<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, 1997
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 whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 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. |_|
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of February 28, 1998, was $7,462,074,689.
The number of shares of common stock of the registrant outstanding as of
February 28, 1998 was 99,366,761 shares.
Part I, Part II and Part IV incorporate information by reference from the
Annual Report to Shareholders for the year ended December 31, 1997. Part III
incorporates information by reference from the definitive proxy statement mailed
to shareholders March 24, 1998 for the annual meeting of shareholders to be held
on April 29, 1998.
<PAGE> 2
TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business......................................................... 1
2. Properties....................................................... 2 - 4
3. Legal proceedings................................................ 5
4. Submission of matters to a vote of security holders ............. 6
Executive officers of the registrant............................. 7
PART II
5. Market for the registrant's common stock and related
stockholder matters....................................... 8
6. Selected financial data.......................................... 8
7. Management's discussion and analysis of financial
condition and results of operations....................... 8
7A. Market Risk...................................................... 8
8. Consolidated financial statements and supplementary
data...................................................... 8
9. Changes in and disagreements with accountants on accounting
and financial disclosure.................................. 8
PART III
10. Directors and executive officers of the registrant............... 9
11. Executive compensation........................................... 9
12. Security ownership of certain beneficial owners
and management............................................ 9
13. Certain relationships and related transactions................... 9
PART IV
14. Exhibits, financial statement schedules, and
reports on Form 8-K....................................... 10 - 13
Signatures ...................................................... 14 - 16
Exhibits.................................................. 17 - 44
Consent of Independent Auditors - Ernst & Young LLP.............. 45
Financial Data Schedule.......................................... 46 - 49
Supplementary schedule........................................... 50
<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 15,690 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 7 to 20 and pages 22 to 23 (textual material) of the Registrant's
1997 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, 1997 and the identifiable
assets of each segment at the end of each year, are included in Exhibit (13), on
page 40 in the Registrant's 1997 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 383 locations: 300 are in the United
States. In addition, the Registrant owns real property at 24 locations: 20 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 1,428 See Explanation Below
New York, NY leased 946 Financial Services
See Explanation Below
New York, NY leased 447 Various Operating Units
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
Denver, CO owned 88 Broadcasting
San Diego, CA owned 43 Broadcasting
Indianapolis, IN leased 54 Broadcasting
Indianapolis, IN leased 79 CTB
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
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
Mather, CA leased 56 CTB
Burr Ridge, IL leased 115 Various Publishing Units
See Explanation Below
Dubuque, IA owned Higher Education
Office 107
Warehouse 279
Monterey, CA owned 215 CTB
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 and subleases for its own account
approximately 598,000 square feet of space. The company has entered into a
supplemental agreement with Rock-McGraw, Inc. to surrender a portion of its
occupied space starting in 1998.
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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 warehouse in Hightstown, NJ is leased
to a tenant.
The Registrant leases approximately 75 percent of a building in Burr Ridge, IL.
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. During January 1998, the Registrant exercised its option
to sell its interest in the limited partnership to Times Mirror for $10.5
million.
At the end of 1997, the Registrant signed 2 new leases in the New York City
area. The lease for the building at 55 Water Street for 946,048 square feet of
space and expiring in March 2020 will house Standard & Poor's Financial
Information Services and Standard & Poor's Ratings Services divisions. The lease
at 2 Penn Plaza for 447,400 square feet also expires March 2020 and will house
various Educational & Professional Publishing Group and Information & Media
Services Group operations.
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<PAGE> 7
Item 3. 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. On April 28, 1997, the Registrant filed a motion to
dismiss the professional malpractice claim, which was denied by the
District Court on June 2, 1997. Discovery has commenced. The
Registrant continues to believe that the allegations of the
Complaint lack merit and intends to vigorously contest the action.
Julian H. Robertson, Jr. v. The McGraw-Hill Companies, Inc.
On September 5, 1997, a Complaint was filed in New York State
Supreme Court in an action captioned Julian H. Robertson, Jr. v. The
McGraw-Hill Companies, Inc., et al. (Index No. 105357/97); an
Amended Complaint was filed on September 11, 1997. The Amended
Complaint alleged that an article about Mr. Robertson entitled "The
Fall of the Wizard of Wall Street" published in the April 1, 1996
issue of Business Week was false and defamatory. The Amended
Complaint sought compensatory damages in the amount of $500 million
and punitive damages in the amount of $500 million. On October 28,
1997, the Registrant filed a motion for summary judgment seeking
dismissal of the Amended Complaint on statute of limitations
grounds. On December 17, 1997, the parties announced in a joint
statement that the Robertson litigation had been dismissed with
prejudice pursuant to a settlement agreement. No money or other
financial consideration was involved in the settlement.
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<PAGE> 8
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.
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<PAGE> 9
Executive Officers of Registrant
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Joseph L. Dionne 64 Chairman and Chief Executive Officer
Harold McGraw III 49 President and Chief Operating Officer
Robert J. Bahash 52 Executive Vice President and
Chief Financial Officer
John D. Negroponte 58 Executive Vice President, Global Markets
Jeffrey Williams 46 Executive Vice President, Global
Markets and Strategic Development
Scott L. Bennett 48 Senior Vice President, Secretary
and Associate General Counsel
Frank J. Kaufman 53 Senior Vice President, Taxes
Barbara B. Maddock 47 Senior Vice President, Human Resources
Barbara A. Munder 52 Senior Vice President, Corporate Affairs
Frank D. Penglase 57 Senior Vice President, Treasury Operations
Kenneth M. Vittor 48 Senior Vice President and General Counsel
Thomas J. Kilkenny 39 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 Maddock,
John Negroponte, 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. Negroponte, prior to his becoming an officer of the Registrant on September
2, 1997, was with the United States Diplomatic Corps for 37 years where he held
numerous senior positions, including ambassador to Mexico, the Philippines, and
Honduras.
Mr. Williams resigned from the Registrant on January 2, 1998. Prior to his
becoming an officer of the Registrant on September 25, 1996, Mr. Williams 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.
On January 28, 1998, the Registrant's Board of Directors announced that
effective as of April 29, 1998 following the Annual Meeting of Shareholders,
Harold McGraw III shall become the Chief Executive Officer of the Registrant,
and Joseph L. Dionne, who shall retire as of July 1, 1998, shall continue as
non-executive Chairman of the Board of Directors of the Registrant.
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<PAGE> 10
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, 1998 was 5,286.
1997 1996
---- ----
Dividends per share of common stock:
$.36 per quarter in 1997 $1.44
$.33 per quarter in 1996 $1.32
Information concerning other matters is incorporated herein by reference from
Exhibit (13), from page 48 of the 1997 Annual Report to Shareholders.
Item 6. Selected Financial Data
Incorporated herein by reference from Exhibit (13), from the 1997 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 1997 Annual Report
to Shareholders, pages 26 to 32.
Item 7A. Market Risk
Incorporated herein by reference from Exhibit (13), from the 1997 Annual Report
to Shareholders, page 32.
Item 8. Consolidated Financial Statements and Supplementary Data
Incorporated herein by reference from Exhibit (13), from the 1997 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
-8-
<PAGE> 11
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 24, 1998 for the annual
meeting of shareholders to be held on April 29, 1998.
Item 11. Executive Compensation
Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 24, 1998 for the annual meeting of shareholders to be held
on April 29, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 24, 1998 for the annual meeting of shareholders to be held
April 29, 1998.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 24, 1998 for the annual meeting of shareholders to be held
April 29, 1998.
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<PAGE> 12
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
Reference
----------------------
Annual Report
Form to Share-
10-K holders (page)
---- --------------
Data incorporated by reference from
Annual Report to Shareholders:
Report of Independent Auditors................... 45
Consolidated balance sheet at
December 31, 1997 and 1996.................. 34-35
Consolidated statement of income
for each of the three years in
the period ended December 31, 1997.......... 33
Consolidated statement of cash flows
for each of the three years in the
period ended December 31, 1997.............. 36
Consolidated statement of shareholders'
equity for each of the three years in
the period ended December 31, 1997.......... 37
Notes to consolidated financial
statements.................................. 38-44
Quarterly financial information.................. 48
Consent of Independent Auditors.................. 45
Consolidated schedule for each of the three
years in the period ended December 31, 1997:
II - Reserves for doubtful accounts
and sales returns........................ 50
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<PAGE> 13
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, 1997 are hereby
incorporated by reference in Exhibit (13). With the exception of the pages
listed in the above index, the 1997 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, incorporated by
reference from Registrant's Form 10-K for the year ended December 31,
1996.
(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> 14
(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 Proxy Statement dated March 25, 1997.
(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
incorporated by reference from Registrant's Form 10-K for the year ended
December 31, 1996.
(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, incorporated by reference from
Registrant's Form 10-K for the year ended December 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> 15
(10)* Resolutions Freezing Existing Benefits and Terminating Additional Benefits
under Registrant's Directors Retirement Plan, as adopted on January 31,
1996, incorporated by reference from Registrant's Form 10-K for the year
ended December 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 1997 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.
No report on Form 8-K was filed by the Registrant in the last quarter
covered by this Form 10-K.
- --------------------
* These exhibits relate to management contracts or compensatory plan
arrangements.
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<PAGE> 16
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, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 26, 1998 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 fourteen 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> 17
/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/ Linda Koch Lorimer
-------------------------------------------
Linda Koch Lorimer
Director
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<PAGE> 18
/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> 19
EXHIBIT INDEX
Exhibit Description
No.
- ------- -------------------------------------------------
(3) Amendment to By-Laws of Registrant
(12) Computation of Ratio of Earnings to Fixed Charges
(13) Registrant's 1997 Annual Report to Shareholders
(Selected Pages)
(21) Subsidiaries of Registrant
(23) Consent of Ernst & Young LLP Independent Auditors
(27) Financial Data Schedule
<PAGE> 1
Exhibit (3)
THE McGRAW-HILL COMPANIES, INC.
BY-LAWS
(As amended April 30, 1997)
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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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
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determine whether a nomination or any business proposed to be brought before the
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 fourteen (14). 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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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.
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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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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 certificate
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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
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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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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.
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<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
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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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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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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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ARTICLE V
CAPITAL STOCK
1. 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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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
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<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.
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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 (12)
THE McGRAW-HILL COMPANIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Earnings
Earnings from continuing operations
before income tax expense, provision
for real estate write-downs and gain
on the sale of Datapro in 1997, gain
on exchange of Shepard's/MGraw-Hill
in 1996, unusual charges in 1993
and 1996
(a)(b)(c)(d) $ 478,622 $ 415,974 $ 382,126 $ 341,816 $ 293,243
Fixed charges 83,840 77,563 90,382 83,219 75,930
Capitalized interest -- -- (421) (353) (536)
--------- --------- --------- --------- ---------
Total Earnings $ 562,462 $ 493,537 $ 472,087 $ 424,682 $ 368,637
========= ========= ========= ========= =========
Earnings from continuing operations
before income tax expense (d) $ 465,873 $ 809,705 $ 382,126 $ 341,816 $ 63,443
Fixed charges 83,840 77,563 90,382 83,219 75,930
Capitalized interest -- -- (421) (353) (536)
--------- --------- --------- --------- ---------
Total Earnings $ 549,713 $ 887,268 $ 472,087 $ 424,682 $ 138,837
========= ========= ========= ========= =========
Fixed Charges(d)
Interest expense $ 56,771 $ 51,347 $ 63,832 $ 55,650 $ 46,998
Portion of rental payments
deemed to be interest 27,069 26,216 26,550 27,569 28,932
--------- --------- --------- --------- ---------
Total Fixed Charges $ 83,840 $ 77,563 $ 90,382 $ 83,219 $ 75,930
========= ========= ========= ========= =========
Ratio of Earnings to Fixed charges:
Before unusual charges, provision
for real estate write-downs, gain
on the sale of Datapro and gain
on exchange of Shepard's/
McGraw-Hill 6.7x 6.4x 5.2x 5.1x 4.9x
After unusual charges, provision
for real estate write-downs, gain
on the sale of Datapro and gain
on exchange of Shepard's/
McGraw-Hill 6.6x 11.4x 5.2x 5.1x 1.8x
</TABLE>
- ---------------
(a) In 1997, the company recorded 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.
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<PAGE> 2
(b) 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.
(c) 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.
(d) 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, (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.
-42-
<PAGE> 1
Exhibit (13)
OUR GROWING MARKETS
[PHOTO OMITTED]
<PAGE> 2
Growth is a universal goal in the world of investor-owned corporations. At The
McGraw-Hill Companies it's sustained by traveling many roads and to scores of
countries. The gains in operating profits achieved for six straight years
reflect a range of carefully planned corporate actions and positive external
factors.
We've invested close to $1 billion in acquisitions since the beginning of
1992. We've stepped up international expansion, intensified development of new
products and services, strengthened our marketing efforts, entered new markets
and initiated new alliances--always stressing innovative thinking.
We've substantially enhanced our technological capabilities to spark
significant advances in electronic information distribution and electronic
commerce (pages 10-13). We've designed human resources development programs and
instituted hiring practices to assure that our workforce has the skills and
talent the new millennium requires (pages 18-20).
We're benefiting from favorable political, social, economic and
demographic influences worldwide and are constantly seeking ways to enhance our
global position and presence. In recent years, our compound annual growth rate
internationally has been nearly double the domestic rate, and we expect that
trend to continue.
Nontraditional products again made important contributions to the uptrend
sustained by Standard & Poor's Ratings Services in 1997. The target: 25% of
revenue from nontraditional products by 2000.
o Ratings of insurance companies, our leading nontraditional product, now
include Lloyd's of London. Also in 1997, nontraditional ratings earned the
support of a key trade association in Brazil, setting the stage for
introduction of the service in that country.
o Standard & Poor's bank loan ratings, introduced in 1995, now encompass
more than 600 issues with a value exceeding $200 billion. In 1997,
Standard & Poor's added 115 new bank clients.
o Ratings of structured finance, associated with large construction
projects, reached record volume.
Striding closer to its goal of generating 30% of revenue from international
sources by 2000, Standard & Poor's Ratings Services took several avenues to
geographic expansion in 1997. All combine Standard & Poor's Ratings Services'
global expertise with the knowledge and insight of local partners.
It acquired Argentina's leading rating service, moved toward creation of a
new rating service in Brazil through a training and marketing
- --------------------------------------------------------------------------------
Standard & Poor's Extends Its Geographic Reach
AS A RESULT OF IMPORTANT ACQUISITIONS, STANDARD & POOR'S EXTENDED ITS BRAND TO
RATINGS OF EUROPEAN AND ASIAN EQUITY FUNDS AND TO MUTUAL FUNDS DATA AND
INFORMATION.
o FUND RESEARCH, LTD. IN THE UNITED KINGDOM, ACQUIRED IN MAY, BECAME STANDARD &
POOR'S FUND RESEARCH. IT ANALYZES AND RATES MORE THAN 700 EQUITY FUNDS OUTSIDE
THE U.S. AND PROVIDES A BASE FOR FUTURE INTRODUCTION OF A RISK-RATING SYSTEM
COVERING U.S. MUTUAL FUNDS.
o MICROPAL, LTD., ALSO BASED IN THE U.K. AND ACQUIRED IN NOVEMBER, BECAME
STANDARD & POOR'S MICROPAL. IT PROVIDES EXTENSIVE DATA ON MORE THAN 38,000 FUNDS
IN 19 COUNTRIES AND IS USED BY NEARLY 200 MEDIA OUTLETS WORLDWIDE AS WELL AS BY
FINANCIAL PROFESSIONALS. IT TOO ENVISIONS EXPANSION IN THE U.S. IN ADDITION,
STANDARD & POOR'S ACQUIRED PUBLISHED IMAGE, INC., A BOSTON-BASED PRODUCER OF
PRIVATE LABEL INVESTMENT NEWSLETTERS TAILORED FOR THE CUSTOMERS OF FIVE OF THE
10 TOP FUND COMPANIES AND SOME OF THE NATION'S LEADING BANKS AND BROKERS--ABOUT
12 MILLION INVESTOR ACCOUNTS IN ALL.
- --------------------------------------------------------------------------------
8
<PAGE> 3
exchange agreement with a leading Brazilian institution, acquired a 10% interest
in the leading rating service in India, signed an affiliation agreement with a
highly regarded rating firm in South Africa (its first in Africa), and
established the first rating service in Taiwan with several prominent Taiwanese
partners. Standard & Poor's Ratings Services is now a fixture in 18 countries
worldwide.
The status of English as the standard language of science, technology and
cyberspace--coupled with the substantial number of U.S.-educated business and
professional people around the world and the increasing need for skilled
professionals in emerging countries--provides healthy growth potential for the
Professional Publishing business.
In addition to its presence in the U.S. market, the Professional
Publishing group encompasses international operations that serve educational and
professional markets in Asia, Canada, Europe and Latin America. The Times Mirror
Higher Education operations acquired in 1996 significantly strengthened
Professional Publishing's sales opportunities outside the U.S. New products in
1997 included an updated edition of the renowned Encyclopedia of Science and
Technology and 85 new titles from Osborne/McGraw-Hill, which specializes in
computer subjects.
The family of Standard & Poor's indexes and variety of financial services
products linked to them grow every year, spurred by their proven investor
acceptance and appeal. More than $600 billion is currently invested in funds
tied to the S&P 500 Index alone.
In mid-1997, Standard & Poor's added a new index to track the performance
of U.S. real estate investment trusts, or REITs. By the end of the year, several
managers were using the new index for REIT-financial based products. Aside from
the new REIT index, licensing of Standard & Poor's equity indexes was quite
active. The largest growth in licensing came from institutions based outside the
U.S.
For brokerage firms, Standard & Poor's introduced a variety of new
portfolio products: the S&P Industrials Portfolio, S&P Intrinsic Value Fund,
Smith Barney Strategic 10/A Plus Portfolio, Nuveen-Standard & Poor's Quality
Equity Portfolio and Standard & Poor's Industry Turnaround Portfolio.
In 1997 nearly 20% of our revenue came from international sources, with
expansion efforts focused on Latin America, Asia and Europe. We have more than
430 offices in over 30 countries.
[GRAPHIC OMITTED]
[Asia]
The McGraw-Hill Companies continued to expand its Asian operations in
1997, including establishing Taiwan's first ratings service in an alliance
between Standard & Poor's and several prominent Taiwanese partners.
[Latin America]
Professionals in growing business centers such as Mexico City, Buenos
Aires and Sao Paulo rely on us for the financial services and educational tools
necessary to speed the development of emerging markets.
[Europe]
Business Week has increased its international circulation base to 167,000.
With a global audience of 6.3 million, it is the world's most widely read
business publication.
[North America]
Standard & Poor's Ratings Services rates debt and other capital market
instruments in nearly 70 countries--valued at more than $10 trillion.
9
<PAGE> 4
Our links to the wired world
Asking "Can you make money on the 'Net?" in a cover feature last fall, Business
Week concluded: "It can be done." Several business units of The McGraw-Hill
Companies demonstrate how. Revenue from fee-based Web and other online services
is rising. Today, more than 90% of the content created by our business units is
available in digital form. Over the past three years we've created more than 80
Web sites for customer use; an increasing number of these sites will soon be
accessible only to paying subscribers. Our broadening spectrum of video,
software, and online products and services dates back much further.
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
We now offer more than 100 online services and hundreds of CD-ROM products.
10
<PAGE> 5
[GRAPHIC OMITTED]
<PAGE> 6
The growing impact of electronic media/electronic commerce is visible in each of
our three business segments. A key emphasis now is development of a unified,
truly global distribution system on the Internet that showcases company brands
and services and offers our customers one-stop electronic shopping.
The launch of the McGraw-Hill Learning Architecture makes available online
economics, humanities, math, science and social sciences courses--plus
others--to students at more than 30 colleges and universities. A total of 25
subject-focused online "Learning Centers" linked to our textbooks will be
introduced during 1998. Students will have the option of buying access to these
Learning Centers when they purchase their textbooks.
Nearly 25% of the revenue of The McGraw-Hill Construction Information Group
(CIG) now comes from electronic products, most notably Dodge DataLine and
Sweet's CD. CIG started two new Web sites in 1997 and redesigned the three it
already offered.
F.W. Dodge delivers information in a variety of print and electronic
formats. Dodge Dataline, with detailed information on more than 400,000 building
projects, is the industry's most widely used online service, and it continues to
expand.
Reshaping its information collection systems, Dodge is extending the scope
of its coverage and speeding availability. The first of six new regional
operations centers, which will be linked to 35 field reporting locations, opened
in August. As part of the broad redesign of its editorial process, CIG's
Construction News Publishing Network and its 12 regional publications have been
integrated into Dodge operations.
The unparalleled databases of Standard & Poor's Financial Information Services
are feeding an array of growing new services:
o Standard & Poor's Compustat's Market Insight offers Standard & Poor's
information and analyses and Standard & Poor's DRI country overviews to
financial professionals.
o Standard & Poor's Compustat's Portfolio Insight, integrating content from
several Standard & Poor's units, gives mutual fund managers continuously
updated information covering more than 10,000 U.S.-based publicly held
companies, allowing instant measurement of performance against well-known
benchmarks.
o Standard & Poor's ComStock on the 'Net provides instant access to
financial information on more than 250,000 worldwide stocks, options,
futures, foreign exchange rates and indexes, along with access to news and
analytic services.
o Standard & Poor's Advantage lets investors access nine of Standard &
Poor's most valuable databases, currently via CD-ROM and soon on the
Internet.
o Standard & Poor's Investment Center, a software product, integrates
analysis and asset allocation advice and provides research information to
assist financial planners in developing investment portfolios for clients.
An historic transition to a common currency for much of Western Europe is
slated for January 1, 1999. Standard & Poor's MMS has launched the premiere
online service tracking its progress. For the second straight year, bankers
participating in an independent global survey named MMS Currency Insight, which
analyzes factors driving currency markets worldwide, the best service of its
kind.
12
<PAGE> 7
[GRAPHIC OMITTED]
The four television stations in the Broadcast Group have become part of
ABCNews.com, an extensive project designed to create a national network of
Internet sites as a news and information source. The group had a record year,
with several of its local news broadcasts ranking No. 1 in their time slots. It
continued extending news reporting to nontraditional time periods and took other
innovative steps to expand audiences. In Indianapolis, for example, WRTV can now
be heard on a local FM radio station and has won a leading market share as a
result. In San Diego, KGTV's 24-hour news service on cable now tops the ratings
of its three competitive channels.
Tracking cargo shipments from international points to destinations in the U.S.
became easier in 1997 as a result of TowerNet, a new cutting-edge software tool
developed by Tower Group International, the leading provider of global trade
services. TowerNet helps companies manage inbound logistics operations and
comply with customs requirements.
As the nation's largest K-12 educational publisher we publish in virtually every
classroom curriculum category. Nearly every program we publish includes an
increasing amount of technology-based material to enhance the learning
experience and to improve the effectiveness of educators. Our McGraw-Hill Home
Interactive unit is producing technology-based products to build our market
position and extend the learning experience beyond the classroom and into the
home.
<PAGE> 8
[GRAPHIC OMITTED]
Our lasting role in learning
<PAGE> 9
[GRAPHIC OMITTED]
Learning never did stop at graduation. What's different now is scope. People
have never had more aids available to nourish their careers and enable career
changes, and they've never been so attentive to managing the intellectual and
financial assets that accrue as they advance. Though our most visible role in
education is in educational institutions, people learn from The McGraw-Hill
Companies through all their working years and well into retirement. We inform
and educate in many ways and in many domains. Learning, for example, is a hidden
cornerstone of financial services. Obtaining and analyzing information is the
first step toward intelligent investing. The learning process taps heavily into
the multitude of financial information services we offer.
<PAGE> 10
Creative collaborations have helped spark a strong uptrend at the McGraw-Hill
Construction Information Group (CIG). Reflecting the success of the alliance
with the American Institute of Architects (AIA) initiated in 1996, Architectural
Record published the biggest issue (304 pages) in its 106-year history in
May--its fifth month as the AIA's official member publication. CIG also started
Architects Learning Source, giving AIA members access to more than 60
educational tools.
In October, in collaboration with Business Week, CIG announced the winners
of the first Business Week/Architectural Record Awards, to be sponsored annually
by the AIA. The program recognizes architecture's ability to solve corporate
problems, increase workforce productivity and boost profits.
The McGraw-Hill Construction Information Group strategically used its
publications to build alliances and its business with industry-leading
professional organizations.
[Graphic Omitted]
CIG has launched alliances with two other important trade groups. With the
Construction Specifications Institute it will jointly develop new products and
services, including reference publications and continuing education activities.
With the Design Build Institute of America, Engineering News-Record developed a
new quarterly magazine, Design-Build, introduced in January 1998. It reflects
the emergence and growing role of firms that consolidate the once separate
functions of architect, engineer and contractor. The alliance also includes
continuing education activities and a new awards program.
A headline in an industry newsletter--"McGraw-Hill Dominates Largest U.S.
Adoptions"--documented the extraordinary success of Educational Publishing in
1997 and its widening lead position.
In Texas, the McGraw-Hill School Division's Adventures in Time and Place
won a 60% share of social studies purchases and in California, the Spotlight on
Literacy series and SRA/McGraw-Hill's reading series, Collections for Young
Scholars, outsold all other elementary school reading/language arts programs,
capturing a combined 35% market share.
California and Texas are the largest markets for textbooks. There also
were notable victories in other states during an active adoption year--such as
reading in Georgia, Mississippi and New Mexico; social studies in Arkansas and
Indiana; and music in Louisiana--as well as in important "open" territories.
(Textbook purchases in the 20 "adoption" states are guided by state-approved
lists, in multiyear cycles; in "open" territories, individual school districts
make purchases independently.)
Educational Publishing's book bag is full, broad and current, reflecting
intense and far-ranging product development initiatives. Eight of the School
Division's nine major programs are 1997 or 1998 copyrights, for example, while
the ninth debuted in 1995.
Educational Publishing hopes to continue its winning streak. The adoption
cycle calls for important purchases in core subjects in several states during
1998-2001 (such as California, Florida and Texas), and buying will also be
active in open territories. New elementary math, spelling, art and health
programs will be available.
In the secondary school market, Glencoe/McGraw-Hill has augmented its No.
1 market position by acquiring two product lines from Thomson Publishing that
focus on computer and technology education.
In higher education, assimilation of the Times Mirror operations acquired
in 1996 was the priority in 1997. The group will introduce more than 450 new or
revised titles in 1998.
16
<PAGE> 11
- --------------------------------------------------------------------------------
The McGraw-Hill brand is moving into the consumer marketplace down three
principal avenues.
McGraw-Hill Home Interactive, launched in December 1996 with four multimedia
CD-ROM titles, added seven more in 1997, focusing primarily on educational
content.
McGraw-Hill Learning Materials debuted in October and now offers 54 workbooks
for home use by kindergarten through eighth grade students. These products,
which take our classroom expertise to a home setting so that parents can
participate in teaching their children basic skills, are sold in such outlets as
Barnes & Noble, Waldenbooks, Noodle Kidoodle and CompUSA.
Standard & Poor's introduced S&P Personal Wealth, an Internet-based personal
investment service, in January 1998. It taps a variety of resources of The
McGraw-Hill Companies (such as Business Week) to provide investment advice and
specific recommendations. No other online service gives investors such extensive
help.
- --------------------------------------------------------------------------------
Business people ever searching for ways to stay "ahead of the curve" got a new
resource in January 1998. BusinessWeek Books debuted with the publication of
Mastering the Art of Creative Collaboration. The new imprint--itself a creative
collaboration between Business Week and the Professional Book Group--extends the
Business Week brand and will appear on 9 to 12 books a year.
Business Week turned in higher revenue and profits for the third
consecutive year, posting an increase in ad pages despite two fewer issues. It
won a prestigious Loeb Award for a report on sexual harassment, while the impact
of many other stories demonstrated both its continuing editorial excellence and
competitive edge. The year's editorial highlights included early warning signals
about the pending Asian financial crisis, coverage of the sleazy side of Wall
Street, the New Economy, Silicon Valley (in a special double issue) and
corporate governance.
Conferences, seminars and trade expositions have been staples of professional
learning for decades as well as forums to discuss industry developments.
Electronic communication hasn't reduced their appeal.
Our Information and Media Services units not only present an array of such
events, but, at a number of prestigious trade shows, also provide news and
information services under contract. Aviation Week, for example, was the
official publication of the 1997 Paris Air Show and will serve the same role at
important 1998 trade shows in Chile, China and Indonesia. Chemical Engineering
published a daily newspaper at "Achema '97" in Frankfurt, Germany, the largest
trade exposition in the chemical process industries, with 230,000 attendees.
MULTIMEDIA PRODUCTS, INCLUDING VIDEOS, CD-ROMS AND INTERNET-BASED AIDS, PLUS
ADVISORY ASSISTANCE FROM THE NATIONAL GEOGRAPHIC SOCIETY, ENHANCED THE QUALITY
OF ADVENTURES IN TIME AND PLACE, A MCGRAW-HILL SCHOOL DIVISION ELEMENTARY SOCIAL
STUDIES PROGRAM THAT CAPTURED 60% OF THE 1997 TEXAS SCHOOL ADOPTION MARKET.
[GRAPHIC OMITTED]
We were the official media services provider at Telecom Interactive '97 in
Geneva, Switzerland, and will return to that city in the same role for Telecom
'99, the world's biggest telecommunications exposition. Four of our
magazines--Business Week, BYTE, LAN Times and tele.com--collaborate at telecom
events.
17
<PAGE> 12
[GRAPHIC OMITTED]
OUR RICH INTELLECTUAL CAPITAL
For us, nothing is more critical than the quality of the information, insight
and knowledge we provide--our rich content, in all of the many ways it's created
and delivered to our customers. The intelligence, creativity and skills of our
people are assets that fundamentally underlie our balance sheet but don't appear
on it. They've come to be called "intellectual capital"--difficult to measure
but evident in many ways. The wealth of intellectual capital we possess fuels
the power of our brands and our success.
<PAGE> 13
[PHOTO OMITTED]
<PAGE> 14
The acknowledged leadership in their respective fields achieved by so many of
our brands is the most visible evidence of the breadth of our intellectual
capital. Our products are integral to the analytic pursuits of investors,
financial professionals, students, teachers, business executives, architects,
builders, engineers, doctors and a diverse range of other people in a number of
key industries worldwide.
Information, analysis and commentary from us are trusted and accepted as
accurate and authoritative. That stature rests on the quality of our people and
what they do. It also reflects a longstanding reputation for integrity. The list
of McGraw-Hill experts saluted by trade and professional organizations for the
excellence of their work and their contributions grows every year.
When news media seek an expert's perspective, they frequently come to our
business units. Standard & Poor's and F.W. Dodge, for example, are fundamental
and frequently quoted news sources. The McGraw-Hill Construction Information
Group's annual forecast of construction industry trends is the preeminent
barometer of that industry's outlook, and our evaluations of the "best" in a
varied range of business and professional activities are followed closely.
Standard & Poor's DRI is a leading source for expert economic forecasting.
Editors and reporters from Aviation Week, Business Week and our other leading
magazines are frequently called on by the general and business news media for
their expertise.
Accomplishments that help drive company goals are honored through longstanding
internal programs. Every January since 1986 we've conferred Excellence in
Management Awards, to 13 stellar managers this year and more than 160 over the
program's history. Our Excellence in Management Awards cite accomplishments that
particularly demonstrate the managerial qualities and skills essential to our
future growth. This year's winners included corporate and operating unit
executives who have made especially significant contributions to our varied
successes in geographic regions outside the U.S., electronic services and key
educational markets.
This April, for the 19th year, we will present our Corporate Achievement
Awards for editorial excellence and innovation. Twenty employee teams were
honored at the Corporate Achievement Awards dinner last spring. Several had
developed new products, such as the Spotlight on Literacy/Spotlight on
Literature reading/language arts program. Others spearheaded product
improvements, such as the Spanish curriculum reform program. Some collaborated
on particularly incisive business reporting, such as stories in Business Week on
corporate governance, identifying the best and worst boards of directors in the
U.S.
Keeping the world up to speed starts with keeping ourselves up to speed.
Continuing education has never received more attention. Standard & Poor's, for
example, annually selects 60 key managers to participate in a management
development program at the University of Virginia's Darden Graduate School of
Business Administration. The program is specially structured to meet Standard &
Poor's management needs.
Our Associate Development Program was started in 1993 to attract and
develop exceptional men and women who have earned master's degrees from leading
business schools. Standard & Poor's has its own Associate Development Program
based on the Corporation's program.
Our global team of accomplished analysts, editors, researchers and reporters
provides the valuable information, insight and analysis that help people in all
walks of life achieve their lifetime goals.
[GRAPHIC OMITTED]
20
<PAGE> 15
The McGraw-Hill Companies At-A-Glance
- --------------------------------------------------------------------------------
Group and Key Markets Market Factors
================================================================================
Financial
Services
Standard & Poor's Financial Increasing consumer financial self-reliance
Information Services drives demand for education and
information. Growth in mutual funds as the
Investors, corporations, investment vehicle of choice stimulates the
government agencies, financial need for fund information. Equity inflows
institutions, portfolio overwhelm other asset categories, resulting
managers, brokers, unit in increased need for analytical services
investment trusts and mutual by money managers. S&P 500 performance is
fund managers, commodities, outstripping most active fund managers,
securities and foreign creating demand for index licenses by asset
exchange traders, and managers in the U.S. and internationally.
libraries
- --------------------------------------------------------------------------------
Standard & Poor's Continued evolution and globalization of
Ratings Services capital markets. Significant growth of
asset securitization. Favorable
Global capital markets and interest-rate environment increases
related risk assessments issuance of debt. Growth and volatility in
nontraditional markets. New borrowing and
refinancing accelerate growth in the
structured finance market. Increasing
demand for risk measurement and management
techniques and services.
================================================================================
Educational and
Professional Publishing
Educational Publishing Baby boom's echo is swelling enrollments.
Favorable outlook for state adoptions.
Elementary, secondary, State economies are in excellent shape, and
testing, vocational and elementary-high school spending continues
postsecondary fields on an upswing. Increasing demand for
multimedia offerings.
- --------------------------------------------------------------------------------
Higher Education and Consumer College enrollments on the rise, with
growth projected through 2002 significantly
College, postgraduate and higher than the past five years. Technology
consumer markets and innovation drive changes in production
and distribution. Over two-thirds of
college students now have access to e-mail
on campus. Multimedia and custom textbooks
growing substantially faster than
traditional products.
- --------------------------------------------------------------------------------
Professional Publishing Strong economy and low unemployment drive
professional book sales. Computer and
Engineering, science, business book titles continue to lead the
medicine, law, healthcare, market. Projected growth in corporate
computer technology, business training market. New technologies drive
and government markets, and changes in production and distribution.
international educational and Current slowdown in some Asian and South
professional markets American markets notwithstanding, the
long-term international growth potential
remains high.
================================================================================
Information and
Media Services
Broadcasting Group Strong economy, increased consumer
spending, low inflation and low
Serving the Denver, unemployment all contribute to favorable
Indianapolis, San Diego and advertising market. For 1998, House and
Bakersfield, Calif., Senate races in California, Indiana and
communities Colorado; gubernatorial races as well in
California and Colorado.
- --------------------------------------------------------------------------------
Business Week Group Corporate profits and cash flow expected to
remain favorable. Growing advertising
Business professionals and sectors include computers, finance,
advertisers worldwide business, consumer services and autos. New
opportunities emerging for Web-based
products and electronic advertising
vehicles.
- --------------------------------------------------------------------------------
Information Technology and Growth in sophisticated telecom services.
Communications Group Greater emphasis on software applications
that use the PC as a communications device.
Information technology and Expansion of public networks. Consolidating
communications markets vendor base.
- --------------------------------------------------------------------------------
McGraw-Hill Construction Six years in a row of growth in
Information Group construction market. For 1998, F.W. Dodge
predicts non-residential market will
Building products continue to grow. Rapid advances in
manufacturers, architects, Internet capabilities and software spur
engineers, contractors, real growth of new products. Intensifying
estate owners, developers and competition in the marketplace.
investors
- --------------------------------------------------------------------------------
Publication Services Group Strong economy and corporate profits aid
business publication advertising. Business
Professionals and corporate magazines and trade show markets both
executives around the world in growing. Utilities market evolving from a
aviation, healthcare and regulated to a deregulated market. Aviation
science and technology market on an upswing, offset by
consolidation. Healthcare information
market grows.
- --------------------------------------------------------------------------------
Tower Group International Third-party management is expected to be a
fast-growing market segment. Industry
Major North American importers consolidation continues. Barriers to entry
and exporters are rising, reflecting demand for
value-added services.
================================================================================
<PAGE> 16
- --------------------------------------------------------------------------------
Leading Brands and Companies
================================================================================
Retail Division
Standard & Poor's ComStock
Standard & Poor's Index Services
S&P Personal Wealth
Standard & Poor's Micropal
Standard & Poor's Retail Brokerage
Institutional Division
Standard & Poor's Compustat
Standard & Poor's Securities, Inc.
Corporate Division
Standard & Poor's DRI
International Division
Standard & Poor's MMS
Standard & Poor's Platt's
Municipal Securities Division
Standard & Poor's J.J. Kenny
Standard & Poor's J.J. Kenny
Evaluation Services
Standard & Poor's J.J. Kenny
Information Services
- --------------------------------------------------------------------------------
Corporate Ratings
Insurance Ratings
Financial Institution Ratings
Managed Funds Ratings
Public Finance Ratings
Sovereign Ratings
Structured Finance Ratings
Infrastructure Finance Ratings
Ratings Information Services
Global Ratings Development
================================================================================
McGraw-Hill School Division
Glencoe/McGraw-Hill
CTB/McGraw-Hill
SRA/McGraw-Hill
McGraw-Hill Consumer Products
- --------------------------------------------------------------------------------
McGraw-Hill Higher Education
McGraw-Hill College
WCB/McGraw-Hill
Irwin/McGraw-Hill
Dushkin/McGraw-Hill
Primis Custom Publishing
McGraw-Hill Lifetime Learning
- --------------------------------------------------------------------------------
Professional Book Group
Business/McGraw-Hill
Osborne/McGraw-Hill
Computing/McGraw-Hill
Continuing Education Center
McGraw-Hill Interamericana
McGraw-Hill Europe
Tata McGraw-Hill
McGraw-Hill Ryerson
McGraw-Hill Asia/Pacific
================================================================================
KMGH-TV (Denver)
KGTV(San Diego)
KERO-TV (Bakersfield)
WRTV (Indianapolis)
- --------------------------------------------------------------------------------
Business Week
Business Week International
Business Week Online
- --------------------------------------------------------------------------------
BYTE
Data Communications/
Data Communications International
LANTimes
tele.com
NSTL
- --------------------------------------------------------------------------------
F.W. Dodge
Sweet's Group
Architectural Record
Engineering News-Record
Design-Build
- --------------------------------------------------------------------------------
Aviation Week
Aviation Week & Space Technology
A/C Flyer
Business & Commercial Aviation
World Aviation Directory
O&M Magazine
Aviation Week Newsletters
Healthcare Information Group
Hospital Practice
The Physician and Sportsmedicine
Postgraduate Medicine
Healthcare Informatics
InfoCare
e.MD
Healthcare Education Group
Science & Technology Group
Chemical Engineering
Modern Plastics/Modern Plastics International
Power
Electrical World
Electric Power International
Information Technologies for
Utilities/IT
Energy and Business Newsletters
Utility Data Institute
- --------------------------------------------------------------------------------
Tower Group International
Tower Group International Canada, Inc.
================================================================================
<PAGE> 17
Financial Contents
26 Management's Discussion and Analysis
33 Consolidated Statement of Income
34 Consolidated Balance Sheet
36 Consolidated Statement of Cash Flows
37 Consolidated Statement of Shareholders' Equity
38 Notes to Consolidated Financial Statements
45 Report of Management/Report of Independent Auditors
46 Eleven-Year Financial Review
48 Supplemental Financial Information
Financial review
[CHARTS OMITTED]
25
<PAGE> 18
Management's Discussion and Analysis
Operating Results
<TABLE>
<CAPTION>
Consolidated Review
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $3,534.1 $3,074.7 $2,935.3
% Increase 14.9 4.7 6.3
- --------------------------------------------------------------------------------
Operating Profit $ 599.2(a) $ 924.5(b) $ 508.6
% Increase (Decrease) (35.1) 81.8 12.7
- --------------------------------------------------------------------------------
% Operating Margin 17 30 17
Income Before Taxes $ 471.3(a) $ 814.8(b) $ 386.3
- --------------------------------------------------------------------------------
Net Income $ 290.7(a) $ 495.7(b) $ 227.1
================================================================================
</TABLE>
(a) Includes provision of $33.2 million ($19.9 million after taxes, or 20 cents
per diluted share) for real estate writedowns for the consolidation of office
space in New York City. Also includes gain on sale of Datapro Information
Services of $20.4 million ($20.2 million after taxes, or 20 cents per diluted
share). $30.5 million of the real estate charge is reflected in operating
profit.
(b) Includes gain on the exchange of the Shepard's/McGraw-Hill legal pub-
lishing unit for the Times Mirror Higher Education Group of $418.7 million
($260.5 million after taxes) and an unusual charge of $25 million ($14.9 million
after taxes) for costs to integrate The McGraw-Hill Companies' College division
with the acquired higher education business.
1997 Compared with 1996
Revenue and Earnings
In 1997 The McGraw-Hill Companies achieved significant growth in revenue and
profit. The 14.9% growth in operating revenue reflects excellent sales in
elementary-high school (el-hi) publishing; record revenue at Standard & Poor's
Ratings Services from strong new issuance volume in the U.S. bond market and
global expansion; and the acquisition of the former Times Mirror Higher
Education Group. Excluding nonrecurring items, operating profit improved $78.4
million, or 14.8%, reflecting the strong revenue growth. Net income increased
16.2% to $290.7 million and diluted earnings per share increased to $2.91 from
$2.50 last year.
Comparisons exclude the 1996 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, or $2.61 per
diluted share) and an unusual charge of $25 million ($14.9 million after taxes,
or 15 cents per diluted share) for costs to integrate the College division with
the acquired higher education business.
In 1997, the Datapro Information Services business was divested for $25
million in cash; operating results reflect a gain of $20.4 million ($20.2
million after taxes, or 20 cents per diluted share). The pretax gain is recorded
as other income on the consolidated statement of income and is reflected in the
operating profit of the Information and Media Services segment. The McGraw-Hill
London House and McGraw-Hill School Systems units were also divested in 1997 for
$29 million in cash; the proceeds approximated the book values of the
properties.
1997 earnings reflect a one-time, noncash provision of $33.2 million
($19.9 million after taxes, or 20 cents per diluted share) for the consolidation
of office space in New York City. This one-time provision is primarily for the
writedown of a building to be sold as part of the office consolidation and the
writedown of leasehold improvements for the surrender of office space to be
vacated in the headquarters building. These actions were taken to consolidate
into fewer and more efficient locations and to align future space requirements
with growth plans. The 1997 operating profit of each segment and corporate
expenses reflect the amount of the provision associated with each segment. New
leases were signed for approximately 1.4 million square feet of office space
through the year 2020.
Income before taxes, excluding the gain on the sale of Datapro and the
facilities charge, increased 14.9% over 1996, reflecting the strong revenue
gains.
Expenses
Operating expenses in 1997 increased 13.4%, reflecting higher revenue,
investments in new products and modest inflationary increases in key expense
categories, such as compensation. Operating expenses include the one-time $33.2
million facilities charge. Combined printing, paper and distribution prices
declined in 1997 by approximately 2% due to the impact of lower paper prices
earlier in the year, the successful negotiations with suppliers and the leverage
gained through the acquisition of the former Times Mirror Higher Education
Group.
Selling and general expenses increased 15.3%, reflecting volume-related
increases. A significant portion of both operating and selling and general
expenses is compensation, which increased approximately 9% to $927 million,
reflecting the impact of merit increases, the acquisition of the Times Mirror
Higher Education Group and incentive related compensation.
Depreciation and amortization expense, including amortization of goodwill,
intangible assets and prepublication costs, increased $55 million, or 23%, due
primarily to the impact of the acquisition of the Times Mirror Higher Education
Group and the amortization of prepublication costs associated with 1997 el-hi
adoptions.
In 1998, combined paper, printing and distribution prices are expected to
increase between 3-4% primarily due to paper price increases that occurred in
late 1997, nominal printing price increases and an expected postal rate
increase. The impact of merit increases on compensation costs should approximate
4%.
26
<PAGE> 19
Interest Expense
Net interest expense in 1997 was $52.5 million compared with $47.7 million in
1996, an increase of $4.8 million, or 10.3%, resulting from an increase in
average commercial paper interest rates from 5.4% in 1996 to 5.6% in 1997 and an
increase in commercial paper borrowing levels. In 1998, interest expense will
increase due to higher borrowing levels associated with capital expenditures,
primarily for the build-out of new office space in New York City.
Provision for Income Taxes
The provision for taxes as a percent of income before taxes, excluding the gain
on the sale of Datapro, was 40.0% in 1997 compared with 40.6% in 1996. The
reduction in the effective tax rate reflects lower state taxes resulting
primarily from the acquisition of the Times Mirror Higher Education Group.
Including the gain on the sale of Datapro, the effective tax rate was 38.3% due
to lower taxes on the gain.
In 1998, the provision for taxes as a percent of income before taxes is
expected to decline to 39% due to favorable apportionment changes reducing state
taxes.
1996 Compared with 1995
Revenue and Earnings
On October 15, 1996 the Shepard's/McGraw-Hill legal publishing unit was
exchanged for the Times Mirror Higher Education Group and other consideration,
including $34 million in cash. The valuation of the properties exchanged was
$485 million. The divestiture of Shepard's reflected a strategy to focus
investment and resources in businesses with significant growth opportunities and
synergies with core businesses.
The acquisition of the Times Mirror properties - Richard D. Irwin, William
C. Brown, Brown & Benchmark, Irwin Professional Publishing and Mosby College -
established the company as the world's largest educational publisher. The
acquired higher education businesses were integrated with the McGraw-Hill
College division, resulting in the elimination of 500 positions and the
consolidation of facilities and systems. The integration actions were largely
completed in 1997.
Operating revenue increased 4.7% in 1996, reflecting a then-record year
for Standard & Poor's Ratings Services and stronger results in school publishing
and higher education. The exchange transaction did not significantly impact
year-to-year revenue comparisons as the former Times Mirror Higher Education
properties 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.
Excluding nonrecurring items, operating profit improved $22.2 million, or
4.4%, primarily due to Standard & Poor's Ratings Services' global growth, a
strong bond market and new products. Educational and Professional Publishing
operating profit declined slightly as strong results in school publishing and
higher education were offset by a decline in professional publishing's domestic
profit, development costs for McGraw-Hill Home Interactive, and fourth quarter
dilution from the exchange transaction. Information and Media Services operating
profit declined, as improved profits at Business Week and the Construction
Information Group were offset by declines in Publication Services and
Broadcasting.
1995's results include a gain on the sale of the topical publishing
division of Shepard's of $23.8 million and a provision of $26.8 million for the
"best practices" program. Under the best practices program, actions were taken
to improve the efficiency and effectiveness of major systems and processes,
including various administrative functions and related technology. Approximately
750 positions were eliminated under this program, mostly in 1996.
Expenses
Operating expenses in 1996 increased $104.7 million, or 7.8%, due to volume and
modest inflationary increases in key expense categories, such as compensation.
Paper, printing and distribution prices were held to a 1% increase. Selling and
general expenses increased less than 1% as costs associated with the revenue
increase were largely offset by cost reductions. Depreciation and amortization
expenses increased $7.2 million, or 3.1%, due to the impact of the acquisition
of the Times Mirror Higher Education Group.
Interest Expense
Net interest expense in 1996 decreased $11.1 million, reflecting a decrease in
average commercial paper interest rates from 6.0% in 1995 to 5.4% in 1996, and
reduced commercial paper borrowing levels.
Provision for Income Taxes
The provision for taxes in 1996 as a percent of income before taxes was 40.6%,
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 reduction in the effective tax rate from 41.2% in 1995
reflects the declining impact of nondeductible goodwill amortization on higher
pretax earnings as well as favorable settlement of state tax audits.
27
<PAGE> 20
Management's Discussion and Analysis
Segment Review
<TABLE>
<CAPTION>
Educational and Professional Publishing
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $1,573.8 $1,277.9 $1,235.6
- --------------------------------------------------------------------------------
% Increase 23.2 3.4 6.3
- --------------------------------------------------------------------------------
Operating Profit $ 187.7(a) $ 545.7(b) $ 162.6(c)
% Increase (Decrease) (65.6) 235.6 29.3
- --------------------------------------------------------------------------------
% Operating Margin 12 43 13
================================================================================
</TABLE>
(a) Includes an $8.6 million provision for the consolidation of office space in
New York City.
(b) 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 an unusual charge of $25 million for costs to integrate The McGraw-Hill
Companies' College division with the acquired higher education business.
(c) 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 (comprising International Publishing, Continuing Education Center,
Professional Book and Medical Publishing). On October 15, 1996, the
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
segment results. Shepard's/McGraw-Hill had revenue of $57 million in 1996.
In 1997, the Educational and Professional Publishing segment achieved
record revenue and operating profit. The revenue growth of 23.2% reflects strong
growth in el-hi publishing and the full year impact of the Times Mirror Higher
Education Group. Operating profit, excluding the $8.6 million provision in the
segment for the consolidation of office space and last year's net gain on the
exchange of Shepard's for the Times Mirror Higher Education Group, increased
29.2% to $196.3 million. In 1996, revenue increased 3.4% and operating profit,
excluding the unusual items in both 1996 and 1995, declined modestly from $154
million to $152 million due to development costs for McGraw-Hill Home
Interactive, reduced profits in domestic professional publishing, and dilution
from the timing of integration savings and the seasonal decline in earnings in
the acquired higher education business resulting from the exchange transaction.
Educational Publishing
The Educational Publishing Group comprises four divisions: McGraw-Hill School,
publisher of textbooks and instructional materials for elementary schools
(grades K-8); 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; and Science
Research Associates (SRA/McGraw-Hill), developer of supplementary elementary and
secondary instructional materials.
Educational Publishing Group revenue grew 25.4% in 1997 to $787 million,
50% of segment revenue. Market conditions were very strong, with a very
favorable adoption cycle and a continued strong funding environment. The revenue
growth reflects market share gains in adoption states and open territories. Two
product offerings in the California reading adoption - McGraw-Hill School's
basal program, Spotlight on Literacy, and the SRA/McGraw-Hill reading series,
Collections for Young Scholars - combined for a market-leading 35% share.
McGraw-Hill School's social studies program, Adventures in Time and Place,
captured 60% market share in Texas. The reading and social studies programs also
performed very well in other adoption states and open territories.
Despite limited adoption opportunities, Glencoe/ McGraw-Hill increased
revenue and profit through its broad product base and successful new programs.
SRA/ McGraw-Hill's performance improved due to the California reading adoption
and increased sales of its skill-based learning materials. CTB/McGraw-Hill had
strong revenue growth from its new testing series, TerraNova, and increased
custom testing services; profit declined due to costs of introducing TerraNova
and lower profit on custom contracts.
In 1998, Educational Publishing anticipates positive market conditions
with a continued favorable funding environment, increasing enrollments and a
less robust, yet still positive, adoption cycle. Major 1998 elementary adoptions
include math in seven states, including Florida, where McGraw-Hill School and
SRA/McGraw-Hill will both have product offerings, and the second year of the
California reading adoption. Glencoe/McGraw-Hill will have stronger adoption
opportunities in the secondary market, particularly in math and social studies.
CTB/McGraw-Hill will face an increasingly competitive testing marketplace.
In 1996, despite an off-adoption year, Educational Publishing had a 5.1%
increase in revenue and improved profits. Glencoe/McGraw-Hill achieved
impressive revenue and profit growth. McGraw-Hill School revenue and profit
declined from 1995, as expected, reflecting fall-off from 1995's Texas music
adoption. SRA/McGraw-Hill's results improved as the acquisition of Open Court
Publishing and sales of direct instruction materials more than offset revenue
declines from 1995's Texas Early Childhood adoption. CTB/McGraw-Hill had higher
revenue and profit.
Higher Education
Revenue in Higher Education increased 64% in 1997 to $336 million, 21% of
segment revenue. The revenue increase reflects the full year impact of the
former
28
<PAGE> 21
Times Mirror Higher Education Group. Key frontlist titles driving the revenue
increase include revisions of Knorre Puntos de Partida, An Invitation to
Spanish, Garrison Managerial Accounting, and Mader Inquiry Into Life. Profits
increased significantly due to the revenue growth and cost reductions from the
integration program initiated with the acquisition. Most of the planned
integration actions were completed in 1997 with the elimination of over 500
positions and the consolidation of facilities and systems.
In 1998, Higher Education expects to expand its frontlist, benefit from a
strong backlist and continue growth in custom publishing. Profits should reflect
the full year impact of 1997 integration actions. 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. Higher
Education plans to expand its electronic delivery of content through products
such as the McGraw-Hill Learning Architecture (MHLA) and customized products
through Primis Custom Publishing.
In 1996, Higher Education revenue increased due to stronger frontlist
sales, including McConnell's & Brue's Economics and Meig & Meigs' Accounting
revisions, stronger backlist and Primis sales, and $54 million in fourth quarter
sales from the former Times Mirror Higher Education Group. Profit increased over
1995 due to the increased revenue and expense controls.
Professional Publishing
Revenue increased 16.0% to $451 million, 29% of segment revenue. The revenue
growth reflects an expanded publishing plan for business, computer and medical
titles, the 8th edition of the Encyclopedia of Science and Technology, and the
14th edition of Harrison's Principles of Internal Medicine. Internationally,
revenue grew significantly due to the full year impact of former Times Mirror
products, the continuing recovery in Mexico and improved economic conditions in
Canada. Professional Publishing profits were dampened by continued softness at
the Continuing Education Center, the home-study business.
In 1998, Professional Publishing plans to expand its publishing plan and
benefit from strong international education markets. Enhancement of course
offerings is planned at the Continuing Education Center as a unit of the new
McGraw-Hill Lifetime Learning unit.
In 1996, revenue grew approximately 1% as increased international revenue
was offset by a decline in domestic revenue reflecting a difficult retail book
market, a reduced publishing plan, and lower completion rates at the Continuing
Education Center. Profit declined due to the domestic operating performance.
<TABLE>
<CAPTION>
Financial Services
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $980.1 $855.9 $786.8
% Increase 14.5 8.8 5.5
- --------------------------------------------------------------------------------
Operating Profit $269.9(a) $262.1 $230.9
% Increase 3.0 13.5 6.3
- --------------------------------------------------------------------------------
% Operating Margin 28 31 29
================================================================================
</TABLE>
(a) Includes a $20.4 million provision for the consolidation of office space in
New York City.
The Financial Services segment consists of two operating groups: Standard
& Poor's Ratings Services and Standard & Poor's Financial Information Services,
which comprises divisions serving the following markets: Retail, Corporate,
Institutional, Sales & Trading, and Municipal Securities.
Financial Services' segment revenue increased 14.5% to $980.1 million and
operating profit, excluding a $20.4 million provision for the consolidation of
office space, rose 10.8% to $290.3 million. Operating margins declined slightly,
reflecting investments in new products and services and global expansion. In
1996, the segment's revenue grew 8.8% and operating profit rose 13.5%.
Standard & Poor's Ratings Services
Standard & Poor's Ratings Services revenue rose in 1997 on record new issue
volume in the U.S. bond market, rapid growth in global markets and expanded
nontraditional ratings services. Corporate ratings growth reflects a favorable
interest rate environment and the increasing demand for high yield bonds.
Structured Finance grew, reflecting strong issuance in asset-backed and
mortgage-backed markets. Public Finance revenue grew moderately in a favorable
market environment. Nontraditional revenue continued to expand in areas such as
managed funds and insurance. International revenue grew substantially,
reflecting the acquisitions of Risk Annalysis in Argentina and Fund Research in
the UK, and continued global growth in all regions. The expanding global focus
also includes a 50% joint venture in Taiwan Ratings Corporation, a 10% equity
interest in CRISIL, India's leading rating service, and the signing of
affiliation agreements with Fundacao Getuliuo Vargas in Brazil and CA Ratings in
South Africa. 1997 operating profit rose, reflecting the higher revenue while
funding larger investments in global expansion and product diversification.
In 1998, Standard & Poor's Ratings Services anticipates another strong
year, dependent on a continuation of a favorable interest rate environment,
healthy bond market issuance, including noninvestment grade corporate debt, and
continued expansion of the nontraditional business areas. Investment in
international expansion will continue.
In 1996, Standard & Poor's Ratings Services revenue rose on higher bond
market issuance in the U.S. municipal, corporate, and structured markets,
primarily reflecting a favorable interest environment and increasing demand for
funds from noninvestment grade issuers. Nontraditional revenue grew, reflecting
continued product line diversification. International revenue also grew
substantially, reflecting 100% ownership of ADEF, the former 50% joint venture
in France, and continued global growth, particularly in Asia and Europe. Global
franchise expansion continued with cooperation agreements signed with Pefindo in
Indonesia and Feller-Rate in Chile. U.S. expansion continued with the opening of
an office in Dallas to serve southwestern states. 1996 operating profit rose,
reflecting the higher revenue while funding increased investments.
29
<PAGE> 22
Management's Discussion and Analysis
Segment Review (continued)
Standard & Poor's Financial Information Services
Standard & Poor's Financial Information Services' 1997 revenue increased, driven
by a strong economic climate in the financial services industry. The Retail
Group's revenue increased due to continued healthy demand for equity-related
information and services. In particular, Standard & Poor's ComStock grew as more
individual investors seek real-time information to manage their own portfolios.
In the Institutional sector, Standard & Poor's Compustat subscription revenue
gained from increased demand for fundamental data used by money managers. In
Sales & Trading, Standard & Poor's Platt's and Standard & Poor's MMS revenue
improved, reflecting growth in demand for real-time fundamental information and
analysis in the global financial and energy services markets. In the Corporate
sector, Standard & Poor's DRI revenue was flat. Negatively influencing the
revenue performance is a continuing contraction in the domestic municipal
securities market. Operating profit declined in 1997, reflecting the weakness in
the secondary municipal securities sector and more aggressive investment in new
products, such as S&P Personal Wealth, a new service targeted to the individual
investor market, which was launched in early 1998.
In 1998, Standard & Poor's Financial Information Services will complete
the realignment of its operations around key core market segments. New product
development will continue to be a priority, concentrating on real-time Web-based
data, commentary, and analytical services for solution-oriented content and
services. Growth plans will continue to be impacted by the strength of
international markets. The November 1997 acquisition of Micropal Group Ltd., a
leading provider of mutual funds data and information, will also contribute to
product line expansion.
In 1996, Standard & Poor's Financial Information Services revenue grew at
a modest rate. Revenue growth was fueled primarily by international market
expansion, a healthy demand for equity-related information and services and
increased demand in electronic subscription products. Negatively influencing
revenue performance during the year was a continued contraction in the domestic
municipal bond market. Greater competitive pressure in the corporate market and
reduced government contracts hampered demand for consulting services offered by
Standard & Poor's DRI. Operating profit grew at a greater rate than revenue due
to strong expense controls.
<TABLE>
<CAPTION>
Information and Media Services
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $980.2 $940.9 $912.9
% Increase 4.2 3.1 7.0
- --------------------------------------------------------------------------------
Operating Profit $141.5(a) $116.8 $115.1
% Increase 21.2 1.5 6.3
- --------------------------------------------------------------------------------
% Operating Margin 14 12 13
================================================================================
</TABLE>
(a) Includes a provision of $1.5 million for real estate writedowns for the
consolidation of office space in New York City and a gain on sale of Datapro
Information Services of $20.4 million.
The Information and Media Services segment comprises three operating
groups: Information Services (Business Week, Publication Services, Information
Technology and Communications, and Tower Group International); McGraw-Hill
Construction Information Group; and the McGraw-Hill Broadcasting Group.
The Information and Media Services segment's revenue increased 4.2% to
$980.2 million in 1997 and operating profit, excluding the gain on the sale of
Datapro and the facilities provision, increased $5.8 million, or 5.0%. In 1996,
revenue increased 3.1% and operating profit increased $1.7 million, or 1.5%.
1995 operating profit reflected a best practice charge of $6.3 million.
Information Services
Information Services 1997 revenue increased 3.3% to $584 million, or 60% of
segment revenue. The revenue growth was 6.9% excluding the divestiture of
Datapro.
Business Week revenue and operating profit grew strongly in 1997, the
third year of growth. The results reflect an increase in advertising pages of
5.8%, despite two fewer issues, and continued improvement in advertising and
circulation margins. Enhanced marketing programs contributed to the performance.
A successful 1998 is dependent on continued strength in advertising in North
American and international markets, where growth is expected to be at a lower
rate due to the Asian economic instability. In 1996, Business Week revenue and
operating profit grew as advertising and circulation margins improved.
Publication Services comprises the Aviation Week, Healthcare Information
and Science and Technology units. Revenue and operating profit increased in
1997, reflecting strong advertising page growth in the healthcare magazines;
strong display and classified advertising, and circulation and ancillary product
growth at Aviation Week; and enhanced profit levels in Science and Technology on
modest revenue growth due to product line rationalization. In 1998, Publication
Services expects to continue investing in circulation and new products and
services. In 1996, Publication Services revenue increased due to growth in
aviation and healthcare and several healthcare acquisitions, partially offset by
declines in Science and Technology; operating profit rose modestly.
Revenue for the Information Technology and Communications Group declined
in 1997, reflecting the divestiture of Datapro and a modest decline in
advertising revenue. Revenue gains in tele.com, LAN Times and NSTL testing
services were offset by lower advertising and circulation revenues at BYTE. The
revenue decline at BYTE and increased marketing investments produced an
operating loss. In 1998, continued difficult market conditions are expected. In
1996, Information Technology
30
<PAGE> 23
and Communications revenue declined and operating profit declined significantly
due to the revenue decline and the costs to launch tele.com.
Tower Group International revenue increased in 1997 due to growth in core
U.S. customs brokerage business and expansion in other transportation services.
Operating profit increased at a lower rate reflecting investments. In 1998,
import growth is expected to continue as will investments in extended product
offerings and global expansion. In 1996, revenue and operating profit increased
due to the expansion of inbound air transportation, drawback and professional
advisory services and the full year impact of the April 1995 acquisition of UCB
Canada.
Construction Information
The McGraw-Hill Construction Information Group revenue increased 7.5% in 1997 to
$279 million, 28% of segment revenue. Revenue increased due to growth at F.W.
Dodge and Sweet's as electronic products grew by 25% and also from new products
such as the Sweet's Directory. Architectural Record and Engineering News Record
had significant increases in advertising pages. Operating profit increased over
1996 due to the revenue growth and continued expense management. The contract
value of new U.S. construction in the key nonresidential building sector rose 7%
in 1997 compared to 5% in 1996.
In 1998, the contract value of nonresidential building is expected to rise
at about half the rate of 1997. The Group should continue to benefit from new
electronic products, product enhancements and opportunity-based partnerships and
alliances to provide enriched content to customers.
In 1996, revenue increased as F.W. Dodge's growth outpaced 1995, Sweet's
electronic revenue expanded and the construction magazines had strong growth in
advertising pages. Operating profit increased over 1995 due to the revenue
growth and expense savings.
Broadcasting
The McGraw-Hill 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 increased
1.0% in 1997 to $117 million, 12% of segment revenue. Revenue growth was limited
by the loss of political advertising, which had reached record levels in 1996.
The stations also faced declining ratings in ABC network prime-time programming
in 1997. Cost reductions enabled profits to increase significantly.
In 1998, Broadcasting expects a healthy sales outlook. Political
advertising should be an important contributor with U.S. Senate and House races
in all markets and gubernatorial races in California and Colorado.
In 1996, Broadcasting revenue was slightly lower than the record level
achieved in 1995; performance was hampered by declining ratings in ABC network
prime-time and early morning programs. Advertiser spending in the San Diego
market was also well below expectations. Political advertising in all four
markets was strong and reached a record level for the Group. Operating profit
declined accordingly.
<TABLE>
<CAPTION>
Liquidity and Capital Resources
(in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Working Capital $ 258.2 $ 130.9
- --------------------------------------------------------------------------------
Total Debt $ 684.4 $ 581.4
- --------------------------------------------------------------------------------
Accounts Receivable (before reserves) $1,155.1 $1,041.7
% Increase 11 11
- --------------------------------------------------------------------------------
Inventories $ 290.5 $ 273.2
% Increase 6 15
- --------------------------------------------------------------------------------
Investment in Prepublication Costs $ 166.8 $ 183.0
% Increase (Decrease) (9) 36
- --------------------------------------------------------------------------------
Capital Expenditures $ 78.7 $ 63.3
% Increase 24 8
================================================================================
</TABLE>
The company continues to maintain a strong financial position. Cash flow
from operations, excluding $150 million in tax payments on last year's gain on
the Shepard's/Times Mirror Higher Education exchange, was $523 million in 1997,
compared with $460 million in 1996. Cash flow from operations was sufficient to
cover dividends, outlays for the purchase of property and equipment, investment
in publishing programs, and the repurchase of common shares. 1996's cash flow
from operations increased $26.9 million from 1995, reflecting the acquisition of
Times Mirror Higher Education.
In 1997, total debt increased $103 million, reflecting the income tax
payment on last year's exchange gain, partially offset by the retirement of
commercial paper borrowings resulting from positive cash flow. Debt includes $46
million of acquisition-related debt, primarily due to the former shareholders of
Micropal Group Limited, classified as notes payable. Total debt as a percentage
of total capital increased to 32.3% at the end of 1997 from 29.9% at the end of
1996. In 1996, total debt decreased $47.3 million, reflecting the retirement of
commercial paper borrowings from positive cash flow.
Commercial paper borrowings at December 31, 1997 were $381 million.
Commercial paper debt 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 that became effective with the Securities and
Exchange Commission in mid-1990, an additional $250 million of debt securities
can be issued. 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.
Working capital at the end of 1997 of $258 million was $127 million above
the level at the end of 1996, primarily due to larger accounts receivable
balances from higher sales, net of larger current debt levels.
Earnings and cash flow are significantly impacted by the seasonality of
businesses, particularly educational publishing. The first quarter is the least
significant, accounting for 18% of revenues and only 5% of income in 1997. The
third quarter is the most significant, generating nearly half of 1997 annual
earnings. This seasonality in revenue also impacts cash flow and related
borrowing patterns. The
31
<PAGE> 24
Management's Discussion and Analysis
Liquidity and Capital Resources (continued)
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 1997. The
acquisition of the Times Mirror Higher Education Group further impacted the
seasonality of operating results.
Accounts receivable (before reserves) increased $113.4 million, or 10.9%,
primarily as a result of increased revenues. The year-to-year increase was
effectively controlled through timely collections. Number of days sales
outstanding, a key indicator of collection efficiency, increased two days in
1997 due to the increased sales in education markets where terms of sale are
longer.
Finished goods and work-in-process inventories increased $22.4 million, or
9.4%, primarily due to the large number of adoptions in 1997. Raw material
inventory, primarily paper, declined $5.1 million, reflecting the timing of
paper purchases.
Capital expenditures, primarily the purchase of property and equipment,
totaled $79 million in 1997, compared with $63 million in 1996. In 1997 and
1996, expenditures were primarily for computer equipment for business units and
corporate departments, including the integration of the Times Mirror Higher
Education units. In 1998, capital expenditures are expected to more than double
due to the build-out of the new leased office space in New York City,
construction of a building in Columbus, Ohio, and spending on systems
replacement.
Net prepublication costs declined to $326 million at December 31, 1997 as
amortization expense exceeded additional spending. Prepublication investment
totaled $167 million in 1997, $16 million less than 1996. 1998 prepublication
spending is expected to increase approximately 20% from 1997 levels, reflecting
an increase in investment for the 1999 and 2000 adoption years.
On January 31, 1996, the Board of Directors approved a stock repurchase
program authorizing the purchase of up to four million shares of common stock.
As of December 31, 1997, 2.7 million common shares have been repurchased at a
cost of $143.2 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 28, 1998, an increase in the quarterly common stock dividend of
three cents, or 8.3%, to 39 cents per share was announced.
In 1998, cash flow from operations is expected to be sufficient to cover
dividends, investment in publishing programs and any share repurchases. Debt
levels will be impacted by borrowings for the increase in capital expenditures.
The company has operations in various foreign countries. In the normal
course of business, these operations are exposed to fluctuations in currency
values. Management does not consider the impact of currency fluctuations to
represent a significant risk. The company has naturally hedged positions in most
countries with a local currency perspective and asset and liability offsets. The
company's interest expense is sensitive to changes in the general level of U.S.
interest rates. In this regard, changes in the U.S. rates affect the interest
paid on a portion of its debt. The company does not generally enter into
derivative financial instruments in the normal course of business, nor are such
instruments used for speculative purposes.
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, mostly to be spent in 1998. Certain systems that are not Year
2000-compliant will be 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 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.
"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: future paper,
printing and distribution prices; future compensation merit increase rates;
Educational Publishing's level of success in 1998 adoptions; the contribution to
revenue and profits from the former Times Mirror Higher Education businesses;
the strength of international education markets; the strength of profit levels
at Standard & Poor's Ratings Services; the level of success of new product
development and strength of international markets at Standard & Poor's Financial
Information 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 level of political
advertising; 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 upon various important factors, including but not
limited to worldwide economic and political conditions, currency and foreign
exchange volatility, the health of capital and equity markets, the successful
marketing of new products, and the effect of competitive products and pricing
and the timing of reducing costs in the newly merged higher education business.
32
<PAGE> 25
Consolidated Statement of Income
<TABLE>
<CAPTION>
Years ended December 31 (in thousands,
except per-share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue $3,534,095 $3,074,697 $2,935,283
- --------------------------------------------------------------------------------------------------
Expenses
Operating 1,639,377 1,445,028 1,340,348
Selling and general 1,116,215 968,103 960,875
Depreciation and amortization 293,518 238,558 231,408
- --------------------------------------------------------------------------------------------------
Total expenses 3,049,110 2,651,689 2,532,631
Gain on exchange of Shepard's/McGraw-Hill (Note 3) -- 418,731 --
Other income - net (Note 2) 38,823 20,724 42,385
- --------------------------------------------------------------------------------------------------
Income from operations 523,808 862,463 445,037
Interest expense - net 52,542 47,656 58,766
- --------------------------------------------------------------------------------------------------
Income before taxes on income 471,266 814,807 386,271
Provision for taxes on income (Note 7) 180,591 319,074 159,144
- --------------------------------------------------------------------------------------------------
Net income $ 290,675 $ 495,733 $ 227,127
- --------------------------------------------------------------------------------------------------
Basic earnings per common share (Note 1) $ 2.94 $ 4.99 $ 2.29
Diluted earnings per common share (Note 1) $ 2.91 $ 4.96 $ 2.28
==================================================================================================
</TABLE>
See accompanying notes.
33
<PAGE> 26
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31 (in thousands, except share data) 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and equivalents (Note 1) $ 4,768 $ 3,430
Accounts receivable (net of allowances
for doubtful accounts and sales returns:
1997 - $182,629; 1996 - $162,260) 972,449 879,466
Receivable from broker-dealers and dealer
banks (Note 1) 9,483 2,473
- ------------------------------------------------------------------------------------
Inventories:
Finished goods 233,105 219,295
Work-in-process 28,455 19,887
Paper and other materials 28,919 33,976
- ------------------------------------------------------------------------------------
Total inventories 290,479 273,158
Prepaid income taxes 99,131 106,464
Prepaid and other current assets 88,111 84,592
- ------------------------------------------------------------------------------------
Total current assets 1,464,421 1,349,583
- ------------------------------------------------------------------------------------
Prepublication costs (net of accumulated
amortization: 1997 - $526,156; 1996 - $486,960)
(Note 1) 326,251 353,064
Investments and other assets
Investment in Rock-McGraw, Inc. - at equity (Note 6) 72,292 66,899
Prepaid pension expense 111,895 104,515
Other 167,701 150,373
- ------------------------------------------------------------------------------------
Total investments and other assets 351,888 321,787
- ------------------------------------------------------------------------------------
Property and equipment - at cost
Land 18,823 19,196
Buildings and leasehold improvements 264,237 285,123
Equipment and furniture 555,154 531,361
- ------------------------------------------------------------------------------------
Total property and equipment 838,214 835,680
Less - accumulated depreciation 564,584 524,187
- ------------------------------------------------------------------------------------
Net property and equipment 273,630 311,493
- ------------------------------------------------------------------------------------
Goodwill and other intangible assets - at cost
(net of accumulated amortization:
1997 - $449,981; 1996 - $411,606) (Notes 1 and 3) 1,308,284 1,306,312
- ------------------------------------------------------------------------------------
$3,724,474 $3,642,239
====================================================================================
</TABLE>
See accompanying notes.
34
<PAGE> 27
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities
Notes payable (Note 5) $ 77,395 $ 24,518
Accounts payable 285,862 241,736
Payable to broker-dealers and dealer banks
(Note 1) 9,331 2,400
Accrued royalties 96,801 89,789
Accrued compensation and contributions to
retirement plans 181,393 142,235
Income taxes currently payable 100,685 235,573
Unearned revenue 219,698 229,216
Other current liabilities 235,077 253,196
- --------------------------------------------------------------------------------
Total current liabilities 1,206,242 1,218,663
- --------------------------------------------------------------------------------
Other liabilities
Long-term debt (Note 5) 607,030 556,850
Deferred income taxes 111,022 150,319
Accrued postretirement healthcare and
other benefits 196,508 198,709
Other non-current liabilities 169,021 156,580
- --------------------------------------------------------------------------------
Total other liabilities 1,083,581 1,062,458
- --------------------------------------------------------------------------------
Total liabilities 2,289,823 2,281,121
- --------------------------------------------------------------------------------
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 - 1,362 shares in 1997
and 1,388 shares in 1996 14 14
Common stock, $1 par value:
authorized - 150,000,000 shares;
issued - 102,919,231 shares in 1997
and 102,919,060 shares in 1996 102,919 102,919
Additional paid-in capital 35,469 37,473
Retained income 1,542,854 1,394,884
Accumulated other comprehensive income (74,247) (57,302)
- --------------------------------------------------------------------------------
Less - common stock in treasury - at cost
(3,817,643 shares in 1997 and 3,388,398
shares in 1996) 159,447 107,410
Unearned compensation on restricted stock 12,911 9,460
- --------------------------------------------------------------------------------
Total shareholders' equity 1,434,651 1,361,118
- --------------------------------------------------------------------------------
$ 3,724,474 $ 3,642,239
================================================================================
</TABLE>
35
<PAGE> 28
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities
Net income $ 290,675 $ 495,733 $ 227,127
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 73,151 71,097 67,916
Amortization of goodwill and intangibles 50,034 39,190 38,548
Amortization of prepublication costs 170,333 128,271 124,944
Provision for losses on accounts receivable 80,600 65,116 65,385
Provision for facility reserve 33,152 -- --
Gain on sale of Datapro Information Services (20,404) -- --
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 7,541 5,839 6,120
Change in assets and liabilities net of effect of
acquisitions and dispositions:
Increase in accounts receivable (185,814) (118,235) (144,007)
(Increase)/decrease in inventories (20,742) 4,000 (30,804)
Increase in prepaid and other current assets (4,303) (15,880) (7,957)
Increase in accounts payable and accrued expenses 91,423 40,717 51,697
Increase/(decrease) in unearned revenue (5,145) 13,770 2,894
Increase/(decrease) in other current liabilities (25,802) (11,010) 6,670
Increase/(decrease) in interest and income taxes
currently payable (134,117) 166,646 23,913
Increase/(decrease) in prepaid/deferred income taxes (19,770) (24,807) 18,913
Net change in other assets and liabilities (7,736) (6,564) 5,659
- -------------------------------------------------------------------------------------------------------
Cash provided by operating activities 373,076 460,152 433,236
- -------------------------------------------------------------------------------------------------------
Investing activities
Investment in prepublication costs (166,784) (182,978) (134,118)
Purchase of property and equipment (78,724) (63,313) (58,776)
Acquisition of businesses and equity interests (43,780) (31,195) (36,246)
Proceeds from exchange of Shepard's/McGraw-Hill
for the Times Mirror Higher Education Group 6,730 27,258 --
Disposition of businesses 54,521 6,383 34,828
Other 3,256 3,658 1,353
- -------------------------------------------------------------------------------------------------------
Cash used for investing activities (224,781) (240,187) (192,959)
- -------------------------------------------------------------------------------------------------------
Financing activities
Dividends paid to shareholders (142,705) (131,375) (119,653)
Additions to/(repayment of) commercial paper
and other short-term debt - net 62,340 (46,696) (133,700)
Repurchase of treasury shares (79,899) (63,314) --
Exercise of stock options 20,367 19,869 20,616
Other (5,560) (4,928) (3,133)
- -------------------------------------------------------------------------------------------------------
Cash used for financing activities (145,457) (226,444) (235,870)
- -------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,500) (341) (2,213)
- -------------------------------------------------------------------------------------------------------
Net change in cash and equivalents 1,338 (6,820) 2,194
Cash and equivalents at beginning of year 3,430 10,250 8,056
- -------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 4,768 $ 3,430 $ 10,250
=======================================================================================================
</TABLE>
See accompanying notes.
36
<PAGE> 29
Consolidated Statement of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Accumulated
other
$1.20 Additional compre-
(in thousands, except preference Common paid-in Retained hensive
per-share data) $10 par $1 par capital income income
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 15 $ 102,918 $ 17,855 $ 923,052 $ (45,224)
Net income -- -- -- 227,127 --
Other comprehensive income,
net of tax - foreign currency
translation adjustments -- -- -- -- (11,023)
Comprehensive income
Dividends ($1.20 per share) -- -- -- (119,653) --
Exercise of stock options -- -- 5,685 -- --
Restricted stock -- -- 3,152 -- --
Other (1) 1 48 -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 14 102,919 26,740 1,030,526 (56,247)
Net income -- -- -- 495,733 --
Other comprehensive income,
net of tax - foreign currency
translation adjustments -- -- -- -- (1,055)
Comprehensive income
Dividends ($1.32 per share) -- -- -- (131,375) --
Share repurchase -- -- -- -- --
Exercise of stock options -- -- 3,886 -- --
Restricted stock -- -- 6,756 -- --
Other -- -- 91 -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 14 102,919 37,473 1,394,884 (57,302)
Net income -- -- -- 290,675 --
Other comprehensive income,
net of tax - foreign currency
translation adjustments -- -- -- -- (16,945)
Comprehensive income
Dividends ($1.44 per share) -- -- -- (142,705) --
Share repurchase -- -- -- -- --
Exercise of stock options -- -- (8,252) -- --
Restricted stock -- -- 6,186 -- --
Other -- -- 62 -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 14 $ 102,919 $ 35,469 $ 1,542,854 $ (74,247)
=========================================================================================================================
<CAPTION>
Less - Less -
common unearned
stock compensation
(in thousands, except in treasury on restricted
per-share data) at cost stock Total
- --------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 76,987 $ 8,577 $ 913,052
Net income -- -- 227,127
Other comprehensive income,
net of tax - foreign currency
translation adjustments -- -- (11,023)
-----------
Comprehensive income 216,104
Dividends ($1.20 per share) -- -- (119,653)
Exercise of stock options (14,583) -- 20,268
Restricted stock (1,539) (469) 5,160
Other (87) -- 135
- --------------------------------------------------------------------------------------
Balance at December 31, 1995 60,778 8,108 1,035,066
Net income -- -- 495,733
Other comprehensive income,
net of tax - foreign currency
translation adjustments -- -- (1,055)
-----------
Comprehensive income 494,678
Dividends ($1.32 per share) -- -- (131,375)
Share repurchase 63,314 -- (63,314)
Exercise of stock options (15,468) -- 19,354
Restricted stock (1,096) 1,352 6,500
Other (118) -- 209
- --------------------------------------------------------------------------------------
Balance at December 31, 1996 107,410 9,460 1,361,118
Net income -- -- 290,675
Other comprehensive income,
net of tax - foreign currency
translation adjustments -- -- (16,945)
-----------
Comprehensive income 273,730
Dividends ($1.44 per share) -- -- (142,705)
Share repurchase 79,899 -- (79,899)
Exercise of stock options (23,268) -- 15,016
Restricted stock (4,463) 3,451 7,198
Other (131) -- 193
- --------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 159,447 $ 12,911 $ 1,434,651
======================================================================================
</TABLE>
See accompanying notes.
37
<PAGE> 30
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 an accelerated 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 $1.8 billion at December 31, 1997 and $1.7 billion at
December 31, 1996 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 $282.4 million and $117.1 million at December
31, 1997 and 1996, 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. Revenues and expenses are translated
at average monthly exchange rates. 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 $109 million, $96 million and $96 million in advertising
costs in 1997, 1996 and 1995, respectively.
Earnings per common share. Basic earnings per common share are based on the
average number of common shares outstanding during the year. Diluted earnings
per common share include the effect of dilutive securities such as $1.20
convertible preference stock, stock options and restricted performance 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.
Accounting change. Effective December 31, 1997, the company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share. The standard requires a change in the method used to compute
earnings per share, a dual presentation of basic earnings per common share and
diluted earnings per common share and the restatement of prior periods
presented.
38
<PAGE> 31
A reconciliation of the number of shares used for calculating basic earnings per
common share and diluted earnings per common share follows:
<TABLE>
<CAPTION>
(in thousands of shares) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Average number of common
shares outstanding 98,973 99,416 99,257
Effect of stock options and
other dilutive securities 779 455 377
- --------------------------------------------------------------------------------
Average number of common
shares outstanding including
effect of dilutive securities 99,752 99,871 99,634
================================================================================
</TABLE>
Restricted performance shares outstanding at December 31, 1997 of 365,700 were
not included in the computation of diluted earnings per common share because the
necessary vesting conditions have not yet been met.
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.
Reclassification. Certain prior-year amounts have been reclassified for
comparability purposes.
2. Acquisitions and Dispositions
Acquisitions. In 1997, the company made seven acquisitions and equity
investments, including Micropal Group Ltd., for $43.8 million in cash, net of
cash acquired, and $41.9 million in debt. In 1996, excluding the exchange of
Shepard's/McGraw-Hill for the Times MirrorHigher 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-TMHEexchange. In 1995, the company made six acquisitions,
including UCB Canada, Inc., for $36.2 million in cash. 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) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of assets acquired $104,116 $583,460 $58,152
Cash paid (net of cash
acquired) 43,780 3,937 36,246
Fair value of business
exchanged -- 485,000 --
- --------------------------------------------------------------------------------
Liabilities assumed $ 60,336 $ 94,523 $21,906
================================================================================
</TABLE>
Dispositions. In 1997, the company sold Datapro Information Services,
McGraw-Hill School Systems and London House for $54.5 million. The pretax gain
on the sale of Datapro Information Services was $20.4 million, which was
included in other income. After taxes, the gain was $20.2 million. The proceeds
from the other two businesses sold approximated the book value of the
properties. In 1996, other than the Shepard's/McGraw-Hill-TMHE exchange
discussed in Note 3, there were no significant dispositions. 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.
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 $34 million in cash.
The valuation of the properties exchanged was $485 million. 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 ($168
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 diluted share).
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. In addition, 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 following unaudited pro forma information presents the consolidated
results of operations of the company for 1996 as if the exchange of businesses
had occurred at the beginning of 1996. Pro forma results for 1996 are: operating
revenue of $3.2 billion, net income of $225 million and diluted earnings per
common share of $2.25.
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
1996.
39
<PAGE> 32
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 pages 22-23 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 profit are from book publishing and financial and
information services operations in 31 countries. Transfers between geographic
areas are recorded at cost plus a markup and intercompany revenue and profit are
eliminated.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information, which
is effective for fiscal years beginning after December 15, 1997. SFAS No. 131
will not have any impact on the financial results or financial condition of the
company, but may result in certain changes in required disclosures of segment
information.
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++
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Educational and Professional Publishing $1,573,797 $ 187,722 $2,058,236 $ 225,030 $ 193,137
Financial Services 980,120 269,886 674,355 33,372 23,542
Information and Media Services 980,178 141,542 614,326 33,871 28,829
- ----------------------------------------------------------------------------------------------------------------------------
Total operating segments 3,534,095 599,150 3,346,917 292,273 245,508
Corporate -- (75,342) 377,557 1,245 --
Interest expense - net -- (52,542) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total company $3,534,095 $ 471,266* $3,724,474 $ 293,518 $ 245,508
- ----------------------------------------------------------------------------------------------------------------------------
1996
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
- ----------------------------------------------------------------------------------------------------------------------------
1997 United States $3,015,679 $ 509,025 $3,300,504
Foreign 518,416 90,125 423,970
- ----------------------------------------------------------------------------------------------------------------------------
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
============================================================================================================================
</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, 1997, the company had short-term borrowings of $427 million,
primarily representing domestic commercial paper borrowings of $381 million and
acquisition-related debt of $46 million at an average interest rate of 5.6%
maturing at various dates during 1998. The commercial paper borrowings are
supported by the revolving credit agreement described below, and $350 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
40
<PAGE> 33
credit line. At December 31, 1997, 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, 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 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:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
9.43% senior notes due 2000 $250,000 $250,000
Commercial paper supported
by bank revolving credit agreement 350,000 300,000
Other (primarily acquisition related notes) 7,030 6,850
- --------------------------------------------------------------------------------
Total long-term debt $607,030 $556,850
================================================================================
</TABLE>
The company paid interest on its debt totaling $52.1 million in 1997,
$50.1 million in 1996 and $58.6 million in 1995.
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, 1997 and 1996, totaling $257.0 million and
$256.9 million, respectively, based on current borrowing rates for debt with
similar terms and maturities, is estimated to be $279.7 million and $282.5
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 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. The company has entered into a supplemental
agreement with Rock-McGraw to surrender a portion of its occupied space starting
in 1998. In 1997, the company paid Rock-McGraw gross annual rentals of $17.3
million (including various escalation payments) for the occupied space and $13.8
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) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 64.6 $ 63.7 $ 62.7
- --------------------------------------------------------------------------------
Net income 13.0 11.2 9.7
- --------------------------------------------------------------------------------
Depreciation expense 6.7 6.5 6.4
- --------------------------------------------------------------------------------
Total assets 228.4 208.8 200.7
- --------------------------------------------------------------------------------
Mortgage payable 20.2 23.8 27.5
- --------------------------------------------------------------------------------
Total liabilities $ 66.7 $ 60.0 $ 63.0
================================================================================
</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) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic operations $425.9 $783.6 $356.1
Foreign operations 45.4 31.2 30.2
- --------------------------------------------------------------------------------
Total income before taxes $471.3 $814.8 $386.3
================================================================================
</TABLE>
A reconciliation of the U.S. statutory tax rate to the company's effective
tax rate for financial reporting purposes follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. statutory rate 35.0% 35.0% 35.0%
Goodwill amortization 1.3 0.7 1.7
Effect of state and local
income taxes 4.0 3.7 5.5
Other - net (2.0) (0.2) (1.0)
- --------------------------------------------------------------------------------
Effective tax rate 38.3% 39.2% 41.2%
================================================================================
</TABLE>
The provision for taxes on income consists of the following:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $154.2 $281.4 $104.9
Deferred (21.2) (19.3) 11.9
- --------------------------------------------------------------------------------
Total federal 133.0 262.1 116.8
- --------------------------------------------------------------------------------
Foreign:
Current 19.1 11.8 7.3
Deferred (0.4) (0.7) 2.3
- --------------------------------------------------------------------------------
Total foreign 18.7 11.1 9.6
- --------------------------------------------------------------------------------
State and local:
Current 33.1 48.8 28.0
Deferred (4.2) (2.9) 4.7
- --------------------------------------------------------------------------------
Total state and local 28.9 45.9 32.7
- --------------------------------------------------------------------------------
Total provision for taxes $180.6 $319.1 $159.1
================================================================================
</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) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Fixed assets and intangible
assets $127.4 $138.8
Prepaid pension and other
expenses 73.7 70.2
Unearned revenue 38.5 41.2
Reserves and accruals (149.0) (152.7)
Postretirement and
postemployment benefits (90.7) (95.9)
Other - net 12.0 42.3
- --------------------------------------------------------------------------------
Deferred tax liability - net $ 11.9 $ 43.9
================================================================================
</TABLE>
The company made net income tax payments totaling $331.5 million in 1997,
$170.6 million in 1996 and $111.4 million in 1995.
41
<PAGE> 34
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 $66
million at December 31, 1997, 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.
8. Rental Expense and Lease Obligations
Rental expense for property and equipment under all operating lease agreements
was as follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross rental expense $108.9 $107.1 $105.7
Less: sublease revenue 27.5 28.5 26.1
- --------------------------------------------------------------------------------
Net rental expense $ 81.4 $ 78.6 $ 79.6
================================================================================
</TABLE>
The company is committed under lease arrangements covering property,
computer systems and office equipment. Certain lease arrangements contain
escalation clauses covering increased costs for real estate taxes and operating
services.
In an effort to consolidate its New York City office space, the company
entered into two new lease agreements in 1997 covering approximately 1.4 million
square feet of office space. Both leases expire in the year 2020. The new lease
arrangements coincide with the expiration of several existing leases in 1999 and
the surrender of a portion of the company's occupied space in its headquarters
building, referred to in Note 6, starting in 1998.
Minimum rental commitments under existing noncancelable leases with a
remaining term of more than one year, including the company's headquarters
building, are shown in the following table. The annual rental commitments for
real estate through the year 2002 have been reduced by approximately $18 million
of revenue from existing noncancelable subleases.
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 53.1
1999 50.3
2000 52.4
2001 47.0
2002 44.3
2003 and beyond 784.8
- --------------------------------------------------------------------------------
Total $1,031.9
================================================================================
</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 10,080,964 at December 31, 1997 and 6,350,994 at December 31, 1996.
Under the Director Deferred Stock Ownership Plan, 158,298 and 160,000 common
shares were reserved for issuance at December 31, 1997 and 1996, respectively.
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, 1997, the company had repurchased
approximately 2.7 million shares of common stock at a total cost of $143.2
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 two stock option plans: the 1993 and 1987 Key Employee
Stock Incentive Plans.
The 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 14.1 million shares of the company's common stock - 4.6
million shares under the 1987 Plan and 9.5 million shares under the 1993 Plan,
as amended.
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.
42
<PAGE> 35
Beginning in 1997, participants who exercise an option by tendering
previously owned shares of common stock of the company may elect to receive a
one-time restoration option covering the number of shares tendered. Restoration
options are granted at fair market value of the company's common stock on the
date of the grant, have a maximum term equal to the remainder of the original
option term, and are subject to a six-month vesting period.
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 $1.1 million, or $.01 per diluted share
for 1997, $2.9 million, or $.03 per diluted share for 1996, and $1.8 million, or
$.02 per diluted share for 1995 after accounting for stock-based compensation
effective for awards made January 1, 1995 and thereafter.
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
1997, 1996 and 1995, respectively: risk-free interest rate of 6.1%, 5.4% and
7.5%; dividend yield of 2.9%, 3.0% and 3.4%; volatility of 19% for 1997 and 15%
for 1996 and 1995 and expected life of five years for all 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>
Weighted
average
exercise
(in thousands of shares) Shares price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1994 3,034 $30.86
Options granted 878 33.57
Options exercised (698) 29.79
Options cancelled and expired (106) 34.00
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 3,108 $31.67
- --------------------------------------------------------------------------------
Options granted 988 43.48
Options exercised (654) 30.82
Options cancelled and expired (142) 39.06
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 3,300 $34.88
- --------------------------------------------------------------------------------
Options granted 1,368 50.41
Options exercised (957) 33.20
Options cancelled and expired (146) 44.32
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 3,565 $40.92
================================================================================
</TABLE>
At December 31, 1997, 1996 and 1995, options for 1,915,000, 2,076,000 and
1,955,000 shares of common stock were exercisable. The weighted average fair
value of options granted during 1997, 1996 and 1995 was $10.04, $6.92 and $6.38,
respectively.
A summary of information about stock options outstanding and options
exercisable at December 31, 1997 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>
$26.22 to $34.88 1,559 5.0 years $31.69 1,559 $31.69
$42.38 to $62.31 1,790 8.6 years $45.68 356 $43.57
$66.81 to $68.75 216 4.9 years $68.06 - -
- --------------------------------------------------------------------------------
$26.22 to $68.75 3,565 6.8 years $40.92 1,915 $33.89
================================================================================
</TABLE>
Under the Director Deferred Stock Ownership 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 319,695 restricted shares were issued at an average market
value of $48.62 in 1997, 289,358 shares at an average market value of $43.79 in
1996 and 282,468 shares at an average market value of $33.68 in 1995. 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. Restricted stock compensation charged
to expense was $16.0 million for 1997, $12.0 million for 1996 and $9.1 million
for 1995. Restricted shares outstanding at the end of the year were 555,717 in
1997, 545,679 in 1996 and 539,356 shares in 1995.
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.
43
<PAGE> 36
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.
A summary of pension cost for the company's domestic defined benefit plans
follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 16.2 $ 16.9 $ 13.2
Interest cost 33.2 30.8 28.5
Return on assets:
Actual return (136.1) (103.4) (122.2)
Deferred 81.4 52.9 75.7
- --------------------------------------------------------------------------------
Recognized (54.7) (50.5) (46.5)
Amortization of net asset
at 1/1/86 (0.9) (3.0) (6.1)
Net amortization and
deferral 0.2 0.9 (2.1)
- --------------------------------------------------------------------------------
Net negative pension cost $ (5.9) $ (4.9) $(13.0)
- --------------------------------------------------------------------------------
Assumed rates - January 1:
Discount rate (interest cost) 7 3/4% 7 1/4% 8 1/2%
Compensation increase factor 5 1/2 5 1/2 5 1/2
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 approximately $2 million for 1997, 1996 and 1995. The accumulated
benefit obligation as of December 31, 1997 was $18.7 million, including vested
benefits of $17.3 million, and the projected benefit obligation was $19.8
million.
Total retirement plans cost was $44.3 million for 1997, $40.0 million for
1996 and $31.3 million for 1995.
The funded status of the domestic defined benefit plans as of December 31
follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of pension benefits:
Vested benefits $(442.1) $(376.5)
Nonvested benefits (21.8) (17.4)
- --------------------------------------------------------------------------------
Accumulated benefit obligation (463.9) (393.9)
Additional amount related to projected
compensation increases (33.0) (30.6)
- --------------------------------------------------------------------------------
Projected benefit obligation (496.9) (424.5)
Plan assets at market value -
primarily listed stocks and
U.S. government obligations 774.5 665.7
- --------------------------------------------------------------------------------
Excess of assets over projected
benefit obligation 277.6 241.2
Unrecognized net asset at 1/1/86 (0.7) (1.6)
Unrecognized prior service cost 18.5 6.6
Unrecognized net gain (183.5) (141.7)
- --------------------------------------------------------------------------------
Prepaid pension cost at December 31 $111.9 $104.5
- --------------------------------------------------------------------------------
Assumed rates - December 31:
Discount rate 7 1/4% 7 3/4%
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 $7.6 million in 1997, $8.3 million in
1996 and $7.1 million in 1995. A summary of the components of the cost in 1997,
1996 and 1995 follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2.4 $ 2.5 $ 2.0
Interest cost 10.1 10.0 10.4
Net amortization and deferral (4.9) (4.2) (5.3)
- --------------------------------------------------------------------------------
Postretirement benefits cost $ 7.6 $ 8.3 $ 7.1
================================================================================
</TABLE>
A summary of the components of the unfunded postretirement benefit
obligation as of December 31 follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Retirees $(102.3) $(98.0)
Fully eligible plan participants (14.5) (14.0)
Other active plan participants (25.7) (23.0)
- --------------------------------------------------------------------------------
Total accumulated postretirement
benefit obligation (142.5) (135.0)
Unrecognized net gain (37.0) (44.2)
Unrecognized prior service cost (17.0) (19.5)
- --------------------------------------------------------------------------------
Accrued postretirement benefit
obligation $(196.5) $(198.7)
================================================================================
</TABLE>
The assumed weighted average healthcare cost trend rate ranges from 7.5%
in 1998 decreasing ratably to 5.5% in 2002 and remaining 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, 1997 by $11.4 million and 1997 benefit expense by
$1.1 million. The weighted average discount rate used to measure expense was
7.75% in 1997 and 7.25% in 1996; the rate used to measure the accumulated
postretirement benefit obligation was 7.25% in 1997 and 7.75% in 1996.
44
<PAGE> 37
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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, 1997 and
1996, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
January 27, 1998
45
<PAGE> 38
Eleven-Year Financial Review
<TABLE>
<CAPTION>
(in thousands, except per-share data) 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating results by segment and income statistics
Operating revenue
Educational and Professional Publishing $ 1,573,797 $ 1,277,895 $ 1,235,578 $ 1,162,157
Financial Services 980,120 855,925 786,786 745,480
Information and Media Services 980,178 940,877 912,919 853,232
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating revenue 3,534,095 3,074,697 2,935,283 2,760,869
- ------------------------------------------------------------------------------------------------------------------------------------
Operating profit(f)
Educational and Professional Publishing(b) 187,722 151,921 162,604 125,765
Financial Services 269,886 262,085 230,934 217,212
Information and Media Services 141,542 116,799 115,069 108,343
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating profit 599,150 530,805 508,607 451,320
Share of profit of Macmillan/McGraw-Hill
School Publishing Company (d and f) -- -- -- --
Unusual charges (b,e and f) -- (25,000) -- --
Gain on exchange of Shepard's/McGraw-Hill (b) -- 418,731 -- --
Gain on sale of interest in Nikkei/McGraw-Hill (g) -- -- -- --
General corporate (expense)/income (f and h) (75,342) (62,073) (63,570) (54,134)
Interest (expense)/income - net (52,542) (47,656) (58,766) (51,746)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes on income (a and c) 471,266 814,807 386,271 345,440
Provision for taxes on income 180,591 319,074 159,144 142,321
- ------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative adjustment 290,675 495,733 227,127 203,119
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect on prior years of changes in accounting (i) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 290,675 $ 495,733 $ 227,127 $ 203,119
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Income before cumulative adjustment $ 2.94 $ 4.99 $ 2.29 $ 2.06
Cumulative adjustment -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2.94 $ 4.99 $ 2.29 $ 2.06
Dilutive earnings per share
Income before cumulative adjustment $ 2.91 $ 4.96 $ 2.28 $ 2.05
Cumulative adjustment (i) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2.91 $ 4.96 $ 2.28 $ 2.05
Dividends per share of common stock $ 1.44 $ 1.32 $ 1.20 $ 1.16
- ------------------------------------------------------------------------------------------------------------------------------------
Operating statistics
Return on average shareholders' equity 20.8% 41.4% 23.3% 23.4%
Income before taxes as a percent of revenue 13.3 26.5 13.2 12.5
Income before cumulative adjustment as a percent of revenue 8.2 16.1 7.7 7.4
- ------------------------------------------------------------------------------------------------------------------------------------
Balance sheet data
Working capital $ 258,179 $ 130,920 $ 193,346 $ 130,272
Total assets 3,724,474 3,642,239 3,057,167 2,960,285
Total debt 684,425 581,368 628,664 762,805
Shareholders' equity 1,434,651 1,361,118 1,035,066 913,052
- ------------------------------------------------------------------------------------------------------------------------------------
Number of employees 15,690 16,220 15,452 15,339
====================================================================================================================================
</TABLE>
(a) 1997 income before taxes on income reflects a $33.2 million provision for
the consolidation of office space in New York City and a $20.4 million gain on
the sale of Datapro Information Services.
(b) 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.
(c) 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.
(d) 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.
(e) 1993 amount reflects unusual charges in connection with the acquisition of
the additional 50% interest in Macmillan/McGraw-Hill.
(f) 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> 39
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 667,444 $ 567,363 $ 532,438 $ 534,724 $ 483,666 $ 437,590 $ 408,252
696,933 617,555 555,820 505,641 432,314 399,242 390,131
831,076 865,573 854,754 898,273 872,983 836,734 801,352
- ------------------------------------------------------------------------------------------------------------------------------------
2,195,453 2,050,491 1,943,012 1,938,638 1,788,963 1,673,566 1,599,735
- ------------------------------------------------------------------------------------------------------------------------------------
49,374 62,746 48,928 70,196 44,107 48,185 30,464
200,865 168,394 143,056 123,999 85,081 81,765 81,557
102,344 113,198 120,242 170,788 192,254 175,384 176,564
- ------------------------------------------------------------------------------------------------------------------------------------
352,583 344,338 312,226 364,983 321,442 305,334 288,585
28,376 11,280 27,483 21,601 13,688 2,349 11,585
(229,800) -- -- -- (220,000) (149,564) --
-- -- -- -- -- -- --
-- -- -- -- -- 221,783 --
(48,538) (50,774) (34,415) (28,370) 6,546 5,005 3,418
(36,342) (37,557) (46,987) (55,627) (35,038) (5,290) (4,506)
- ------------------------------------------------------------------------------------------------------------------------------------
66,279 267,287 258,307 302,587 86,638 379,617 299,082
54,838 114,132 110,297 130,112 46,847 194,112 134,288
- ------------------------------------------------------------------------------------------------------------------------------------
11,441 153,155 148,010 172,475 39,791 185,505 164,794
- ------------------------------------------------------------------------------------------------------------------------------------
-- (124,587) -- -- 8,000 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$ 11,441 $ 28,568 $ 148,010 $ 172,475 $ 47,791 $ 185,505 $ 164,794
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0.12 $ 1.57 $ 1.52 $ 1.77 $ 0.41 $ 1.92 $ 1.64
-- (1.28) -- -- 0.08 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0.12 $ 0.29 $ 1.52 $ 1.77 $ 0.49 $ 1.92 $ 1.64
$ 0.12 $ 1.57 $ 1.52 $ 1.77 $ 0.41 $ 1.91 $ 1.64
-- (1.28) -- -- 0.08 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$ 0.12 $ 0.29 $ 1.52 $ 1.77 $ 0.49 $ 1.91 $ 1.64
$ 1.14 $ 1.12 $ 1.10 $ 1.08 $ 1.00 $ 0.92 $ 0.84
- ------------------------------------------------------------------------------------------------------------------------------------
1.3% 3.0% 15.2% 18.8% 5.3% 21.2% 19.5%
3.0 13.0 13.3 15.6 4.8 22.7 18.7
0.5 7.5 7.6 8.9 2.7 11.1 10.3
- ------------------------------------------------------------------------------------------------------------------------------------
$ 62,887 $ (19,596) $ 29,543 $ 44,193 $ 22,743 $ (72,023) $ (66,214)
3,043,232 2,473,021 2,482,679 2,501,130 2,181,718 1,705,547 1,602,181
928,710 482,991 568,159 622,372 503,434 148,434 186,476
823,008 908,760 998,975 954,260 880,154 922,803 825,265
- ------------------------------------------------------------------------------------------------------------------------------------
15,661 13,393 13,539 13,868 13,741 13,891 13,879
====================================================================================================================================
</TABLE>
(g) 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).
(h) 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.
(i) 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> 40
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
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Operating revenue $ 652,935 $ 836,652 $1,143,740 $ 900,768 $3,534,095
Income before taxes 24,977 108,593 225,973 111,723 471,266
Net income 14,986 65,156 143,499 67,034 290,675
Earnings per share:
Basic 0.15 0.66 1.45 0.68 2.94
Diluted 0.15 0.65 1.44 0.67 2.91
- ------------------------------------------------------------------------------------------------------------
1996
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:
Basic 0.16 0.57 1.16 3.10 4.99
Diluted 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:
Basic 0.14 0.53 1.07 0.55 2.29
Diluted 0.14 0.53 1.06 0.55 2.28
============================================================================================================
</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 diluted share) and a one-time
charge of $25 million ($14.9 million after taxes, or 15 cents per diluted share)
for costs of integrating the company's College Division with the acquired higher
education business.
High and low sales prices of The McGraw-Hill Companies common stock on the New
York Stock Exchange*
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
First quarter $53 1/8-44 7/8 $46 1/4-42 3/4 $36 5/8-31 7/8
Second quarter 62 7/8-49 7/8 49 1/4-42 1/8 38 7/8-35 5/8
Third quarter 69 5/8-59 45 7/8-37 1/4 42 3/8-37 5/8
Fourth quarter 74 3/4-63 1/8 48 1/4-42 1/2 43 7/8-39 1/2
- --------------------------------------------------------------------------------
Year 74 3/4-44 7/8 49 1/4-37 1/4 43 7/8-31 7/8
================================================================================
</TABLE>
*The New York Stock Exchange is the principal market on which the Corporation's
shares are traded.
Shareholder Information
To obtain a free copy of the annual Form 10-K filed with the Securities and
Exchange Commission, which contains certain additional information, contact:
Corporate Affairs Department
The McGraw-Hill Companies
1221 Avenue of the Americas
New York, N.Y. 10020-1095
http://www.mcgraw-hill.com
Shareholder Services and
Transfer Agent
Questions or changes relating to shareholder accounts should be directed to the
Corporation's transfer agent:
ChaseMellon Shareholder Services
Post Office Box 3315
South Hackensack, N.J. 07606-1937
888-201-5538
www.chasemellon.com
Dividend Reinvestment Plan
This plan offers shareholders the opportunity to reinvest their dividends and
make optional payments toward the purchase of additional shares of the
Corporation's common stock. For more information, contact ChaseMellon at
888-201-5538.
Shareholders may contact The McGraw-Hill Companies directly about their stock by
calling Shareholder Relations, 212-512-2192.
Annual Meeting
The 1998 annual meeting will be held at 11 a.m. on Wednesday, April 29, at the
Corporation's headquarters, 1221 Avenue of the Americas, New York, N.Y.
10020-1095.
Stock Exchange Listing
The McGraw-Hill Companies is listed on the New York Stock Exchange (MHP).
Additional Information
Media inquiries relating to the Corporation should be directed to the Corporate
Affairs Department, 212-512-3640.
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
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
McGraw-Hill Broadcasting
Company, Inc. New York 100
McGraw-Hill Capital Corporation Delaware 100
McGraw-Hill Capital, Inc. New York 100
*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
McGraw-Hill World University, Inc. Delaware 100
MMS International Nevada 100
Money Market Directories, Inc. New York 100
Rock-McGraw, Inc. New York 45
S&P ComStock, Inc. New York 100
Standard & Poor's International
Ratings, Ltd. New York 100
*Credit Ratings Information Services
of India Limited India 9.6
*Taiwan Ratings Corporation Taiwan 50
Standard & Poor's Investment Advisory
Services, Inc. Delaware 100
Standard & Poor's Ltd. Delaware 100
*Fund Research Limited United Kingdom 100
Standard & Poor's Securities, Inc. Delaware 100
Tower Group International, Inc. New York 100
*Tower Group International Canada Inc. Canada 100
</TABLE>
-43-
<PAGE> 2
<TABLE>
<CAPTION>
State or Percentage
Jurisdiction of Voting
of Securities
Incorporation Owned
------------- ----------
<S> <C> <C>
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
Micropal Group Limited United Kingdom 100
*Dividend Analysis Limited United Kingdom 100
*Micropal Limited United Kingdom 100
*Micropal Accounting Portfolio
Services Inc. Delaware 100
*Micropal Asia Limited Hong Kong 100
*Micropal Deutschland GmbH Germany 100
*Micropal Limited (Ireland) Ireland 100
*Micropal S.A. France 100
*Micropal Inc. Massachusetts 100
*Micropal Data, Inc. Iowa 100
Science Research Associates, Pty., Ltd. Australia 100
Standard & Poor's - ADEF France 100
Standard & Poor's International, S.A. Belgium 100
Standard & Poor's AB Sweden 100
Standard & Poor's, S.A. de C.V. Mexico 100
Tata McGraw-Hill Publishing Company
Private Limited India 66.25
</TABLE>
*Subsidiary of a subsidiary.
-44-
<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 27,
1998, included in the 1997 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, No. 33-30043), 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 27, 1998 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, 1998
-45-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 4,768 3,430 10,250
<SECURITIES> 0 0 0
<RECEIVABLES> 1,155,078 1,041,726 935,352
<ALLOWANCES> 182,629 162,260 127,202
<INVENTORY> 290,479 273,158 238,030
<CURRENT-ASSETS> 1,464,421 1,349,583 1,192,583
<PP&E> 838,214 835,680 827,307
<DEPRECIATION> 564,584 524,187 491,178
<TOTAL-ASSETS> 3,724,474 3,642,239 3,057,167
<CURRENT-LIABILITIES> 1,206,242 1,218,663 999,237
<BONDS> 0 0 0
14 14 14
0 0 0
<COMMON> 102,919 102,919 102,919
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 3,724,474 3,642,239 3,057,167
<SALES> 3,534,095 3,074,697 2,935,283
<TOTAL-REVENUES> 3,534,095 3,074,697 2,935,283
<CGS> 3,049,110 2,651,689 2,532,631
<TOTAL-COSTS> 3,049,110 2,651,689 2,532,631
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 80,600 65,116 65,385
<INTEREST-EXPENSE> 52,542 47,656 58,766
<INCOME-PRETAX> 471,266 814,807 386,271
<INCOME-TAX> 180,591 319,074 159,144
<INCOME-CONTINUING> 290,675 495,733 227,127
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 290,675 495,733 227,127
<EPS-PRIMARY> 2.94<F1> 4.99<F1> 2.29<F1>
<EPS-DILUTED> 2.91<F2> 4.96<F2> 2.28<F2>
<FN>
<F1>Amount reported is EPS-BASIC.
<F2>Amount reported is EPS-FULLY DILUTED.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 19,183 9,883
<SECURITIES> 0 0
<RECEIVABLES> 1,274,089 1,046,586
<ALLOWANCES> 188,142 128,903
<INVENTORY> 316,587 264,272
<CURRENT-ASSETS> 1,613,924 1,342,698
<PP&E> 808,269 854,055
<DEPRECIATION> 547,988 535,069
<TOTAL-ASSETS> 3,812,496 3,229,750
<CURRENT-LIABILITIES> 1,340,426 1,120,144
<BONDS> 0 0
14 14
0 0
<COMMON> 102,919 102,919
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 3,812,496 3,229,750
<SALES> 2,633,327 2,243,794
<TOTAL-REVENUES> 2,633,327 2,243,794
<CGS> 2,264,587 1,905,433
<TOTAL-COSTS> 2,264,587 1,905,433
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 64,296 50,047
<INTEREST-EXPENSE> 40,917 36,906
<INCOME-PRETAX> 359,543 316,272
<INCOME-TAX> 135,902 128,406
<INCOME-CONTINUING> 223,641 187,866
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 223,641 187,866
<EPS-PRIMARY> 2.26<F1> 1.89<F1>
<EPS-DILUTED> 2.24<F2> 1.88<F2>
<FN>
<F1>Amount reported is EPS-BASIC.
<F2>Amount reported is EPS-FULLY DILUTED.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 6,788 4,828
<SECURITIES> 0 0
<RECEIVABLES> 1,019,350 867,344
<ALLOWANCES> 142,040 106,737
<INVENTORY> 360,001 294,239
<CURRENT-ASSETS> 1,450,799 1,209,702
<PP&E> 849,072 839,370
<DEPRECIATION> 546,274 518,829
<TOTAL-ASSETS> 3,767,392 3,116,586
<CURRENT-LIABILITIES> 1,368,591 1,096,203
<BONDS> 0 0
14 14
0 0
<COMMON> 102,919 102,919
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 3,767,392 3,116,586
<SALES> 1,489,587 1,294,785
<TOTAL-REVENUES> 1,489,587 1,294,785
<CGS> 1,339,090 1,157,425
<TOTAL-COSTS> 1,339,090 1,157,425
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 40,595 35,287
<INTEREST-EXPENSE> 25,618 23,831
<INCOME-PRETAX> 133,570 123,499
<INCOME-TAX> 53,428 50,141
<INCOME-CONTINUING> 80,142 73,358
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 80,142 73,358
<EPS-PRIMARY> 0.81<F1> 0.73<F1>
<EPS-DILUTED> 0.80<F2> 0.73<F2>
<FN>
<F1>Amount reported is EPS-BASIC.
<F2>Amount reported is EPS-FULLY DILUTED.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 4 14,350
<SECURITIES> 0 0
<RECEIVABLES> 892,993 799,243
<ALLOWANCES> 153,243 115,126
<INVENTORY> 308,032 268,008
<CURRENT-ASSETS> 1,262,921 1,112,277
<PP&E> 833,709 829,553
<DEPRECIATION> 535,300 504,458
<TOTAL-ASSETS> 3,552,077 3,004,823
<CURRENT-LIABILITIES> 1,153,686 952,440
<BONDS> 0 0
14 14
0 0
<COMMON> 102,919 102,919
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 3,552,077 3,004,823
<SALES> 652,935 583,851
<TOTAL-REVENUES> 652,935 583,851
<CGS> 620,200 550,415
<TOTAL-COSTS> 620,200 550,415
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 21,526 18,419
<INTEREST-EXPENSE> 11,384 11,419
<INCOME-PRETAX> 24,977 27,259
<INCOME-TAX> 9,991 11,067
<INCOME-CONTINUING> 14,986 16,192
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 14,986 16,192
<EPS-PRIMARY> 0.15<F1> 0.16<F1>
<EPS-DILUTED> 0.15<F2> 0.16<F2>
<FN>
<F1>Amount reported is EPS-BASIC.
<F2>Amount reported is EPS-FULLY DILUTED.
</FN>
</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 12/31/97
Allowance for doubtful
accounts $ 85,965 $80,600 $68,244 $ $ 98,321
Allowance for returns 76,295 8,013 84,308
-------- ------- ------- ------- --------
$162,260 $88,613 $68,244 $ $182,629
======== ======= ======= ======= ========
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
======== ======= ======= ======= ========
</TABLE>
(A) Accounts written off, less recoveries.
(B) Reserves acquired in connection with the purchase of the Times Mirror
Higher Education Group.
-50-
