<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
For the fiscal year ended December 31, 1999
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 definite 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 29, 2000, was $9,761,496,394.
The number of shares of common stock of the registrant outstanding as
of February 29, 2000 was 194,491,435 shares.
Part I, Part II and Part IV incorporate information by reference from
the Annual Report to Shareholders for the year ended December 31, 1999. Part III
incorporates information by reference from the definitive proxy statement mailed
to shareholders March 23, 2000 for the annual meeting of shareholders to be held
on April 26, 2000.
<PAGE> 2
TABLE OF CONTENTS
-----------------
PART I
-----------
Item Page
- ---- ----
1. Business.......................................................... 1 - 2
2. Properties........................................................ 3 - 4
3. Legal proceedings................................................. 5
4. Submission of matters to a vote of security holders .............. 5
Executive officers of the registrant.............................. 6
PART II
-----------
5. Market for the registrant's common stock and related
stockholder matters............................................... 7
6. Selected financial data........................................... 7
7. Management's discussion and analysis of financial
condition and results of operations............................... 7
7A. Market Risk....................................................... 7
8. Consolidated financial statements and supplementary
data.............................................................. 7
9. Changes in and disagreements with accountants on accounting
and financial disclosure.......................................... 7
PART III
-----------
10. Directors and executive officers of the registrant................ 8
11. Executive compensation............................................ 8
12. Security ownership of certain beneficial owners
and management.................................................... 8
13. Certain relationships and related transactions.................... 8
PART IV
----------
14. Exhibits, financial statement schedules, and
reports on Form 8-K............................................... 9 - 12
Signatures............................................................ 13 - 15
Exhibits.......................................................... 17 - 20
Consent of Independent Auditors - Ernst & Young LLP............... 21
Financial Data Schedule........................................... 22
Supplementary schedule............................................ 23
<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,
aerospace and defense. As a multimedia publishing and information company, the
Registrant employs a broad range of media, including books, magazines,
newsletters, software, on-line data services, CD-ROMs, facsimile and television
broadcasting. Most of the Registrant's products and services face substantial
competition from a variety of sources.
The Registrant's 16,376 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 5 to 19 and 22 to 23, (textual material) of the Registrant's 1999
Annual Report to Shareholders.
Information as to Operating Segments
The relative contribution of the operating segments of the Registrant and its
subsidiaries to operating revenue, operating profit, long-lived assets and
geographic information for the three years ended December 31, 1999 at the end of
each year, are included in Exhibit (13), on pages 43 and 44 in the Registrant's
1999 Annual Report to Shareholders and is hereby incorporated by reference.
In 1999, Platt's, a provider of real-time information and analysis in the global
energy services market, was consolidated with the Energy Information Group in
the Information and Media Services segment. Also, in 1999, the management of S&P
Personal Wealth, an e-commerce initiative that provides allocation and planning
tools to the individual investor, was transferred to Business Week, in the
Information and Media Services segment, for operation and consolidation in its
online business. The following is a summary of the segment's revenue and
operating profit restated for these transfers for the years 1999, 1998 and 1997.
-1-
<PAGE> 4
<TABLE>
<CAPTION>
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter Y-T-D
---- ------- ------- ------- ------- -----
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Revenue
Educational & Professional
Publishing $ 208,983 $371,068 $ 766,557 $ 388,314 $1,734,922
Financial Services 292,846 298,723 305,983 327,053 1,224,605
Information & Media Services 214,642 252,930 245,937 318,961 1,032,470
------- ------- ---------- ---------- ----------
Total $ 716,471 $922,721 $1,318,477 $1,034,328 $3,991,997
========= ======== ========== ========== ==========
Operating Profit
Educational & Professional
Publishing $ (43,857) $ 41,250 $ 235,122 $ 41,152 $ 273,667
Financial Services 91,653 93,069 88,086 96,932 369,740
Information & Media Services 18,084 41,848 25,721 94,207 179,860
--------- ------ ---------- ---------- ----------
Total $ 65,880 $176,167 $ 348,929 $ 232,291 $ 823,267
========= ======== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter Y-T-D
---- ------- ------- ------- ------- -----
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Revenue
Educational & Professional
Publishing $ 208,357 $ 354,217 $ 713,023 $ 344,746 $1,620,343
Financial Services 266,046 265,980 270,784 285,007 1,087,817
Information & Media Services 229,017 260,925 222,618 308,425 1,020,985
--------- --------- ---------- ---------- ----------
Total $ 703,420 $ 881,122 $1,206,425 $ 938,178 $3,729,145
========= ========= ========== ========== ==========
Operating Profit
Educational & Professional
Publishing $ (39,731) $ 35,457 $ 183,930 $ 22,420 $ 202,076
Financial Services 82,247 84,247 108,017 81,358 355,869
Information & Media Services 18,301 38,340 22,276 52,206 131,123
--------- --------- ---------- ---------- ----------
Total $ 60,817 $ 158,044 $ 314,223 $ 155,984 $ 689,068
========= ========= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Y-T-D
---- ------- ------- ------- ------- -----
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Revenue
Educational & Professional
Publishing $ 196,857 $ 357,278 $ 681,214 $ 338,448 $1,573,797
Financial Services 221,019 220,179 229,545 250,392 921,135
Information & Media Services 235,059 259,195 232,981 311,928 1,039,163
--------- --------- ---------- ---------- ---------
Total $ 652,935 $ 836,652 $1,143,740 $ 900,768 $3,534,095
========= ========= ========== ========== ==========
Operating Profit
Educational & Professional
Publishing $ (42,551) $ 34,204 $ 178,276 $ 17,793 $ 187,722
Financial Services 70,717 65,522 45,814 74,025 256,078
Information & Media Services 21,891 38,568 41,182 53,709 155,350
--------- --------- ---------- ---------- ----------
Total $ 50,057 $ 138,294 $ 265,272 $ 145,527 $ 599,150
========= ========= ========== ========== ==========
</TABLE>
-2-
<PAGE> 5
Item 2. Properties
The Registrant leases office facilities at 361 locations: 277 are in the United
States. In addition, the Registrant owns real property at 21 locations: 18 are
in the United States. The principal facilities of the Registrant are as follows:
<TABLE>
<CAPTION>
OWNED SQUARE
OR FEET
LOCATIONS LEASED (THOUSANDS) BUSINESS UNIT
--------- ------ ----------- -------------
<S> <C> <C> <C>
DOMESTIC
New York, NY leased 1,002 1221 Avenue of the Americas: See below
New York, NY leased 946 Standard & Poor's: See below
(55 Water)
New York, NY leased 448 Various Units: See below
(2 Penn Plaza)
Hightstown, NJ owned
Office and Data Center 490 Various Units
Warehouse 412 Leased to non-McGraw-Hill
tenant
Blacklick (Gahanna), OH owned Various operating units
Book Distr. Ctr. 558
Office 73
Desoto, TX
Book Dist. Ctr. leased 382 School
Dallas, TX leased School
Assembly Plant 418
Dubuque, IA owned Higher Education
Office 107
Warehouse 279
Grove City, OH
Warehouse leased 305 School
Columbus, OH owned 170 School: See below
Monterey, CA owned 215 CTB
Englewood, CO owned 133 Financial Services
Lexington, MA leased 132 Various operating units and
non-McGraw-Hill sub-tenants
Lexington, MA owned 53 Partially occupied with non-
McGraw-Hill tenant
Burr Ridge IL leased 115 Various publishing units
Denver, CO owned 88 Broadcasting
Indianapolis, IN leased 54 Broadcasting
Indianapolis, IN leased 127 CTB
</TABLE>
-3-
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
Washington, DC, MD leased 73 Various operating units
Kent, WA leased Tower Group International
Warehouse/Dist. Ctr. 82
Office 3
Chicago, IL leased 68 Various operating units
and McGraw-Hill subtenants
Mather, CA leased 56 CTB
Redondo Beach, CA leased 50 Tower Group International
FOREIGN
Whitby, Canada owned McGraw-Hill Ryerson, Ltd./
Office 80 non-McGraw-Hill tenant
Book Distribution Ctr. 80
Maidenhead, England leased 85 McGraw-Hill International
(U.K.) Ltd.
Jurong, Singapore leased 22 Various Operating Units
Office leased 91 Various Publishing Units
</TABLE>
The leases at 25 Broadway, 26 Broadway, 1633 Broadway, and 11 West 19th Street
expired in 1999 and the occupants were relocated to 55 Water Street and 2 Penn
Plaza.
The space leased at 1221 Avenue of the Americas in New York City continues to be
the corporate headquarters. The building is owned by Rock-McGraw, Inc., a
corporation in which the Registrant and the Rockefeller Group, Inc., are the
sole shareholders. As of January 1, 2000, the Registrant occupies approximately
319,064 square feet of the rental space under a 30 year lease expiring in June
30, 2002. In addition, the Registrant subleases for its own account
approximately 683,039 square feet of space. On February 1, 2000, the termination
of a sublease resulted in total occupied space by Registrant of 457,076 square
feet and subleased space of 540,790 square feet. A new lease at 1221 Avenue of
the Americas has been executed for the period July 1, 2002 through March 31,
2020, during which time the Registrant will lease 395,485 square feet.
Two leases were signed at the end of 1997 for locations at 55 Water Street and 2
Penn Plaza in New York City. The 55 Water Street lease is for 946,048 square
feet and houses all of the Standard & Poor's divisions. The 2 Penn Plaza lease
for 447,048 square feet currently houses various operating units within
Educational and Professional Publishing segment and Information and Media
Services segment.
Construction in Columbus Ohio was completed at year-end 1999 and the School
division moved into 170,000 square feet of space in December of 1999. This
location at Westerville, Ohio which the school group previously occupied is
planned to be sold in 2000.
-4-
<PAGE> 7
Item 3. Legal Proceedings
While the Registrant and its subsidiaries are defendants in
numerous legal proceedings in the United States and abroad, neither
the Registrant nor its subsidiaries are a party to, nor are any of
their properties subject to, any known material pending legal
proceedings which Registrant believes will result in a material
adverse effect on its financial statements or business operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Registrant's security
holders during the last quarter of the period covered by this
Report.
-5-
<PAGE> 8
Executive Officers of Registrant
--------------------------------
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Harold McGraw III 51 Chairman of the Board
President and Chief Executive Officer
Robert J. Bahash 54 Executive Vice President and
Chief Financial Officer
Barbara B. Maddock 49 Executive Vice President, Organizational
Effectiveness
John Negroponte 60 Executive Vice President, Global Markets
Kenneth M. Vittor 50 Executive Vice President and General Counsel
Peter Watkins 52 Executive Vice President, Information
Management and Chief Technology Officer
Scott L. Bennett 50 Senior Vice President, Associate General
Counsel and Secretary
Glenn S. Goldberg 41 Senior Vice President, Corporate Affairs
and Assistant to the Chairman, President and Chief
Executive Officer
Frank J. Kaufman 55 Senior Vice President, Taxes
Frank D. Penglase 59 Senior Vice President, Treasury Operations
Talia M. Griep 37 Corporate 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 John Negroponte
and Peter Watkins.
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. Watkins, prior to his becoming an officer of the Registrant on February 1,
2000, was executive vice president and chief information officer for the
Canadian Imperial Bank of Commerce for two and one-half years. Prior to that he
was with Ernst & Young Canada for ten years.
-6-
<PAGE> 9
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The approximate number of holders of the Company's common stock as of February
29, 2000 was 5,397.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Dividends per share of common stock:
$.215 per quarter in 1999 $0.86
$.195 per quarter in 1998 $0.78
</TABLE>
Information concerning other matters is incorporated herein by reference from
Exhibit (13), from page 52 of the 1999 Annual Report to Shareholders.
Item 6. Selected Financial Data
Incorporated herein by reference from Exhibit (13), from the 1999 Annual Report
to Shareholders, page 50 and page 51.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Incorporated herein by reference from Exhibit (13), from the 1999 Annual Report
to Shareholders, pages 26 to 36.
Item 7A. Market Risk
Incorporated herein by reference from Exhibit (13), from the 1999 Annual Report
to Shareholders, page 36.
Item 8. Consolidated Financial Statements and Supplementary Data
Incorporated herein by reference from Exhibit (13), from the 1999 Annual Report
to Shareholders, pages 37 to 48 and page 52.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
-7-
<PAGE> 10
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors is incorporated herein by reference from the
Registrant's definitive proxy statement dated March 23, 2000 for the annual
meeting of shareholders to be held on April 26, 2000.
Item 11. Executive Compensation
Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 23, 2000 for the annual meeting of shareholders to be held
on April 26, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 23, 2000 for the annual meeting of shareholders to be held
April 26, 2000.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 23, 2000 for the annual meeting of shareholders to be held
April 26, 2000.
-8-
<PAGE> 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements.
2. Financial Statement Schedules.
The McGraw-Hill Companies
Index to Financial Statements
And Financial Statement Schedules
<TABLE>
<CAPTION>
Reference
-----------------------------
Annual Report
Form to Share-
10-K holders (page)
---- --------------
<S> <C> <C>
Data incorporated by reference from Annual Report to Shareholders:
Report of Independent Auditors............................................. 49
Consolidated balance sheet at
December 31, 1999 and 1998............................................. 38-39
Consolidated statement of income
for each of the three years in
the period ended December 31, 1999..................................... 37
Consolidated statement of cash flows
for each of the three years in the
period ended December 31, 1999......................................... 40
Consolidated statement of shareholders'
equity for each of the three years in
the period ended December 31, 1999..................................... 41
Notes to consolidated financial
statements............................................................. 42-48
Quarterly financial information............................................ 52
Consent of Independent Auditors............................................ 21
Consolidated schedule for each of the three
years in the period ended December 31, 1999
II - Reserves for doubtful accounts
and sales returns ............................................. 23
</TABLE>
-9-
<PAGE> 12
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
The financial statements listed in the above index which are included in the
Annual Report to Shareholders for the year ended December 31, 1999 are hereby
incorporated by reference in Exhibit (13). With the exception of the pages
listed in the above index, the 1999 Annual Report to Shareholders is not to be
deemed filed as part of Item 14 (a)(1).
(a) (3)Exhibits.
(3) Articles of Incorporation of Registrant incorporated by reference from
Registrant's Form 10-K for the year ended December 31, 1995 and Form
10-Q for the quarter ended June 30, 1998.
(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 July 29, 1998 between Registrant and
ChaseMellon Shareholder Services, L.L.C., incorporated by reference
from Registrant's Form 8A filed August 3, 1998.
(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.
-10-
<PAGE> 13
(10)* Registrant's 1983 Stock Option Plan for Officers and Key Employees,
incorporated by reference from Registrant's Form SE filed March 29,
1990 in connection with Registrant's Form 10-K for the year ended
December 31, 1989.
(10)* Registrant's 1987 Key Employee Stock Incentive Plan, incorporated by
reference from Registrant's Form 10-K for the year ended December 31,
1993.
(10)* Registrant's 1993 Key Employee Stock Incentive Plan, incorporated by
reference from Registrant's 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.
-11-
<PAGE> 14
(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.
(10)* Letter dated March 23, 1998, from Mr. Paul J. Rizzo, Chairman,
Compensation Committee, The McGraw-Hill Companies Board of Directors to
Joseph L. Dionne with respect to Mr. Dionne's services as non-executive
Chairman of the Registrant's Board of Directors.
(10)* Letter dated June 23, 1998, from Barbara B. Maddock to Robert P. McGraw
with respect to Mr. Robert McGraw's resignation as Executive Vice
President of the Professional Publishing Group of the Registrant.
(12) Computation of ratio of earnings to fixed charges.
(13) Registrant's 1999 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 reports on Form 8-K were filed by the Registrant in the last quarter
covered by this Form 10-K.
- ----------------
* These exhibits relate to management contracts or compensatory plan
arrangements.
-12-
<PAGE> 15
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
The McGraw-Hill Companies, Inc.
- -------------------------------
Registrant
By: /s/ Kenneth M. Vittor
------------------------------------------
Kenneth M. Vittor
Executive Vice President and General Counsel
March 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 22, 2000 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 twelve members and the
signatures set forth below of individual board members, constitute at least a
majority of such board.
/s/ Harold McGraw III
- ------------------------------------------
Harold McGraw III
Chairman of the Board
President and Chief Executive Officer
Director
/s/ Robert J. Bahash
- ------------------------------------------
Robert J. Bahash
Executive Vice President and
Chief Financial Officer
-13-
<PAGE> 16
/s/ Talia M. Griep
- ------------------------------------------
Talia M. Griep
Corporate Controller
/s/ Pedro Aspe
- ------------------------------------------
Pedro Aspe
Director
/s/ Sir Winfried Bischoff
- -------------------------------------------
Sir Winfried Bischoff
Director
/s/ Joseph L. Dionne
- ------------------------------------------
Joseph L. Dionne
Director
/s/ Vartan Gregorian
- -------------------------------------------
Vartan Gregorian
Director
/s/ John T. Hartley
- -------------------------------------------
John T. Hartley
Director
/s/ George B. Harvey
- -------------------------------------------
George B. Harvey
Director
/s/ Linda Koch Lorimer
- -------------------------------------------
Linda Koch Lorimer
Director
-14-
<PAGE> 17
/s/ Robert P. McGraw
- --------------------------------------------
Robert P. McGraw
Director
/s/ Lois Dickson Rice
- --------------------------------------------
Lois Dickson Rice
Director
/s/ James H. Ross
- --------------------------------------------
James H. Ross
Director
/s/ Sidney Taurel
- --------------------------------------------
Sidney Taurel
Director
-15-
<PAGE> 18
Table of Contents
EXHIBITS AND FINANCIAL STATEMENTS
EXHIBIT PAGE
(12) Computation of Ratio of Earnings to Fixed Charges............... 17-18
(13) Registrant's 1999 Annual Report to Shareholders................. -
(21) Subsidiaries of Registrant...................................... 19-20
(23) Consent of Ernst & Young LLP Independent Auditors............... 21
(27) Financial Data Schedules........................................ 22
Schedule II Reserves for Doubtful Accounts and Sales Returns............. 23
-16-
<PAGE> 1
Exhibit (12)
THE McGRAW-HILL COMPANIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Earnings
Earnings from continuing operations
before income tax expense and
extraordinary item, net of
taxes (b)(f) $ 691,371 $ 553,320 $ 465,873 $ 809,705 $ 382,126
Fixed charges 78,198 79,618 83,840 77,563 90,382
Capitalized interest -- -- -- -- (421)
--------- --------- --------- --------- ---------
Total Earnings $ 769,569 $ 632,938 $ 549,713 $ 887,268 $ 472,087
========= ========= ========= ========= =========
Earnings from continuing operations
before income tax expense, extraordinary
and other unusual items
(a)(b)(c)(d)(e)(f) 651,703 $ 542,633 $ 478,622 $ 415,974 $ 382,126
Fixed charges 78,198 79,618 83,840 77,563 90,382
Capitalized interest -- -- -- -- (421)
--------- --------- --------- --------- ---------
Total Earnings $ 729,901 $ 622,251 $ 562,462 $ 493,537 $ 472,087
========= ========= ========= ========= =========
Fixed Charges(f)
Interest expense $ 44,953 $ 51,857 $ 56,771 $ 51,347 $ 63,832
Portion of rental payments
deemed to be interest 33,245 27,761 27,069 26,216 26,550
--------- --------- --------- --------- ---------
Total Fixed Charges $ 78,198 $ 79,618 $ 83,840 $ 77,563 $ 90,382
========= ========= ========= ========= =========
Ratio of Earnings to Fixed charges:
Earnings from continuing operations
before income tax expense and
extraordinary item, net of
taxes (b)(f) 9.8x 7.9x 6.6x 11.4x 5.2x
Earnings from continuing operations
before income tax expense,
extraordinary and other unusual items
(a)(b)(c)(d)(e)(f) 9.3x 7.8x 6.7x 6.4x 5.2x
</TABLE>
(a) Excludes a $39.7 million pre-tax one-time gain on the sale of the
company's Petrochemical publications.
(b) All earnings amounts exclude the impact from the early extinguishment
of $155 million of the company's 9.43% Notes in 1998.
(c) Excludes a $26.7 million gain on the sale of a building at 65 Broadway
and a $16.0 million charge for the write-down of assets at the
Continuing Education Center recorded in 1998.
(d) Excludes 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 recorded in 1997.
-17-
<PAGE> 2
(e) 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 1996 results exclude 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.
(f) For purposes of computing the ratio of earnings to fixed charges,
"earnings from continuing operations before income tax expense"
excludes undistributed equity in income of less than 50%-owned
companies. "Fixed charges" consist of (1) interest on debt, and (2) the
portion of the company's rental expense deemed representative of the
interest factor in rental expense.
-18-
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What Matters?
Annual Report '99
[LOGO]
The McGraw-Hill Companies
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<PAGE> 2
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Trust Matters
Information Age...or information maze? 320 million Web sites. 1.3 million book
titles in print. 100,000 magazines. Thousands of broadcast outlets. Hundreds of
online services. A staggering amount of information, subjects and sources. Where
to go? What to use? Whom to trust? Investors, issuers and intermediaries in the
global capital markets know the answer: they've made Standard & Poor's the
world's foremost provider of financial analysis, ratings and information.
Educators do too: McGraw-Hill's learning materials are the most widely used in
the United States. Professionals around the world rely on our business,
computing, science and medical reference works. Construction, aerospace and
energy executives recognize us as the most authoritative source of information
on their industries. And more people around the world read Business Week than
any other business news source.
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The difference between trusted brands and also-rans? Consider the value of
Standard & Poor's in meeting the global demand for financial information and
insight. By uniting all of our financial services under the Standard & Poor's
brand - as we did in 1999 - we're building a singular global positioning,
encouraging more joint initiatives and technology-sharing - and setting the
stage for continued increases in market share. But the effort doesn't stop
there. We're building and leveraging the value of our strong brands in
elementary, high school and higher education - where our McGraw-Hill,
Glencoe/McGraw-Hill, SRA/McGraw-Hill and Irwin/McGraw-Hill imprints stand out;
in Professional Publishing which features the Osborne and Appleton & Lange
brands; in our Business Week Group; and in our business-to-business information
segments, which include the highly regarded F.W. Dodge, Sweet's, Aviation Week
and Platt's brands.
Brands Matter
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<PAGE> 4
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Reliability Matters
Standard & Poor's. Institutions and individuals depend on it before making
investment decisions. Corporate executives and governments use it to help raise
capital and fund their operations. Financial intermediaries count on it to stay
abreast of market developments and better serve their clients. From the Americas
to Europe to Asia, participants in the world's capital markets know they can
trust Standard & Poor's to provide timely, consistent and meaningful
information...information on credit quality and financial performance...on
current activity and future prospects in the equity, corporate, fixed-income,
government debt and currency markets. Our global capabilities, the integrity of
our research, our experience in the markets: they're why our customers have made
Standard & Poor's the world's leading provider of financial information
services.
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<PAGE> 5
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Insight Matters
Its first issue in September 1929 forecast the most famous stock market crash in
history. Its last issues of the 20th century featured groundbreaking coverage
and analysis of the "new economy" created by the global technology revolution.
Business Week, celebrating its 70th year, is the most popular business magazine
in the world - and the fastest-growing English-language business publication in
Asia and Europe. Business Week's remarkable story of success begins - and
continues - with relentless adherence to its core values: cutting-edge story
selection; in-depth reporting; experienced point-of-view. It's how Business Week
provides insight every day for its 6.3 million global readers. It's what makes
the magazine the medium of choice for multinational marketers, with ad pages
rising 22.9% in 1999. And it has allowed us to position Business Week at the
core of a growing family of print publications and online information services.
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<PAGE> 6
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Standard & Poor's non-U.S. revenues have increased substantially over the last
five years, and key developments in 1999 will ensure this growth continues. With
European debt issuance soaring in volume, Standard & Poor's expanded its strong
local market presence - and the world's largest ratings network - by opening its
30th office, in Milan. We acquired IFIS, the top provider of analysis on Japan's
$300 billion mutual fund industry, to complement our extensive information on
52,000 funds in over 50 countries. We created the S&P Global 1200, the first
truly investable global index, comprising leading companies in major industries
and market sectors worldwide. And we acquired the International Finance
Corporation's vast database covering 2,200 stocks in 54 emerging markets.
Reach Matters
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<PAGE> 7
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Opportunity Matters
Take record-breaking school enrollments and growing demand for improved
educational performance. Add expanding education funding fueled by $170 billion
in state and local budget surpluses. What do you get? If you're the nation's
leading provider of K-12 education materials, you get opportunities - to improve
education and to build on our success. Our experience in developing curricula,
in making instruction and learning more effective, and in producing learning
materials that engage and stimulate, are key to our success. Our education
businesses boast the broadest range of products and extensive use of multimedia
tools. With our top ranking in elementary schools (McGraw-Hill School Division),
in grades 6-12 (Glencoe/McGraw-Hill), in standardized testing (CTB/McGraw-Hill)
and in supplementary materials (SRA/McGraw-Hill), we have the size and scale to
meet students' complete educational needs.
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<PAGE> 8
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If you build it, will they come? They will if you offer them what they want and
need, which in our business means value-added content. A case in point: Business
Week substantially enhanced its personal finance coverage in 1999, to the
delight of readers and advertisers alike. It also rolled out e.biz, a quarterly
magazine-within-a-magazine on e-commerce, which completely sold out its
advertising space in 1999 and will appear monthly later this year. Frontier, a
monthly for small business owners also published within Business Week, continued
its success among readers. Business Week Online, which allows us to leverage all
our content - and to enhance our offerings to reach new audiences - now achieves
over 10 million monthly page views and boasts more than 600,000 frequent
readers, 70% of whom do not subscribe to the print version.
Content Matters
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<PAGE> 9
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Access Matters
Yes, more than 90% of our information is created in both print and digital
formats. Yes, our information reaches customers around the world in virtually
every way imaginable: print, online, fax, broadcast or conferences. And yes, we
offer information in multiple frequencies: real-time, on demand and everything
in between. But is this all that customers want and need? No. So we're finding
new ways of enabling customers to access our wealth of resources, content and
analysis. Such as Web-based hubs and portals that aggregate data, news and
information...that provide community, content and commerce in one place, on one
screen, with one click...and that enable us to leverage such leading brands as
Standard & Poor's, the McGraw-Hill educational imprint, Business Week, Aviation
Week, F.W. Dodge, Sweet's and Platt's to enhance our position in key markets.
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<PAGE> 10
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Over the next three years California, Texas, Florida and other key states will
spend almost $700 million on elementary and high school science programs. With
offerings like McGraw-Hill Science and Glencoe/McGraw-Hill's Science Voyages -
two new, comprehensive text, activity and technology programs - we're ready to
meet this demand. For teachers, there are well-organized planning guides,
assessment materials, interactive lesson plans, online discussion forums and
instructional tools. For students, there are compelling content, dynamic
visuals, multimedia learning experiences and interactive quizzes. The same
approach we're taking in science can be found in our Versatile Learning Systems
- - comprehensive educational programs that integrate print and electronic
materials into an easy-to-use multimedia presentation that enables teachers to
teach more effectively.
Leadership Matters
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<PAGE> 11
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For a look at tomorrow's delivery model today, click onto AviationNow.com or
Construction.com, two of our commercial business-to-business information hubs
that made major developmental strides in 1999. At the core of each you'll find
the industry news, views and analysis for which we're already well known. You'll
also find essential data on products and companies that let you reach or connect
to anyone. There are discussion forums that link people with similar interests,
and the ability to make our home page your home page for accessing the Web. But
there's more still: online continuing education courses and bookstores. And
there's more to come: the facilitation of commerce among buyers and sellers. All
of which provides greater value to our customers, as well as growth
opportunities for our company - through advertising revenue, licensing fees,
subscriptions and online purchases.
Delivery Matters
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<PAGE> 12
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Innovation Matters
The Internet: Friend or foe? For traditional publishers, the conventional
thinking has been, well, pretty conventional. But think again. Think the way we
do about the Internet's potential to serve our customers with customized
products...to increase sales by transforming printed text to online editions
that are continually updated...to increase profits by substantially reducing
printing and distribution costs...to create new revenue streams by selling
subscriptions to our Web services and online information. This is precisely our
approach in Professional Publishing, where we continue to create electronic
versions of our well-known print products to serve the information needs of
professionals worldwide. Harrison's Online, our Web-based version of the world's
best-selling medical reference, added more new global subscribers in 1999. New
for 2000 - Access Science - an online version of our renowned Encyclopedia of
Science and Technology.
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<PAGE> 13
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There's a radical new idea taking hold on college campuses across the nation:
PageOut, our online system that enables instructors to create custom Web sites
for their own courses. It comes complete with tools that allow educators to post
notes to students, an interactive syllabus, assignment lists and online quizzes.
It also features links to our Online Learning Centers, which provide fee-based
access to supplementary materials for 170 texts - up from 25 last year - and our
OnLine Supersites, covering 32 different disciplines. The rollout of PageOut
follows the 1998 debut of McGraw-Hill Learning Architecture, a Web-based system
used by professors at more than 200 colleges and universities to manage their
courses. PageOut's grade so far? In less than a year, more than 6,000
instructors at colleges and universities have registered for the service.
Solutions Matter
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<PAGE> 14
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Partnerships Matter
Leading: Already the top provider of real-time equity price quotes, S&P ComStock
has joined with Xinhua Financial Company to be the exclusive provider of
real-time financial information to China's growing capital markets. Enhancing:
By integrating interactive testing software from Advantage Learning Systems and
materials from Time magazine's student edition, the McGraw-Hill School Division
is building more effective K-6 reading programs. Expanding: By teaming with
domestic ratings agencies, Standard & Poor's brings its expertise to emerging
markets that need impartial risk evaluation. Enabling: By joining with
technology leaders such as Oracle and Microsoft, our Professional Publishing
group is producing technical education and certification programs that support
professional development. Growing: By forming partnerships to meet our markets'
needs, we are generating significant new business opportunities.
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<PAGE> 15
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Leveraging strengths, sharing resources, spreading expertise within and across
our businesses: key catalysts for growth and success. In 1999 Platt's joined
with Power, Electrical World, Power International and our energy and business
newsletters to form the McGraw-Hill Energy Information Group, the largest and
most complete source of energy market information in the world. We also
continued to enhance our leadership in other key business-to-business markets.
F.W. Dodge and Standard & Poor's jointly launched a new information tool for
construction firms that provides comparative data and risk assessments on 58
countries...S&P Personal Wealth teamed with Business Week to enhance the
magazine's already content-rich Web site...and our Educational and Professional
Publishing group formed a businesswide new media team to accelerate the
development of electronic products and services.
Teamwork Matters
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<PAGE> 16
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Excellence Matters
You can measure it by our record financial results over the past seven years.
You can judge it by our success with customers: most of our businesses are the
recognized leaders in their markets. You can see the industry honors we receive:
Business Week was named International Magazine of 1999 by the Association of
Circulation Executives; three of our publications were chosen as Library
Journal's top 50 reference books of the millennium; and the National Building
Museum recognized our leader-ship in providing construction industry
information. We celebrate excellence ourselves through our Excellence in
Management and Corporate Achievement awards - programs that recognize top
managers and successful teams for demonstrating innovation, leadership and
collaboration in meeting our growth goals.
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<PAGE> 17
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Energy...enthusiasm... accomplishment...collaboration. It all adds up to
attitude...and it's what information providers need to innovate, grow and
succeed in our rapidly changing markets. It's why our Standard & Poor's
Corporate Finance Ratings unit achieved a 108% growth rate in nontraditional
ratings product revenue from 1998 to 1999...why our SRA/McGraw-Hill business
significantly increased market share and realized higher sales of its
outstanding supplementary learning materials...why in International Publishing
we continue to advance our position as the world's leading Spanish-language
publisher, producing more than 800 new or revised titles annually...and it's why
our four ABC-affiliated TV stations are expanding their local news coverage and
community activities to drive increased ratings and advertising sales. This kind
of spirit is fueling our momentum and igniting our success.
Attitude Matters
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<PAGE> 18
The McGraw-Hill Companies At a Glance
Overall Review of Businesses and Strategy
The McGraw-Hill Companies touches people at all stages of life with the breadth
and depth of our information products and services, helping them to make
decisions and move ahead. Standard & Poor's serves the world's capital markets
as a leading source of financial information and ratings services. Teachers,
students, doctors, engineers and other specialists rely on the McGraw-Hill
imprint for learning materials that improve education and advance professional
skills. And business executives around the world look to Business Week, Aviation
Week, Platt's, Sweet's and our other well-known brands for the information,
insight and analysis they need to build their businesses and further their
careers. Our mission worldwide is to enhance the professional and personal
development of our customers and help them to reach their potential.
We have established five priorities for growth that will drive much of our
activity in the future:
o Grow globally in financial services
o Expand our global publishing operations
o Increase our penetration of the U.S. education market
o Capitalize on opportunities in electronic commerce
o Grow our business-to-business information services and products
[GRAPHIC OMITTED]
Financial Services
Key Markets
Global financial markets. Customers include debt issuers, investors,
intermediaries, corporations, government agencies, financial institutions,
portfolio managers, brokers, fund managers and commodities, securities and
foreign exchange traders.
1999 Highlights
Strong international ratings growth in 1999 as the global shift to bond issuance
continued and Eurobond issuance soared. Introduced new Web-based products that
provide investment information and risk analysis to financial advisors, 401(k)
investors, corporations and governments. Enhanced index, mutual fund and
retirement planning business through acquisitions. Launched S&P Global 1200
index.
Growth Strategy
Continue global expansion in ratings business with focus on Europe and Japan.
Expand offerings of non-traditional ratings products to diversify revenue.
Capitalize on global growth of self-directed retirement and investment planning.
Build on reputation of Standard & Poor's equity indexes to create new investable
products and generate new licensing fees. Meet the information needs of the
burgeoning worldwide mutual fund industry.
Key Businesses
Standard and Poor's
Capital Markets Services
Corporate Ratings Services
Financial Institutions Ratings Services
Fund Services
Insurance Ratings Services
Investment Services
Public Finance Ratings Services
Research Services
Structured Finance Ratings Services
22
<PAGE> 19
Educational and Professional Publishing
Key Markets
U.S. markets for elementary, secondary, testing, vocational and postsecondary
fields. Global college and postgraduate fields. International education markets,
and global markets in engineering, science, medicine, healthcare, computer
technology, business, government and training.
1999 Highlights
El-hi business grew at three times the industry rate. Outstanding performance in
math, social studies, music, and in educational testing. Introduced new
multimedia learning programs. Expanded online learning through subject-specific
Web sites and Web-based instructional tools in Higher Education. Bolstered
medical information business through acquisition. New alliances and computer
book titles drove growth in Professional Publishing segment.
Growth Strategy
Continue new product development across all el-hi subject areas to take
advantage of strong adoption schedule through 2004 and continue integrating
multimedia into learning programs. Expand online programs in higher education,
including introduction of e-books in 2000. Expand global approach in
professional publishing to capitalize on the growing worldwide need for
professional development and English-language training. Continue to build on
strength as leading Spanish-language publisher.
Key Businesses
Educational Publishing
McGraw-Hill School Division
Glencoe/McGraw-Hill
CTB/McGraw-Hill
SRA/McGraw-Hill
McGraw-Hill Consumer Products
Higher Education
Dushkin/McGraw-Hill
Irwin/McGraw-Hill
McGraw-Hill Science, Engineering & Mathematics
McGraw-Hill Social Sciences, Humanities, World Languages/ESOL
Primis Custom Publishing
International Publishing
McGraw-Hill Asia/Pacific
McGraw-Hill Australia, New Zealand and South Africa
McGraw-Hill Europe, Middle East and Africa
McGraw-Hill Latin America
McGraw-Hill Spain
McGraw-Hill Ryerson (Canada)
Tata/McGraw-Hill
McGraw-Hill Lifetime Learning
Xebec/McGraw-Hill
Professional Publishing
Business/General Reference
Computing/McGraw-Hill
Osborne/McGraw-Hill
Scientific, Technical & Medical
[GRAPHIC OMITTED]
Information and Media Services
Key Markets
Global business professionals, advertisers and consumers. Professionals and
corporate executives worldwide in aviation, construction, energy and healthcare.
Television audiences in Denver, Indianapolis, San Diego and Bakersfield,
California.
1999 Highlights
Business Week achieved fifth year of record growth; franchise enhanced with
broader personal finance coverage, expansion of on-line presence and successful
launches of e-commerce and small business magazines-within-a-magazine.
Development of online hubs for construction and aviation markets. Created energy
information market segment. Sold chemical and plastics publications.
Growth Strategy
Continue building global franchise for Business Week-branded products, with
focus on increasing global ad sales and circulation. Continue to establish
broader and deeper penetration of vertical markets for business-to-business
information. Accelerate Web presence, expanding commercial hubs in aviation,
construction and energy that offer content, community and e-commerce
opportunities. Enhance community presence of local market television stations,
and take advantage of opportunities to build election-year advertising revenue.
Key Businesses
Aviation Week Group
AviationNow.com
Aviation Week & Space Technology
A/C Flyer
Business & Commercial Aviation
World Aviation Directory
O&M Magazine
Broadcasting Group
(All ABC affiliates)
KMGH-TV (Denver)
KGTV (San Diego)
KERO-TV (Bakersfield)
WRTV (Indianapolis)
Business Week Group
Business Week
Business Week International
Business Week Online
Healthcare Information Group
Hospital Practice
The Physician and Sportsmedicine
Postgraduate Medicine
Healthcare Informatics
e.MD
Your Patient & Fitness
McGraw-Hill Construction Information Group
F.W. Dodge
Sweet's Group
Architectural Record
Engineering News-Record
Design-Build
McGraw-Hill Energy Information Group
Platt's
Natural Gas Information Services
Electric Power Information Services
Nuclear Power Information Services
Coal Information Services
Utility Data Institute
Energy Magazines
Tower Group International
23
<PAGE> 20
Results Matter
[GRAPHIC OMITTED]
<PAGE> 21
Operating Profit by Segment
(dollars in millions)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Educational and Professional Information and Media
Year Publishing Financial Services Services Total
- ---- ---------------------------- ------------------ ---------------------- -----
97 196 277 136 609
98 218 329 131 678
99 274 370 140 784
</TABLE>
Excludes the following items:
1999 Gain on the sale of the Petrochemical publicatons
1998 Gain on the sale of a building
Writedown of Continuing Education Center's Assets
1997 Gain on the sale of Datapro Information Services
Real Estate writedowns for the consolidation of office space in New York
City
Capital Expenditures by Segment
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Educational and Professional Information and Media
Year Publishing Financial Services Services Total
- ---- ---------------------------- ------------------ --------------------- -----
97 193 24 29 246
98 258 50 66 374
99 298 58 45 401
</TABLE>
EDITDA by Segment
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Educational and Professional Information and Media
Year Publishing Financial Services Services Total
- ---- ---------------------------- ------------------ --------------------- ------
97 421 310 170 901
98 444 365 166 975
99 506 411 173 1,090
</TABLE>
- --------------------------------------------------------------------------------
Financial Review
- --------------------------------------------------------------------------------
Operating Revenue by Segment
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Educational and Professional Information and Media
Year Publishing Financial Services Services Total
- ---- ---------------------------- ------------------ -------------------- ------
97 1,574 921 1,039 3,534
98 1,620 1,088 1,021 3,729
99 1,735 1,225 1,032 3,992
</TABLE>
FINANCIAL CONTENTS
26 MANAGEMENT'S DISCUSSION AND ANALYSIS
37 CONSOLIDATED STATEMENT OF INCOME
38 CONSOLIDATED BALANCE SHEET
40 CONSOLIDATED STATEMENT OF CASH FLOWS
41 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
49 REPORT OF MANAGEMENT/REPORT OF INDEPENDENT AUDITORS
50 ELEVEN-YEAR FINANCIAL REVIEW
52 SUPPLEMENTAL FINANCIAL INFORMATION
25
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Results
CONSOLIDATED REVIEW
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $3,992.0 $3,729.1 $3,534.1
% Increase 7.0 5.5 14.9
- --------------------------------------------------------------------------------
Operating Profit $ 823.3 $ 689.1 $ 599.1
% Increase (Decrease) 19.5 15.0 (35.2)
- --------------------------------------------------------------------------------
% Operating Margin 21 18 17
- --------------------------------------------------------------------------------
Income Before Taxes $ 698.0 $ 560.4 $ 471.3
- --------------------------------------------------------------------------------
Net Income $ 425.8 $ 333.1 $ 290.7
- --------------------------------------------------------------------------------
</TABLE>
Operating profit is income before taxes on income, interest expense and
corporate expense. Includes unusual items as described below.
1999 COMPARED WITH 1998
REVENUE AND EARNINGS
Operating revenue for 1999 increased $262.9 million, 7.0% over 1998 due to the
strong performances of the Financial Services segment and Educational and
Professional Publishing segment and the record performance of Business Week
within the Information and Media Services segment.
Operating profit of $823.3 million increased 19.5% over 1998. Included in
each of the respective periods are the following one-time items: in the fourth
quarter of 1999, a $39.7 million pre-tax gain was recorded on the sale of
McGraw-Hill's Petrochemical publications ($24.2 million after-tax, or 12 cents
per diluted common share) and is reflected in the Information and Media Services
segment; in the third quarter of 1998, the company recorded a $26.7 million
pre-tax gain ($16.3 million after-tax, or 8 cents per diluted common share) on
the sale of an office building, reflected in the Financial Services segment; an
$8.7 million extraordinary loss after taxes of $5.6 million on the early
extinguishment of debt (4 cents per diluted common share); and a pre-tax charge
of $16.0 million ($9.8 million after-tax, or 5 cents per diluted common share)
for the writedown of assets at the Continuing Education Center, reflected in the
Educational and Professional Publishing segment. In the second quarter of 1998,
the company sold the remainder of its Information Technology and Communications
Group; the proceeds of $28.6 million approximated book value.
Excluding the one-time items and the extraordinary loss from 1999 and
1998, operating profit was $783.6 million, an increase of $105.2 million, 15.5%
over 1998. Net income was $401.6 million, 19.7% higher than full-year 1998.
Earnings per share for 1999 increased 28.1% over 1998 to $2.14. Excluding
the one-time items and the extraordinary loss from 1999 and 1998, EPS grew 20.2%
to $2.02.
EXPENSES
Operating expenses for the year increased 4.6%. Excluding the impact of the
divestitures, operating expenses would have increased 6.3%, reflecting
investments in new products, technology and facilities. Modest inflation
occurred in most of the expense categories. Continued best practice efforts
mitigated the impact of these increases. Combined paper, printing and
distribution prices decreased 1.2% due primarily to favorable marketplace
conditions. Combined paper, printing and distribution expenses represent 23% of
operating expenses.
Selling and general expenses increased 4.3%, reflecting increased volume.
Excluding the impact of divestitures, selling and general expenses increased
6.2%. A significant portion of both operating and selling and general expenses
is compensation, which increased 7.3% to $1.1 billion.
Depreciation and amortization expense, including the amortization of
goodwill, intangible assets and prepublication costs, increased $9.1 million, or
3.0%, due primarily to the amortization of prepublication costs associated with
1999 el-hi adoptions. Starting in 2002, various real estate leases in New York,
primarily the company's headquarters, will renew at higher rates.
In 2000, paper prices are anticipated to rise approximately 5% along with
increases in the industry. Printing costs should increase modestly due to the
early printing program taking some production for the Educational and
Professional Publishing segment out of peak periods and ensuring delivery.
Inventory carrying values will increase, but will be offset by the discount in
printing costs. A modest increase in distribution costs is anticipated due to
higher fuel surcharges. Merit increases will approximate 4%. The discount rate
for the actuarial pension calculation was changed from 6.75% in 1999 to 7.5% in
2000, reflecting the upward trend in interest rates.
INTEREST EXPENSE
Net interest expense in 1999 was $42.0 million, compared with $48.0 million in
1998, a $6.0 million, or 12.4%, decrease due to lower average interest rates on
borrowings throughout the year. The lower interest expense reflects the
company's decision to repurchase $155 million of its 9.43% Notes in September
1998, which were replaced with commercial paper borrowings at lower interest
rates. The average commercial paper rate was 5.2% in 1999 and 5.6% in 1998.
In 2000, interest expense may increase due to the increases in commercial
paper borrowing rates.
26
<PAGE> 23
PROVISION FOR INCOME TAXES
The provision for income taxes as a percent of income before taxes was 39% in
1999 and 1998. In 2000, the effective tax rate is expected to approximate the
current year's rate.
1998 COMPARED WITH 1997
REVENUE AND EARNINGS
Operating revenue for the year of $3.7 billion grew 5.5% from 1997, reflecting
strong growth in the Financial Services segment, along with modest growth in the
Educational and Professional Publishing segment despite a very strong
performance in 1997. Excluding divested businesses, revenues increased 8.1%.
Operating profit of $689.1 million grew 15.0% and net income of $333.1
million increased 14.6% from 1997. Included in the respective periods are the
following one-time items: in the third quarter of 1998, the company recorded a
$26.7 million pre-tax gain on the sale of an office building; an $8.7 million
extraordinary loss after taxes on the early extinguishment of debt; and a $16.0
million pre-tax charge for the writedown of assets at the Continuing Education
Center due to a continuing decline in enrollments. In the second quarter of
1998, the company sold the remainder of its Information Technology and
Communications Group.
In the third quarter of 1997, the company divested its McGraw-Hill London
House and McGraw-Hill School Systems businesses, which were part of the
Educational and Professional Publishing segment, for $29 million in cash; the
proceeds approximated the book values of the properties. Also during the
quarter, the company divested its Datapro Information Services business for
proceeds of $25 million in cash; the quarter results reflect a pre-tax gain of
$20.4 million ($20.2 million after-tax, or 10 cents per diluted common share) on
the divestiture. The pre-tax 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.
1997 expenses also include a one-time, noncash provision of $33.2 million
($19.9 million after taxes, or 10 cents per diluted common share) for the
consolidation of office space in New York City. The one-time provision was
primarily for the writedown of a building and the writedown of leasehold
improvements for office space vacated in the company's headquarters building.
The provision associated with each segment and corporate expense is as follows:
Educational and Professional Publishing - $8.6 million; Financial Services -
$20.4 million; Information and Media Services - $1.5 million; and Corporate -
$2.7 million.
Excluding the extraordinary loss and other one-time items in 1998 and
1997, operating profit was $678.4 million, an increase of 11.4% over 1997, while
net income was $335.4 million, or 15.5% higher than the same period in 1997.
Earnings per share for 1998 were $1.67, an increase of 14.4% over 1997.
Excluding the extraordinary loss and other one-time items, EPS was $1.68, a
15.1% increase over 1997.
EXPENSES
Operating expenses for 1998 increased 2.2%. Excluding the net effect of
acquisitions/divestitures and the 1997 facilities charge, operating expenses
would have increased 6.2%, reflecting investments in new products and technology
and modest inflationary increases in key categories, such as compensation,
somewhat offset by cost containment. Combined paper, printing and distribution
prices increased approximately 1.8%, primarily due to the carryforward impact of
paper price increases that occurred in late 1997 and normal printing increases.
Selling and general expenses increased 6.9%, reflecting volume-related
increases. A significant portion of both operating and selling and general
expenses is compensation, which increased approximately 8% to $1.0 billion.
Depreciation and amortization expense, including amortization of goodwill,
intangible assets and prepublication costs, increased $5.7 million, or 1.9%,
primarily due to technology-related investments and the first full year of
office space consolidation in New York City.
INTEREST EXPENSE
Net interest expense of $48.0 million decreased $4.6 million, or 8.7%, from the
prior year, essentially due to lower debt levels resulting from improved cash
flow. Average commercial paper borrowings declined to $417 million from $489
million. The lower interest expense also reflects the company's decision to
repurchase $155 million of its 9.43% Notes, which will be replaced at lower
rates. The average commercial paper rate was 5.6% for both 1998 and 1997.
PROVISION FOR INCOME TAXES
The provision for income taxes as a percent of income before taxes was 39%,
compared with 40% in 1997, excluding the gain on the sale of Datapro, due to
favorable apportionment changes reducing state taxes.
27
<PAGE> 24
MANAGEMENT"S DISCUSSION AND ANALYSIS
Segment Review
EDUCATIONAL AND PROFESSIONAL PUBLISHING
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $1,734.9 $1,620.3 $1,573.8
% Increase 7.1 3.0 23.2
- --------------------------------------------------------------------------------
Operating Profit $ 273.7 $ 202.1(a) $ 187.7(b)
% Increase (Decrease) 35.4 7.7 (65.6)
- --------------------------------------------------------------------------------
% Operating Margin 16 12 12
================================================================================
</TABLE>
(a) Includes a $16.0 million pre-tax provision at Continuing Education Center
for the writedown of assets due to a continuing decline in enrollments.
(b) Includes an $8.6 million provision for the consolidation of office space in
New York City.
The Educational and Professional Publishing segment consists of two
operating groups that provide educational and professional reference materials,
training, and lifetime learning. The two units are the Educational Publishing
Group and the Higher Education, Professional Book and International Publishing
Group. Included in the 1999 performance are results from Appleton & Lange, which
was acquired in June 1999 and has become a part of the Higher Education,
Professional Book and International Publishing Group. The Continuing Education
Center (CEC) was part of the Higher Education, Professional Book and
International Publishing Group, but in 1999, due to a decline in enrollments,
McGraw-Hill began the teach out of the CEC programs and discontinued its
operations.
In 1999, the Educational and Professional Publishing segment had a record
year in both sales and operating profit. Revenue grew 7.1% with both operating
groups contributing to the increase. Operating profit increased by 35.4%
including the effect of the CEC writedown. Excluding the writedown of CEC,
operating profit increased 25.5%.
In 1998, revenue grew 3.0% and operating profit increased 7.7% led by
strong performances in Educational Publishing and Higher Education. Excluding
the writedown of the Continuing Education Center in 1998 and the facilities
charge in 1997, operating profit increased 11.1%.
EDUCATIONAL PUBLISHING
The Educational Publishing Group comprises five divisions: SRA/McGraw-Hill,
publisher of supplementary and specialized research-based educational programs
for the elementary market; McGraw-Hill School Division, publisher of
instructional programs for the elementary market (grades K-6);
Glencoe/McGraw-Hill, secondary school (grades 7-12) and post-secondary
publisher; CTB/McGraw-Hill, publisher of testing materials and provider of
scoring for standardized achievement tests, customized testing and specialized
educational software products; and McGraw-Hill Consumer Products, publisher of
educational products for home use.
Several trends favorably affected the el-hi market in the 1998-1999 school
year and their influence is expected to continue in 2000 and beyond. These
include growing enrollments, which again increased 1% this year as they did in
1998, robust funding, a favorable political climate, overall adoption
opportunities that were comparable to last year and continued emphasis on
accountability. Benefiting from these trends, the Educational Publishing Group
revenue grew 9.8% to $913 million, nearly 53% of segment revenue. Strength in
reading at the elementary level, math and social studies at the secondary level,
the expansion of statewide testing contracts, and the popularity of educational
books in the retail market have contributed substantially to this year-to-year
gain. SRA/McGraw-Hill achieved record sales and profits, driven largely by the
success of its skill-based, phonics intensive reading programs. Both Open Court
Reading and SRA/McGraw Hill's reading intervention program, Corrective Reading,
did particularly well enabling SRA/McGraw-Hill to overcome softness in the sale
of its mathematics program. The School Division, in contrast, experienced a
reduction in its reading sales, having enjoyed an exceptional 1998 with the
California reading adoption. An improvement in its mathematics program and
success in various music and social studies adoptions resulted in sales
remaining even with the prior year. Although the School Division's adoption
sales declined, open territory sales outpaced the industry.
Once again the mathematics and social studies programs at
Glencoe/McGraw-Hill played a significant role in Educational Publishing's
performance. The division retained its place as leader of the secondary market
in these two disciplines. Adoption sales were strong for Glencoe/McGraw-Hill,
allowing for respectable growth in revenue and profit year-to-year.
CTB/McGraw-Hill generated a healthy increase in sales and profit over 1998 due
to the continued success of its standardized achievement test series, TerraNova,
and its significant presence in the statewide testing market. In 1999
CTB/McGraw-Hill was responsible for testing contracts in 21 states. Consumer
Products, the newest of the Group's divisions, nearly doubled its 1998 sales in
1999, with a correspondingly dramatic improvement in profit. Consumer confidence
in the stability of the current economy, an increase in shelf space at major
retailers and a growing interest in educational books and workbooks by consumers
have all contributed to the division's success.
For 2000, the Educational Publishing Group expects continued growth,
fueled by an unusually strong adoption cycle, particularly for the School
Division and SRA/McGraw-Hill, an increase in sales at Glencoe/McGraw-Hill and
SRA/McGraw-Hill, increasing enrollments and a sustained favorable environment
for educational funding. Some of the most promising opportunities are expected
in the elementary markets where three critical states - California, Texas, and
Florida - are scheduled to buy major new programs, including science in all
three states, reading in Texas and social studies in California. The School
Division will be participating with new programs in reading and science and a
revised 2000 copyright of its social studies program, Adventures in Time and
Place. SRA/McGraw-Hill expects to be a strong contender in the reading adoptions
with new reading programs, although it also anticipates
28
<PAGE> 25
greater competition from large basal publishers who have developed new reading
programs that can compete directly with SRA/McGraw-Hill's phonics-based Open
Court Reading. Glencoe/McGraw-Hill will experience more modest growth in the
secondary market, where key adoptions include science in Florida, California,
and North Carolina. Glencoe/McGraw-Hill will also be entering the last major
market where it is not a leading publisher, literature, with a new series
entitled Literature, The Reader's Choice. CTB/McGraw-Hill will benefit from the
continued focus on accountability, the introduction of the sixth edition of the
California Achievement Test, and growth and expansion of statewide testing
contracts. The Consumer Products division will continue to explore strategic
alliances, pursue e-commerce opportunities and expand its product lines as it
positions itself as a premier publisher in the retail market niche of
educational workbooks.
In 1998, market conditions were strong, though the adoption schedule was
lighter than that in 1999. Educational Publishing achieved a $44.8 million, 5.7%
increase in revenue, to $831.5 million. Excluding divested businesses,
McGraw-Hill School Systems and McGraw-Hill London House, revenue increased 7.6%
over 1997. High market shares in elementary reading, K-12 social studies and
secondary math adoptions contributed favorably to the revenue growth.
SRA/McGraw-Hill and the School Division combined to take 34% of the K-8
California reading market in the second year of the adoption.
Glencoe/McGraw-Hill contributed to the revenue and profit growth in 1998, as it
maintained its historic market leadership in math and distinguished itself as
the market leader in social studies. CTB/McGraw-Hill had revenue growth from its
testing series, TerraNova, and from significant expansion in statewide custom
testing contracts.
HIGHER EDUCATION, PROFESSIONAL BOOK AND INTERNATIONAL PUBLISHING GROUP
This group comprises four operating units that cover higher educational needs,
professional reference and educational materials, the international arena, and
lifetime learning and training. Revenue in 1999 for the group grew 4.3% to
$821.9 million, which represents 47% of total segment sales. All four units
posted revenue increases over the prior year.
The Higher Education Group produced a 9.4% gain in revenue to $393.1
million in 1999. Higher Education had an outstanding year with all imprints
exceeding expectations. Results for the year were led by the McGraw-Hill
Science, Engineering and Mathematics imprint due to strong performance of its
frontlist and backlist titles. Key revisions published in the year include
Garrison: Managerial Accounting, 9th ed., Mader: Inquiry into Life, 9th ed., and
Silberberg: Chemistry: Molecular Nature of Matter & Change. Successful first
editions published were Foerster: Puntos Y Aparte, Adams: Art Across Time,
Bentley: Traditions and Encounters, and Molles: Ecology: Concepts and
Applications. Operating profit increased management's discussion and analysis
substantially and margins improved for the sixth consecutive year, consistent
with the increase in revenue.
In 2000, the college market will continue to benefit from increased
enrollments as well as opportunities driven by technology. Enrollments, expected
to grow at a compound annual growth rate of 1.8% from 1998 to 2001, are being
fueled by an increase in high school graduates, the continuation of beneficial
tax treatment for tuition expense, growing demand for skilled labor, increased
wage disparity between high school and college graduates and the movement toward
lifelong learning. The increasing use of technology in the classroom is a key
trend and has led to additional spending on electronic media. Capitalizing on
these trends, Higher Education has two main technology initiatives: PageOut and
Online Learning Centers. PageOut is a custom course Web site development tool
created for professors who adopt Higher Education's textbooks. The Online
Learning Center is a Web-based product that supports major titles. With ongoing
strength in the front and backlists and new technological initiatives, Higher
Education anticipates solid growth in 2000.
Revenue for the Professional Book Group was $132.5 million in 1999.
Revenue growth was affected by the phaseout of the book club operations during
the first quarter of 1999 and by the acquisition of the medical publishing
program of Appleton & Lange at the end of June. The Group achieved strong growth
in the retail bookstore marketplace, especially via national chains and also
through the rapidly expanding online retailer channel. All product groups
experienced revenue increases, led by robust sales in the computer product line,
where titles addressing high-level subject areas and the computer certification
market performed well. Two noteworthy titles in this imprint were Meyers: A+
Certification Exam Guide, and Loney: Oracle 8, The Complete Reference. The
Business and General/Reference Group achieved solid growth driven in part by a
strong line of finance and investment guides. Nassar: How to Get Started in
Electronic Day Trading was a top selling title. The Scientific, Technical &
Medical Group had a sales increase in the base business and also successfully
integrated the new products and programs of Appleton & Lange. The group expanded
the subscriber base for Harrison's Online, which had been launched in 1998, and
completed development for Access Science, an online product based on the
Encyclopedia of Science and Technology. Especially strong print titles included
Tintinalli: Emergency Medicine, 5th ed., and Tierney: Current Medicine Diagnosis
/ Treatment 2000, 39th ed.
In 2000, the Professional Book Group expects to benefit from continuing
new developments in information technology, which will drive strong worldwide
demand for its computer publishing program. The Business and General/ Reference
Group will grow as demand increases in the key areas of finance and investing
and e-commerce implementation. Scientific, Technical & Medical Group will
continue to grow aided by the full year effect of Appleton & Lange. The Group
will pursue growth through a number of channels, including Internet retailers,
other e-commerce opportunities and national book retailing chains. International
revenue is expected to increase as well as a result of improving demand, the
continued globalization of information and new marketing initiatives. Electronic
publishing, distribution and promotion will continue to present the Group with
new opportunities for supplying content
29
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
Segment Review (continued)
directly to consumers as well as through partnerships with e-commerce companies.
In 1999, the International Publishing Group performed well in many of its
key markets resulting in revenue and profit increases over the prior year. Two
regions that generated significant increases included Canada, where School,
Trade, and Medical product sales were strong, and Asia, where the economy has
been recovering. The Latin America region also improved, with strong sales of
Higher Education product occurring in Mexico, while Europe showed moderate
increases in revenue. Partially offsetting these favorable results were several
factors including the weakness of the euro currency and the ongoing economic
crisis in South America.
In 2000, all regions served by the International Publishing Group are
expected to show either stable or improving economic environments. Prospects in
Mexico remain promising, offsetting more volatile conditions in smaller
territorial markets in the region. South America is expected to rebound, while a
renewed confidence and optimism is projected for Asia. Europe will maintain
steady growth with solid projections for continued prosperity, despite some
concern over the euro's weakness compared with other currencies. Given this
context, International is projecting growth in all of its major markets in 2000.
Lifetime Learning, the newest division within the Higher Education,
Professional Book and International Publishing Group, is dedicated to meeting
the learning and training needs of corporations and individual professionals,
utilizing technology-based delivery systems. Xebec, a CD-ROM-based training
company acquired in 1998, was merged into this division. In 1999, the global
management team was formed and this operation is now ready to accelerate its
sales growth by increasing product offerings and by developing the latest
methods of delivering training via the Internet and corporate intranets.
Government training initiatives in domestic and foreign markets have assisted
and will continue to assist the growth of employer workplace training. Skill
shortages within corporations and the demands of the new economy will ensure the
continued market for corporate training, and new lifestyle changes will drive
individuals' needs to continue education beyond college. With McGraw-Hill's rich
library of higher education and professional content to draw upon, Lifetime
Learning will capitalize upon these training needs, projecting healthy revenue
growth in 2000.
In 1998, Higher Education, Professional Book and International Publishing
Group revenue increased to $788.7 million, 49% of segment revenue. Significant
revenue increases were achieved in Higher Education by the Irwin/McGraw-Hill and
McGraw-Hill/College imprints. The key frontlist revisions driving their sales
increase were: McConnell: Economics, 14th ed., Nickels: Understanding Business,
5th ed., Libby: Financial Accounting, 2nd ed., Lucas: The Art of Public
Speaking, 6th ed., Terrell: Dos Mundos, 4th ed., and Kamien: Music: An
Appreciation, 3rd ed. Revenue increases were also posted by WCB/ McGraw-Hill led
by Mader: Biology, 6th ed., Shier: Human Anatomy and Physiology, 8th ed., and
Hole: Essentials of Human Anatomy and Physiology, 6th ed. Operating profit and
margin increased in 1998, reflecting the higher revenue and the full year impact
of the 1997 integration actions relating to the acquisition of the Times Mirror
Higher Education Group in late 1996.
Professional Book Group revenue was flat with 1997 as a result of second
year fall-off from 1997's release of two major products: the 8th edition of The
Encyclopedia of Science and Technology and the 14th edition of Harrison's
Principles of Internal Medicine. The Group achieved strong growth in the
trade/retail sales channel. The computer book product line sold particularly
well, reflecting increased title output, redirected publishing programs and new
sales and marketing initiatives. Direct and indirect sales to Amazon.com and
other online retailers were also a significant factor in 1998 performance.
Additionally, the Professional Book Group successfully introduced its first
revenue-generating online product, Harrison's Online, to a worldwide market.
Best-selling business titles included The Electronic Day Trader and Jack Welch
and the GE Way. International revenue was also flat with 1997. Revenues improved
in Latin America due to strong growth in Mexico, particularly in medical and
professional publishing. Canada's results benefited from strong growth in the
school and professional markets. Operating results also improved in Europe,
particularly in Spain's school market. Business in Asia declined due to the
effects of the economic crisis. Professional Publishing profits declined
primarily due to lower international profits and the continued softness at the
Continuing Education Center, the home-study business, due to lower enrollments.
As a result the company recorded a $16 million pre-tax charge to write down the
assets of the CEC business.
FINANCIAL SERVICES
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $1,224.6 $1,087.8 $ 921.1
% Increase 12.6 18.1 14.8
- --------------------------------------------------------------------------------
Operating Profit $ 369.7 $ 355.9(a) $ 256.1(b)
% Increase 3.9 39.0 5.0
- --------------------------------------------------------------------------------
% Operating Margin 30 33 28
================================================================================
</TABLE>
All amounts reflect the transfer of Platt's and S&P Personal Wealth to the
Information and Media Services segment.
(a) Includes a $26.7 million pre-tax gain on the sale of an office building in
New York City.
(b) Includes a $20.4 million provision for the consolidation of office space in
New York City.
The Financial Services segment operates under the Standard & Poor's brand
through two operating divisions: Ratings Services and Information Services.
Ratings Services provides credit ratings and analysis globally on corporations,
financial institutions, securitized and project financings, and local, state and
sovereign governments.
30
<PAGE> 27
It accounts for a proportionately larger share of the segment's revenues and
operating profits. Information Services provides a wide range of investment
information, analyses, and opinions to institutional and individual investors
globally. In 1999, Platt's, a provider of real-time information and analysis in
the global energy services market, was consolidated with the Energy Information
Group in the Information and Media Services segment. Also in 1999, S&P Personal
Wealth, an e-commerce initiative which provides allocation and planning tools to
the individual investor, was transferred to Business Week, in the Information
and Media Services segment. Accordingly, the segment information reflects these
changes.
In 1999, the Financial Services segment revenue increased 12.6%. Operating
profit, excluding the $26.7 million gain on the sale of a building in 1998,
increased 12.3%. Excluding the gain in 1998, operating margins were consistent
with prior year, reflecting faster revenue growth at the wider-margined ratings
business offset by the impact of higher rent expense from the relocation of its
headquarters, continued global expansion, and investments in new products.
In 1998, Financial Services segment revenue increased 18.1%. Operating
profit, excluding the $26.7 million gain on the sale of a building and the 1997
facilities charge, rose 19.1% and operating margins increased slightly.
RATINGS SERVICES
In 1999, Standard & Poor's Ratings Services revenue rose based in part on a
soaring Eurobond market. Eurobond issuance rose 74% as issues denominated in the
newly-launched euro rose 142%. U.S. corporate bond issuance was essentially flat
while tax exempt and structured finance issuance in the U.S. were off 22% and
15%, respectively.
Corporate ratings growth came from the outstanding performance in Europe,
the acceptance of new products such as Corporate Credit Ratings and Bank Loan
Ratings and fee increases on large transactions. Structured Finance grew
primarily due to continued strong global demand in the asset backed and
commercial real estate markets. Structured Finance also increased market share
in the U.S. from ratings of collateralized loan obligations, asset backed
securities and the commercial mortgage backed securities. Public Finance
revenues were essentially unchanged as the introduction of new ratings services
offset the impact from lower bond issuance. Insurance and Financial Institutions
both had double-digit revenue growth. International revenue grew, reflecting the
expansion in Europe as financing began to move away from the traditional banking
relationships and as the structured finance market continued to develop. The
global network expanded with an office opening in Milan, Italy. Foreign source
revenue represented 29.0% of total revenue in 1999 versus 26.0% in 1998.
Nontraditional revenue growth was driven by Bank Loan Ratings, Corporate Credit
Ratings and Ratings Evaluation Services. Operating profit grew on the strength
of international and domestic markets and the performance of nontraditional
products, offset by investments in international expansion and technology.
Standard & Poor's Ratings Services remains the market leader in the global
rating services industry, among such formidable competitors as Moody's Investor
Services, Fitch IBCA and local rating agencies internationally. The basis of
competition has expanded beyond analytical coverage to also focus on customer
service, media and communications, and brand management.
In 2000, Standard & Poor's anticipates continued strength in the U.S. bond
market and very strong growth in Europe. The European Monetary Union should
continue to spur the growth of capital markets in Europe and in turn raise
demand for ratings products. Non traditional products and continued
international expansion will also benefit the group. Continued investments in
global business opportunities are anticipated again in 2000. The key known
uncertainties include: to what extent the proposed Basle Committee regulations
concerning bank capital adequacy will accelerate rating demand in Europe; and
how the Internet revolution will change Ratings Services clients' business
models.
Standard & Poor's revenue from Ratings Services rose in 1998 on new issue
volume in the U.S. bond market, rapid growth in global markets and expanded
nontraditional ratings services. New issue dollar volume in the U.S. bond market
grew 41.2%; unit volume grew 22.4%. Corporate ratings growth reflected a
favorable interest rate environment and the continued demand for high yield
bonds. Structured Finance grew, primarily due to strong issuance in asset-backed
and mortgage-backed markets. Public Finance revenue increased in a favorable
market environment for new municipal bond issues and increased market share.
Nontraditional revenue continued to expand in areas such as insurance.
International revenue grew substantially, reflecting growth and development in
global capital markets. The global network was expanded with office openings in
Sao Paulo, Brazil, and Moscow to serve emerging markets in Latin America and
Eastern Europe. Additional affiliation agreements were signed with EA Ratings in
Russia and Maalot, Israel's leading rating service. Operating profit grew,
reflecting strength in both the domestic and foreign markets and the
diversification of its revenue base, while funding larger investments in global
expansion.
INFORMATION SERVICES
In 1999, Standard & Poor's Information Services revenue increased, primarily due
to the booming U.S. equity market, a revitalization of the international
markets, offset by weakness in the secondary municipal market. Index Services,
S&P Retail Market Services, Investment Advisory Services, and Fund Services all
showed strong growth offsetting difficult conditions in the fixed income and
commodity businesses. Index Services benefited from fees on index-based
derivative products, including S&P depository receipts (SPDRs), which
consistently held the highest trading volume of any security on the American
Stock Exchange. Internationally, this unit launched the S&P Global 1200 index,
incorporating the S&P 500, S&P Euro 350, the S&P Topix 150, the S&P Asia Pacific
100, the S&P Canada 60 and the S&P Latin America 40 as components. This rapid
international expansion will allow Index Services to capitalize on the
developing index cultures in
31
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
Segment Review (continued)
Europe and the trend for investors toward a unified global view of equities. To
leverage its popularity of SPDRs in 2000, Standard & Poor's will partner with
Barclay's Global Investors to launch a number of Exchange Traded Funds, which
are no-load index funds.
Standard & Poor's revenues from retail market services continued to rise
with the Internet tide. Standard & Poor's is the leading distributor of quotes
to financial Web sites. The popular advisory services group, which provides
investment advice to retail investors, continued its history of successful stock
selection. In 1999, assets under management in Standard & Poor's fee generating
portfolios reached $6.2 billion. Standard & Poor's continues to establish new
portfolios with distribution partners such as Merrill Lynch and Salomon Smith
Barney. Continued strong public interest in mutual funds is propelling Standard
& Poor's fund services to double-digit revenue growth. Standard & Poor's fund
services provides mutual fund data and performance information, as well as
forward looking fund ratings as part of the newly launched S&P Select Funds
program. Servicing the institutional investor market, Standard & Poor's
Compustat, the leading provider of "standardized" financial information,
benefited from the market equity volatility and increased demand for fundamental
data and analysis. In 1999, Compustat expanded its worldwide content. Standard &
Poor's MMS, a provider of real-time information analysis in the global financial
markets, had a decline in revenue due to industry consolidation and lower
foreign currency trading volumes. Standard & Poor's DRI, a provider of economic
analysis, showed softness due to declining subscription and data revenue for
macroeconomic information.
Operating profit in 1999 decreased as the benefits of the soaring equity
market could not offset the weakness in the secondary market for fixed income
securities, and in particular municipal bond securities. In addition continued
investment in international expansion in Europe, along with technology
investments in new Web-based services, had a dampening effect on operating
profit.
In 2000, Standard & Poor's will continue to focus on providing top quality
independent data, analysis, opinions, and benchmarks. Through various business
units, Standard & Poor's will launch several products on the Internet providing
financial commentary and analysis. Technology will continue to play an important
role in the delivery of its content and will continue to distribute data and
analysis through all available channels including traditional vendors and its
own Web-based products.
Standard & Poor's Information Services' 1998 revenue increased, primarily
due to a favorable economic climate, worldwide interest in the equity markets,
and demand for customer-focused Internet services, somewhat offset by softness
in the secondary municipal market. The Index unit benefited from fees on
index-based derivative products, including SPDRs, which consistently held the
highest trading volume of any security on the American Stock Exchange. It also
introduced two new indexes for the European market, the S&P Euro Index and the
S&P Euro Plus Index and an index for Canada. Portfolio Services, which has
marketing agreements with several major financial institutions, also witnessed
assets tied to its managed portfolios post strong growth. Standard & Poor's
ComStock's revenue grew and improved its position as a leading redistributor of
stock quotes to many of the world-wide Web's most frequented financial sites. In
the Institutional sector, Standard & Poor's Compustat, a leading provider of
"standardized" financial information used by money managers, benefited from
tremendous equity volatility and increased demand for fundamental data and
analysis. Standard & Poor's MMS grew revenue despite the difficult market
conditions primarily in Asia. In 1998, Information Services introduced nine new
products for customers ranging from portfolio managers to financial advisors and
individual investors.
INFORMATION AND MEDIA SERVICES
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $1,032.5 $1,021.0 $1,039.2
% Increase (Decrease) 1.1 (1.7) 4.5
- --------------------------------------------------------------------------------
Operating Profit $ 179.9(a) $ 131.1 $ 155.3(b)
% Increase (Decrease) 37.2 (15.6) 15.1
- --------------------------------------------------------------------------------
% Operating Margin 17 13 15
================================================================================
</TABLE>
All amounts reflect the transfer of Platt's and S&P Personal Wealth from the
Financial Services segment.
(a) Includes a one time gain of $39.7 million from the sale of Petrochemical
publications.
(b) 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 four operating
groups, which includes business and professional media offering information,
insight and analysis: Publication Services (comprising Business Week, Aviation
Week Group, Energy Information Group, Petrochemical Group, and Healthcare
Information Group); Tower Group International; McGraw-Hill Construction
Information Group; and the McGraw-Hill Broadcasting Group. In 1999, the
operational responsibility for Platt's was transferred from the Financial
Services segment to the Energy Information Group. Also in 1999, S&P Personal
Wealth was transferred to Business Week from the Financial Services segment.
The company has an agreement to sell Tower Group International in the
first quarter of 2000. The net assets approximated $100 million as of January
31, 2000, subject to adjustment at the closing date. No significant gain is
anticipated.
The Information and Media Services segment's revenue grew by 1.1% to
$1,032.5 million in 1999 and operating profit grew 37.2%. The company sold its
Petrochemical publications in 1999 and the remainder of its Information
Technology and Communications Group in 1998.
32
<PAGE> 29
Excluding these divested businesses, revenue increased 5.2% and operating profit
grew 32.2%.
In 1998, revenue decreased 1.7%. Operating profit, excluding the
divestiture of the remainder of the Information Technology and Communications
Group, the gain on the sale of Datapro in 1997 and the facilities provision for
consolidation of New York office space, was essentially flat with 1997. The
Information Technology and Communications Group produced a loss in 1997 due to
declining revenue and increased marketing investments.
PUBLICATION SERVICES
Publication Services comprises Business Week, Aviation Week, Energy Information,
Healthcare Information and Petrochemical groups. In the third quarter of 1999,
McGraw-Hill divested the Petrochemical group and recognized a $39.7 million
gain. Revenue increased 7.8%, to $512.0 million, and operating profit increased
93.1% over 1998. Excluding the gain on the divestiture, operating profit
increased 30.6% over 1998. Strong performances by Business Week and Aviation
Week were partially offset by weaknesses elsewhere in the Group.
Business Week had a record year, with revenue increasing 17.2% in 1999,
and a fifth consecutive year of double-digit operating profit growth. The
results reflect solid gains in the North American and International editions as
well as online initiatives. Domestic advertising pages, as measured by the
Publishers' Information Bureau, grew 22.9% in 1999, while an influx of new
advertisers improved the revenue per page. Business Week's revenue growth,
excluding the transfer of S&P Personal Wealth, was 16.9% in 1999.
Successful programs in North America include the introductions of e.biz, a
supplement on e-business, and frontier, for small business owners. Advertising
revenue growth showed strong gains in Europe and Asia, with non-U.S. source
revenue growing at a double-digit rate. Businessweek Online, including S&P
Personal Wealth, continues to expand its traffic and revenue base, tripling its
revenues from 1997, and increasing its traffic by 70% in 1999.
Corporate profits from the booming economy are driving advertising growth
to higher levels. In 1999, Business Week outperformed its competitors by
increasing its advertising pages 23% compared to their 12%. The gains were
achieved through a combination of new product introductions and enhancements,
increased branding initiatives, alliances, and targeted category efforts.
In 2000, Business Week expects to benefit from continued worldwide
advertising growth stemming from the strong economy in the U.S., acceleration of
European economies and the continued Asian economic recovery. Consumer
confidence continues to soar and businesses retain a bullish outlook for the
year 2000. Among Business Week's main competitors, the strategies in the
upcoming year include elements of global expansion and online penetration.
Internationally, Business Week is rapidly gaining on its competitors in Europe
and Asia.
Business Week's growth strategy in 2000 will continue in the same
direction that led to its stellar performance in 1999: market share gain in
North America, continued international growth, and an aggressive online
strategy.
Aviation Week Group's operating profit grew in 1999, continuing a growth
trend that has expanded profits by 61% since 1995. This growth has resulted from
increased market share, effective cost management, and the development of new
products and services. Aviation Week Group has the leading market share and
brand in the aviation, aerospace and defense information industries.
In 2000, a cyclical slowdown is anticipated in industry sales and
employment. The aerospace industry is continuing its trend of consolidation.
Airline profits and traffic have flattened in the Commercial Aviation segment,
but traffic is expected, in the long term, to maintain 5% annual growth.
Likewise, the Business Aviation segment is expected to continue on a growth
path, driven by the introduction of new models and a strong U.S. economy. The
Military segment has been declining over the past decade due to defense
cutbacks, but is projected to inch upward in 2000. Finally, the MRO
(Maintenance, Repair and Overhaul) segment is also undergoing a round of
consolidation as major firms such as GE expand their MRO position.
For 2000, the Aviation Week Group is focused on multimedia growth in
electronic information services, conferences/exhibitions, other non-advertising
revenue sources, and on seeking opportunities for strategic acquisitions and
alliances. The Group launched AviationNow.com, a major portal destination site,
in January 2000 to establish an even stronger presence on the Internet. This
vertical business-to-business site addresses the industry's need for an
aggregated information and business services hub. Other key focus areas of the
Aviation Week Group include continued expansion efforts into the Space and MRO
segments through new product launches and new conferences. The increase in air
shows in 2000 should also positively impact the Group.
The Energy Information Group is comprised of Platt's and magazines,
newsletters, databases and directories serving the electric-power, natural gas,
nuclear, and coal industries. Platt's is a provider of real time information and
analysis in the global energy services market. The Group finished 1999 with
revenue and operating profit decreases from 1998 as continued industry
consolidation negatively impacted Platt's, magazine advertising revenues and
newsletter subscribers. In addition, the newsletter operation experienced
attrition in its print product subscriber base as customers sought lower cost or
no cost information on the Internet. Excluding the transfer of Platt's, revenue
and operating profit decreased from 1998.
The U.S. power generation market continues its two-year-old boom - both in
terms of new project proposals and plant sell-offs by utilities to independent
power companies and other wholesale producers. Even though this market is
active, the number of participants continues to dwindle due to ongoing
consolidation. Primary opportunities will continue to come from the electricity
and natural gas markets in the year 2000. Performance in the near term will
depend on the spending of industry participants as they resume investment in
existing plant and increased capacity and the
33
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
Segment Review (continued)
ability of the group to maintain the newsletter customer base while increasing
electronic delivery.
The Healthcare Information Group's revenues decreased in 1999. The major
reason for the softness in advertising revenue is the delay in FDA approval of
new drugs and associated advertising programs. The changing mix of FDA product
approvals in late 1999 and 2000 towards more primary care drugs, however, should
benefit the Group, whose publications focus on providing clinical information to
primary care physicians.
Another recent market trend is the changing marketing mix for prescription
drugs. Traditionally, pharmaceutical companies marketed their drugs to
healthcare providers and payers, not directly to consumers. However, changes in
FDA regulations that allow pharmaceutical companies to advertise Direct to
Consumer (DTC) are having implications for the industry. Consequently, journal
advertising spending has decreased in some categories as dollars are allocated
towards DTC. At the same time, marketing events and professional promotions
spending is increasing dramatically.
In 2000, the Healthcare Information Group will concentrate on expanding
its exhibition and conference revenues, additional special issues and online
initiatives. More timely FDA approvals and a favorable outlook for new drug
introductions should also benefit the Group in 2000.
Revenue and operating profit increased in 1998, reflecting growth in
Business Week, due to a 1.8% increase in advertising pages, with an influx of
new advertisers improving revenue per pages; Aviation Week Group, aided by
strong performances in advertising, airshows and exhibitions; the Energy
Information Group, due to Platt's launch of new products covering the world's
deregulating power markets as well as modest growth in the Petrochemical unit;
offset by weakness in the Healthcare publications. The Healthcare Information
unit was affected by a reduction in new drug approval and a shift in advertising
from print to broadcasting.
TOWER GROUP INTERNATIONAL
Tower Group International revenue increased 4.4% to $116.4 million, and
operating profit improved in 1999, due to growth in the non-border business, the
expansion of existing major customer relationships and the full year impact of
offices opened in the prior year. Border revenues declined by 5.8%. Lower price
per transaction, associated with automotive transactions, contributed
significantly to the decline. Increased technology costs were recognized in 1999
due to initiatives relating to cash management.
The company has an agreement to sell Tower Group International in the
first quarter of 2000. The net assets approximated $100 million as of January
31, 2000, subject to adjustment at the closing date. No significant gain is
anticipated.
Tower Group International revenue increased in 1998 due to growth in core
U.S. customs brokerage business and from opening new offices. Operating profits
declined due to integration costs associated with acquisitions made over the
years.
CONSTRUCTION INFORMATION GROUP
The Construction Information Group's revenues increased 1.6% over 1998 to $290.5
million, but operating profits declined modestly due to investments in digital
platforms and the costs of rolling out a major new Internet product.
Year-to-year declines in Sweet's revenues, mainly in catalogue file revenue and
certain electronic products, offset increases in F.W. Dodge revenues and the
magazines Architectural Record and Engineering News-Record. Revenue growth at
F.W. Dodge resulted from higher subscription based revenue, primarily from
growth in Dodge Plans, increased advertising in the F.W. Dodge regional
Construction Publications and incremental revenue from the units' Market
Analysis Group. Dodge Plans is a new product, fully launched in 1999, which
provides digital plans specifications over the Internet. The Construction
Group's Market Analysis Group maintains a database of historical construction
information. The information contained in the database, as well as industry
forecasts based on this information, is marketed to building product
manufacturers and to the financial, insurance and real estate communities. Lower
technology, production and distribution expenses at both Sweet's and F.W. Dodge
helped to offset the incremental costs associated with the rolling out of Dodge
Plans.
Nonresidential construction contract value is projected to level off in
2000, after a record year in 1999. Total construction contract value has grown
an average of 8% per year since 1992, maintaining a steady upward trend that is
in sharp contrast to the boom-and-bust pattern of earlier decades. Another trend
that is evident throughout the construction industry is the increasing use of
Internet-based project management tools that serve to streamline the
collaboration needed in the project life cycle. The Group will continue the
expansion of its electronic offerings.
The Construction Information Group revenue increased 2.3% in 1998. Revenue
increased due to growth at F.W. Dodge and Sweet's as electronic products grew
and also from growth at Architectural Record and Engineering News-Record.
Operating profit declined due to investments in new products and technology.
Nonresidential building rose 1% in 1998.
BROADCASTING
The Broadcasting Group operates four television stations, all ABC affiliates:
VHF stations in Denver, Indianapolis and San Diego and a UHF station in
Bakersfield, California. The Broadcasting Group revenue declined 3.3% from 1998
to $115.5 million, which is consistent with an overall decline in the entire
broadcasting industry. In 1999,
34
<PAGE> 31
Broadcasting did not have the strong political advertising that existed in 1998.
Effective expense management helped offset part of the revenue softness.
In 2000, the Broadcasting Group expects to see stronger advertising demand
stemming in part from the political and ballot-initiative advertising. Although
2000 is a presidential election year, political revenues are not expected to be
as robust as 1998. This is due to the absence of a significant ballot issue and
gubernatorial race in California, uncertainty surrounding spending for the
presidential election and an increase in the number of competitive newscasts.
ABC's airing of the Super Bowl and ratings improvements from the November 1999
sweeps should also have a positive impact on the Group.
In the competitive world of television broadcasting, the race to gain
ratings share is an ongoing one. The stations have positioned themselves well in
their respective markets through a local branding campaign that will continue
into the year 2000. The branding campaign, along with continued active
involvement in the local communities, has helped each of the four stations
develop a distinct identity in the eyes of the viewers. In addition, the
stations will continue to emphasize building their excellent local news
franchises.
In 1998, Broadcasting revenue increased 2.3%. Revenue growth benefited
from political campaign advertising spending, but was hurt in the second half of
the year by an advertising industry slowdown. The stations' advertising levels
were particularly impacted by the General Motors strike. Revenue was also
impacted by a drop in ABC's prime time ratings. The Broadcasting Group was
operating at expense levels below that of 1995, so margins improved in 1998.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
(in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Working Capital $ 28.3 $ 137.3
- --------------------------------------------------------------------------------
Total Debt $ 536.4 $ 527.6
- --------------------------------------------------------------------------------
Accounts Receivable (before reserves) $1,281.5 $1,162.7
% Increase 10 1
- --------------------------------------------------------------------------------
Inventories $ 295.3 $ 284.7
% Increase (Decrease) 4 (2)
- --------------------------------------------------------------------------------
Investment in Prepublication Costs $ 246.3 $ 195.0
% Increase 26 17
- --------------------------------------------------------------------------------
Capital Expenditures $ 154.3 $ 178.9
% (Decrease) Increase (14) 127
================================================================================
</TABLE>
The company continues to maintain a strong financial position. Cash flow
from operations declined to $708 million in 1999, compared with $755 million in
1998. The decrease in operating cash flow primarily reflects an increase in
accounts receivable caused by higher sales, particularly in international
markets, and timing of collections. Cash flow from operations more than covered
dividends, investment in publishing programs and capital expenditures.
In 1999, total debt increased $8.8 million, primarily due to the share
purchases under the share repurchase program, and increased spending on
prepublication costs and acquisitions, including Appleton & Lange. Shares
repurchased under the repurchase program were used for general corporate
purposes including the issuance of shares for stock compensation plans. Total
debt includes $95.0 million of 9.43% Notes due in the year 2000. In 1998, $155
million of the 9.43% Notes were replaced with commercial paper borrowings at a
lower interest rate. 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. 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. Total debt as a percentage of
total capital decreased to 24.1% at the end of 1999 from 25.4% at the end of
1998.
Commercial paper borrowings at December 31, 1999 were $411 million.
Commercial paper debt is supported by an $800 million revolving credit agreement
with a group of banks and terminates in February 2002, and $350 million has been
classified as long-term debt. There are no amounts outstanding under this
agreement. This agreement has a covenant restriction that requires the company
not to exceed an indebtedness to cash flow ratio, as defined, of 4 to 1 at any
time. The company met this restriction throughout 1999.
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 8% of net earnings in 1999.
The third quarter is the most significant, generating over 40% of 1999 annual
earnings. This seasonality in revenue also impacts cash flow and related
borrowing patterns. The company typically borrows in the first half of the
fiscal year, and generates cash in the second half of the year, primarily from
fourth quarter collections from customers in the education markets. This pattern
is magnified in years where there is significant state adoption activity, such
as in 1999.
Working capital at the end of 1999 of $28.3 million was $109.0 million
lower than the level at the end of 1998, primarily because the company's 9.43%
Notes are maturing in September 2000.
Accounts receivable (before reserves) increased $118.8 million, or 10%.
The year-to-year increase was due to higher sales, particularly in international
markets, and timing of collections. Number of day's sales outstanding increased
three days in 1999.
Total inventories increased $10.6 million, or 3.7%, from prior year due to
early ordering to avoid potential external Year 2000 issues.
Capital expenditures totaled $154.3 million, primarily the purchase of
property and equipment, compared with $178.9 million in 1998. The decrease in
1999 relates to the near completion of the new leased office space in New York
City and the construction of a building in Columbus, Ohio. For 2000, capital
expenditures are expected to decline to approximately $105 million as spending
returns to more normal levels.
Net prepublication costs increased to $439.4 million at December 31, 1999.
Prepublication investment totaled $246.3 million in 1999, $51.3 million more
than 1998,
35
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources (continued)
reflecting an increase in investment for the 2000 adoption year. For 2000,
prepublication spending is expected to further increase by approximately 3% for
upcoming adoptions years.
On January 27, 1999, the Board of Directors approved a two-for-one stock
split for distribution on March 8, 1999 to shareholders of record on February
24, 1999. Additionally, the Board of Directors approved a stock repurchase
program authorizing the purchase of up to 15 million shares or 7.5% of the
outstanding common stock on a post-split basis.
On January 26, 2000, an increase in the quarterly common stock dividend of
2 cents, or 9.3%, to 23.5 cents per share was announced.
In 2000, cash flow from operations is expected to be sufficient to cover
dividends, investment in publishing programs and capital expenditures. Debt
levels will be impacted by the continuation of the stock repurchase program.
The company has operations in various foreign countries. The functional
currency is the local currency for all locations, except in the Educational and
Professional Publishing segment where operations that are extensions of the
parent have the U.S. dollar as the functional currency. 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. The new
standard is effective January 1, 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instuments and for hedging activities,
requiring companies to recognize all derivatives as either assets or liabilities
on their balance sheet and measuring them at fair value. The adoption of SFAS
No. 133 will not have a material impact on the company's financial statements.
YEAR 2000 ISSUE
Computer software and certain embedded systems that use two digits rather than
four to identify the applicable year may be unable to interpret appropriately
the calendar Year 2000, and thus could potentially disrupt normal business
activities. The Year 2000 issue affects virtually all companies and
organizations, including vendors, suppliers, customers and other third parties
that interface with the company. The company uses software and data in various
aspects of its business, including its products, product development, product
support and many administrative functions such as billing and receiving
information and merchandise from suppliers.
The company completed substantially all of its Year 2000 readiness work
and experienced no significant problems or disruption to its normal business
activities related to this issue as of February 29, 2000. The cost to assess,
remediate and test systems that were not replaced approximated $19 million from
1998 to the present; approximately $10 mil lion was spent in 1999. No material
expenditures are expected to be incurred in the future related to the Year 2000
issue.
"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 2000 adoptions and the level of
educational funding; the strength of higher education, professional and
international publishing markets; the strength of profit levels and the capital
markets in the U.S. and abroad with respect to Standard & Poor's Ratings
Services; the level of success of new product development and strength of
domestic and international markets at Standard & Poor's Information Services;
Business Week's success in expansion into international markets; the strength of
the domestic and international advertising markets; 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 and ballot-initiative advertising; and 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.
36
<PAGE> 33
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years ended December 31 (in thousands, except per-share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE (Note 4) $ 3,991,997 $ 3,729,145 $ 3,534,095
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES
Operating 1,738,125 1,661,615 1,625,735
Selling and general 1,269,479 1,216,686 1,137,887
Depreciation and amortization 308,355 299,240 293,518
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 3,315,959 3,177,541 3,057,140
Other income - net (Note 2) 63,949 56,779 46,853
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 739,987 608,383 523,808
Interest expense - net 42,013 47,961 52,542
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 697,974 560,422 471,266
Provision for taxes on income (Note 6) 272,210 218,565 180,591
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 425,764 341,857 290,675
EXTRAORDINARY ITEM - LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF TAX (Note 3) -- (8,716) --
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 425,764 $ 333,141 $ 290,675
- ----------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE (Note 12)
INCOME BEFORE EXTRAORDINARY ITEM $ 2.17 $ 1.73 $ 1.47
NET INCOME $ 2.17 $ 1.69 $ 1.47
============================================================================================================================
DILUTED EARNINGS PER COMMON SHARE (Note 12)
INCOME BEFORE EXTRAORDINARY ITEM $ 2.14 $ 1.71 $ 1.46
NET INCOME $ 2.14 $ 1.67 $ 1.46
============================================================================================================================
</TABLE>
See accompanying notes.
37
<PAGE> 34
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 (in thousands, except share data) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents (Note 1) $ 6,489 $ 10,451
Accounts receivable (net of allowances for doubtful accounts and sales returns:
1999 - $232,526; 1998 - $212,423) 1,048,991 950,296
Receivable from broker-dealers and dealer banks (Note 1) 3,615 4,597
- -----------------------------------------------------------------------------------------------------------
Inventories:
Finished goods 239,139 235,341
Work-in-process 25,205 31,260
Paper and other materials 30,911 18,128
- -----------------------------------------------------------------------------------------------------------
Total inventories 295,255 284,729
Deferred income taxes 113,206 92,496
Prepaid and other current assets 86,169 86,192
- -----------------------------------------------------------------------------------------------------------
Total current assets 1,553,725 1,428,761
- -----------------------------------------------------------------------------------------------------------
PREPUBLICATION COSTS (net of accumulated amortization:
1999 - $661,207; 1998 - $607,574) (Note 1) 439,351 358,429
INVESTMENTS AND OTHER ASSETS
Investment in Rock-McGraw, Inc. - at equity (Note 5) 85,997 79,394
Prepaid pension expense (Note 10) 119,495 107,997
Other 206,770 189,991
- -----------------------------------------------------------------------------------------------------------
Total investments and other assets 412,262 377,382
- -----------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT - AT COST
Land 12,654 12,867
Buildings and leasehold improvements 300,898 295,374
Equipment and furniture 680,152 606,564
- -----------------------------------------------------------------------------------------------------------
Total property and equipment 993,704 914,805
Less - accumulated depreciation 563,296 550,781
- -----------------------------------------------------------------------------------------------------------
Net property and equipment 430,408 364,024
- -----------------------------------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS - AT COST
(net of accumulated amortization:
1999 - $555,346; 1998 - $493,610) (Notes 1 and 2) 1,253,051 1,259,548
- -----------------------------------------------------------------------------------------------------------
$4,088,797 $3,788,144
===========================================================================================================
</TABLE>
See accompanying notes.
38
<PAGE> 35
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note 3) $ 86,631 $ 75,500
Current portion of long-term debt (Note 3) 95,043 --
Accounts payable 340,220 318,572
Payable to broker-dealers and dealer banks (Note 1) 2,725 4,585
Accrued royalties 99,468 97,753
Accrued compensation and contributions to retirement plans 245,871 215,163
Income taxes currently payable 105,066 67,396
Unearned revenue 242,494 236,167
Other current liabilities 307,935 276,315
- ------------------------------------------------------------------------------------------------
Total current liabilities 1,525,453 1,291,451
- ------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt (Note 3) 354,775 452,097
Deferred income taxes 135,426 129,303
Accrued postretirement healthcare and other benefits (Note 11) 187,485 192,743
Other non-current liabilities 194,165 170,742
- ------------------------------------------------------------------------------------------------
Total other liabilities 871,851 944,885
- ------------------------------------------------------------------------------------------------
Total liabilities 2,397,304 2,236,336
- ------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 7)
- ------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes 8 and 9)
$1.20 preference stock, $10 par value: authorized - 891,256 shares;
outstanding - 1,352 and 1,362 shares in 1999 and 1998 14 14
Common stock, $1 par value: authorized - 300,000,000 shares;
issued - 205,838,594 and 205,838,462 shares in 1999 and 1998 205,838 205,838
Additional paid-in capital 24,305 --
Retained income 1,926,816 1,670,101
Accumulated other comprehensive income (87,731) (75,962)
- ------------------------------------------------------------------------------------------------
Less - common stock in treasury - at cost
(10,129,840 shares in 1999 and 8,727,116 shares in 1998) 363,728 234,673
Unearned compensation on restricted stock 14,021 13,510
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 1,691,493 1,551,808
- ------------------------------------------------------------------------------------------------
$ 4,088,797 $ 3,788,144
================================================================================================
</TABLE>
39
<PAGE> 36
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 425,764 $ 333,141 $ 290,675
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 82,110 77,168 73,151
Amortization of goodwill and intangibles 55,586 52,530 50,034
Amortization of prepublication costs 170,653 169,542 170,333
Provision for losses on accounts receivable 68,657 104,597 80,600
Provision for facility reserve -- -- 33,152
Gain on sale of Datapro Information Services -- -- (20,404)
Gain on sale of building -- (26,656) --
Gain on sale of Petrochemical publications (39,668) -- --
Extraordinary loss on early extinguishment of debt -- 14,289 --
Other 1,372 (4,595) 342
Change in assets and liabilities net of effect of acquisitions and dispositions:
Increase in accounts receivable (156,360) (80,421) (185,814)
Decrease/(increase) in inventories (10,512) 6,430 (20,742)
Increase in prepaid and other current assets (948) (161) (4,303)
Increase in accounts payable and accrued expenses 54,906 66,500 91,423
Increase/(decrease) in unearned revenue 6,778 21,999 (5,145)
Increase/(decrease) in other current liabilities 15,107 21,290 (25,802)
Increase/(decrease) in interest and income taxes currently payable 67,254 (20,050) (134,117)
(Decrease)/increase in deferred income taxes (8,306) 34,844 (19,770)
Net change in other assets and liabilities (24,340) (15,377) (537)
- ----------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 708,053 755,070 373,076
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in prepublication costs (246,341) (194,978) (166,784)
Purchase of property and equipment (154,324) (178,889) (78,724)
Acquisition of businesses and equity interests (67,085) (24,720) (43,780)
Proceeds from exchange of Shepard's/McGraw-Hill
for the Times Mirror Higher Education Group -- -- 6,730
Proceeds from disposition of property, equipment and businesses 67,244 66,479 57,777
- ----------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (400,506) (332,108) (224,781)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid to shareholders (169,049) (154,386) (142,705)
Additions to/(repayment of) commercial paper and other short-term debt - net 11,899 (1,660) 62,340
Repayment of long-term debt -- (154,988) --
Repurchase of treasury shares (173,784) (105,637) (79,899)
Exercise of stock options 22,813 16,080 15,208
Other (1,709) (14,973) (401)
- ----------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (309,830) (415,564) (145,457)
- ----------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,679) (1,715) (1,500)
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash and equivalents (3,962) 5,683 1,338
Cash and equivalents at beginning of year 10,451 4,768 3,430
- ----------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 6,489 $ 10,451 $ 4,768
======================================================================================================================
</TABLE>
See accompanying notes.
40
<PAGE> 37
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Less-
Accumulated Less- unearned
Years ended other common compensation
$1.20 Additional compre- stock in on
December 31, 1999, 1998 and 1997 preference Common paid-in Retained hensive treasury restricted
(in thousands, except per-share data) $10 par $1 par capital income income at cost stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 14 $102,919 $ 37,473 $1,394,884 $ (57,302) $107,410 $ 9,460 $ 1,361,118
Net income -- -- -- 290,675 -- -- -- 290,675
Other comprehensive income,
net of tax - foreign currency
translation adjustments -- -- -- -- (16,945) -- -- (16,945)
-----------
COMPREHENSIVE INCOME 273,730
Dividends ($.72 per share) -- -- -- (142,705) -- -- (142,705)
Share repurchase -- -- -- -- -- 79,899 -- (79,899)
Employee stock plans -- -- (2,066) -- -- (27,731) 3,451 22,214
Other -- -- 62 -- -- (131) -- 193
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 14 102,919 35,469 1,542,854 (74,247) 159,447 12,911 1,434,651
Net income -- -- -- 333,141 -- -- -- 333,141
Other comprehensive income,
net of tax - foreign currency
translation adjustments -- -- -- -- (1,715) -- -- (1,715)
-----------
COMPREHENSIVE INCOME 331,426
Dividends ($.78 per share) -- -- -- (154,386) -- -- -- (154,386)
Share repurchase -- -- -- -- -- 105,637 -- (105,637)
Employee stock plans -- -- 15,840 -- -- (30,275) 599 45,516
Other -- -- 102 -- -- (136) -- 238
Two-for-one stock split at par value -- 102,919 (51,411) (51,508) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 14 205,838 -- 1,670,101 (75,962) 234,673 13,510 1,551,808
Net income -- -- -- 425,764 -- -- -- 425,764
Other comprehensive income,
net of tax - foreign currency
translation adjustments -- -- -- -- (11,769) -- -- (11,769)
-----------
COMPREHENSIVE INCOME 413,995
Dividends ($.86 per share) -- -- -- (169,049) -- -- -- (169,049)
Share repurchase -- -- -- -- -- 173,784 -- (173,784)
Employee stock plans -- -- 24,121 -- -- (44,646) 511 68,256
Other -- -- 184 -- -- (83) -- 267
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 14 $205,838 $ 24,305 $1,926,816 $ (87,731) $363,728 $ 14,021 $ 1,691,493
===================================================================================================================================
</TABLE>
See accompanying notes.
41
<PAGE> 38
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 $1.7 billion at December 31, 1999 and 1998 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 $66.0 million and $209.1 million at December
31, 1999 and 1998, 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. Revenues are generally recognized when goods are shipped to customers
or services rendered. 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 $101 million, $107 million and $109 million in advertising
costs in 1999, 1998 and 1997, respectively.
STOCK-BASED COMPENSATION. As permitted by Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation, the
company measures compensation expense for its stock-based employee compensation
plans using the intrinsic method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and has provided in
Note 9 pro forma disclosures of the effect on net income and earnings per share
as if the fair value-based method prescribed by SFAS No. 123 had been applied in
measuring compensation expense.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The new standard is effective January 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities, requiring companies to recognize all derivatives as
either assets or liabilities on their balance sheet and measuring them at fair
value. The adoption of SFAS No. 133 will not have a material impact on the
company's financial statements.
RECLASSIFICATION. Certain prior-year amounts have been reclassified for
comparability purposes.
42
<PAGE> 39
2. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS. In 1999, the company acquired six companies, principally Appleton
& Lange, Rational Investor and Emerging Markets Database, for $67.1 million, net
of cash acquired. In 1998, the company acquired Xebec Multi Media Solutions,
Ltd. and Optical Data Corporation for $24.7 million, net of cash acquired. 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. All of these acquisitions were accounted for under the purchase
method. Goodwill recorded for all current trans actions is amortized using the
straight-line method for periods not exceeding 15 years.
NONCASH INVESTING ACTIVITIES. Liabilities assumed in conjunction with the
acquisition of businesses:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of assets acquired $70.7 $28.0 $104.1
Cash paid (net of cash
acquired) 67.1 24.7 43.8
- --------------------------------------------------------------------------------
Liabilities assumed $ 3.6 $ 3.3 $ 60.3
================================================================================
</TABLE>
DISPOSITIONS. In 1999, the company sold its Petrochemical publications for $62.8
million. As a result of this transaction a pre-tax gain of $39.7 million, ($24.2
million after-tax, or 12 cents per diluted share) was recognized. The company
has an agreement to sell Tower Group International in the first quarter of 2000.
The net assets approximated $100 million as of January 31, 2000, subject to
adjustment at the closing date. No significant gain is anticipated. In 1998, the
company sold the remainder of its Information Technology and Communications
Group for $28.6 million. There was no gain or loss on the divestiture as the net
proceeds minus disposition costs approximated the net book value of the Group's
assets. In 1997, the company sold Datapro Information Services, McGraw-Hill
School Systems and London House for $54.5 million. The pre-tax 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.
3. DEBT
At December 31, 1999, the company had short-term borrowings of $532 million,
primarily representing domestic commercial paper borrowings of $411 million
maturing at various dates during 2000, $95 million of notes maturing in
September 2000 and acquisition related debt of $26 million at an average
interest rate of 5.2%. At December 31, 1998, the company had short-term
borrowings of $426 million, primarily representing domestic paper borrowings of
$397 million that matured at various dates during 1999 and acquisition related
debt of $29 million at an average interest rate of 5.6%. The commercial paper
borrowings in both years 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. It also contains
a covenant restriction which requires the company not to exceed an indebtedness
to cash flow ratio, as defined, of 4 to 1 at any time. This restriction was met
in 1999. The agreement requires a commitment fee on the unused portion of the
credit line. At December 31, 1999, there were no borrowings under the agreement.
In September 1998, the company commenced a tender offer for $250 million
of its 9.43% Notes due in 2000. As a result of this tender offer, approximately
$155 million of the debt was retired. The company incurred an $8.7 million
after-tax loss related to this transaction, which is classified as an
extraordinary item on the consolidated statement of income. The Notes are
unsecured obligations of the company and are not redeemable by the company prior
to the maturity date.
A summary of long-term debt at December 31 follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
9.43% Notes due 2000 $ 95.0 $ 95.0
Commercial paper supported
by bank revolving credit agreement 350.0 350.0
Other (primarily acquisition related notes) 4.8 7.1
- --------------------------------------------------------------------------------
449.8 452.1
Less: current portion of long-term debt (95.0) --
- --------------------------------------------------------------------------------
Total long-term debt $ 354.8 $ 452.1
================================================================================
</TABLE>
The company paid interest on its debt totaling $42.8 million in 1999,
$48.9 million in 1998 and $52.1 million in 1997.
The carrying amount of the company's commercial paper borrowings
approximates fair value. The fair value of the company's 9.43% Notes and other
long-term debt at December 31, 1999 and 1998, based on current borrowing rates
for debt with similar terms and maturities, is estimated to be $99.7 million and
$108.6 million, respectively.
4. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
The company has three reportable segments: Educational and Professional
Publishing, Financial Services and Information and Media Services. The
educational and professional publishing segment provides education, training and
lifetime learning textbooks and instructional materials for students and
professionals. The financial services segment consists of Standard & Poor's
operations, which provide financial information, ratings and analyses, enabling
access to capital markets. The information and media services segment includes
business and professional media offering information, insight and analysis.
Information as to the operations of the three segments of the company is
set forth below based on the nature of the products and services offered. The
CEO Council, comprising the company's principal corporate and operations
executives, is the company's chief operating decision maker and evaluates
performance based primarily on operating profit. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies - refer to Note 1 of the financial statements for the
company's significant accounting policies. All figures below
43
<PAGE> 40
reflect the transfer of Platt's, a provider of real-time information and
analysis in the global energy services markets, and S&P Personal Wealth, an
e-commerce initiative which provides allocation and planning tools to the
individual investor, from Financial Services to Information and Media Services.
<TABLE>
<CAPTION>
Educational Information
and Professional Financial and Media Segment Consolidated
(in millions) Publishing Services Services totals Adjustments total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Operating revenue $1,734.9 $1,224.6 $1,032.5 $3,992.0 $ -- $3,992.0
Operating profit 273.7 369.7 179.9 823.3 (125.3) 698.0*
Depreciation and amortization+ 232.8 40.8 32.6 306.2 2.2 308.4
Assets 2,172.0 827.1 592.1 3,951.2 497.6 4,088.8
Capital expenditures++ 298.2 57.8 44.7 400.7 -- 400.7
- -----------------------------------------------------------------------------------------------------------------
1998
Operating revenue $1,620.3 $1,087.8 $1,021.0 $3,729.1 $ -- $3,729.1
Operating profit 202.1 355.9 131.1 689.1 (128.7) 560.4*
Depreciation and amortization+ 226.9 35.5 34.6 297.0 2.2 299.2
Assets 2,049.4 729.7 606.0 3,385.1 403.0 3,788.1
Capital expenditures++ 257.4 50.1 66.4 373.9 -- 373.9
- -----------------------------------------------------------------------------------------------------------------
1997
Operating revenue $1,573.8 $ 921.1 $1,039.2 $3,534.1 $ -- $3,534.1
Operating profit 187.7 256.1 155.3 599.1 (127.8) 471.3*
Depreciation and amortization+ 225.0 33.4 33.9 292.3 1.2 293.5
Assets 2,058.2 674.4 614.3 3,346.9 366.2 3,713.1
Capital expenditures++ 193.1 23.6 28.8 245.5 -- 245.5
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Income before taxes on income.
+ Includes amortization of goodwill and intangible assets and prepublication
costs.
++ Includes purchase of property and equipment and investments in
prepublication costs.
The operating profit adjustments listed above relate to the operating
results of the corporate entity, which is not considered an operating segment,
and includes all corporate expenses of $83.3 million, $80.7 million and $75.3
million, respectively, for 1999, 1998 and 1997, and net interest expense of
$42.0 million, $48.0 million and $52.5 million, respectively, of the company.
Corporate assets consist principally of cash and equivalents, investment in
Rock-McGraw, Inc., prepaid pension expense, deferred income taxes and leasehold
improvements related to subleased areas.
The following is a schedule of revenues and long-lived assets by
geographic location:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Long-lived Long-lived Long-lived
Revenues assets Revenues assets Revenues assets
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $3,243.8 $2,171.2 $3,045.3 $2,018.8 $2,898.4 $1,917.6
European region 372.7 67.8 330.3 67.3 283.2 46.2
Rest of world 375.5 67.7 353.5 60.3 352.5 67.9
- ---------------------------------------------------------------------------------------------
Total $3,992.0 $2,306.7 $3,729.1 $2,146.4 $3,534.1 $2,031.7
=============================================================================================
</TABLE>
Foreign operating profit from our continuing businesses were $138.8
million, $119.4 million, and $112.6 million in 1999, 1998 and 1997,
respectively. Foreign revenue, operating profit and long-lived assets include
operations in 32 countries. The company does not have operations in any foreign
country that represents more than 5% of its consolidated revenues. Transfers
between geographic areas are recorded at cost plus a markup and intercompany
revenue and profit are eliminated.
5. INVESTMENT IN ROCK-MCGRAW, INC.
Rock-McGraw owns the company's headquarters building in New York City.
Rock-McGraw is owned 45% by the company and 55% by Rockefeller Group, Inc.
The company currently occupies a portion of the rentable space. The
current lease is for 30 years ending in the year 2002. In 1998, the company
entered into a new lease agreement, starting in 2002, covering approximately 0.4
million square feet of office space. The lease will expire in 2020 and includes
renewal options for three additional 5-year periods.
As part of its supplemental agreement with Rock-McGraw, the company has
commenced surrendering a portion of its occupied space. In 1999, the company
paid Rock-McGraw gross annual rentals of $8.6 million (including various
escalation payments) for the occupied space and $14.1 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.
44
<PAGE> 41
A summary of significant financial information for Rock-McGraw follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 73.3 $ 66.2 $ 64.6
- --------------------------------------------------------------------------------
Net income 16.6 13.2 13.0
- --------------------------------------------------------------------------------
Depreciation and
amortization expense 8.1 7.3 6.7
- --------------------------------------------------------------------------------
Total assets 257.7 240.4 228.4
- --------------------------------------------------------------------------------
Mortgage payable 19.3 19.3 20.2
- --------------------------------------------------------------------------------
Total liabilities 66.1 65.4 66.7
================================================================================
</TABLE>
During 1998, Rock-McGraw refinanced its mortgage on the building for $19.3
million with a 5-year mortgage maturing on April 1, 2003. Interest is payable
based on either the LIBOR rate between 30-180 days plus 0.4%, or the higher of
the Prime rate or Federal Funds rate plus 0.5%, with the principal prepayable at
any time in increments of $0.5 million and the balance due at maturity.
6. 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) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic operations $ 642.3 $ 513.5 $ 425.9
Foreign operations 55.7 46.9 45.4
- --------------------------------------------------------------------------------
Total income before taxes $ 698.0 $ 560.4 $ 471.3
================================================================================
</TABLE>
A reconciliation of the U.S. statutory tax rate to the company's effective
tax rate for financial reporting purposes follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. statutory rate 35.0% 35.0% 35.0%
- ------------------------------------------------------------------------------
Goodwill amortization 0.9 1.2 1.3
Effect of state and local
income taxes 4.1 4.1 4.0*
Other - net (1.0) (1.3) (2.0)
- ------------------------------------------------------------------------------
Effective tax rate 39.0% 39.0% 38.3%
==============================================================================
</TABLE>
*Includes impact of lower taxes on gain on sale of Datapro.
The provision for taxes on income consists of the following:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 216.3 $ 135.6 $ 154.2
Deferred (6.4) 29.0 (21.2)
- -------------------------------------------------------------------------------
Total federal 209.9 164.6 133.0
- -------------------------------------------------------------------------------
Foreign:
Current 18.6 21.8 19.1
Deferred (0.6) (3.0) (0.4)
- -------------------------------------------------------------------------------
Total foreign 18.0 18.8 18.7
- -------------------------------------------------------------------------------
State and local:
Current 45.7 25.9 33.1
Deferred (1.4) 9.3 (4.2)
- -------------------------------------------------------------------------------
Total state and local 44.3 35.2 28.9
- -------------------------------------------------------------------------------
Total provision for taxes $ 272.2 $ 218.6 $ 180.6
===============================================================================
</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) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Fixed assets and intangible assets $ 135.9 $ 132.9
Prepaid pension and other expenses 93.5 85.9
Unearned revenue 41.8 37.9
Reserves and accruals (165.1) (140.7)
Postretirement and postemployment benefits (90.5) (90.9)
Other - net 6.6 11.7
- -------------------------------------------------------------------------------
Deferred tax liability - net $ 22.2 $ 36.8
===============================================================================
</TABLE>
The company made net income tax payments totaling $215.0 million in 1999,
$193.0 million in 1998, and $331.5 million in 1997.
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 $71
million at December 31, 1999, 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 $18 million
would have been required.
7. RENTAL EXPENSE AND LEASE OBLIGATIONS
Rental expense for property and equipment under all operating lease agreements
was as follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross rental expense $ 130.2 $ 113.3 $ 108.9
Less: sublease revenue 30.4 30.0 27.5
- --------------------------------------------------------------------------------
Net rental expense $ 99.8 $ 83.3 $ 81.4
================================================================================
</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 various defined 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. The company also entered into a new lease agreement
in 1998 for its headquarters building, referred to in Note 5, covering
approximately 0.4 million square feet starting in 2002. All leases expire in the
year 2020. The new lease arrangements coincide with the expiration of several
existing leases in 1999 and the company's headquarters building lease and the
surrender of a portion of the company's occupied space in its headquarters
building that began 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 rental income from existing noncancelable subleases.
45
<PAGE> 42
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 89.0
2001 82.2
2002 83.8
2003 84.2
2004 77.5
2005 and beyond 1,021.3
- --------------------------------------------------------------------------------
Total $1,438.0
================================================================================
</TABLE>
8. CAPITAL STOCK
The Board of Directors declared a two-for-one stock split of the company's
common stock, payable on March 8, 1999, to stockholders of record on February
24, 1999. All references to the number of common shares and per share amounts
elsewhere in the consolidated financial statements and related footnotes have
been restated as appropriate to reflect the effect of the stock split for all
periods presented.
On January 27, 1999, the Board of Directors also approved a share
repurchase program authorizing the repurchase of up to 15 million shares,
approximately 7.5% of the company's outstanding common stock. The company
implemented the program through open market purchases and private trans actions.
Through December 31, 1999, the company had repurchased approximately 3.2 million
shares of common stock from the 1999 program at a total cost of $173.8 million.
The repurchased shares will be used for general corporate purposes, including
the issuance of shares for stock compensation plans. In the event of a
significant investment opportunity, the company may slow the pace of repurchase
activity.
The number of common shares reserved for issuance for employee stock plan
awards was 15,628,036 at December 31, 1999 and 18,015,440 at December 31, 1998.
Under the Director Deferred Stock Ownership Plan, 313,095 and 316,596 common
shares were reserved for issuance at December 31, 1999 and 1998.
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 13.2 shares of common stock.
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 July 29, 1998. Under the 1998 Rights Plan, one Right for
each share of common stock outstanding was issued to shareholders of record on
August 14, 1998. These Rights will become exercisable only if a person or group
acquires 20% or more of the company's common stock or announces a tender offer
that would result in the ownership of 20% or more of the common stock. Each
Right will then entitle the holder to buy a 1/400th interest in a share of
Series A preferred stock at an exercise price of $150. The Rights are redeemable
by the company's Board of Directors for one-quarter cent each prior to a 20%
acquisition by a third party. The 1998 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. In the event, after a person or group
acquires 20% or more of the company's stock, that the company is acquired in a
merger or other business combination transaction of 50% or more of its
consolidated assets or earning power are sold, each Right becomes exercisable
for common stock equivalent to two times the exercise price of the Right.
Dividends were paid at the quarterly rate of $0.215 per common share and
$0.30 per preferred share. All preferred dividends are cumulative. Total
dividends paid in 1999, 1998 and 1997 were $169.0 million, $154.4 million and
$142.7 million, respectively.
9. 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 other than for its restricted stock performance awards.
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 28.2 million shares of the company's common stock - 9.2
million shares under the 1987 Plan and 19.0 million shares under the 1993 Plan,
as amended.
Stock options, which 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.
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.
Under the fair value based method of accounting in SFAS No. 123,
Accounting for Stock-Based Compensation, net income would have been reduced by
$16.2 million, or $.08 per diluted share for 1999, $1.9 million, or $.01 per
diluted share for 1998 and $1.1 million, or $.01 per diluted share for 1997,
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
1999, 1998 and 1997, respectively: risk-free average interest rate of 5.1%, 5.6%
and 6.1%; dividend yield of 1.7%, 2.1% and 2.9%; volatility of 24%, 22% and 19%;
and expected life of five years for all years.
46
<PAGE> 43
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, 1996 6,600 $ 17.44
- --------------------------------------------------------------------------------
Options granted 2,736 25.21
Options exercised (1,914) 16.60
Options cancelled and expired (292) 22.16
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 7,130 $ 20.46
- --------------------------------------------------------------------------------
Options granted 3,825 37.74
Options exercised (1,871) 19.93
Options cancelled and expired (216) 28.41
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998 8,868 $ 27.79
- --------------------------------------------------------------------------------
Options granted 4,100 53.71
Options exercised (2,260) 23.05
Options cancelled and expired (358) 46.58
- --------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1999 10,350 $ 38.41
================================================================================
</TABLE>
At December 31, 1999, 1998 and 1997, options for 5,328,000, 4,644,000 and
3,830,000 shares of common stock were exercisable. The weighted average fair
value of options granted during 1999, 1998 and 1997 was $13.69, $8.95 and $5.02,
respectively.
A summary of information about stock options outstanding and options
exercisable at December 31, 1999 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>
$13.11 to $17.44 1,192 3.82 years $16.11 1,192 $16.11
$21.19 to $31.16 1,861 6.59 years $22.96 1,861 $22.96
$33.47 to $49.66 3,487 8.17 years $37.45 2,059 $37.36
$50.41 to $60.56 3,810 9.21 years $53.82 216 $54.67
- --------------------------------------------------------------------------------
$13.11 to $60.56 10,350 7.77 years $38.41 5,328 $28.27
================================================================================
</TABLE>
Under the Director Deferred Stock Ownership Plan, a total of 313,095
shares of common stock was reserved as of December 31, 1999, 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.
A total of 280,405 restricted shares were issued at an average market
value of $52.70 in 1999, 373,596 shares at an average market value of $37.54 in
1998 and 639,390 shares at an average market value of $24.31 in 1997. 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 $33.0 million for 1999, $37.0 million for 1998 and $16.0 million
for 1997. Restricted shares outstanding at the end of the year were 868,039 in
1999, 1,121,750 in 1998 and 1,111,434 in 1997.
10. RETIREMENT PLANS
The company and its subsidiaries have a number of defined benefit pension plans
and defined contribution plans covering substantially all employees. The
company's primary pension plan is a noncontributory plan under which benefits
are based on employee career employment compensation. The company also has a
voluntary deferred compensation plan under which the company matches employee
contributions up to certain levels of compensation and an Employee Retirement
Account Plan under which the company contributes a percentage of eligible
employees' compensation to the employees' accounts.
For purposes of determining annual pension cost, prior service costs and
the net asset at January 1, 1986 are being amortized straight-line over the
average remaining service period of employees expected to receive benefits. The
assumed return on plan assets of 9.5% is based on a calculated market-related
value of assets, which recognizes changes in market value over five years.
A summary of pension income for the company's domestic defined benefit
plans follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 20.2 $ 17.6 $ 16.2
Interest cost 38.2 36.1 33.2
Expected return on assets (69.4) (60.8) (54.7)
Amortization of:
Transitional net asset (0.1) (0.7) (0.9)
Prior service cost 1.1 1.0 0.9
Actuarial (gain)/loss (1.5) (0.7) (0.6)
- -------------------------------------------------------------------------------
Net pension income $ (11.5) $ (7.5) $ (5.9)
===============================================================================
Assumed rates - January 1:
Discount rate 6 3/4% 7 1/4% 7 3/4%
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 unfunded supplemental benefit plans to provide senior
management with supplemental retirement, disability and death benefits. Supple-
mental retirement benefits are based on final monthly earnings. Pension cost was
approximately $6 million for 1999 and $4 million for 1998 and 1997. The accrued
benefit obligation as of December 31, 1999 was $28.2 million.
Total retirement plans cost was $48.6 million for 1999, $45.3 million for
1998 and $44.3 million for 1997.
47
<PAGE> 44
The funded status of the domestic defined benefit plans as of December 31
follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation
Net benefit obligation at beginning of year $ 557.5 $ 496.8
Service cost 20.2 17.6
Interest cost 38.2 36.1
Actuarial (gain)/loss (39.5) 37.7
Gross benefits paid (35.6) (30.7)
- -------------------------------------------------------------------------------
Net benefit obligation at end of year $ 540.8 $ 557.5
Change in plan assets
Fair value of plan assets at beginning of year 905.5 $ 774.4
Actual return on plan assets 320.5 161.6
Employer contributions -- 0.1
Gross benefits paid (35.6) (30.7)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year $1,190.4 $ 905.4
Funded status at end of year 649.7 $ 347.9
Unrecognized net actuarial (gain)/loss (533.9) (244.6)
Unrecognized prior service costs 3.7 4.8
Unrecognized net transition obligation/(asset) -- (0.1)
- -------------------------------------------------------------------------------
Prepaid pension cost $ 119.5 $ 108.0
===============================================================================
Assumed rates - December 31:
Discount rate 7 1/2% 6 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.
11. 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 $5.5 million in 1999, $6.9 million in
1998 and $7.6 million in 1997. A summary of the components of the cost in 1999,
1998 and 1997 follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2.4 $ 2.5 $ 2.4
Interest cost 8.7 9.4 10.0
Amortization of:
Prior service cost (3.4) (2.6) (2.5)
Actuarial (gain)/loss (2.2) (2.4) (2.3)
- -------------------------------------------------------------------------------
Postretirement benefits cost $ 5.5 $ 6.9 $ 7.6
===============================================================================
</TABLE>
A summary of the components of the unfunded post retirement benefit
obligation as of December 31 follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation
Net benefit obligation at beginning of year $ 142.7 $ 142.5
Service cost 2.4 2.5
Interest cost 8.7 9.4
Plan participants contributions 2.0 1.4
Plan amendments 2.1 --
Actuarial (gain)/loss (16.9) (1.8)
Gross benefits paid (12.8) (11.3)
- -------------------------------------------------------------------------------
Net benefit obligation at end of year $ 128.2 $ 142.7
Change in plan assets
Fair value of plan assets at beginning of year -- $ --
Employer contributions 10.8 9.9
Plan participants contributions 2.0 1.4
Gross benefits paid (12.8) (11.3)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year -- $ --
Funded status at end of year $(128.2) $(142.7)
Unrecognized net actuarial (gain)/loss (50.3) (35.6)
Unrecognized prior service costs (9.0) (14.4)
- -------------------------------------------------------------------------------
Accrued benefit cost $(187.5) $(192.7)
===============================================================================
</TABLE>
The assumed weighted average healthcare cost trend rate ranges from 6.5%
in 2000 decreasing ratably to 5.5% in 2002 and remaining at that level
thereafter. The weighted average discount rate used to measure expense was 6.75%
in 1999 and 7.25% in 1998; the rate used to measure the accumulated
postretirement benefit obligation was 7.50% in 1999 and 6.75% in 1998. Assumed
healthcare cost trends have a significant effect on the amounts reported for the
healthcare plans. A one-percentage point change in assumed healthcare cost trend
creates the following effects:
<TABLE>
<CAPTION>
One-Percentage One-Percentage
(in millions) Point Increase Point Decrease
- -------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost $ 1.0 $(0.9)
Effect on postretirement benefit obligation $10.3 $(9.5)
===============================================================================
</TABLE>
12. EARNINGS PER SHARE
All share figures have been restated to reflect the two-for-one stock split
announced January 27, 1999 - see Note 8 for further details.
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) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $425,764 $333,141 $290,675
- --------------------------------------------------------------------------------
Average number of common
shares outstanding 196,311 197,206 197,946
Effect of stock options and
other dilutive securities 2,246 1,898 1,558
- --------------------------------------------------------------------------------
Average number of common shares
outstanding including effect
of dilutive securities 198,557 199,104 199,504
================================================================================
</TABLE>
Restricted performance shares outstanding at December 31, 1999 of 682,000
were not included in the computation of diluted earnings per common share
because the necessary vesting conditions have not yet been met.
48
<PAGE> 45
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
auditing standards generally accepted in the United States. 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/ Harold McGraw III
Harold McGraw III
Chairman of the Board,
President 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, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and
1998, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
January 25, 2000
49
<PAGE> 46
ELEVEN-YEAR FINANCIAL REVIEW
<TABLE>
<CAPTION>
(in thousands, except per-share data) 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS BY SEGMENT AND INCOME
STATISTICS
OPERATING REVENUE
Educational and Professional Publishing $1,734,922 $1,620,343 $1,573,797 $1,277,895
Financial Services 1,224,605 1,087,817 921,135 802,280
Information and Media Services 1,032,470 1,020,985 1,039,163 994,522
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUE 3,991,997 3,729,145 3,534,095 3,074,697
- -------------------------------------------------------------------------------------------------
OPERATING PROFIT(h)
Educational and Professional Publishing(d) 273,667 202,076 187,722 151,921
Financial Services 369,740 355,869 256,078 243,889
Information and Media Services 179,860 131,123 155,350 134,995
- -------------------------------------------------------------------------------------------------
OPERATING PROFIT 823,267 689,068 599,150 530,805
Share of profit of Macmillan/McGraw-Hill
School Publishing Company(f and h) -- -- -- --
Unusual charges(d,g and h) -- -- -- (25,000)
Gain on exchange of Shepard's/McGraw-Hill(d) -- -- -- 418,731
General corporate (expense)/income(h and i) (83,280) (80,685) (75,342) (62,073)
Interest (expense)/income - net (42,013) (47,961) (52,542) (47,656)
- -------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME(a, b, c and e) 697,974 560,422 471,266 814,807
Provision for taxes on income 272,210 218,565 180,591 319,074
- -------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE ADJUSTMENT 425,764 341,857 290,675 495,733
- -------------------------------------------------------------------------------------------------
Early extinguishment of debt, net of tax(j) -- (8,716) -- --
Cumulative effect on prior years of changes
in accounting(j) -- -- -- --
- -------------------------------------------------------------------------------------------------
NET INCOME $ 425,764 $ 333,141 $ 290,675 $ 495,733
- -------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before extraordinary item cumulative
adjustment $ 2.17 $ 1.73 $ 1.47 $ 2.50
Extraordinary item and cumulative adjustment -- (0.04) -- --
- -------------------------------------------------------------------------------------------------
Net income $ 2.17 $ 1.69 $ 1.47 $ 2.50
DILUTIVE EARNINGS PER SHARE
Income before extraordinary item and cumulative
adjustment $ 2.14 $ 1.71 $ 1.46 $ 2.48
Extraordinary item and cumulative adjustment(j) -- (0.04) -- --
- -------------------------------------------------------------------------------------------------
Net income $ 2.14 $ 1.67 $ 1.46 $ 2.48
Dividends per share of common stock $ 0.86 $ 0.78 $ 0.72 $ 0.66
- -------------------------------------------------------------------------------------------------
OPERATING STATISTICS
Return on average shareholders' equity 26.7% 22.9% 20.8% 41.4%
Income before taxes as a percent of revenue 17.5 15.0 13.3 26.5
Income before extraordinary item and cumulative
adjustment as a percent of revenue 10.7 9.2 8.2 16.1
- -------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $ 28,272 $ 137,310 $ 258,179 $ 130,920
Total assets 4,088,797 3,788,144 3,713,074 3,642,239
Total debt 536,449 527,597 684,425 581,368
Shareholders' equity 1,691,493 1,551,808 1,434,651 1,361,118
- -------------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 16,376 15,897 15,690 16,220
- -------------------------------------------------------------------------------------------------
</TABLE>
Note: All figures reflect the transfer of Platt's and S&P Personal Wealth from
Financial Services to Information and Media Services.
(a) 1999 income before taxes on income reflects a $39.7 million gain on the sale
of the Petrochemical publications.
(b) 1998 income before taxes on income reflects a $26.7 million gain on sale of
a building and a $16.0 million charge at Continuing Education Center for
writedown of assets due to a continuing decline in enrollments.
(c) 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.
(d) 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.
(e) 1995 income before taxes on income reflects a $26.8 million provision for
best practices initiatives and a $23.8 million gain on sale of the topical
publishing division of Shepard's/McGraw-Hill.
(f) 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.
(g) 1993 amount reflects unusual charges in connection with the acquisition of
the additional 50% interest in Macmillan/McGraw-Hill.
50
<PAGE> 47
<TABLE>
<CAPTION>
(in thousands, except per-share data) 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS BY SEGMENT AND INCOME
STATISTICS
OPERATING REVENUE
Educational and Professional Publishing $1,235,578 $1,162,157 $ 667,444 $ 567,363 $ 532,438 $ 534,724 $ 483,666
Financial Services 736,788 699,436 651,601 573,864 515,218 470,689 400,990
Information and Media Services 962,917 899,276 876,408 909,264 895,356 933,225 904,307
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUE 2,935,283 2,760,869 2,195,453 2,050,491 1,943,012 1,938,638 1,788,963
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT(h)
Educational and Professional Publishing(d) 162,604 125,765 49,374 62,746 48,928 70,196 44,107
Financial Services 215,320 202,757 186,148 155,186 131,683 115,796 78,078
Information and Media Services 130,683 122,798 117,061 126,406 131,615 178,991 199,257
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 508,607 451,320 352,583 344,338 312,226 364,983 321,442
Share of profit of Macmillan/McGraw-Hill
School Publishing Company(f and h) -- -- 28,376 11,280 27,483 21,601 13,688
Unusual charges(d,g and h) -- -- (229,800) -- -- -- (220,000)
Gain on exchange of Shepard's/McGraw-Hill(d) -- -- -- -- -- -- --
General corporate (expense)/income(h and i) (63,570) (54,134) (48,538) (50,774) (34,415) (28,370) 6,546
Interest (expense)/income - net (58,766) (51,746) (36,342) (37,557) (46,987) (55,627) (35,038)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME(a, b, c and e) 386,271 345,440 66,279 267,287 258,307 302,587 86,638
Provision for taxes on income 159,144 142,321 54,838 114,132 110,297 130,112 46,847
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE ADJUSTMENT 227,127 203,119 11,441 153,155 148,010 172,475 39,791
- ----------------------------------------------------------------------------------------------------------------------------------
Early extinguishment of debt, net of tax(j) -- -- -- -- -- -- --
Cumulative effect on prior years of changes
in accounting(j) -- -- -- (124,587) -- -- 8,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 227,127 $ 203,119 $ 11,441 $ 28,568 $ 148,010 $ 172,475 $ 47,791
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before extraordinary item cumulative
adjustment $ 1.14 $ 1.03 $ 0.06 $ 0.79 $ 0.76 $ 0.89 $ 0.21
Extraordinary item and cumulative adjustment -- -- -- (0.64) -- -- 0.04
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.14 $ 1.03 $ 0.06 $ 0.15 $ 0.76 $ 0.89 $ 0.25
DILUTIVE EARNINGS PER SHARE
Income before extraordinary item and cumulative
adjustment $ 1.14 $ 1.03 $ 0.06 $ 0.79 $ 0.76 $ 0.89 $ 0.21
Extraordinary item and cumulative adjustment(j) -- -- -- (0.64) -- -- 0.04
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.14 $ 1.03 $ 0.06 $ 0.15 $ 0.76 $ 0.89 $ 0.25
Dividends per share of common stock $ 0.60 $ 0.58 $ 0.57 $ 0.56 $ 0.55 $ 0.54 $ 0.50
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING STATISTICS
Return on average shareholders' equity 23.3% 23.4% 1.3% 3.0% 15.2% 18.8% 5.3%
Income before taxes as a percent of revenue 13.2 12.5 3.0 13.0 13.3 15.6 4.8
Income before extraordinary item and cumulative
adjustment as a percent of revenue 7.7 7.4 0.5 7.5 7.6 8.9 2.7
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $ 193,346 $ 130,272 $ 62,887 $ (19,596) $ 29,543 $ 44,193 $ 22,743
Total assets 3,057,167 2,960,285 3,043,232 2,473,021 2,482,679 2,501,130 2,181,718
Total debt 628,664 762,805 928,710 482,991 568,159 622,372 503,434
Shareholders' equity 1,035,066 913,052 823,008 908,760 998,975 954,260 880,154
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 15,452 15,339 15,661 13,393 13,539 13,868 13,741
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(h) 1989 operating profit excludes unusual charges of $220 million, as follows;
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Educational and Professional Publishing $ 33,140
Financial Services 94,899
Information and Media Services 15,554
Total operating segments $143,593
Macmillan/McGraw-Hill joint venture units --
Corporate expense 76,407
- --------------------------------------------------------------------------------
$220,000
================================================================================
</TABLE>
(i) General corporate income for 1989 includes gains on dispositions of business
totaling $48.8 million.
(j) 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. The extraordinary item in 1998 relates to costs for the early
extinguishment of $155 million of the company's 9.43% Notes during the third
quarter.
51
<PAGE> 48
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>
1999
Operating revenue $716,471 $922,721 $1,318,477 $1,034,328 $3,991,997
Income before taxes 40,078 147,573 312,363 197,960 697,974
Net income 24,448 90,020 190,541 120,755 425,764
Earnings per share: Basic(a) 0.12 0.46 0.97 0.62 2.17
Diluted(a) 0.12 0.45 0.96 0.61 2.14
- -------------------------------------------------------------------------------------------------------
1998
Operating revenue $703,420 $881,122 $1,206,425 $ 938,178 $3,729,145
Income before taxes 33,015 127,609 277,713 122,085 560,422
Net income 20,139 77,841 160,689 74,472 333,141
Earnings per share: Basic(a) 0.10 0.39 0.82 0.38 1.69
Diluted(a) 0.10 0.39 0.81 0.37 1.67
- -------------------------------------------------------------------------------------------------------
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(a) 0.07 0.33 0.73 0.34 1.47
Diluted(a) 0.07 0.33 0.72 0.34 1.46
- -------------------------------------------------------------------------------------------------------
</TABLE>
(a) All basic and diluted earnings per share figures reflect the two-for-one
stock split approved by the company's Board of Directors on January 27, 1999.
HIGH AND LOW SALES PRICES OF THE MCGRAW-HILL COMPANIES COMMON STOCK ON THE NEW
YORK STOCK EXCHANGE*
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
First quarter** $59 1/8-48 7/8 $39 1/2-34 1/4 $26 9/16-22 7/16
Second quarter** 60 3/4-50 7/16 41 1/2-36 3/8 31 7/16-24 15/16
Third quarter** 54 1/8- 47 1/8 43 1/2-37 1/16 34 13/16-29 1/2
Fourth quarter** 63 1/8-49 51 11/16-36 1/8 37 11/16-31 9/16
- --------------------------------------------------------------------------------
Year** 63 1/8-47 1/8 51 11/16-34 1/4 37 11/16-22 7/16
================================================================================
</TABLE>
* The New York Stock Exchange is the principal market on which the Corporation's
shares are traded.
** All high and low prices reflect the two-for-one stock split approved by the
Corporation's Board of Directors on January 27, 1999.
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
212-512-6741
www.mcgraw-hill.com
ANNUAL MEETING
The 2000 annual meeting will be held at 11 a.m. on Wednesday, April 26, 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 (NYSE: MHP).
- --------------------------------------------------------------------------------
NEW DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN
This expanded program offers a convenient, low-cost way to invest in the
Corporation's common stock. Participants can purchase and sell shares directly
through the program, make optional cash investments weekly (up to a maximum of
$10,000 per month), reinvest dividends and send certificates to the transfer
agent for safekeeping.
To order an information packet and enrollment forms, please call the automated
request line at 800-842-7629. For specific questions about the program, call
ChaseMellon Shareholder Services at 888-201-5538.
- --------------------------------------------------------------------------------
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
ADDITIONAL INFORMATION
For additional shareholder information and services, please visit our investor
relations Web site at http://www.mcgraw-hill.com/investor_relations. Further
inquiries can be sent by e-mail to [email protected], or by
phone, 212-512-2192.
News media inquiries should be directed to the Corporate Affairs Department,
212-512-3640. www.mcgraw-hill.com/corporate/news_bureau/news_bureau.html
52
<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
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
*Editora McGraw-Hill Interamericana do Brazil 100
Brasil Ltda.
*McGraw-Hill Korea, Inc. Korea 100
*McGraw-Hill (Malaysia) Sdn.Bhd Malaysia 100
McGraw-Hill News Bureaus, Inc. New York 100
McGraw-Hill New York, Inc. New York 100
McGraw-Hill Publications Overseas Corporation New York 100
McGraw-Hill Real Estate, Inc. New York 100
MMS International Nevada 100
Money Market Directories, Inc. New York 100
National Radio Institute Delaware 100
Rational Investors, Inc. Massachusetts 100
Rock-McGraw, Inc. New York 45
S&P ComStock, Inc. New York 100
Standard & Poor's International Ratings, Ltd. New York 100
*Credit Rating Information Services
of India Limited India 9.6
*Taiwan Ratings Corporation Taiwan 50
Standard & Poor's Investment Advisory
Services LLC 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>
-19-
<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 United Kingdom 100
*McGraw-Hill International (U.K.) Limited United Kingdom 100
*Thesys Information Limited United Kingdom 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
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
MHFSCO, Ltd. U.S. Virgin Islands 100
Micropal Group Limited United Kingdom 100
*Micropal Limited United Kingdom 100
*Micropal Accounting Portfolio Services Inc. Delaware 100
*Standard & Poor's Fund Services Asia Limited Hong Kong 100
*Micropal Deutschland GmbH Germany 100
*Micropal Limited (Ireland) Ireland 100
*Standard & Poor's Fund Services, SARL France 100
*Standard & Poor's Fund Services, Inc. Massachusetts 100
Science Research Associates, Pty., Ltd. Australia 100
Standard & Poor's 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
Xebec Multi Media Solutions Limited United Kingdom 100
</TABLE>
*Subsidiary of a subsidiary.
-20-
<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 25,
2000, included in the 1999 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 and 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 25, 2000 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
New York, New York
March 22, 2000
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,489
<SECURITIES> 0
<RECEIVABLES> 1,281,517
<ALLOWANCES> 232,526
<INVENTORY> 295,255
<CURRENT-ASSETS> 1,553,725
<PP&E> 993,704
<DEPRECIATION> 563,296
<TOTAL-ASSETS> 4,088,797
<CURRENT-LIABILITIES> 1,525,453
<BONDS> 0
14
0
<COMMON> 205,838
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,088,797
<SALES> 3,991,997
<TOTAL-REVENUES> 3,991,997
<CGS> 3,315,959
<TOTAL-COSTS> 3,315,959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 68,657
<INTEREST-EXPENSE> 42,013
<INCOME-PRETAX> 697,974
<INCOME-TAX> 272,210
<INCOME-CONTINUING> 425,764
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425,764
<EPS-BASIC> 2.17<F1>
<EPS-DILUTED> 2.14<F2>
<FN>
<F1>AMOUNT REPORTED IS EPS-BASIC.
<F2>AMOUNT REPORTED IS EPS-DILUTED.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 10,451 4,768
<SECURITIES> 0 0
<RECEIVABLES> 1,162,719 1,155,078
<ALLOWANCES> 212,423 182,629
<INVENTORY> 284,729 290,479
<CURRENT-ASSETS> 1,428,761 1,464,421
<PP&E> 914,805 838,214
<DEPRECIATION> 550,781 564,584
<TOTAL-ASSETS> 3,788,144 3,713,074
<CURRENT-LIABILITIES> 1,291,451 1,206,242
<BONDS> 0 0
14 14
0 0
<COMMON> 205,838 102,919
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 3,788,144 3,713,074
<SALES> 3,729,145 3,534,095
<TOTAL-REVENUES> 3,729,145 3,534,095
<CGS> 3,177,541 3,049,110
<TOTAL-COSTS> 3,177,541 3,049,110
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 104,597 80,600
<INTEREST-EXPENSE> 47,961 52,542
<INCOME-PRETAX> 560,422 471,266
<INCOME-TAX> 218,565 180,591
<INCOME-CONTINUING> 341,857 290,675
<DISCONTINUED> 0 0
<EXTRAORDINARY> (8,716) 0
<CHANGES> 0 0
<NET-INCOME> 333,141 290,675
<EPS-BASIC> 1.69<F1> 1.47<F1>
<EPS-DILUTED> 1.67<F2> 1.46<F2>
<FN>
<F1>AMOUNT REPORTED IS EPS-BASIC.
<F2>AMOUNT REPORTED IS EPS-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 12/31/99
Allowance for doubtful
accounts $113,639 $ 68,657 $ 57,152 $ $125,144
Allowance for returns 98,784 8,598 107,382
-------- -------- -------- ----- --------
$212,423 $ 77,255 $ 57,152 $ $232,526
======== ======== ======== ===== ========
Year ended 12/31/98
Allowance for doubtful
accounts $ 98,321 $104,597 $ 89,279 $ $113,639
Allowance for returns 84,308 14,476 98,784
-------- -------- -------- ----- --------
$182,629 $119,073 $ 89,279 $ $212,423
======== ======== ======== ===== ========
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
======== ======== ======== ===== ========
</TABLE>
(A) Accounts written off, less recoveries.
23
