOGO] OUR PREEMINENCE in kindergarten through twelfth grade classrooms
reflects the ongoing success of four divisions.
- - The McGraw-Hill School Division's basal programs consistently rank among
the top sellers in major state adoptions. In 1996, Share the Music for
grades K-8 became the most widely used music series in the U.S., and its
new social studies series, Adventures in Time and Place, developed in
collaboration with the National Geographic Society, is continuing a
tradition of leadership in that subject.
- - Glencoe/McGraw-Hill, the nation's largest secondary publisher, now holds
leading positions in nine of its 14 curriculum areas. Exemplifying that
dominance, Glencoe's products generated sales well above all competitors
combined in each of the seven states that adopted science programs in
1996.
- - Our SRA/McGraw-Hill division's March 1996 acquisition of the educational
assets of Open Court Publishing Company broadened its position as the
nation's best-known publisher of supplementary, skills-based educational
materials. The acquisition included phonics-based reading, language arts
and mathematics instructional programs for the K-8 market.
- - CTB/McGraw-Hill's addition of TerraNova, a ground-breaking test series,
reinforced its standing as the U.S. leader in primary and secondary
pupil-testing programs. CTB currently has 15 statewide testing contracts,
including seven awarded in 1996 - five for TerraNova.
<PAGE> 15
THE MCGRAW-HILL COMPANIES
AT-A-GLANCE
<TABLE>
<CAPTION>
GROUP AND KEY MARKETS LEADING BRANDS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial STANDARD & POOR'S FINANCIAL Standard & Poor's Compustat Standard & Poor's Marketscope
Services INFORMATION SERVICES Standard & Poor's ComStock Standard & Poor's MMS
Investors, corporations, govern- Standard & Poor's Index Services Standard & Poor's Outlook
ment agencies, financial institu- Standard & Poor's J.J. Kenny Drake Standard & Poor's Platt's
tions, portfolio managers, brokers, Standard & Poor's J.J. Kenny Standard & Poor's Securities, Inc.
unit investment trusts and mutual Evaluation Services Standard & Poor's Stock Reports
funds managers, commodities, Standard & Poor's J.J. Kenny Standard & Poor's The Blue List
securities and foreign exchange Information Services DRI/McGraw-Hill
traders, and libraries Standard & Poor's KENNYBASE
----------------------------------------------------------------------------------------------------------------
STANDARD & POOR'S Corporate Ratings Sovereign Ratings
RATINGS SERVICES Insurance Ratings Structured Finance Ratings
Global capital markets and related Financial Institutions Ratings Project Finance Ratings
risk assessments Managed Funds Ratings Ratings Information Services
Public Finance Ratings
- ----------------------------------------------------------------------------------------------------------------------------------
Educational and EDUCATIONAL PUBLISHING McGraw-Hill School Division SRA/McGraw-Hill
Professional Elementary, secondary, testing, (formerly Macmillan/McGraw-Hill) McGraw-Hill School Systems
Publishing vocational and postsecondary Glencoe/McGraw-Hill McGraw-Hill Home Interactive
fields CTB/McGraw-Hill McGraw-Hill/London House
----------------------------------------------------------------------------------------------------------------
HIGHER EDUCATION AND McGraw-Hill Higher Education - Irwin/McGraw-Hill
CONSUMER GROUP - McGraw-Hill College - Dushkin/McGraw-Hill
College, postgraduate - WCB/McGraw-Hill
and consumer markets
----------------------------------------------------------------------------------------------------------------
INTERNATIONAL PUBLISHING McGraw-Hill Interamericana
Educational and professional McGraw-Hill Europe
markets in Asia, Latin America, Tata McGraw-Hill
Europe and Canada McGraw-Hill Ryerson
----------------------------------------------------------------------------------------------------------------
PROFESSIONAL PUBLISHING Professional Book Group Computing/McGraw-Hill
Engineering, science, medicine, law Business/McGraw-Hill Continuing Education Center
healthcare, computer technology, Osborne/McGraw-Hill
business and government markets
- ----------------------------------------------------------------------------------------------------------------------------------
Information and BROADCASTING GROUP KMGH-TV (Denver) KERO-TV (Bakersfield)
Media Services Serving the Denver, Indianapolis, KGTV (San Diego) WRTV (Indianapolis)
San Diego and Bakersfield, Calif.
communities
----------------------------------------------------------------------------------------------------------------
BUSINESS WEEK GROUP Business Week
Business professionals and Business Week International
advertisers worldwide Business Week Online
----------------------------------------------------------------------------------------------------------------
MCGRAW-HILL CONSTRUCTION F.W. Dodge
INFORMATION GROUP Sweet's Group
Architects, engineers, contractors, Architectural Record
real estate owners, developers Engineering News-Record
and investors, building products
manufacturers
----------------------------------------------------------------------------------------------------------------
DATAPRO INFORMATION Datapro Information Services BYTE
SERVICES GROUP National Software Testing Data Communications/
INFORMATION TECHNOLOGY AND Laboratories Data Communications International
COMMUNICATIONS GROUP Northern Business Information LAN Times
Information technology market tele.com
----------------------------------------------------------------------------------------------------------------
PUBLICATIONS SERVICES GROUP Aviation Week & Space Technology Chemical Engineering
Professionals and corporate Healthcare Informatics Electrical World
executives around the world in Hospital Practice Modern Plastics
aviation, healthcare, and science InfoCare Power
and technology The Physician and Sportsmedicine
Postgraduate Medicine
----------------------------------------------------------------------------------------------------------------
TOWER GROUP INTERNATIONAL Tower Group International
Major North American importers Tower Group International Canada, Inc.
and exporters
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
MARKET FACTORS
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Strength of equity and bond markets, which affects major quote vendors, providing multiple and growing
transaction volume and stimulates demand for distribution channels. SEC demand for greater price
information. Growing global investments and popularity transparency in municipal bond market, creating new
of mutual funds, creating demand for market information opportunities to reach the individual investor.
and analysis. Worldwide installed base of screens from
- -----------------------------------------------------------------------------------------------------------------------------------
Growth of global financial markets fueled by bank risk, asset-backed securities). New measurements of
disintermediation, privatization of state-owned credit and market risk that are gaining wider
enterprises, and establishment of market economies acceptance. Growing regulatory pressures/requirements
throughout the world. Growth in nontraditional by SEC. Level of transaction volume in U.S. bond market.
financial markets (e.g., project finance, counterparty Growth of indigenous local capital markets.
- -----------------------------------------------------------------------------------------------------------------------------------
Improving standards of academic achievement. Increased million to 38.7 million by 1999, grades 9 - 12 enrollments
spending on textbooks. Growing use of multimedia rising at about 1.7% a year from 14.4 million to 15.2 million
technology in schools. Federal funding that continues by 1999. Fragmenting national testing marketplace, which puts
to foster use of technology in education. Grades K - 8 more emphasis on state-specific customized programs.
enrollments rising at about 1.3% a year from 35.5
- -----------------------------------------------------------------------------------------------------------------------------------
College enrollments rising at about 1.5% a year from 14.6 market. Soaring educational software market, up about 30% to
million to 16 million by 2002. Increasing demand for $1.4 billion in 1996.
customized course materials and multimedia products in college
- -----------------------------------------------------------------------------------------------------------------------------------
Economic growth in Latin America, Asia and Europe. Dramatically Continued demand for English-language training material and
increasing enrollments in secondary and college markets. technical and professional information in indigenous languages.
- -----------------------------------------------------------------------------------------------------------------------------------
Rising demand for technical and professional information in New opportunities in online distribution of technical and
medicine, engineering, business, science, computing and law. professional products.
- -----------------------------------------------------------------------------------------------------------------------------------
Change in affiliation in Denver and Bakersfield (from CBS to consumer confidence, auto sales, and home sales levels,
ABC), which is expected to improve ratings and increase which will be key determinants of total market advertising
compensation over the long term. Political advertising, demand in 1997.
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate profits, which affect advertising expenditures. in Asia and Latin America. Growing sales of personal computers
Moderate growth in domestic print advertising. New growth with modem and CD-ROM drives. Expansion of digital network.
opportunities in international publishing, particularly Extension of franchises into nonmagazine formats.
- -----------------------------------------------------------------------------------------------------------------------------------
Primary focus on nonresidential construction, which is less Delivery media to include online, CD-ROM and fax services,
susceptible to shifts in interest rates. Increased demand as well as traditional print and microfilm. Information
for timely delivery of information. Customers converting product growth that exceeds general construction growth.
from print to electronic services. New products that reflect Intensifying competition in the marketplace.
increased emphasis on speed, accuracy and ease of use.
- -----------------------------------------------------------------------------------------------------------------------------------
Projected 10% annual growth in global information technology gains in computer and communications fields. Commercialization
market for the rest of the decade. New product introductions of networks providing opportunity to reach new readers.
and rapid growth of home computer market, which are key to
- -----------------------------------------------------------------------------------------------------------------------------------
Growth in commercial and business aviation that will help provide clinical and business information. Growing worldwide
offset slow growth in aerospace and cutbacks in defense. demand for information on plastics, chemicals and energy.
Shift to managed care, which creates new opportunities to
- -----------------------------------------------------------------------------------------------------------------------------------
Projected strong growth in international trade throughout GATT, which increase demand for logistics services.
the rest of the decade. Rapid market growth for third party Modernization of U.S. Customs, which shifts focus from
logistics management. North American Free Trade Zone and transaction-monitoring to audit-based system.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 17
FINANCIAL REVIEW AND ANALYSIS
Operating Results
CONSOLIDATED REVIEW
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $ 3,074.7 $ 2,935.3 $ 2,760.9
% Increase 4.7 6.3 25.8
- --------------------------------------------------------------------------------
Operating Profit $ 924.5(a) $ 508.6 $ 451.3
% Increase 81.8 12.7 28.0
- --------------------------------------------------------------------------------
% Operating Margin 30 17 16
- --------------------------------------------------------------------------------
Income before Taxes $ 814.8(a) $ 386.3 $ 345.4
- --------------------------------------------------------------------------------
Net Income $ 495.7(a) $ 227.1 $ 203.1
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes gain on the exchange of the Shepard's/McGraw-Hill legal publishing
unit for the Times Mirror Higher Education Group of $418.7 million ($260.5
million after taxes) and one-time charge of $25 million ($14.9 million after
taxes) for costs to integrate the company's College Division with the acquired
higher education business.
REVENUE AND EARNINGS
Operating revenue in 1996 grew to $3.1 billion, an increase of 4.7%. Net income
was $495.7 million, or $4.96 per share. 1996 net income reflects the impact of
the gain on the exchange of the Shepard's/McGraw-Hill legal publishing unit for
the Times Mirror Higher Education Group ($260.5 million, or $2.61 per share) and
a one-time charge for costs to integrate the company's College Division with the
acquired higher education business ($14.9 million, or 15 cents per share);
excluding these items, net income was $250.1 million, or $2.50 per share,
compared with $227.1 million, or $2.28 per share, in 1995. 1996 results reflect
five cents dilution from the exchange transaction reflecting the timing of
integration savings and the typical seasonal decline in higher education
business earnings as compared with Shepard's. Operating revenue in 1995
increased $174.4 million, or 6.3%, over 1994 and net income increased $24
million, or 11.8%. Earnings per share reflects the two-for-one stock split of
the company's common stock announced on January 31, 1996.
On October 15, 1996, the company exchanged its Shepard's/ McGraw-Hill
legal publishing unit for the Times Mirror Higher Education Group and other
consideration, including $27 million in cash, subject to finalization of a
post-closing adjustment. The valuation of the properties exchanged is $485
million, subject to completion of an independent appraisal in 1997. The
divestiture of Shepard's and the acquisition of the Times Mirror properties
reflect the company's strategy to focus investment and resources in businesses
with significant growth opportunities and synergies with its core businesses.
The acquisition of the Times Mirror Higher Education properties - Richard D.
Irwin, William C. Brown, Brown & Benchmark, Irwin Professional Publishing and
Mosby College - establishes the company as the world's largest educational
publisher. The company is integrating the College Division with the acquired
higher education businesses, encompassing the elimination of over 500 positions
and the consolidation of facilities and systems. Most of the integration actions
are expected to be completed by mid-1997.
In 1995, the company recorded a $23.8 million pretax gain on the sale of
the topical publishing division of Shepard's/McGraw-Hill; this gain is reflected
as other income on the consolidated statement of income and is included in the
operating profit of the Educational and Professional Publishing segment.
1995 earnings reflected a pretax charge of $26.8 million related to the
company's "best practices" initiative to improve the efficiency and
effectiveness of major systems and processes, including various administrative
functions and related technology. The charge primarily represented the costs
associated with the elimination of approximately 750 positions, or 5% of the
company's work force. The 1995 operating profit of each segment and corporate
expenses reflected the amount of the best practices charge associated with each
segment. Under the best practices program, the company continued to review
opportunities to improve its operations in 1996, including reinvestment in
technology applications. Through the end of 1996 most of the targeted 750
positions had been eliminated.
Income as a percent of revenue was 8.1% in 1996, excluding the gain and
integration charge from the exchange transaction, compared with 7.7% in 1995.
Return on average shareholders' equity, excluding the 1996 gain and integration
charge from the exchange transaction, was 23.3% in 1996 and 1995.
Operating revenue increased $139.4 million in 1996, or 4.7%, reflecting
increases in all three operating segments. Educational and Professional
Publishing revenue increased $42.3 million, or 3.4%, to $1,278 million,
reflecting strong results in educational publishing and higher education offset
by a decline in professional publishing's domestic operations. The exchange
transaction did not significantly impact year-to-year revenue comparisons as the
Times Mirror Higher Education units contributed $59 million in revenue while
Shepard's revenue declined $53 million due to the exchange transaction and the
divestiture of the topical publishing unit at the end of 1995. Financial
Services' revenue increased $69.1 million, or 8.8%, to $856 million, reflecting
another record year for Standard & Poor's Ratings Services as well as growth at
Standard & Poor's Financial Information Services. Information and Media
Services' revenue increased $28.0 million, or 3.1%, to $941 million, due to
growth at Business Week, Tower Group International and the Construction
Information Group, offsetting declines in Publication Services and Broadcasting.
Operating profit for the company, excluding the gain and integration
charge from the exchange transaction, improved $22.2 million, or 4.4%, primarily
due to Financial Services. Financial Services' operating profit increased $31.2
million, or 13.5%. Operating profit for Standard & Poor's Ratings Services
improved due to strong global growth, a strong bond market and new products.
Standard & Poor's Financial Information Services also had operating profit
growth. Educational and Professional Publishing operating profit, excluding the
1996 gain and integration charge from the
26
<PAGE> 18
exchange transaction, was $151.9 million and, excluding 1995's gain from the
sale of the Shepard's topical unit and the best practices charge, declined $2.0
million, or 1.3%. However, 1996's operating profit also reflects fourth-quarter
dilution from the exchange transaction due to the timing of integration savings
and the seasonal decline in earnings in the higher education business; excluding
this dilution, segment operating profit would have increased. Operating profit
reflects strong results in educational publishing and higher education offset by
a decline in Professional Publishing's domestic operations and the impact of
development costs for McGraw-Hill Home Interactive. In Information and Media
Services, operating profits improved slightly, including last year's best
practices charge, but declined when excluding the charge, as improved profits at
Business Week and the McGraw-Hill Construction Information Group were offset by
declines in Publication Services and Broadcasting.
In 1995, operating revenue increased $174.4 million, or 6.3%, reflecting
increases in all three operating segments. Educational and Professional
Publishing revenues increased $73.4 million, or 6.3%, to $1,236 million,
reflecting a strong performance in Educational Publishing. Financial Services'
revenues increased $41.3 million, or 5.5%, to $787 million reflecting a then
record year for Standard & Poor's Ratings Services, as new issue volume
rebounded in the second half of the year due to declining interest rates.
Information and Media Services' revenue increased $59.7 million, or 7.0%, to
$913 million, due to strong results at Business Week and an acquisition in Tower
Group International. Operating profit improved $57.3 million, or 12.7%, with
improvement in all three segments. Educational and Professional Publishing had
an increase of $36.8 million, reflecting the strong adoption year and the gain
on the sale of the Shepard's topical publishing unit of $23.8 million, net of
the segment's $15.1 million best practices charge. Financial Services' operating
profit increased $13.7 million, or 6.3%, due to the strength at Standard &
Poor's Ratings Services and growth at Financial Information Services. In
Information and Media Services, operating profit improved $6.8 million, or 6.3%,
as Business Week had an excellent year along with small gains at Broadcasting
and the McGraw-Hill Construction Information Group.
EXPENSES
Operating expenses in 1996 increased $104.7 million, or 7.8%, reflecting volume
increases associated with higher revenues, investments in new products and
modest inflationary increases in key expense categories, such as compensation.
Operating expenses include the $25 million one-time integration charge. Combined
printing, paper and distribution prices were held to a 1% increase. Declining
paper prices helped to lessen the impact of modest printing and distribution
increases and the effect of higher priced 1995 inventory. Selling and general
expenses increased $7.2 million, less than 1%, as costs associated with the
increase in revenue were largely offset by nonvolume-related cost reductions. A
significant portion of both operating and selling and general expenses is
compensation, which increased approximately 5.4% to $850 million in 1996,
reflecting primarily the impact of merit increases and expansion at Standard &
Poor's Ratings Services, net of reduced headcount from the best practices
program. Depreciation and amortization expense, including amortization of
goodwill, intangible assets and prepublication costs, increased $7.2 million, or
3.1%, due primarily to the impact of the acquisition of the Times Mirror Higher
Education Group. The ratio of operating, selling and general and amortization
and depreciation expenses to total revenue in 1996 was 86.2% compared with 86.3%
in 1995.
In 1997, paper, printing and distribution prices are expected to decline
slightly, due primarily to declining paper prices, successful negotiations with
suppliers and increased leverage gained through the acquisition of the Times
Mirror Higher Education Group. The impact of merit increases on compensation
costs should approximate 4%. Amortization expenses will increase, reflecting the
intangible assets associated with the acquisition of Times Mirror Higher
Education and larger prepublication cost investment associated with the major
school adoptions.
Operating expenses in 1995 increased $92 million, or 7.4%, due to volume
increases, higher paper costs, modest inflationary increases in key expense
categories, such as compensation, and the best practices charge. Selling and
general expenses increased $54 million, or 6.0%, due to increased revenues.
Depreciation and amortization expenses were flat compared with the prior year.
INTEREST EXPENSE
Net interest expense in 1996 was $47.7 million compared with $58.8 million in
1995, a decrease of $11.1 million, resulting from a reduction in average
commercial paper interest rates from 6.0% in 1995 to 5.4% in 1996 and reduced
commercial paper borrowing levels from the prior year due to paydowns from the
company's operating cash flow. In 1995, net interest expense increased $7.1
million, reflecting an increase in average commercial paper interest rates from
4.2% in 1994 to 6.0% in 1995, net of lower borrowing levels.
PROVISION FOR INCOME TAXES
The provision for taxes as a percent of income before taxes was 40.6% in 1996,
excluding the gain on the exchange of the Shepard's/McGraw-Hill legal publishing
unit for the Times Mirror Higher Education Group. Including the gain on the
exchange transaction, the effective tax rate was 39.2% due to a lower state tax
rate on the gain. The effective tax rate was 41.2% in 1995 and 1994. The
reduction in the effective tax rate to 40.6% reflects the declining impact of
nondeductible goodwill amortization on higher pretax earnings as well as the
favorable settlement of state tax audits.
27
<PAGE> 19
FINANCIAL REVIEW AND ANALYSIS
Segment Review
EDUCATIONAL AND PROFESSIONAL PUBLISHING
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $ 1,277.9 $ 1,235.6 $ 1,162.2
% Increase 3.4 6.3 74.1
- --------------------------------------------------------------------------------
Operating Profit $ 545.7(a) $ 162.6(b) $ 125.8
% Increase 235.6 29.3 154.7
- --------------------------------------------------------------------------------
% Operating Margin 43 13 11
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes the pretax gain on the exchange of Shepard's/McGraw-Hill legal
publishing unit for the Times Mirror Higher Education Group of $418.7 million
and a one-time charge of $25 million for costs to integrate the company's
College Division with the acquired higher education business.
(b) Includes the pretax gain on the sale of the Shepard's/McGraw-Hill topical
publishing unit of $23.8 million and a best practices charge of $15.1 million.
The Educational and Professional Publishing segment consists of three
operating groups: Educational Publishing; Higher Education; and Professional
Publishing (including International Publishing, Continuing Education Center,
Professional Book and Medical Publishing). On October 15, 1996, the company's
Shepard's/ McGraw-Hill legal publishing unit was exchanged for the Times Mirror
Higher Education Group, which is reflected from the date of acquisition in the
company's Higher Education operating group.
The Educational and Professional Publishing segment revenue increased
$42.3 million, or 3.4%, in 1996. The increase reflects growth in educational,
higher education and international publishing and the acquisition of Open Court
Publishing, partially offset by a decline in Professional Publishing's domestic
operations. Operating profit, excluding the unusual items in 1996 and 1995 noted
above, of $151.9 million declined $2.0 million, or 1.3%, reflecting development
costs for McGraw-Hill Home Interactive and dilution due to the timing of
integration savings and the seasonal decline in earnings in the higher education
business resulting from the exchange transaction. In 1995, segment revenue
increased $73.4 million, or 6.3%, reflecting robust sales in the educational
marketplace during the strong 1995 adoption year and growth in higher education,
professional and legal publishing. 1995 operating profit, excluding the pretax
gain on the sale of the Shepard's topical business and the best practices
charge, improved $28.1 million, or 22.3%, to $153.9 million reflecting the
strong revenue performance.
EDUCATIONAL PUBLISHING
The Educational Publishing Group primarily comprises five divisions: McGraw-Hill
School, publisher of textbooks and instructional materials for elementary
(grades K - 8) schools; Glencoe/McGraw-Hill, secondary school (grades 7 - 12)
and postsecondary publisher; California Testing Bureau (CTB/McGraw-Hill),
producer of publications and provider of scoring for standardized achievement
tests, customized testing and specialized educational software products; Science
Research Associates (SRA/McGraw-Hill), developer of supplementary elementary and
secondary instructional materials; and McGraw-Hill Home Interactive, developer
of educational products for the home.
The Educational Publishing Group had revenues of $627 million in 1996, 49%
of segment revenues. Revenues increased 5.1% from 1995. The Group had an
excellent performance in 1996, despite an off-adoption year, as Glencoe/
McGraw-Hill achieved impressive revenue and profit growth through increased
sales in both open territories and adoption states, particularly science, social
studies and math. McGraw-Hill School revenues and profits declined from 1995,
reflecting fall-off from last year's Texas music adoption. SRA/McGraw-Hill's
results improved from last year's excellent performance as the acquisition of
Open Court Publishing and sales of direct instruction materials more than offset
revenue declines from last year's Texas Early Childhood adoption.
CTB/McGraw-Hill's higher revenue and profits reflect growth in custom contracts
and the introduction of the TerraNova testing series. McGraw-Hill Home
Interactive launched four multimedia educational titles at the end of 1996 in
the consumer retail market; this unit has been merged into the educational
publishing operations in 1997 to leverage development and marketing resources.
In 1997, the adoption cycle improves, with reading in California for
McGraw-Hill School and SRA/McGraw-Hill and social studies in Texas for
McGraw-Hill School. Glencoe/McGraw-Hill, having less adoption opportunity in
1997, will be more dependent on open territories.
In 1995, Educational Publishing achieved double-digit increases in
revenues and profit as Glencoe/McGraw-Hill had then record-setting revenues and
profits; McGraw-Hill School sales showed modest growth, aided by strong music
revenues in Texas; and SRA/McGraw-Hill had a very significant increase in
revenues and profits due to Early Childhood program sales in Texas.
HIGHER EDUCATION
The Higher Education Group - McGraw-Hill's College Division and the recently
acquired Times Mirror Higher Education Group - reported 1996 revenues of $205
million, 16% of segment revenues. McGraw-Hill's College Division had higher
revenues in 1996, reflecting stronger frontlist sales, including McConnell's
Economics and Meigs & Meigs' Accounting revisions; higher backlist sales,
particularly social sciences and humanities; and double-digit revenue growth in
Primis Custom Publishing. The former Times Mirror Higher Education college units
contributed $54 million in revenue since the acquisition in mid-October. Higher
Education profits improved significantly from 1995 due to the revenue increase
and continued expense controls.
In 1997, the Higher Education Group will continue the integration program
begun in 1996 with the elimination of more than 500 positions and the
consolidation of facilities and systems. Revenues and profits are expected to
improve, reflecting the full year impact of the former Times Mirror units.
Enrollment trends are improving; however, students remain sensitive to the
perceived high prices of books, and used books continue to be a factor in the
marketplace.
28
<PAGE> 20
In 1995, Higher Education's revenue increased, driven by a strong frontlist
performance and growth in Primis Custom Publishing; profit improvement reflected
the increased revenue, expense controls and savings associated with
consolidation of certain book operating functions.
PROFESSIONAL PUBLISHING
The Professional Publishing Group had revenues of $389 million in 1996, 30% of
segment revenue. 1996's revenue increased approximately 1% as increased
international revenues were offset by a decline in domestic revenues, reflecting
a difficult retail book market, a reduced publishing program, and lower
completion rates at the Continuing Education Center. Internationally, despite a
slow recovery in Mexico, where the company has a significant publishing
presence, revenues and profits improved due to excellent results in the
secondary school market in Spain and $5 million in sales of Times Mirror
products in the fourth quarter. 1996 profits declined due to the domestic
operating performance.
In 1997, the Professional Publishing Group will benefit from the
international sales potential of the former Times Mirror titles and an increased
publishing plan, including the 8th edition of the Encyclopedia of Science and
Technology and the 14th edition of Harrison's Principles of Internal Medicine.
In 1995, the Professional Publishing Group achieved modest revenue growth
despite the negative economic conditions experienced in Mexico as the Asia
Pacific and non-Mexican Spanish language markets were vigorously pursued and
domestic revenues benefited from expanded publishing in the business, computing
and engineering lines. 1995 profits increased as a result of continued margin
improvement and focus on operating efficiencies.
SHEPARD'S/MCGRAW-HILL
The Legal Information Group (Shepard's/McGraw-Hill) had revenues of $57 million
in 1996, 5% of segment revenues. 1996 revenue declined $53 million, or 48%, from
1995 reflecting the divestiture of the topical publishing unit at the end of
1995, the 1995 publication of the Federal Citations, and the exchange for the
Times Mirror Higher Education Group on October 15, 1996. 1996 profits declined
accordingly.
FINANCIAL SERVICES
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $ 855.9 $ 786.8 $ 745.5
% Increase 8.8 5.5 7.0
- --------------------------------------------------------------------------------
Operating Profit $ 262.1 $ 230.9 $ 217.2
% Increase 13.5 6.3 8.1
- --------------------------------------------------------------------------------
% Operating Margin 31 29 29
- --------------------------------------------------------------------------------
</TABLE>
The Financial Services segment consists of two operating groups: Standard &
Poor's Ratings Services and Standard & Poor's Financial Information Services,
which comprises Financial Data Services (Standard & Poor's MMS, Standard &
Poor's Platt's, and Standard & Poor's ComStock); Equity Services (Standard &
Poor's Equity Investor Services, Standard & Poor's Compustat and Standard &
Poor's Securities, Inc.); Municipal Securities Services (Standard & Poor's J.J.
Kenny Drake, Standard & Poor's J.J. Kenny Evaluation Services, Standard & Poor's
J.J. Kenny Information Services and CUSIP Service Bureau) and DRI/McGraw-Hill.
Financial Services revenue increased 8.8% to $856 million and operating
profit rose 13.5% to $262.1 million in 1996. In 1995, the segment's revenue grew
5.5% and operating profit rose 6.3% to $230.9 million. 1995 operating profit
reflects a $4.1 million best practices charge.
STANDARD & POOR'S RATINGS SERVICES
Standard & Poor's Ratings Services revenue rose in 1996 on higher bond market
issuance in the U.S. municipal, corporate and structured markets, primarily
reflecting a favorable interest rate environment and increasing demand for funds
by noninvestment grade issuers. Structured Finance revenues grew, reflecting
strong issuance in asset-backed and commercial real estate markets.
Nontraditional revenues also continued to grow in areas such as corporate credit
ratings, insurance ratings and mutual fund ratings along with continued product
line diversification. International revenue also grew, substantially in 1996,
reflecting the now 100% ownership of Standard & Poor's ADEF, the former 50%
joint venture in France, as well as continued global growth, particularly in
Asia and Europe. Standard & Poor's Ratings expansion of its global franchise
continued with cooperative agreements signed with Pefindo in Indonesia and
Feller-Rate in Chile. Regional expansion in the U.S. continued with the opening
of an office in Dallas to serve southwestern states. Operating profits also rose
significantly, reflecting the higher revenues, while funding increased
investments in global expansion and product diversification.
In 1997, Ratings Services anticipates another strong year, dependent on a
continuation of the favorable interest rate environment and healthy bond market
issuance, including noninvestment grade corporate debt. Investment in growth
areas will continue in 1997.
In 1995, Standard & Poor's Ratings Services revenue increased over 1994
despite a decline in municipal bond issuance and early year softness in the
corporate bond market. As interest rates declined during the year, new issuance
volume in the corporate bond market rebounded. Increases in asset-backed
securities volume enabled the Structured Finance unit to post excellent
financial results, despite a significant decline in mortgage-backed securities
volume. Worldwide expansion continued with a cooperation agreement with CRISIL,
India's leading rating agency, and the opening of new offices in Hong Kong and
Singapore. Product line diversification also contributed as new products and
initiatives produced solid growth. 1995 operating profits improved, reflecting
the increased revenues net of continuing investments.
29
<PAGE> 21
FINANCIAL REVIEW AND ANALYSIS
Segment Review (continued)
STANDARD & POOR'S FINANCIAL INFORMATION SERVICES
Standard & Poor's Financial Information Services' 1996 revenue grew at a modest
rate. Despite downward pressure in certain market segments, year-to-year revenue
growth was fueled primarily by international market expansion and a healthy
demand for equity-related information and services stimulated by the continued
growth of the stock market. The Group also experienced increased demand in
electronic subscription products, which continue to supplant a larger portion of
print product. Increased sales of data products have been a significant
contributor to revenue growth at Standard & Poor's ComStock, Standard & Poor's
Compustat and the nonconsulting business at DRI/McGraw-Hill. Standard & Poor's
Platt's and Standard & Poor's MMS had higher revenue where demand for electronic
delivered information on fixed income securities and energy services drove
year-to-year growth. Negatively influencing revenue performance during the year
was a continued contraction in the domestic municipal bond market. The trend of
higher redemptions by state and local municipalities caused a decline at
Municipal Securities Services. Greater competitive pressure in the corporate
market and reduced government contracts have hampered demand for consulting
services offered by DRI/McGraw-Hill, resulting in a revenue decline. Operating
profit grew at a greater rate than revenue due to strong expense controls.
In 1997, Standard & Poor's Financial Information Services will sharpen its
focus toward its core customer base through a realignment of the operating units
which will focus on five customer segments: Retail, Consumer, Broker/Dealer,
Money Manager and Corporate with strategic focus on the informational needs of
investors and international product development.
In 1995, Standard & Poor's Financial Information Services experienced
increases in revenue and operating profit reflecting growth in international
markets, as domestic revenue growth was negatively impacted by a severe
contraction in the municipal securities market and weaker demand for print-based
subscription products.
INFORMATION AND MEDIA SERVICES
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $ 940.9 $ 912.9 $ 853.2
% Increase 3.1 7.0 2.7
- --------------------------------------------------------------------------------
Operating Profit $ 116.8 $ 115.1 $ 108.3
% Increase 1.5 6.3 5.9
- --------------------------------------------------------------------------------
% Operating Margin 12 13 13
- --------------------------------------------------------------------------------
</TABLE>
The Information and Media Services segment comprises three operating
groups: Information Services (Business Week, Publication Services, Information
Technology and Communications, Datapro Information Services and Tower Group
International); McGraw-Hill Construction Information Group and Broadcasting.
The Information and Media Services segment's revenues increased 3.1% to
$941 million in 1996 and operating profit increased $1.7 million, or 1.5%, to
$116.8 million. In 1995, revenue increased 7.0% and operating profit increased
$6.8 million, or 6.3%, to $115.1 million. 1995 operating profit reflects a best
practice charge of $6.3 million.
INFORMATION SERVICES
The Information Services Group had 1996 revenues of $565 million, 60% of segment
revenues. Revenues increased $24 million, or 4.3%.
Business Week revenue and operating profit grew in 1996 as advertising and
circulation margins increased significantly versus 1995. Investment in
technology, electronic publishing and international circulation continued. North
American advertising pages, as measured by the Publishers Information Bureau,
were up 1.9%. A successful 1997 is dependent upon continued strength in the
domestic advertising market and continued success in the expansion in
international markets. In 1995, revenues and margins were up substantially
despite large paper price increases. North American advertising pages were up
4.8% and significant investments in technology and international circulation
were made.
Publication Services comprises the Aviation Week, Healthcare Publications
and Science and Technology groups. The Aviation Week Group's revenue grew in
1996, reflecting increased advertising pages and the successful launching of
several multimedia products and services. The Healthcare Publications revenue
grew significantly in 1996 due to a strong advertising market, several new
ancillary products and services, and the acquisition of Healthcare Informatics
and InfoCare magazines late in the year. The Science and Technology Group's
revenue declined in 1996 due to a fall in advertising from major chemical and
plastics exhibitions held in 1995 and not in 1996, in addition to a declining
utility advertising marketplace. Operating profit in 1996 increased modestly,
reflecting the revenue increase partially offset by additional investments. In
1997, Publication Services expects to expand its portfolio of multimedia
products and should benefit from the full year impact of the 1996 Healthcare
Publications acquisitions. In 1995, Publication Services revenues increased,
reflecting the acquisition of Hospital Practice magazine and strong advertising
growth at Modern Plastics International; profits increased modestly.
The Information Technology and Communications and the Datapro Information
Services groups revenue declined in 1996. Data Communications magazine grew
slightly while LAN Times, BYTE and Datapro declined. Operating profit declined
significantly, reflecting the revenue decline and investments, including the
launch of tele.com magazine. In 1997, these groups will continue to focus on
electronic media and new services and growth in circulation. In 1995, revenue
and profit were flat as growth for LAN Times and Data Communications was offset
by a decline in advertising pages for BYTE and the shutdown of Open Computing.
30
<PAGE> 22
Tower Group International revenue and operating profit increased in
1996 due to strong growth from the expansion of inbound air transportation,
drawback and professional advisory services. Additional revenue was generated by
key national accounts in the expanded San Francisco office and new offices in
Indianapolis and Philadelphia. The full year impact of the April 1995
acquisition of UCB Canada also contributed. In 1997, import activity is expected
to grow at a comparable rate to 1996 and the Group intends to continue to invest
in expanded service offerings. In 1995 Tower Group International experienced
significant revenue growth as a result of the acquisition of UCB Canada,
expansion of service capabilities and generally favorable market conditions for
core import services. 1995 operating profit declined slightly as investments in
new logistics services and products combined with the development of a national
sales and marketing organization offset the year-to-year revenue growth.
CONSTRUCTION INFORMATION
The McGraw-Hill Construction Information Group had 1996 revenue of $260 million,
28% of segment revenues. Revenue increased due to gains at F.W. Dodge, Sweet's,
Architectural Record and Engineering News-Record. F.W. Dodge's revenue growth
outpaced its 1995 growth rate, Sweet's revenue growth came from electronic
products, and the construction magazines had an increase in advertising pages.
Operating profit increased over 1995 due to the revenue growth and expense
savings. Total U.S. construction contract value was up 6% versus the prior year;
however, the key nonresidential sector reported an increase of only one-half of
one percent. Electronic products continued to show strong growth in 1996 with
Dodge Dataline and Sweet's electronic products growing approximately 15%.
In 1997, the contract value of total nonresidential building is
expected to rise, fostering a more positive environment. New electronic
products, product extensions and enhancements and opportunity-based partnerships
and alliances should benefit the Group.
In 1995, revenues increased primarily due to Sweet's advertising page
and electronic revenue growth, while Dodge had a small increase in revenue and
advertising revenue for the construction magazines was down slightly. 1995
profits increased modestly.
BROADCASTING
Broadcasting had 1996 revenue of $116 million, 12% of segment revenue. The
Broadcasting Group operates four television stations: VHF stations in Denver,
Indianapolis and San Diego and a UHF station in Bakersfield, California. All
four stations are ABC affiliates. Broadcasting revenue for 1996 was slightly
lower than the record level achieved in 1995 as performance was hampered by
declining ratings in ABC network prime time and early morning programs.
Advertiser spending in the San Diego market was also below expectations.
Political advertising in all four markets was strong and reached a record level
in 1996.
In 1997, the Broadcasting Group will face the loss of political
advertising. Substantial cost savings measures have been implemented in
anticipation of that revenue loss in order to seek profit improvement during
1997.
In 1995, revenue and operating profit increased modestly to record
levels, despite the lack of political advertising following a strong 1994
election year. 1995 performance was enhanced by increased network compensation
for the Denver station and the switch in Denver's affiliation in September from
CBS to ABC.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
(in millions) 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Working Capital $ 130.9 $ 193.3
- ---------------------------------------------------------------------
Total Debt $ 581.4 $ 628.7
- ---------------------------------------------------------------------
Accounts Receivable (before reserves) $1,041.7 $ 935.4
% Increase 11 12
- ---------------------------------------------------------------------
Inventories $ 273.2 $ 238.0
% Increase 15 12
- ---------------------------------------------------------------------
Investment in Prepublication Costs $ 183.0 $ 134.1
% Increase 36 13
- ---------------------------------------------------------------------
Purchases of Property and Equipment $ 63.3 $ 58.8
% Increase/(Decrease) 8 (24)
- ---------------------------------------------------------------------
</TABLE>
The company continues to maintain a strong financial position. Cash
flow from operations increased to $460.2 million in 1996, an increase of $26.9
million, which was sufficient to cover dividends, outlays for the purchase of
property and equipment, investment in publishing programs, and the repurchase of
common shares while also reducing commercial paper borrowings. 1995's cash flow
from operations was $433 million, an increase of $19.3 million from 1994.
Working capital at the end of 1996 of $131 million was $62 million
below the level at the end of 1995, primarily reflecting income taxes payable on
the gain on exchange of Shepard's/McGraw-Hill and the impact of integration and
acquisition liabilities partially offset by the excess of Times Mirror Higher
Education's current assets over liabilities.
The company's earnings and cash flow are significantly impacted by the
seasonality of some of its businesses, particularly educational publishing. The
first quarter is the least significant to the company, accounting for 19% of
revenues and only 6% of income in 1996 excluding the net one-time gain from the
exchange transaction. The third quarter of the year is the most significant to
the company, generating nearly half of full year earnings. This seasonality also
impacts cash flow and related borrowing patterns. The company typically borrows
in the first half of the fiscal year and generates cash in the second half of
the year, primarily from fourth quarter collections from customers in the
education markets. This pattern is magnified in years where there is significant
state adoption activity, such as in 1995 and 1997,
31
<PAGE> 23
FINANCIAL REVIEW AND ANALYSIS
Liquidity and Capital Resources (continued)
where there are significant sales and marketing expenses in the first half of
the year. The acquisition of the Times Mirror Higher Education Group will
further impact the seasonality of the company's results.
In 1996, total debt decreased $47.3 million, reflecting the retirement
of commercial paper borrowings resulting from the company's positive cash flow.
Total debt as a percentage of total capital improved to 29.9% at the end of 1996
from 37.8% at the end of 1995. In 1995, total debt decreased $134.1 million,
reflecting the retirement of commercial paper borrowings resulting from the
company's positive cash flow.
The company's commercial paper borrowings at December 31, 1996 were
$322.1 million. Commercial paper debt is supported by a $800 million revolving
credit agreement with a group of banks terminating in February 2002, and $300
million has been classified as long-term. There are no amounts outstanding under
this agreement.
The company has $250 million of 9.43% senior notes due in the year
2000. Under a shelf registration that 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) increased $106.4 million, or
11.4%, primarily as a result of increased revenues and the acquisitions of Times
Mirror Higher Education and Open Court. The increase in the accounts receivable
reserve, which includes the allowance for sales returns in 1996 and 1995,
reflects the acquisition of Times Mirror Higher Education. The year-to-year
increase was effectively controlled through timely collections. A portion of the
increase was in international markets, where terms of sale and repayment are
traditionally longer. Number of days sales outstanding, a key indicator of
collection efficiency, decreased four days at year end due to improved billing
and collection efforts at various business units.
Finished goods and work-in-process inventories increased $37.9 million,
or 18.8%, primarily due to the addition of Times Mirror Higher Education and
Open Court inventory. Raw material inventory, primarily paper, declined $2.8
million, reflecting the timing of paper purchases.
Capital expenditures for the purchase of property and equipment totaled
$63.3 million in 1996 compared with $58.8 million in 1995. In 1996 and 1995,
expenditures were primarily for computer equipment for business units and
corporate departments. In 1997, purchases of property and equipment are expected
to increase in the range of 20%-30% as the company continues the integration of
the Times Mirror Higher Education Group.
Net prepublication costs increased to $353.1 million at December 31,
1996, as 1996 spending exceeded amortization expense and Times Mirror Higher
Education and Open Court prepublication costs were added. Prepublication
investment totaled $183.0 million in 1996, an increase over 1995 of $48.9
million, reflecting spending for the 1997 and 1998 adoption year programs as
well as Higher Education and Professional Publishing titles. 1997 prepublication
spending is expected to increase approximately 10%-20% from 1996 levels,
reflecting the addition of Times Mirror Higher Education.
On January 31, 1996, the company's Board of Directors approved a stock
repurchase program authorizing the purchase of up to four million shares of the
company's common stock. As of December 31, 1996, 1.4 million common shares have
been repurchased at a cost of $63.3 million. The repurchased shares were
financed from internally generated funds. The repurchased shares will be used
for general corporate purposes, including the issuance of shares for the
exercise of employee stock options.
On January 29, 1997, the company announced an increase in the quarterly
common stock dividend of three cents, or 9.1%, to 36 cents per share.
In 1997, the company expects that cash flow from operations will be
sufficient to cover dividends, outlays for the purchase of property and
equipment and investment in publishing programs, and spending associated with
integration actions. Debt levels will be impacted by borrowings for the tax
payment on the gain from the exchange transaction of approximately $170 million
in March 1997 and expenditures related to the share repurchase program.
"SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This section, as well as other portions of this document, includes certain
forward-looking statements about the company's business, new products, sales,
expenses, cash flows and operating and capital requirements. Such
forward-looking statements include, but are not limited to: the timing of
integration actions related to the Times Mirror Higher Education Group; future
paper, printing and distribution prices; future compensation cost merit increase
rates; Educational Publishing's level of success in 1997 adoptions; the
contribution to revenue and profit increases from the former Times Mirror Higher
Education businesses; the strength of profit levels at Standard & Poor's Ratings
Services; Business Week's success in expansion into international markets; the
strength of the domestic advertising market; the level of import activity; the
contract value of nonresidential building; McGraw-Hill Construction Information
Group's ability to introduce new electronic products, product extensions and
enhancements; Broadcasting's ability to reduce costs and achieve profit
improvement; the level of future cash flow, debt levels, capital expenditures
and prepublication cost investment. Actual results may differ materially from
those in any forward-looking statements because any such statements involve
risks and uncertainties and are subject to change based on various important
factors, including but not limited to worldwide economic and political
conditions, the health of capital and equity markets, the successful marketing
of new products, the effect of competitive products and pricing, and the timing
of reducing costs in the newly merged higher education businesses.
32
<PAGE> 24
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years ended December 31 (in thousands, except per-share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE $3,074,697 $2,935,283 $2,760,869
- ----------------------------------------------------------------------------------------------------------------------
EXPENSES:
Operating 1,445,028 1,340,348 1,248,306
Selling and general 968,103 960,875 906,878
Depreciation and amortization 238,558 231,408 230,026
- ----------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 2,651,689 2,532,631 2,385,210
Gain on exchange of Shepard's/McGraw-Hill (Note 3) 418,731 -- --
Other income - net (Note 2) 20,724 42,385 21,527
- ----------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 862,463 445,037 397,186
Interest expense - net 47,656 58,766 51,746
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 814,807 386,271 345,440
Provision for taxes on income (Note 7) 319,074 159,144 142,321
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 495,733 $ 227,127 $ 203,119
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE (NOTE 1) $ 4.96 $ 2.28 $ 2.05
Average number of common shares outstanding during year (Note 1) 99,997 99,752 98,998
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
33
<PAGE> 25
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 (in thousands, except share data) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents (Note 1) $ 3,430 $ 10,250
Accounts receivable (net of allowances for doubtful accounts and sales returns:
1996 - $162,260; 1995 - $127,202) 879,466 808,150
Receivable from broker-dealers and dealer banks (Note 1) 2,473 9,674
Inventories:
Finished goods 219,295 185,608
Work-in-process 19,887 15,675
Paper and other materials 33,976 36,747
- -------------------------------------------------------------------------------------------------------------------
Total inventories 273,158 238,030
Prepaid income taxes 106,464 67,128
Prepaid and other current assets 84,592 59,351
- -------------------------------------------------------------------------------------------------------------------
Total current assets 1,349,583 1,192,583
- -------------------------------------------------------------------------------------------------------------------
PREPUBLICATION COSTS (net of accumulated amortization:
1996 - $486,960; 1995 - $391,384) (Note 1) 353,064 268,200
INVESTMENTS AND OTHER ASSETS
Investment in Rock-McGraw, Inc. - at equity (Note 6) 66,899 61,797
Prepaid pension expense 104,515 98,177
Other 150,373 141,861
- -------------------------------------------------------------------------------------------------------------------
Total investments and other assets 321,787 301,835
- -------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT - AT COST
Land 19,196 19,365
Buildings and leasehold improvements 285,123 297,796
Equipment and furniture 531,361 510,146
- -------------------------------------------------------------------------------------------------------------------
Total property and equipment 835,680 827,307
Less - accumulated depreciation 524,187 491,178
- -------------------------------------------------------------------------------------------------------------------
Net property and equipment 311,493 336,129
- -------------------------------------------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS - AT COST
(net of accumulated amortization:
1996 - $411,606; 1995 - $366,277) (Notes 1 and 3) 1,306,312 958,420
- -------------------------------------------------------------------------------------------------------------------
$3,642,239 $3,057,167
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
34
<PAGE> 26
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note 5) $ 24,518 $ 71,299
Accounts payable 241,736 215,179
Payable to broker-dealers and dealer banks (Note 1) 2,400 7,469
Accrued royalties 89,789 63,582
Accrued compensation and contributions to retirement plans 142,235 124,800
Income taxes currently payable 235,573 70,405
Unearned revenue 229,216 241,816
Other current liabilities 253,196 204,687
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 1,218,663 999,237
- -----------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt (Note 5) 556,850 557,365
Deferred income taxes 150,319 140,531
Accrued postretirement healthcare and other benefits 198,709 200,100
Other non-current liabilities 156,580 124,868
- -----------------------------------------------------------------------------------------------------------
Total other liabilities 1,062,458 1,022,864
- -----------------------------------------------------------------------------------------------------------
Total liabilities 2,281,121 2,022,101
- -----------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 8)
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes 9 and 10)
$1.20 preference stock, $10 par value: authorized - 891,256 shares;
outstanding - 1,388 shares in 1996 and 1,416 in 1995 14 14
Common stock, $1 par value: authorized - 150,000,000 shares;
issued - 102,919,060 shares in 1996 and 102,918,876 in 1995 102,919 102,919
Additional paid-in capital 37,473 26,740
Retained income 1,394,884 1,030,526
Foreign currency translation adjustments (57,302) (56,247)
- -----------------------------------------------------------------------------------------------------------
Less - common stock in treasury - at cost
(3,388,398 shares in 1996 and 2,775,996 in 1995) 107,410 60,778
Unearned compensation on restricted stock 9,460 8,108
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,361,118 1,035,066
- -----------------------------------------------------------------------------------------------------------
$ 3,642,239 $ 3,057,167
- -----------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 27
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 495,733 $ 227,127 $ 203,119
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 71,097 67,916 64,281
Amortization of goodwill and intangibles 39,190 38,548 37,489
Amortization of prepublication costs 128,271 124,944 128,256
Provision for losses on accounts receivable 65,116 65,385 67,508
Gain on exchange of Shepard's/McGraw-Hill
for the Times Mirror Higher Education Group (418,731) -- --
Gain on sale of topical publishing -- (23,782) --
Provision for one-time integration costs 25,000 -- --
Other 5,839 6,120 3,862
Change in assets and liabilities net of effect of acquisitions and dispositions:
Increase in accounts receivable (118,235) (144,007) (117,139)
(Increase)/decrease in inventories 4,000 (30,804) (7,026)
Increase in prepaid and other current assets (15,880) (7,957) (6,549)
Increase/(decrease) in accounts payable and accrued expenses 40,717 51,697 (7,460)
Increase/(decrease) in unearned revenue 13,770 2,894 (9,088)
Increase/(decrease) in other current liabilities (11,010) 6,670 2,935
Increase in interest and income taxes currently payable 166,646 23,913 12,293
Increase/(decrease) in prepaid/deferred income taxes (24,807) 18,913 39,048
Net change in other assets and liabilities (6,564) 5,659 2,390
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 460,152 433,236 413,919
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in prepublication costs (182,978) (134,118) (118,377)
Purchase of property and equipment (63,313) (58,776) (77,068)
Acquisition of businesses and equity interests (31,195) (36,246) (1,219)
Proceeds from exchange of Shepard's/McGraw-Hill
for the Times Mirror Higher Education Group 27,258 -- --
Disposition of property, equipment and businesses 9,352 35,481 12,962
Other 689 700 2,655
- -----------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (240,187) (192,959) (181,047)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid to shareholders (131,375) (119,653) (114,317)
Repayment of commercial paper and other short-term debt - net (46,696) (133,700) (165,785)
Repurchase of treasury shares (63,314) -- --
Exercise of stock options 19,869 20,616 13,983
Other (4,928) (3,133) (1,767)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (226,444) (235,870) (267,886)
- -----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (341) (2,213) (4,883)
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and equivalents (6,820) 2,194 (39,897)
Cash and equivalents at beginning of year 10,250 8,056 47,953
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 3,430 $ 10,250 $ 8,056
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
36
<PAGE> 28
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Foreign Less -
$1.20 Additional currency common stock
preference Common paid-in Retained translation in treasury
(in thousands, except per-share data) $10 par $1 par capital income adjustments at cost
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $ 16 $102,918 $12,053 $ 834,250 $(28,577) $ 87,687
Net income -- -- -- 203,119 -- --
Dividends ($1.16 per share) -- -- -- (114,317) -- --
Exercise of stock options -- -- 3,513 -- -- (10,470)
Restricted stock -- -- 2,242 -- -- (707)
Foreign currency translation
adjustments - net -- -- -- -- (16,647) --
Other (1) -- 47 -- -- 477
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 15 102,918 17,855 923,052 (45,224) 76,987
Net income -- -- -- 227,127 -- --
Dividends ($1.20 per share) -- -- -- (119,653) -- --
Exercise of stock options -- -- 5,685 -- -- (14,931)
Restricted stock -- -- 3,152 -- -- (1,539)
Foreign currency translation
adjustments - net -- -- -- -- (11,023) --
Other (1) 1 48 -- -- 261
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 14 102,919 26,740 1,030,526 (56,247) 60,778
Net income -- -- -- 495,733 -- --
Dividends ($1.32 per share) -- -- -- (131,375) -- --
Share repurchase -- -- -- -- -- 63,314
Exercise of stock options -- -- 3,886 -- -- (15,983)
Restricted stock -- -- 6,756 -- -- (1,096)
Foreign currency translation
adjustments - net -- -- -- -- (1,055) --
Other -- -- 91 -- -- 397
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ 14 $102,919 $37,473 $1,394,884 $(57,302) $ 107,410
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Less -
unearned
compensation
on restricted
stock Total
- -----------------------------------------------------------------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1993 $ 9,965 $ 823,008
Net income -- 203,119
Dividends ($1.16 per share) -- (114,317)
Exercise of stock options -- 13,983
Restricted stock (1,388) 4,337
Foreign currency translation
adjustments - net -- (16,647)
Other -- (431)
- -----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 8,577 913,052
Net income -- 227,127
Dividends ($1.20 per share) -- (119,653)
Exercise of stock options -- 20,616
Restricted stock (469) 5,160
Foreign currency translation
adjustments - net -- (11,023)
Other -- (213)
- -----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 8,108 1,035,066
Net income -- 495,733
Dividends ($1.32 per share) -- (131,375)
Share repurchase -- (63,314)
Exercise of stock options -- 19,869
Restricted stock 1,352 6,500
Foreign currency translation
adjustments - net -- (1,055)
Other -- (306)
- -----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ 9,460 $1,361,118
- -----------------------------------------------------------------------
</TABLE>
See accompanying notes.
37
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include the
accounts of all subsidiaries and the company's share of earnings or losses of
joint ventures and affiliated companies under the equity method of accounting.
All significant intercompany accounts and transactions have been eliminated.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash equivalents. Cash equivalents consist of highly liquid investments with
maturities of three months or less at the time of purchase.
Inventories. Inventories are stated at the lower of cost (principally first-in,
first-out) or market.
Prepublication costs. Prepublication costs, principally outside preparation
costs, are amortized from the year of publication over their estimated useful
lives, primarily three to five years, using either the sum-of-the-years-digits
or the straight-line method. It is the company's policy to evaluate the
remaining lives and recoverability of such costs, which is often dependent upon
program acceptance by state adoption authorities.
Goodwill and other intangible assets. Goodwill and other intangible assets that
arose from acquisitions either consummated or initiated prior to November 1,
1970 are not amortized unless there has been a reduction in the value of the
related assets. Goodwill and other intangible assets arising subsequent to
November 1, 1970 of $1.7 billion at December 31, 1996 and $1.3 billion at
December 31, 1995 are being amortized over periods of up to 40 years. The
company periodically reviews its goodwill to determine if any impairment exists
based upon projected, undiscounted net cash flows of the related business unit.
Receivable from/payable to broker-dealers and dealer banks. 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 matched
purchase and sale commitments of $117.1 million and $198.1 million at December
31, 1996 and 1995, respectively. Only those transactions not closed at the
settlement date are reflected in the balance sheet as receivables and payables.
Foreign currency translation. Assets and liabilities are translated using
current exchange rates, except certain accounts of units whose functional
currency is the U.S. dollar, and translation adjustments are accumulated in a
separate component of shareholders' equity. Inventory, prepublication costs and
property and equipment accounts of units whose functional currency is the U.S.
dollar are translated using historical exchange rates and translation
adjustments are charged and credited to income.
Revenue. Tuition revenue from home-study courses is recorded when the contracts
are accepted. At the same time, provisions for cancellation and uncollectible
accounts, and estimated costs to service the contracts, are recorded. Units
whose revenues are principally from subscription income and service contracts
record revenue as earned. Units whose revenues are principally from advertising
generally record subscription income as received. Costs related to subscriptions
generally are expensed as incurred.
Depreciation. The costs of property and equipment are depreciated using the
straight-line method based upon the following estimated useful lives:
Buildings and leasehold improvements - 15 to 40 years
Equipment and furniture - 3 to 10 years
Advertising expense. The cost of advertising is expensed as incurred. The
company incurred $62 million, $63 million and $58 million in advertising costs
in 1996, 1995 and 1994, respectively.
Earnings per common share. Earnings per common share and common share
equivalents are based on the average number of such shares outstanding during
the year. Common share equivalents consist of $1.20 preference stock, stock
options and restricted performance incentive shares. The number of shares
issuable upon exercise of stock options has been reduced by the number of common
shares assumed to have been purchased with the proceeds from the exercise of the
options. The number of restricted performance shares issued has been reduced by
the number of shares assumed to have been repurchased using unearned
compensation as exercise proceeds.
Stock based compensation. The company grants options for a fixed number of
shares to employees with the exercise price equal to the fair value of the
shares at the date of grant. The company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants.
Stock split. 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 in the financial statements and notes to common share data have been
restated to reflect that split.
38
<PAGE> 30
Reclassification. Certain prior-year amounts
have been reclassified for comparability purposes.
2. ACQUISITIONS AND DISPOSITIONS
Acquisitions. In 1996, excluding the exchange of Shepard's/McGraw-Hill for the
Times Mirror Higher Education Group (TMHE), the company made four acquisitions,
including Open Court Publishing, for $31.2 million in cash, net of cash
acquired. See Note 3 for details of the Shepard's/McGraw-Hill - TMHE exchange.
In 1995, the company made six acquisitions, including UCB Canada, Inc., for
$36.2 million in cash. In 1994, the company made five small acquisitions
totaling $1.2 million. The effect of these acquisitions on the results of
operations for the years presented was not material.
Noncash Investing Activities. Liabilities assumed in conjunction with the
acquisition of businesses, including TMHE, are as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Fair value of assets acquired $583,460 $ 58,152 $ 1,520
Cash paid (net of cash
acquired) 3,937 36,246 1,219
Fair value of business
exchanged 485,000 -- --
- -------------------------------------------------------------
Liabilities assumed $ 94,523 $21,906 $ 301
- -------------------------------------------------------------
</TABLE>
Dispositions. Other than the Shepard's/McGraw-Hill - TMHE exchange discussed in
Note 3, there were no significant dispositions in 1996. In 1995, the company
sold the topical publishing business of Shepard's/McGraw-Hill. The pretax gain
on this disposition was $23.8 million, which was included in other income. After
taxes, the gain was $15.1 million. In 1994 there were no significant
dispositions.
3. EXCHANGE OF SHEPARD'S/MCGRAW-HILL FOR
TIMES MIRROR HIGHER EDUCATION GROUP
On October 15, 1996, The McGraw-Hill Companies completed the exchange of its
Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher
Education Group (TMHE) and other consideration, including approximately $27
million in cash, subject to finalization of a post-closing adjustment. The
valuation of the properties exchanged is $485 million, subject to finalization
that will be based upon independent appraisals. The acquisition of TMHE was
accounted for as a purchase and the net assets and results of operations of TMHE
have been included in the consolidated financial statements since the date of
acquisition. The excess of the transaction value over the tangible assets
acquired was allocated to identifiable publishing intangible assets ($231
million) being amortized over 18 to 30 years and goodwill ($175 million) being
amortized over 40 years.
The company recorded a pretax gain on the sale of Shepard's/
McGraw-Hill of $418.7 million ($260.5 million net of taxes, or $2.61 per share).
1996 earnings reflect dilution of five cents per share from the
transaction, reflecting the timing of integration savings and the typical
seasonal decline in higher education business earnings as compared with
Shepard's/McGraw-Hill.
In connection with the acquisition of TMHE, the company recorded
acquisition reserves of $26.6 million. Such costs were primarily for employee
severance as well as professional fees and various other costs associated with
the acquisition. Remaining reserves of $25.9 million at December 31, 1996 will
be expended within the next year.
In addition to the above, one-time charges of $25 million related to
the integration of the company's College Division with the acquired TMHE
business were recorded in 1996. Such costs were attributed to employee
severance, asset write-offs and other costs to integrate and consolidate the
operations. The balance of the integration reserves of $18.6 million at December
31, 1996 will also be expended within the next year.
The following unaudited pro forma information presents the consolidated
results of operations of the company for 1996 and 1995, as if the exchange of
businesses had occurred at the beginning of 1995.
<TABLE>
<CAPTION>
(in millions, except per share data) 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Operating revenue $ 3,186.4 $ 3,073.1
Net income 225.4 172.7
Earnings per common share $ 2.25 $ 1.73
- ------------------------------------------------------------
</TABLE>
These pro forma results are not necessarily indicative of those that
would have occurred had the exchange of businesses taken place at the beginning
of 1995.
4. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
A description of each of the company's three segments and their products,
services and markets served is included on the inside back cover of this annual
report.
Operating profit by segment and geographic area is total operating
revenue less expenses that are deemed to be related to the unit's operating
revenue. Identifiable assets by segment and geographic area are those assets
that are used in the operation of that unit. Corporate assets consist
principally of cash and equivalents, investment in Rock-McGraw, Inc., prepaid
pension expense and income taxes and leasehold improvements related to subleased
areas.
Foreign revenue and profits are from book publishing and financial and
information services operations in 32 countries. Transfers between geographic
areas are recorded at cost plus a markup and intercompany revenue and profits
are eliminated.
39
<PAGE> 31
A summary of information about the company's operations by segment and
geographic area follows:
<TABLE>
<CAPTION>
Operating Operating Assets at Depreciation and Capital
(in thousands) revenue profit December 31 amortization+ expenditures++
- --------------------------------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C>
Educational and Professional Publishing $1,277,895 $545,652v $2,085,540 $172,306 $201,211
Financial Services 855,925 262,085 561,128 30,478 20,155
Information and Media Services 940,877 116,799 626,324 34,635 24,925
- --------------------------------------------------------------------------------------------------------------------------------
Total operating segments 3,074,697 924,536 3,272,992 237,419 246,291
Corporate - (62,073) 369,247 1,139 -
Interest expense - net - (47,656) - - -
- --------------------------------------------------------------------------------------------------------------------------------
Total company $3,074,697 $814,807* $3,642,239 $238,558 $246,291
- --------------------------------------------------------------------------------------------------------------------------------
1995
Educational and Professional Publishing $1,235,578 $162,604 $1,573,601 $166,847 $154,560
Financial Services 786,786 230,934 562,742 29,331 19,960
Information and Media Services 912,919 115,069 620,114 33,086 18,048
- --------------------------------------------------------------------------------------------------------------------------------
Total operating segments 2,935,283 508,607 2,756,457 229,264 192,568
Corporate - (63,570) 300,710 2,144 326
Interest expense - net - (58,766) - - -
- --------------------------------------------------------------------------------------------------------------------------------
Total company $2,935,283 $386,271* $3,057,167 $231,408 $192,894
- --------------------------------------------------------------------------------------------------------------------------------
1994
Educational and Professional Publishing $1,162,157 $125,765 $1,567,224 $171,249 $144,414
Financial Services 745,480 217,212 553,240 29,027 34,613
Information and Media Services 853,232 108,343 564,530 28,550 15,358
- --------------------------------------------------------------------------------------------------------------------------------
Total operating segments 2,760,869 451,320 2,684,994 228,826 194,385
Corporate - (54,134) 275,291 1,200 1,060
Interest expense - net - (51,746) - - -
- --------------------------------------------------------------------------------------------------------------------------------
Total company $2,760,869 $345,440* $2,960,285 $230,026 $195,445
- --------------------------------------------------------------------------------------------------------------------------------
1996 United States $2,624,703 $853,061 $3,274,513
Foreign 449,994 71,475 367,726
- --------------------------------------------------------------------------------------------------------------------------------
1995 United States $2,528,553 $448,876 $2,707,536
Foreign 406,730 59,731 349,631
- --------------------------------------------------------------------------------------------------------------------------------
1994 United States $2,402,976 $408,846 $2,644,014
Foreign 357,893 42,474 316,271
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Income before taxes on income.
+ Includes amortization of goodwill and intangible assets and prepublication
costs.
++ Includes purchases of property and equipment and investments in
prepublication costs.
v Operating profit includes a pretax gain on exchange of Shepard's/McGraw-Hill
for the Times Mirror Higher Education Group of $418.7 million and a one-time
charge of $25 million for costs of integrating the company's College Division
with the acquired higher education business.
5. DEBT
At December 31, 1996, the company had short-term borrowings of $325 million,
primarily representing domestic commercial paper borrowings at an average
interest rate of 5.4% maturing at various dates during 1997. The commercial
paper borrowings are supported by the revolving credit agreement described
below, and $300 million has been classified as long-term.
The company has an $800 million revolving credit agreement with a group of
banks terminating in February 2002. Interest rates on amounts borrowed vary
depending upon the source and are based on either the Eurodollar or a bank base
rate, at the company's option. The credit agreement contains various warranties
and covenants that must be complied with on a continuing basis. The agreement
requires a commitment fee on the unused portion of the credit line. At December
31, 1996, there were no borrowings under the agreement.
In 1990, the company issued $250 million of 9.43% senior notes due September
1, 2000. The notes are unsecured obligations of the company and are not
redeemable by the company prior to the maturity date.
At December 31, 1995, the company had short-term borrowings of $371 million,
primarily representing domestic commercial paper borrowings at an average
interest rate of 6.0% maturing at various dates during 1996. The commercial
paper borrowings were supported by the revolving credit agreement noted above
and $300 million of the commercial paper borrowings was classified as long-term.
A summary of long-term debt at December 31 follows:
(in thousands) 1996 1995
- ------------------------------------------------------------
9.43% senior notes due 2000 $250,000 $250,000
Commercial paper supported
by bank revolving credit agreement 300,000 300,000
Other 6,850 7,365
- ------------------------------------------------------------
Total long-term debt $556,850 $557,365
- ------------------------------------------------------------
40
<PAGE> 32
The company paid interest on its debt totaling $50.1 million in 1996, $58.6
million in 1995 and $51.7 million in 1994.
The carrying amount of the company's commercial paper borrowings approximates
fair value. The fair value of the company's 9.43% senior notes and other
long-term debt at December 31, 1996 and 1995, totaling $256.9 million and $257.4
million, respectively, based on current borrowing rates for debt with similar
terms and maturities, is estimated to be $282.5 million and $294 million,
respectively.
6. INVESTMENT IN ROCK-MCGRAW, INC.
Rock-McGraw owns the company's headquarters building in New York City. It is
owned 45% by the company and 55% by Rockefeller Group, Inc.
The company currently occupies a significant portion of the rentable space.
The lease is for 30 years ending in the year 2002 and includes renewal options
for two additional 15-year periods. In 1996, the company paid Rock-McGraw gross
annual rentals of $18.8 million (including various escalation payments) for the
occupied space and $14.2 million for space that it has sublet. Over the lease
term, the company is recovering a portion of the rentals through its share of
earnings of Rock-McGraw.
A summary of significant financial information for Rock-McGraw follows:
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 63.7 $ 62.7 $ 61.8
- --------------------------------------------------------------
Net income 11.2 9.7 10.0
- --------------------------------------------------------------
Depreciation expense 6.5 6.4 6.4
- --------------------------------------------------------------
Total assets 208.8 200.7 198.0
- --------------------------------------------------------------
Mortgage payable 23.8 27.5 31.2
- --------------------------------------------------------------
Total liabilities $ 60.0 $ 63.0 $ 70.1
- --------------------------------------------------------------
</TABLE>
The building is financed by an 8 1/8%, 25-year mortgage repayable in
quarterly installments of $.9 million plus interest, with the balance of $18.3
million due at maturity in 1998.
7. TAXES ON INCOME
Income before taxes on income resulted from domestic operations (including
foreign branches) and foreign subsidiaries' operations as follows:
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Domestic operations $783.6 $356.1 $319.3
Foreign operations 31.2 30.2 26.1
- --------------------------------------------------------------
Total income before taxes $814.8 $386.3 $345.4
- --------------------------------------------------------------
</TABLE>
A reconciliation of the U.S. statutory tax rate to the company's effective
tax rate for financial reporting purposes follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
U.S. statutory rate 35.0% 35.0% 35.0%
Goodwill amortization 0.7 1.7 1.9
Effect of state and local
income taxes 3.7 5.5 6.1
Other - net (0.2) (1.0) (1.8)
- --------------------------------------------------------------
Effective tax rate 39.2% 41.2% 41.2%
- --------------------------------------------------------------
</TABLE>
The provision for taxes on income consists of the following:
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $281.4 $104.9 $ 75.8
Deferred (19.3) 11.9 28.5
- --------------------------------------------------------------
Total federal 262.1 116.8 104.3
- --------------------------------------------------------------
Foreign:
Current 11.8 7.3 8.8
Deferred (0.7) 2.3 (3.2)
- --------------------------------------------------------------
Total foreign 11.1 9.6 5.6
- --------------------------------------------------------------
State and local:
Current 48.8 28.0 20.9
Deferred (2.9) 4.7 11.5
- --------------------------------------------------------------
Total state and local 45.9 32.7 32.4
- --------------------------------------------------------------
Total provision for taxes $319.1 $159.1 $142.3
- --------------------------------------------------------------
</TABLE>
The principal temporary differences between the accounting for income and
expenses for financial reporting and income tax purposes as of December 31
follow:
<TABLE>
<CAPTION>
(in millions) 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Fixed assets and intangible
assets $ 138.8 $ 125.9
Prepaid pension and other
expenses 70.2 65.6
Unearned revenue 41.2 36.0
Reserves and accruals (152.7) (117.7)
Postretirement and
postemployment benefits (95.9) (95.1)
Other - net 42.3 58.7
- --------------------------------------------------------------
Deferred tax liability - net $ 43.9 $ 73.4
- --------------------------------------------------------------
</TABLE>
The company made net income tax payments totaling $170.6 million in 1996,
$111.4 million in 1995 and $83.9 million in 1994.
The company has not recorded deferred income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations. Undistributed earnings amounted to approximately $65
million at December 31, 1996, excluding amounts that, if remitted, generally
would not result in any additional U.S. income taxes because of available
foreign tax credits. If the earnings of such foreign subsidiaries were not
indefinitely reinvested, a deferred tax liability of approximately $17 million
would have been required.
41
<PAGE> 33
8. RENTAL EXPENSE AND LEASE OBLIGATIONS
Rental expense for property and equipment under all operating lease agreements
was as follows:
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Gross rental expense $107.1 $105.7 $109.1
Less: sublease revenue 28.5 26.1 26.4
- --------------------------------------------------------------
Net rental expense $ 78.6 $ 79.6 $ 82.7
- --------------------------------------------------------------
</TABLE>
The company is committed under lease arrangements covering property, computer
systems and office equipment. Certain lease arrangements, including the lease
for the company's headquarters building, contain escalation clauses covering
increased costs for real estate taxes and operating services.
Minimum rental commitments under existing noncancelable leases with a
remaining term of more than one year, including the company's headquarters
building referred to in Note 6, are shown in the following table. The annual
rental commitments for real estate through the year 2002 have been reduced by
approximately $19 million of revenue from existing noncancelable subleases.
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------
<C> <C>
1997 $ 55.8
1998 46.5
1999 36.0
2000 25.1
2001 24.3
2002 and beyond 71.2
- --------------------------------------------------------------
Total $258.9
- --------------------------------------------------------------
</TABLE>
9. CAPITAL STOCK
The $1.20 convertible preference stock may be converted into common stock at the
option of the shareholder at the rate of one share of preference stock for 6.6
shares of common stock.
The number of common shares reserved for issuance for employee stock plan
awards was 6,350,994 at December 31, 1996 and 7,208,178 at December 31, 1995.
Under the Director Deferred Stock Ownership Plan and its predecessor plan, the
Directors' Stock Payment Plan, 160,000 common shares were reserved for issuance
at December 31, 1996 and 37,048 at December 31, 1995.
On January 31, 1996, the Board of Directors approved a stock repurchase
program authorizing the company to purchase up to four million shares of the
company's common stock. Through December 31, 1996, the company had repurchased
1,362,900 shares of common stock at a total cost of $63.3 million. The
repurchased shares may be used for general corporate purposes, including the
issuance of shares for the exercise of stock options.
Two million shares of preferred stock, par value $1 per share, are
authorized; none have been issued. 600,000 shares have been reserved for
issuance under a Preferred Share Purchase Rights Plan adopted by the company's
Board of Directors on October 25, 1989. Under the Plan, one right for each share
of common stock outstanding was granted to shareholders of record on November 6,
1989. Each right entitles shareholders to buy a 1/200th interest in a share of a
series of preferred stock at an exercise price of $137.50 per right. The rights
will not be exercisable or transferable until a party either acquires beneficial
ownership of 20% or more of the company's common shares or announces a tender
offer for 20% or more of the common shares. In the event the company is a party
to a merger, reverse merger or other business combination, each right will
entitle its holder to purchase, at the exercise price of the right, a number of
shares of common stock of the surviving company having a market value of two
times the exercise price of the right. The Plan also gives the Board of
Directors the option to exchange one share of common stock of the company for
each right (not owned by the acquirer) after an acquirer holds 20% but less than
50% of the outstanding shares of common stock. The rights are redeemable at
one-half cent per right until a party acquires 20% or more of the company's
common shares, and expire November 6, 1999.
10. STOCK PLAN AWARDS
The company applies the provisions of Accounting Principles Board Opinion (APBO)
No. 25, Accounting for Stock Issued to Employees, in accounting for its
stock-based awards. Accordingly, no compensation cost has been recognized for
its stock option plans and the compensation cost that has been recognized for
its restricted stock performance awards continues under APBO No. 25.
The company has three stock option plans: the 1993 and 1987 Key Employee
Stock Incentive Plans and the 1983 Stock Option Plan. The 1983 Plan, which
provided for the granting of incentive stock options and nonqualified stock
options to purchase 2,400,000 shares of the company's common stock, expired
January 25, 1993 except as to options then outstanding.
The 1993 and 1987 Key Employee Stock Incentive
Plans provide for the granting of incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock awards, deferred stock
(applicable to the 1987 Plan only) or other stock-based awards to purchase a
total of 9,200,000 shares of the company's common stock - 4,600,000 shares under
each plan.
Stock options may not be granted at a price less than the fair market value
of the company's common stock at date of grant, vest in two years in equal
annual installments and have a maximum term of ten years.
Had the company elected to apply the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
net income would have been reduced by $2.9 million, or $.03 per share, for 1996
and $1.8 million, or $.02 per share, for 1995 after accounting for stock-based
compensation effective for awards made January 1, 1995 and thereafter.
42
<PAGE> 34
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for 1996
and 1995, respectively: risk-free interest rate of 5.4% and 7.5%; dividend yield
of 3.0% and 3.4%; volatility of 15% for both years and expected life of five
years for both years.
A summary of the status of the company's stock option plans as of December 31
and activity during the year follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
(in thousands of shares) Shares price Shares price
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 3,108 $31.67 3,034 $30.86
Options granted 988 43.48 878 33.57
Options exercised (654) 30.82 (698) 29.79
Options cancelled and expired (142) 39.06 (106) 34.00
- ---------------------------------------------------------------------------
Outstanding at end of year 3,300 $34.88 3,108 $31.67
- ---------------------------------------------------------------------------
Exercisable at end of year 2,076 $31.51 1,955 $30.48
- ---------------------------------------------------------------------------
Weighted average fair value of
options granted during
the year $ 6.92 $ 6.38
- ---------------------------------------------------------------------------
</TABLE>
A summary of information about stock options outstanding and options
exercisable at December 31, 1996 follows:
<TABLE>
<CAPTION>
Options Options
(in thousands of shares) Outstanding Exercisable
- ---------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise prices Shares term price Shares price
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$24.84 to $34.87 2,398 5.8 years $31.64 2,041 $31.30
$42.37 to $48.25 902 8.9 years 43.48 35 43.41
- ---------------------------------------------------------------------------
$24.84 to $48.25 3,300 6.7 years $34.88 2,076 $31.51
- ---------------------------------------------------------------------------
</TABLE>
The 1993 Directors' Stock Payment Plan, which required that 20% of eligible
Directors' annual retainer be paid in common stock beginning in 1994, was
terminated June 30, 1996. The Plan provided for the issuance of a total of
40,000 shares of stock.
The Director Deferred Stock Ownership Plan, which was approved by the
shareholders in April 1996, replaced the 1993 Directors' Stock Payment Plan and
the Directors' Retirement Plan effective July 1, 1996. Under this Plan, a total
of 160,000 shares of common stock was reserved for issuance on July 1, 1996 and
may be credited to deferred stock accounts for eligible Directors. In general,
the Plan requires that 50% of eligible Directors' annual compensation plus
dividend equivalents be credited to deferred stock accounts. Each Director may
also elect to defer all or a portion of the remaining compensation and have an
equivalent number of shares credited to the deferred stock account. Recipients
under this Plan are not required to provide consideration to the company other
than rendering service. Shares will be delivered as of the date a recipient
ceases to be a member of the Board of Directors or within five years thereafter,
if so elected. The Plan will remain in effect until terminated by the Board of
Directors or until no shares of stock remain available under the Plan.
Restricted stock performance awards have been granted under the 1993 and 1987
Plans. These restricted stock awards will vest only if the company achieves
certain financial goals over various vesting periods. Recipients are not
required to provide consideration to the company other than rendering service
and have the right to vote the shares and to receive dividends.
Under SFAS No. 123, compensation cost is recognized for the fair value of the
restricted stock awarded, which is its market value without restrictions at the
date of grant. For performance incentive shares, adjustments are made for
achievement of goals but not for subsequent changes in the market value of the
stock.
A total of 289,358 restricted shares was issued at an average market value of
$43.79 in 1996. In 1995, 282,468 restricted shares were issued at an average
market value of $33.68. The awards are recorded at the market value on the date
of grant. Initially the total market value of the shares is treated as unearned
compensation and is charged to expense over the respective vesting periods.
Under APBO No. 25, for performance incentive shares, adjustments are also made
to expense for changes in market value and achievement of financial goals.
Unearned compensation charged to expense was $8.5 million for 1996, $7.2 million
for 1995 and $5.2 million for 1994. Restricted shares outstanding at the end of
the year were 545,679 in 1996, 539,356 in 1995 and 549,894 shares in 1994.
11. RETIREMENT PLANS
The company and its subsidiaries have a number of defined benefit pension plans
and defined contribution plans covering substantially all employees. The
company's primary pension plan is a noncontributory plan under which benefits
are based on employee career employment compensation. The company also has a
voluntary deferred compensation plan under which the company matches employee
contributions up to certain levels of compensation and an Employee Retirement
Account Plan under which the company contributes a percentage of eligible
employees' compensation to the employees' accounts.
For purposes of determining annual pension cost, prior service costs and the
net asset at January 1, 1986 are being amortized straight-line over the average
remaining service period of employees expected to receive benefits. The assumed
return on plan assets of 9.5% is based on a calculated market-related value of
assets, which recognizes changes in market value over five years.
43
<PAGE> 35
A summary of pension cost for the company's domestic defined benefit plans
follows:
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 16.9 $ 13.2 $ 16.4
Interest cost 30.8 28.5 27.7
Return on assets:
Actual return (103.4) (122.2) (7.4)
Deferred 52.9 75.7 (37.5)
- --------------------------------------------------------------
Recognized (50.5) (46.5) (44.9)
Amortization of net asset
at 1/1/86 (3.0) (6.1) (6.1)
Net amortization and
deferral 0.9 (2.1) 1.2
- --------------------------------------------------------------
Net negative pension cost $ (4.9) $ (13.0) $ (5.7)
- --------------------------------------------------------------
Assumed rates - January 1:
Discount rate (interest cost) 7 1/4% 8 1/2% 7 1/4%
Compensation increase factor 5 1/2 5 1/2 6
Return on assets 9 1/2 9 1/2 9 1/2
- --------------------------------------------------------------
</TABLE>
The company also has an unfunded supplemental benefits plan to provide senior
management with supplemental retirement, disability and death benefits.
Supplemental retirement benefits are based on final monthly earnings. Pension
cost was $2.4 million for 1996, $2.0 million for 1995 and $2.4 million for 1994.
The accumulated benefit obligation as of December 31, 1996 was $17.0 million,
including vested benefits of $16.0 million, and the projected benefit obligation
was $18.1 million.
Total retirement plans cost was $40.0 million for 1996, $31.3 million for
1995 and $36.7 million for 1994.
The funded status of the domestic defined benefit plans as of December 31
follows:
<TABLE>
<CAPTION>
(in millions) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of pension benefits:
Vested benefits $(376.5) $(362.5)
Nonvested benefits (17.4) (19.4)
- ----------------------------------------------------------------------
Accumulated benefit obligation (393.9) (381.9)
Additional amount related to projected
compensation increases (30.6) (28.1)
- ----------------------------------------------------------------------
Projected benefit obligation (424.5) (410.0)
Plan assets at market value -
primarily listed stocks and
U.S. government obligations 665.7 585.4
- ----------------------------------------------------------------------
Excess of assets over projected
benefit obligation 241.2 175.4
Unrecognized net asset at 1/1/86 (1.6) (4.6)
Unrecognized prior service cost 6.6 7.6
Unrecognized net gain (141.7) (80.2)
- ----------------------------------------------------------------------
Prepaid pension cost at December 31 $ 104.5 $ 98.2
- ----------------------------------------------------------------------
Assumed rates - December 31:
Discount rate 7 3/4% 7 1/4%
Compensation increase factor 5 1/2 5 1/2
- ----------------------------------------------------------------------
</TABLE>
The company has several foreign pension plans that do not determine the
accumulated benefits or net assets available for benefits as disclosed above.
The amounts involved are not material and are therefore not included.
12. POSTRETIREMENT HEALTHCARE AND OTHER BENEFITS
The company and some of its domestic subsidiaries provide certain medical,
dental and life insurance benefits for retired employees and eligible
dependents. The medical and dental plans are contributory while the life
insurance plan is noncontributory. The company currently does not fund any of
these plans.
Postretirement benefits cost was $8.3 million in 1996, $7.1 million in 1995
and $9.3 million in 1994. A summary of the components of the cost in 1996, 1995
and 1994 follows:
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2.5 $ 2.0 $ 2.2
Interest cost 10.0 10.4 10.6
Net amortization and deferral (4.2) (5.3) (3.5)
- --------------------------------------------------------------
Postretirement benefits cost $ 8.3 $ 7.1 $ 9.3
- --------------------------------------------------------------
</TABLE>
A summary of the components of the unfunded postretirement benefit obligation
as of December 31 follows:
<TABLE>
<CAPTION>
(in millions) 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Retirees $ (98.0) $(103.8)
Fully eligible plan participants (14.0) (14.9)
Other active plan participants (23.0) (22.1)
- --------------------------------------------------------------
Total accumulated postretirement
benefit obligation (135.0) (140.8)
Unrecognized net gain (44.2) (37.2)
Unrecognized prior service cost (19.5) (22.1)
- --------------------------------------------------------------
Accrued postretirement benefit
obligation $(198.7) $(200.1)
- --------------------------------------------------------------
</TABLE>
The assumed weighted average healthcare cost trend rate ranges from 8.0% in
1997 decreasing ratably to 5.5% in 2002 and remains at that level thereafter.
Increasing the assumed healthcare cost trend rate by one percentage point in
each future year would increase the accumulated postretirement benefit
obligation at December 31, 1996 by $10.5 million and 1996 benefit expense by
$1.0 million. The weighted average discount rate used to measure expense was
7.25% in 1996 and 8.5% in 1995; the rate used to measure the accumulated
postretirement benefit obligation was 7.75% in 1996 and 7.25% in 1995.
44
<PAGE> 36
REPORT OF MANAGEMENT
TO THE SHAREHOLDERS OF
THE MCGRAW-HILL COMPANIES, INC.
The financial statements in this report were prepared by the management of The
McGraw-Hill Companies, Inc., which is responsible for their integrity and
objectivity.
These statements, prepared in conformity with generally accepted accounting
principles and including amounts based on management's best estimates and
judgments, present fairly The McGraw-Hill Companies' financial condition and the
results of the company's operations. Other financial information given in this
report is consistent with these statements.
The McGraw-Hill Companies' management maintains a system of internal
accounting controls designed to provide reasonable assurance that the financial
records accurately reflect the company's operations and that the company's
assets are protected against loss. Consistent with the concept of reasonable
assurance, the company recognizes that the relative costs of these controls
should not exceed the expected benefits in maintaining these controls. It
further assures the quality of the financial records in several ways: a program
of internal audits, the careful selection and training of management personnel,
maintaining an organizational structure that provides an appropriate division of
financial responsibilities, and communicating financial and other relevant
policies throughout the corporation. The financial statements in this report
have been audited by Ernst & Young LLP, independent auditors, in accordance with
generally accepted auditing standards. The independent auditors were retained to
express an opinion on the financial statements, which appears in the next
column.
The McGraw-Hill Companies' Board of Directors, through its Audit Committee,
composed entirely of outside directors, is responsible for reviewing and
monitoring the company's financial reporting and accounting practices. The Audit
Committee meets periodically with management, the company's internal auditors
and the independent auditors to ensure that each group is carrying out its
respective responsibilities. In addition, the independent auditors have full and
free access to the Audit Committee and meet with it with no representatives from
management present.
/s/ Joseph L. Dionne
Joseph L. Dionne
Chairman and Chief Executive Officer
/s/ Robert J. Bahash
Robert J. Bahash
Executive Vice President and Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF THE MCGRAW-HILL COMPANIES, INC.
We have audited the accompanying consolidated balance sheets of The McGraw-Hill
Companies, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of The McGraw-Hill Companies, Inc. at December 31, 1996 and
1995, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/Ernst and Young LLP
New York, New York
January 28, 1997
45
<PAGE> 37
ELEVEN-YEAR FINANCIAL REVIEW
<TABLE>
<CAPTION>
(in thousands, except per-share data) 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS BY SEGMENT AND INCOME STATISTICS
OPERATING REVENUE
Educational and Professional Publishing $1,277,895 $1,235,578 $1,162,157 $ 667,444
Financial Services 855,925 786,786 745,480 696,933
Information and Media Services 940,877 912,919 853,232 831,076
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUE 3,074,697 2,935,283 2,760,869 2,195,453
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT(e)
Educational and Professional Publishing(a) 151,921 162,604 125,765 49,374
Financial Services 262,085 230,934 217,212 200,865
Information and Media Services 116,799 115,069 108,343 102,344
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING PROFIT 530,805 508,607 451,320 352,583
Share of profit of Macmillan/McGraw-Hill
School Publishing Company (c,e) -- -- -- 28,376
Unusual charges (a,d and e) (25,000) -- -- (229,800)
Gain on exchange of Shepard's/McGraw-Hill (a) 418,731 -- -- --
Gain on sale of interest in Nikkei/McGraw-Hill (f) -- -- -- --
General corporate (expense)/income (e and g) (62,073) (63,570) (54,134) (48,538)
Interest (expense)/income - net (47,656) (58,766) (51,746) (36,342)
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME (b) 814,807 386,271 345,440 66,279
Provision for taxes on income 319,074 159,144 142,321 54,838
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE ADJUSTMENT 495,733 227,127 203,119 11,441
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative effect on prior years of changes in accounting (h) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 495,733 $ 227,127 $ 203,119 $ 11,441
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Income before cumulative adjustment $ 4.96 $ 2.28 $ 2.05 $ 0.12
Cumulative adjustment (h) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 4.96 $ 2.28 $ 2.05 $ 0.12
Shares used to calculate earnings per share 99,997 99,752 98,998 98,378
Dividends per share of common stock $ 1.32 $ 1.20 $ 1.16 $ 1.14
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING STATISTICS
Return on average shareholders' equity 41.4% 23.3% 23.4% 1.3%
Income before taxes as a percent of revenue 26.5 13.2 12.5 3.0
Income before cumulative adjustment as a percent of revenue 16.1 7.7 7.4 0.5
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $ 130,920 $ 193,346 $ 130,272 $ 62,887
Total assets 3,642,239 3,057,167 2,960,285 3,043,232
Total debt 581,368 628,664 762,805 928,710
Shareholders' equity 1,361,118 1,035,066 913,052 823,008
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 16,220 15,452 15,339 15,661
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 1996 operating profit excludes a net gain on the exchange of Shepard's/
McGraw-Hill for the Times Mirror Higher Education Group comprising a $418.7
million gain on the exchange and a $25 million one-time charge for integration
costs.
(b) 1995 income before taxes on income reflects a $26.8 million provision
for best practice initiatives and a $23.8 million gain on sale of the topical
publishing division of Shepard's/McGraw-Hill.
(c) Reflects The McGraw-Hill Companies' share of profit of Macmillan/
McGraw-Hill School Publishing Company through September 30, 1993. Macmillan/
McGraw-Hill results are consolidated effective October 1, 1993 in the
Educational and Professional Publishing segment.
(d) 1993 amount reflects unusual charges in connection with the acquisition of
the additional 50% interest in Macmillan/McGraw-Hill.
(e) 1989 and 1988 operating profit excludes unusual charges of $220 million and
$149.6 million, respectively, as follows:
<TABLE>
<CAPTION>
1989 1988
- -----------------------------------------------------------------
<S> <C> <C>
Educational and Professional Publishing $33,140 $20,534
Financial Services 94,899 67,155
Information and Media Services 15,554 29,009
- -------------------------------------------------------------------
Total operating segments 143,593 116,698
Macmillan/McGraw-Hill joint venture units - 7,866
Corporate expense 76,407 25,000
- -------------------------------------------------------------------
Total company $220,000 $149,564
- -------------------------------------------------------------------
</TABLE>
46
<PAGE> 38
<TABLE>
<CAPTION>
(in thousands, except per-share data) 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS BY SEGMENT AND INCOME STATISTICS
OPERATING REVENUE
Educational and Professional Publishing $ 567,363 $ 532,438 $ 534,724 $ 483,666
Financial Services 617,555 555,820 505,641 432,314
Information and Media Services 865,573 854,754 898,273 872,983
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUE 2,050,491 1,943,012 1,938,638 1,788,963
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT(e)
Educational and Professional Publishing(a) 62,746 48,928 70,196 44,107
Financial Services 168,394 143,056 123,999 85,081
Information and Media Services 113,198 120,242 170,788 192,254
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING PROFIT 344,338 312,226 364,983 321,442
Share of profit of Macmillan/McGraw-Hill
School Publishing Company (c,e) 11,280 27,483 21,601 13,688
Unusual charges (a,d and e) -- -- -- (220,000)
Gain on exchange of Shepard's/McGraw-Hill (a) -- -- -- --
Gain on sale of interest in Nikkei/McGraw-Hill (f) -- -- -- --
General corporate (expense)/income (e and g) (50,774) (34,415) (28,370) 6,546
Interest (expense)/income - net (37,557) (46,987) (55,627) (35,038)
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME (b) 267,287 258,307 302,587 86,638
Provision for taxes on income 114,132 110,297 130,112 46,847
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE ADJUSTMENT 153,155 148,010 172,475 39,791
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative effect on prior years of changes in accounting (h) (124,587) -- -- 8,000
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 28,568 $ 148,010 $ 172,475 $ 47,791
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Income before cumulative adjustment $ 1.57 $ 1.52 $ 1.77 $ 0.41
Cumulative adjustment (h) (1.28) -- -- 0.08
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.29 $ 1.52 $ 1.77 $ 0.49
Shares used to calculate earnings per share 97,778 97,642 97,638 97,450
Dividends per share of common stock $ 1.12 $ 1.10 $ 1.08 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING STATISTICS
Return on average shareholders' equity 3.0% 15.2% 18.8% 5.3%
Income before taxes as a percent of revenue 13.0 13.3 15.6 4.8
Income before cumulative adjustment as a percent of revenue 7.5 7.6 8.9 2.7
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $ (19,596) $ 29,543 $ 44,193 $ 22,743
Total assets 2,473,021 2,482,679 2,501,130 2,181,718
Total debt 482,991 568,159 622,372 503,434
Shareholders' equity 908,760 998,975 954,260 880,154
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 13,393 13,539 13,868 13,741
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(in thousands, except per-share data) 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING RESULTS BY SEGMENT AND INCOME STATISTICS
OPERATING REVENUE
Educational and Professional Publishing $ 437,590 $ 408,252 $ 327,903
Financial Services 399,242 390,131 357,998
Information and Media Services 836,734 801,352 741,891
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUE 1,673,566 1,599,735 1,427,792
- ---------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT(e)
Educational and Professional Publishing(a) 48,185 30,464 37,109
Financial Services 81,765 81,557 81,558
Information and Media Services 175,384 176,564 166,679
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING PROFIT 305,334 288,585 285,346
Share of profit of Macmillan/McGraw-Hill
School Publishing Company (c,e) 2,349 11,585 30,037
Unusual charges (a,d and e) (149,564) -- --
Gain on exchange of Shepard's/McGraw-Hill (a) -- -- --
Gain on sale of interest in Nikkei/McGraw-Hill (f) 221,783 -- --
General corporate (expense)/income (e and g) 5,005 3,418 (23,519)
Interest (expense)/income - net (5,290) (4,506) 3,915
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME (b) 379,617 299,082 295,779
Provision for taxes on income 194,112 134,288 141,770
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE ADJUSTMENT 185,505 164,794 154,009
- ---------------------------------------------------------------------------------------------------------------------
Cumulative effect on prior years of changes in accounting (h) -- -- --
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 185,505 $ 164,794 $ 154,009
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Income before cumulative adjustment $ 1.92 $ 1.64 $ 1.52
Cumulative adjustment (h) -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 1.92 $ 1.64 $ 1.52
Shares used to calculate earnings per share 96,950 100,820 101,302
Dividends per share of common stock $ 0.92 $ 0.84 $ 0.76
- ---------------------------------------------------------------------------------------------------------------------
OPERATING STATISTICS
Return on average shareholders' equity 21.2% 19.5% 18.8%
Income before taxes as a percent of revenue 22.7 18.7 20.7
Income before cumulative adjustment as a percent of revenue 11.1 10.3 10.8
- ---------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $ (72,023) $ (66,214) $ 65,641
Total assets 1,705,547 1,602,181 1,431,888
Total debt 148,434 186,476 56,403
Shareholders' equity 922,803 825,265 861,418
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 13,891 13,879 13,257
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(f) In May 1988, the company sold its 49% interest in Nikkei/McGraw-Hill, Inc.,
a magazine publishing operation in Japan, for $283.1 million. The gain on sale
was $221.8 million ($109.8 million after taxes).
(g) General corporate income for 1989 includes gains on dispositions of
businesses totaling $48.8 million. 1988 includes gains on dispositions of $26.5
million and 1987 includes gains from the settlement of a portion of the
company's pension obligation of $20.1 million.
(h) The cumulative adjustment in 1992 reflects the adoption of the provisions of
Statement of Financial Accounting Standards (SFAS) No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 112,
Employers' Accounting for Postemployment Benefits. In 1989, the company
recognized the cumulative effect of a change in accounting for income taxes
under SFAS No. 96.
47
<PAGE> 39
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth Total
(in thousands, except per-share data) quarter quarter quarter quarter year
- ---------------------------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C>
Operating revenue $583,851 $710,934 $949,009 $830,903 $3,074,697
Income before taxes (Note a) 27,259 96,240 192,773 498,535 814,807
Net income (Note a) 16,192 57,166 114,508 307,867 495,733
Earnings per share (Notes a and b) 0.16 0.57 1.15 3.08 4.96
- ---------------------------------------------------------------------------------------------------------------------------
1995
Operating revenue $568,548 $712,782 $904,351 $749,602 $2,935,283
Income before taxes 23,727 89,864 179,970 92,710 386,271
Net income 13,951 52,841 105,822 54,513 227,127
Earnings per share (Note b) 0.14 0.53 1.06 0.55 2.28
- ---------------------------------------------------------------------------------------------------------------------------
1994
Operating revenue $559,774 $648,279 $855,517 $697,299 $2,760,869
Income before taxes 25,454 81,702 153,338 84,946 345,440
Net income 14,967 48,041 90,162 49,949 203,119
Earnings per share (Note b) 0.15 0.49 0.91 0.50 2.05
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The fourth quarter of 1996 includes a gain on exchange of
Shepard's/McGraw-Hill for the Times Mirror Higher Education Group of $418.7
million ($260.5 million after taxes, or $2.61 per share) and a one-time charge
of $25 million ($14.9 million after taxes, or 15 cents per share) for costs of
integrating the company's College Division with the acquired higher education
business.
(b) Earnings per share reflect a two-for-one stock split approved by
the company's Board of Directors on January 31, 1996. All prior periods have
been restated to reflect the split.
HIGH AND LOW SALES PRICES OF THE MCGRAW-HILL COMPANIES COMMON STOCK ON THE NEW
YORK STOCK EXCHANGE* (NOTE a)
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
First quarter $46 1/4 - 42 3/4 $36 5/8 - 31 7/8 $36 1/2 - 32 1/4
Second quarter 49 1/4 - 42 1/8 38 7/8 - 35 5/8 35 - 31 1/4
Third quarter 45 7/8 - 37 1/4 42 3/8 - 37 5/8 38 5/8 - 33 1/8
Fourth quarter 48 1/4 - 42 1/2 43 7/8 - 39 1/2 37 3/8 - 32
- -------------------------------------------------------------------------
Year 49 1/4 - 37 1/4 43 7/8 - 31 7/8 38 5/8 - 31 1/4
- -------------------------------------------------------------------------
</TABLE>
*The New York Stock Exchange is the principal market on which the company's
shares are traded.
(a) High and low sales prices were adjusted to reflect the two-for-one stock
split approved by the company's Board of Directors on January 31, 1996. All
prior periods have been restated to reflect the split.
48
<PAGE> 1
Exhibit (21)
THE McGRAW-HILL COMPANIES, INC.
Subsidiaries of Registrant
Listed below are all the subsidiaries of Registrant, except certain inactive
subsidiaries and certain other McGraw-Hill's subsidiaries which are not included
in the listing because considered in the aggregate they do not constitute a
significant subsidiary as of the end of the year covered by this Report.
<TABLE>
<CAPTION>
State or Percentage
Jurisdiction of Voting
of Securities
Incorporation Owned
------------- ----------
<S> <C> <C>
The McGraw-Hill Companies, Inc. New York Registrant
CM Research, Inc. New York 100
Capitol Radio Engineering
Institute, Inc. Delaware 100
*National Radio Institute Delaware 100
Computer and Communications
Information Group, Inc. New Jersey l00
DRI Europe, Inc. Delaware 100
International Advertising/
McGraw-Hill, Inc. Delaware 100
J.J. Kenny Company, Inc. New York 100
*J.J. Kenny Drake, Inc. New York 100
*Kenny Services, Inc. New York 100
*Liberty Brokerage Investment Corp. Delaware 25
McGraw-Hill Broadcasting
Company, Inc. New York 100
McGraw-Hill Capital Corporation Delaware 100
McGraw-Hill Capital, Inc. New York l00
*International Valuation
Services, Inc. Delaware 40
McGraw-Hill Financial Publications, Inc. Delaware 100
McGraw-Hill Interamericana, Inc. New York 100
McGraw-Hill International
Enterprises, Inc. New York 100
*McGraw-Hill Korea, Inc. Korea 100
*McGraw-Hill (Malaysia) Sdn.Bhd Malaysia 100
McGraw-Hill News Bureaus, Inc. New York 100
McGraw-Hill Publications Overseas
Corporation New York 100
McGraw-Hill Real Estate, Inc. New York 100
MMS International Nevada 100
Money Market Directories, Inc. New York l00
Rock-McGraw, Inc. New York 45
S&P ComStock, Inc. New York 100
Standard & Poor's International
Ratings, Ltd. New York 100
Standard & Poor's Investment Advisory
Services, Inc. Delaware 100
Standard & Poor's Ltd. Delaware 100
Standard & Poor's Securities, Inc. Delaware l00
</TABLE>
-71-
<PAGE> 2
<TABLE>
<CAPTION>
State or Percentage
Jurisdiction of Voting
of Securities
Incorporation Owned
------------- ----------
<S> <C> <C>
Tower Group International, Inc. New York 100
*Tower Group International Canada Inc. Canada 100
Columbia Administration Software
Publishing Corporation British Columbia 100
*Columbia Computing Services, Ltd. Canada 100
Editora McGraw-Hill de
Portugal, Ltda. Portugal 100
Editorial Interamericana, S.A. Colombia 100
Editoriales Pedagogicas
Associadas, S.A. Guatemala 100
McGraw-Hill Book Company Australia
Pty. Limited Australia 100
*McGraw-Hill Book Company
New Zealand, Pty. Limited New Zealand 100
*Standard & Poor's (Australia)
Pty. Ltd. Australia 100
McGraw-Hill Data Services -
Ireland, Ltd. Ireland 100
McGraw-Hill Holdings (U.K.) Limited Great Britain 100
*McGraw-Hill International
(U.K.) Limited Great Britain 100
McGraw-Hill Information Systems
Company of Canada Limited Ontario, Canada 100
McGraw-Hill/Interamericana
de Chile Limitada Chile 100
McGraw-Hill/Interamericana
de Espana, S.A. Spain 100
*Standard & Poor's Espana, S.A. Spain 100
McGraw-Hill/Interamericana de Venezuela
S.A. Venezuela 100
McGraw-Hill/Interamericana Editores,
S.A. de C.V. Mexico 100
*Ediciones Pedagogicas, S.A. de C.V. Mexico 100
McGraw-Hill/Interamericana, S.A. Panama 100
*Editora McGraw-Hill de Espana S.A. Panama 100
McGraw-Hill Libri Italia Italy 100
McGraw-Hill Ryerson Limited Ontario, Canada 70
Medical China Publishing Limited Hong Kong 25
MHFSCO, Ltd. U.S. Virgin Islands 100
Science Research Associates, Pty., Ltd. Australia 100
Science Research Associates, Limited United Kingdom 100
Standard & Poor's - ADEF France 100
Standard & Poor's International, S.A. Belgium 100
Standard & Poor's - Nordisk Rating AB Sweden 100
Standard & Poor's, S.A. de C.V. Mexico 100
Tata McGraw-Hill Publishing Company
Private Limited India 66
</TABLE>
*Subsidiary of a subsidiary.
-72-
<PAGE> 1
Exhibit (23)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on Form 10-K
of The McGraw-Hill Companies, Inc. ("Company") of our report dated January 28,
1997, included in the 1996 Annual Report to Shareholders of The McGraw-Hill
Companies, Inc.
Our audits also included the consolidated financial statement schedule of The
McGraw-Hill Companies, Inc. listed in Item 14 (a). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the consolidated financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
on Form S-3 (No. 33-33667) pertaining to the Debt Securities of The McGraw-Hill
Companies, Inc. and in the Registration Statements on Form S-8 pertaining to the
1983 Stock Option Plan for Officers and Key Employees (No. 2-84058), the 1987
Key Employee Stock Incentive Plan (No. 33-22344), the 1993 Key Employee Stock
Incentive Plan (No. 33-49743), the Director Deferred Stock Ownership Plan (No.
33-06871) and The Savings Incentive Plan of McGraw-Hill, Inc. and Its
Subsidiaries, The Employee Retirement Account Plan of McGraw-Hill, Inc. and Its
Subsidiaries, The Standard & Poor's Savings Incentive Plan for Represented
Employees, The Standard & Poor's Employee Retirement Account Plan for
Represented Employees, The Employees' Investment Plan of McGraw-Hill
Broadcasting Company, Inc. and Its Subsidiaries (No. 33-50856) and in the
related prospectuses of our report dated January 28, 1997 with respect to the
consolidated financial statements incorporated therein by reference, and our
report included above with respect to the consolidated financial statement
schedule included in this Annual Report (Form 10-K) of The McGraw-Hill
Companies, Inc.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
- --------------------------
New York, New York
March 26, 1997
-73-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,430
<SECURITIES> 0
<RECEIVABLES> 1,041,726
<ALLOWANCES> 162,260
<INVENTORY> 273,158
<CURRENT-ASSETS> 1,349,583
<PP&E> 835,680
<DEPRECIATION> 524,187
<TOTAL-ASSETS> 3,642,239
<CURRENT-LIABILITIES> 1,218,663
<BONDS> 0
14
0
<COMMON> 102,919
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,642,239
<SALES> 3,074,697
<TOTAL-REVENUES> 3,074,697
<CGS> 2,651,689
<TOTAL-COSTS> 2,651,689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 65,116
<INTEREST-EXPENSE> 47,656
<INCOME-PRETAX> 814,807
<INCOME-TAX> 319,074
<INCOME-CONTINUING> 495,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 495,733
<EPS-PRIMARY> 4.96
<EPS-DILUTED> 4.96
</TABLE>
<PAGE> 1
THE McGRAW-HILL COMPANIES, INC.
SCHEDULE II - RESERVES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
(Thousands of dollars)
<TABLE>
<CAPTION>
Balance at Additions Balance
beginning charged at end
of year to income Deductions Other of year
-------- -------- -------- -------- --------
(A) (B)
<S> <C> <C> <C> <C> <C>
Year ended 12/31/96
Allowance for doubtful
accounts $ 79,980 $ 65,116 $ 67,237 $ 8,106 $ 85,965
Allowance for returns 47,222 8,296 20,777 76,295
-------- -------- -------- -------- --------
$127,202 $ 73,412 $ 67,237 $ 28,883 $162,260
======== ======== ======== ======== ========
Year ended 12/31/95
Allowance for doubtful
accounts $ 78,732 $ 65,385 $ 64,137 $ $ 79,980
Allowance for returns 44,078 3,144 47,222
-------- -------- -------- -------- --------
$122,810 $ 68,529 $ 64,137 $ $127,202
======== ======== ======== ======== ========
Year ended 12/31/94
Allowance for doubtful
accounts $ 79,461 $ 67,508 $ 68,237 $ $ 78,732
Allowance for returns 40,912 3,166 44,078
-------- -------- -------- -------- --------
$120,373 $ 70,674 $ 68,237 $ $122,810
======== ======== ======== ======== ========
</TABLE>
(A) Accounts written off, less recoveries.
(B) Reserves acquired in connection with the purchase of the Times Mirror
Higher Education Group.
-75-
