UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
------------------
Not Applicable
- ---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES [X] NO[ ]
On April 30, 1998 there were approximately 99.5 million shares of
common stock (par value $1.00 per share) outstanding.
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
TABLE OF CONTENTS
-----------------
Page Number
-----------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
-------
Consolidated Statement of Income for
the three months ended March 31, 1998 and 1997 3
Consolidated Statement of Comprehensive Income for
the three months ended March 31, 1998 and 1997 4
Consolidated Balance Sheet at March 31, 1998,
December 31, 1997 and March 31, 1997 5-6
Consolidated Statement of Cash Flows for the three
months ended March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Operating
------- Results and Financial Condition 12-15
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 16
-------
Item 6. Exhibits and Reports on Form 8-K 16-19
-------
-2-
<PAGE>
PART I
Financial Information
Item 1. Financial Statements
--------------------
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
--------------------------------
Three Months Ended March 31, 1998 and 1997
------------------------------------------
<CAPTION>
1998 1997
---------- ----------
(In thousands, except
per-share data)
<S> <C> <C>
Operating revenue $ 703,420 $ 652,935
Expenses:
Operating 358,575 325,596
Selling and general 252,952 246,445
Depreciation and amortization 51,606 48,159
---------- ----------
Total expenses 663,133 620,200
Other income - net 4,829 3,626
---------- ----------
Income from operations 45,116 36,361
Interest expense - net 12,102 11,384
---------- ----------
Income before taxes on income 33,014 24,977
Provision for taxes on income 12,875 9,991
---------- ----------
Net income $ 20,139 $ 14,986
========== ==========
Earnings per common share:
Basic $ 0.20 $ 0.15
========== ==========
Diluted $ 0.20 $ 0.15
========== ==========
Average number of common shares outstanding:
Basic 98,889 99,293
========== ==========
Diluted 99,791 99,897
========== ==========
</TABLE>
-3-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Comprehensive Income
----------------------------------------------
Three Months Ended March 31, 1998 and 1997
------------------------------------------
<CAPTION>
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Net income $ 20,139 $ 14,986
Other comprehensive income, net of tax:
Foreign currency translation adjustments (1,687) (8,738)
---------- ----------
Total other comprehensive income (1,687) (8,738)
---------- ----------
Comprehensive income $ 18,452 $ 6,248
========== ==========
</TABLE>
-4-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
March 31, Dec. 31, March 31,
1998 1997 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,721 $ 4,768 $ 4
Accounts receivable (net of allowance
for doubtful accounts and sales
returns) (Note 3) 806,313 972,449 739,750
Receivable from broker-dealers and
dealer banks (Note 4) 9,115 9,483 5,463
Inventories (Note 3) 323,603 290,479 308,032
Prepaid income taxes 99,191 99,131 108,262
Prepaid and other current assets 92,502 88,111 101,410
---------- ---------- ----------
Total current assets 1,332,445 1,464,421 1,262,921
---------- ---------- ----------
Prepublication costs (net of accumulated
amortization) (Note 3) 333,390 326,251 369,578
Investments and other assets:
Investment in Rock-McGraw, Inc. - at
equity 73,624 72,292 68,225
Prepaid pension expense 114,009 111,895 105,978
Other 170,971 167,701 156,427
---------- ---------- ----------
Total investments and other assets 358,604 351,888 330,630
---------- ---------- ----------
Property and equipment - at cost 847,002 838,214 833,709
Less - accumulated depreciation 579,589 564,584 535,300
---------- ---------- ----------
Net property and equipment 267,413 273,630 298,409
Goodwill and other intangible assets - at
cost (net of accumulated amortization) 1,289,116 1,308,284 1,290,539
---------- ---------- ----------
$3,580,968 $3,724,474 $3,552,077
========== ========== ==========
</TABLE>
-5-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
March 31, Dec. 31, March 31,
1998 1997 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 75,458 $ 77,395 $ 232,826
Accounts payable 231,687 285,862 220,582
Payable to broker-dealers and dealer
banks (Note 4) 8,988 9,331 5,295
Accrued liabilities 172,571 278,194 143,026
Income taxes currently payable 108,272 100,685 90,806
Unearned revenue 240,227 219,698 225,899
Other current liabilities 244,293 235,077 235,252
---------- ---------- ----------
Total current liabilities 1,081,496 1,206,242 1,153,686
---------- ---------- ----------
Other liabilities:
Long-term debt (Note 5) 606,901 607,030 557,223
Deferred income taxes 107,669 111,022 144,108
Accrued postretirement healthcare and
other benefits 198,504 196,508 198,266
Other non-current liabilities 157,836 169,021 156,429
---------- ---------- ----------
Total other liabilities 1,070,910 1,083,581 1,056,026
---------- ---------- ----------
Total liabilities 2,152,406 2,289,823 2,209,712
---------- ---------- ----------
Shareholders' equity (Note 6):
Capital stock 102,933 102,933 102,933
Additional paid-in capital 42,888 35,469 43,743
Retained income 1,524,398 1,542,854 1,374,038
Accumulated other comprehensive income (75,934) (74,247) (66,040)
---------- ---------- ----------
1,594,285 1,607,009 1,454,674
Less - common stock in treasury-at cost 149,637 159,447 95,496
unearned compensation on
restricted stock 16,086 12,911 16,813
---------- ---------- ----------
Total shareholders' equity 1,428,562 1,434,651 1,342,365
---------- ---------- ----------
$3,580,968 $3,724,474 $3,552,077
========== ========== ==========
</TABLE>
-6-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Cash Flows
------------------------------------
For The Three Months Ended March 31, 1998 And 1997
--------------------------------------------------
<CAPTION>
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net income $ 20,139 $ 14,986
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 18,899 17,809
Amortization of goodwill and intangibles 13,473 12,392
Amortization of prepublication costs 19,234 17,958
Provision for losses on accounts receivable 18,309 21,526
Other 278 2,542
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Decrease in accounts receivable 146,520 112,858
Increase in inventories (33,612) (36,069)
Increase in prepaid and other current assets (4,451) (19,385)
Decrease in accounts payable and accrued expenses (159,308) (109,441)
Increase/(decrease) in unearned revenue 20,548 (3,125)
Increase/(decrease) in other current liabilities 14,414 (10,491)
Increase/(decrease) in interest and income taxes
currently payable 2,278 (150,821)
Increase/(decrease) in prepaid/deferred income taxes 2,468 (1,838)
Net change in other assets and liabilities (10,080) (2,984)
- --------------------------------------------------- --------- ---------
Cash provided by/(used for) operating activities 69,109 (134,083)
- --------------------------------------------------- --------- ---------
Investing activities
- --------------------
Investment in prepublication costs (26,292) (37,010)
Purchases of property and equipment (12,429) (11,223)
Acquisition of businesses (49) (2,852)
Disposition of property, equipment and businesses 39 1,595
- --------------------------------------------------- --------- ---------
Cash used for investing activities (38,731) (49,490)
- --------------------------------------------------- --------- ---------
Financing activities
- --------------------
(Repayments of)/Additions to short-term debt - net (2,421) 209,296
Dividends paid to shareholders (38,595) (35,832)
Exercise of stock options 9,072 8,606
Other (1,481) (1,923)
- --------------------------------------------------- --------- ---------
Cash (used for)/provided by financing activities (33,425) 180,147
- --------------------------------------------------- --------- ---------
Net change in cash and equivalents (3,047) (3,426)
Cash and equivalents at beginning of period 4,768 3,430
- --------------------------------------------------- --------- ---------
Cash and equivalents at end of period $ 1,721 $ 4
========= =========
</TABLE>
-7-
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
1. The financial information in this report has not been audited, but in the
opinion of management all adjustments (consisting only of normal recurring
adjustments) considered necessary to present fairly such information have
been included. The operating results for the three months ended March 31,
1998 and 1997 are not necessarily indicative of results to be expected for
the full year due to the seasonal nature of some of the company's
businesses. The financial statements included herein should be read in
conjunction with the financial statements and notes included in the
company's Annual Report on Form 10-K for the year ended December 31, 1997.
Certain prior year amounts have been reclassified for comparability
purposes.
<TABLE>
2. Operating profit by segment is total operating revenue less expenses which
are deemed to be related to the unit's operating revenue. A summary of
operating results by segment for the three months ended March 31, 1998 and
1997 follows:
<CAPTION>
1998 1997
-------------------- ---------------------
Operating Operating
Revenue Profit Revenue Profit
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Educational and Professional
Publishing $208,357 $(39,731) $196,857 $(42,551)
Financial Services 281,504 83,039 234,928 74,680
Information and Media Services 213,559 17,509 221,150 17,928
-------------------------------- -------- -------- -------- --------
Total operating segments 703,420 60,817 652,935 50,057
General corporate expense - (15,701) - (13,696)
Interest expense - net - (12,102) - (11,384)
-------------------------------- -------- -------- -------- --------
Total company $703,420 $ 33,014* $652,935 $ 24,977*
======== ======== ======== ========
<FN>
*Income before taxes on income.
</FN>
</TABLE>
-8-
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
<TABLE>
3. The allowance for doubtful accounts and sales returns, the components of
inventory and the accumulated amortization of prepublication costs were as
follows:
<CAPTION>
March 31, Dec. 31, March 31,
1998 1997 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Allowance for doubtful accounts $ 94,350 $ 98,321 $ 90,182
========= ========= =========
Allowance for sales returns $ 74,093 $ 84,308 $ 63,061
========= ========= =========
Inventories:
Finished goods $ 257,154 $ 233,105 $ 247,751
Work-in-process 35,451 28,455 25,300
Paper and other materials 30,998 28,919 34,981
--------- --------- ---------
Total inventories $ 323,603 $ 290,479 $ 308,032
========= ========= =========
Accumulated amortization of
prepublication costs $ 474,392 $ 526,156 $ 459,863
========= ========= =========
</TABLE>
4. A subsidiary of J.J. Kenny Co. acts as an undisclosed agent in the purchase
and sale of municipal securities for broker-dealers and dealer banks and
the company had $210 million of matched purchase and sale commitments at
March 31, 1998. Only those transactions not closed at the settlement
date are reflected in the balance sheet as receivables and payables.
<TABLE>
5. A summary of long-term debt follows:
<CAPTION>
March 31, Dec. 31, March 31,
1998 1997 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
9.43% senior notes due 2000 $ 250,000 $ 250,000 $ 250,000
Commercial paper supported by
bank revolving credit agreement 350,000 350,000 300,000
Other 6,901 7,030 7,223
--------- --------- ---------
Total long-term debt $ 606,901 $ 607,030 $ 557,223
========= ========= =========
</TABLE>
-9-
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
<TABLE>
6. Common shares approved for issuance for conversions and stock based awards
were as follows:
<CAPTION>
March 31, Dec. 31, March 31,
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
$1.20 convertible preference stock
at the rate of 6.6 shares for each
share of preference stock 8,989 8,989 9,161
Stock based awards 9,803,081 10,239,262 5,819,300
--------- ---------- ---------
9,812,070 10,248,251 5,828,461
========= ========== =========
</TABLE>
<TABLE>
7. Cash dividends per share declared during the three months ended March 31, 1998
and 1997 were as follows:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Common stock $.39 $.36
Preference stock .30 .30
</TABLE>
<TABLE>
8. A reconciliation of the number of shares used for calculating basic earnings
per common share and diluted earnings per common share for the three months
ended March 31, 1998 and 1997 follows:
<CAPTION>
1998 1997
------- -------
(Thousands of shares)
<S> <C> <C>
Average number of common shares outstanding 98,889 99,293
Effect of stock options and other dilutive securities 902 604
------- -------
Average number of common shares outstanding including
effect of dilutive securities 99,791 99,897
======= =======
</TABLE>
Restricted performance shares outstanding at March 31, 1998 of 443,000 were
not included in the computation of diluted earnings per common share because
the necessary vesting conditions have not yet been met.
-10-
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
9. In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments
of an Enterprise and Related Information. The new standard must be adopted
on December 31, 1998. SFAS No. 131 establishes standards for the manner in
which companies report information about operating segments and related
disclosures about products and services, geographic areas and major
customers. SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise. The adoption of SFAS No. 131 is not
expected to have a material impact on the company's financial statement
disclosures.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Operating
-------------------------------------------------
Results and Financial Condition
-------------------------------
Operating Results - Comparing Three Months Ended March 31, 1998 and 1997
- ------------------------------------------------------------------------
Consolidated Review
- -------------------
Operating revenue for the first quarter grew $50.5 million, or 7.7%, over the
1997 quarter to $703.4 million. The revenue increase reflects strong growth at
S&P Ratings Services as well as increased sales in educational publishing. Net
income increased $5.2 million, or 34.4%, to $20.1 million and diluted earnings
per share improved to 20 cents from 15 cents in the prior year's quarter. The
first quarter represents the company's smallest quarter due to the seasonal
aspects of some of the company's businesses, primarily the educational
publishing operations.
Total expenses in 1998 increased $42.9 million, or 6.9%, reflecting volume-
related expenses due to the revenue growth and expenses associated with new
products and initiatives.
Net interest expense of $12.1 million increased $0.7 million, or 6.3%, due to
higher average debt levels. Commercial paper borrowing rates increased from
5.4% in 1997 to 5.7% in 1998; average commercial paper borrowing levels were
comparable to the prior year. 1998 debt includes approximately $42 million in
debt from 1997 acquisitions at an average interest rate of 5.8%.
The provision for taxes as a percent of income before taxes was 39% in 1998
compared to 40% in 1997. The reduction in the effective tax rate reflects
favorable apportionment changes reducing state taxes.
Segment Review
- --------------
Educational and Professional Publishing revenue increased $11.5 million, or
5.8%. Educational publishing revenue increased reflecting growth in el-hi
publishing and testing. The revenue growth was enhanced by earlier than
anticipated ordering in North Carolina and California. Higher Education
revenues improved as sales of several 1998 editions were off to a good start.
Professional publishing revenue increased due to strong computer titles created
through alliances with several technology companies. International revenue grew
modestly as business improved in Europe and Latin America, offset by softness
in Canada and Asia-Pacific. Results at CEC/McGraw-Hill weakened due to
declining enrollments; this business is being repositioned as part of McGraw-
Hill Lifetime Learning, a new operating unit. The segment's operating loss,
reflecting typical first quarter seasonal losses in educational publishing,
declined 6.6% to $39.7 million, due to the larger revenues and reduced costs in
the higher education business resulting from the integration of the Times Mirror
Higher Education business, acquired in late 1996.
-12-
<PAGE>
Financial Services' revenue increased $46.6 million, or 19.8%, while operating
profit improved $8.4 million, or 11.2%. Standard & Poor's Ratings Services'
revenue and profits grew due to increased new issuance volume in the U.S.
corporate bond market, particularly the high yield sector, as well as continued
global growth. The public finance and structured finance sectors also performed
well. Standard & Poor's Financial Information Services' revenue improved due to
growth in the retail, institutional and global markets, while softness continued
in municipal securities services reflecting a continued weak market. Operating
profit declined due to investments in new products and the launch of S&P
Personal Wealth in the first quarter.
Information and Media Services' revenue declined $7.6 million, or 3.4%.
Excluding the impact of last year's Datapro divestiture, revenue would have
increased slightly. Segment operating profit declined $0.4 million, or 2.3%.
Business Week advertising revenues increased as a 4.3% decline in advertising
pages was more than offset by a rate increase; profits increased accordingly.
Despite the page decline, the quarter's advertising pages represent the second
highest first quarter total since 1989, lagging only last year's record-setting
first quarter page count. Revenues and profits in the Construction Information
Group improved modestly. Broadcasting revenues increased modestly while profits
grew at a higher rate due to cost management. Results in the healthcare and
technology magazines declined reflecting reduced advertising pages amid weaker
market conditions.
Financial Condition
- -------------------
The company continues to maintain a strong financial position. Cash provided by
operating activities in the first quarter totaled $69 million compared to $16
million in 1997, excluding last year's $150 million in tax payments on 1996's
gain on the exchange of Shepard's/McGraw-Hill for the Times Mirror Higher
Education Group. Total debt declined $2.1 million since year end reflecting
cash provided by operations, offset by seasonal spending for inventory and
prepublication costs and the payment of dividends. The company's strong
presence in school and higher education publishing significantly impacts the
seasonality of its earnings and borrowing patterns during the year, with the
company borrowing during the first half of the fiscal year and generating cash
in the second half of the year, primarily in the fourth quarter.
Commercial paper borrowings at March 31, 1998 totaled $379 million, a decline of
$2 million from December 31, 1997. Commercial paper is supported by a $800
million revolving credit agreement with a group of banks terminating in February
2002, and $350 million has been classified as long-term. There are no amounts
outstanding under this agreement.
$250 million 9.43% senior notes, due in the year 2000, remain outstanding.
Under a shelf registration which became effective with the Securities and
Exchange Commission in 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.
-13-
<PAGE>
Accounts receivable before reserves of $975 million decreased $180 million from
the end of 1997 due primarily to the seasonal nature of the company's
educational publishing business. Inventories increased $33 million from the end
of 1997 to $324 million due primarily to inventory purchases for school
publishing adoptions later this year.
Net prepublication costs increased $7 million from the end of 1997 to $333
million due to spending for school publishing programs and higher education and
professional publishing titles. Prepublication cost spending in the first
quarter totaled $26 million, a decline of $11 million from last year's first
quarter due to the timing of expenditures. Spending is expected to increase
over the remainder of the year. Purchases of property and equipment were $12
million, $1 million higher than the comparable period last year; the purchases
were primarily for computer equipment and new office construction and
furnishings. Spending will increase significantly over the remainder of the
year as the company consolidates its office space in New York City.
In January 1996, the Board of Directors approved a stock repurchase program
authorizing the purchase of up to four million shares of common stock. At the
end of 1997, 2.7 million common shares had been repurchased at a cost of $143.2
million. No shares were repurchased in the first quarter of 1998; the company
intends to repurchase additional shares later this year. Purchases under this
program may be made from time to time dependent on market conditions. The
repurchased shares will be used for general corporate purposes, including the
issuance of shares for the exercise of employee stock options.
The technology environment has been reviewed to assess Year 2000 risks. Plans
have been developed to convert or replace systems to achieve Year 2000
compatibility. The cost for Year 2000 modifications will approximate $15
million; $2.9 million was spent in the first quarter. Certain systems that are
not Year 2000-complaint are being replaced as part of ongoing system development
projects included in the company's capital expenditure program.
The company has communicated with its significant vendors, redistributors and
customers to determine their plans to address the Year 2000 issue. While the
company expects a successful resolution of these issues, there can be no
guarantee that the systems of other companies, on which our systems rely, will
address all Year 2000 issues on a timely basis or that their failure to
successfully address all issues would not have an adverse effect on the company.
On May 5, 1998 the company announced the signing of an agreement to sell its
Information Technology and Communications Group, which includes the technology
magazines BYTE, Data Communications, LAN Times and tele.com, and the testing
business NSTL. The businesses will be sold for proceeds of $26.8 million in
cash; the divestiture is expected to close in late May.
At the company's annual meeting on April 29, 1998, the shareholders approved an
increase in the number of authorized common shares from 150 million shares to
300 million share.
-14-
<PAGE>
"Safe Harbor Statement under the Private Securities Litigation Reform Act of
- ----------------------------------------------------------------------------
1995"
- -----
This section, as well as other portions of this document, include certain
forward-looking statements about the company's business, new products, sales,
expenses, cash flows, debt levels and operating and capital requirements. Such
forward-looking statements include, but are not limited to: the strength of
profit levels at Standard & Poor's Rating's Services; the level of success in
1998 school publishing adoptions; the level of prepublication cost spending and
capital expenditures in 1998; shares to be reacquired under the share repurchase
plan; and the level of the future cash flow and debt levels.
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, and the effect of competitive
products and pricing.
-15-
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
-----------------
County of Orange v. McGraw-Hill Companies, Inc.
-----------------------------------------------
In previous filings, Registrant reported that a Complaint was 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 alleged
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. Registrant appealed this
decision to the District Court which, on March 18, 1997, dismissed
the County's professional negligence claim, with leave to amend. On
April 9, 1997, the County filed an Amended Complaint for breach of
contract and professional malpractice, adding a claim for punitive
damages. On April 28, 1997, the Registrant filed a motion to dismiss
the professional malpractice claim, which motion was denied by the
District Court on June 2, 1997. Discovery is well underway. On
February 13, 1998, Registrant moved again to dismiss the County's
professional malpractice claim, which motion was denied by the
District Court on March 16, 1998. Registrant continues to believe
that the allegations of the complaint lack merit and is vigorously
contesting the action.
Item 6. Exhibits and Reports on Form 8-K Page Number
-------------------------------- -----------
(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges. 18
(27) Financial Data Schedule. 19
(b) Reports on Form 8-K
A Report on Form 8-K was filed on January 29, 1998.
Item 5 was reported on pursuant to said Report.
-16-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE McGRAW-HILL COMPANIES, INC.
-------------------------------
Date: 05/12/98 By Robert J. Bahash
------------------ -------------------------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer
Date: 05/12/98 By Thomas J. Kilkenny
------------------ -------------------------------
Thomas J. Kilkenny
Vice President and Controller
Date: 05/12/98 By Kenneth M. Vittor
------------------ -------------------------------
Kenneth M. Vittor
Senior Vice President
and General Counsel
-17-
<PAGE>
<TABLE>
Exhibit (12)
The McGraw-Hill Companies, Inc.
-------------------------------
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
Periods Ended March 31, 1998
----------------------------
<CAPTION>
Three Twelve
Months Months
--------- ---------
(In thousands)
<S> <C> <C>
Earnings
Earnings from continuing operations
before income tax expense (Note)...... $ 31,682 $ 473,904
Fixed charges........................... 19,380 84,633
--------- ---------
Total Earnings....................... $ 51,062 $ 558,537
========= =========
Fixed Charges (Note)
Interest expense........................ $ 13,113 $ 57,839
Portion of rental payments deemed to be
interest.............................. 6,267 26,794
--------- ---------
Total Fixed Charges.................. $ 19,380 $ 84,633
========= =========
Ratio of Earnings to Fixed Charges 2.6x 6.6x
<FN>
(Note) For purposes of computing the ratio of earnings to fixed charges,
"earnings from continuing operations before income taxes" excludes
undistributed equity in income of less than 50%-owned companies. "Fixed
charges" consist of (1) interest on debt, and (2) the portion of the
company's rental expense deemed representative of the interest factor in
rental expense.
Earnings from continuing operations before income taxes for the twelve
month period ended March 31, 1998 includes a $33.2 million pre-tax one-
time provision for real estate write-downs related to the consolidation
of office space in New York City and a $20.4 million pre-tax gain on the
sale of Datapro Information Services.
</FN>
</TABLE>
-18-
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,721
<SECURITIES> 0
<RECEIVABLES> 974,756
<ALLOWANCES> 168,443
<INVENTORY> 323,603
<CURRENT-ASSETS> 1,332,445
<PP&E> 847,002
<DEPRECIATION> 579,589
<TOTAL-ASSETS> 3,580,968
<CURRENT-LIABILITIES> 1,081,496
<BONDS> 0
14
0
<COMMON> 102,919
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,580,968
<SALES> 703,420
<TOTAL-REVENUES> 703,420
<CGS> 663,133
<TOTAL-COSTS> 663,133
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,309
<INTEREST-EXPENSE> 12,102
<INCOME-PRETAX> 33,014
<INCOME-TAX> 12,875
<INCOME-CONTINUING> 20,139
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,139
<EPS-PRIMARY> 0.20<F1>
<EPS-DILUTED> 0.20<F2>
<FN>
<F1> Amount reported is EPS-BASIC.
<F2> Amount reported is EPS-FULLY DILUTED.
</FN>
</TABLE>
