-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CakcCD5yVUiaTrhZ4BO3LSNhbDaivuVWLYxIYHYgYrrxvAlVHBb94kIApbf1jZCd heNed8Hnc+IAScLDf4Ye2w== 0000950123-97-002496.txt : 19970327 0000950123-97-002496.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950123-97-002496 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCGRAW-HILL COMPANIES INC CENTRAL INDEX KEY: 0000064040 STANDARD INDUSTRIAL CLASSIFICATION: BOOKS: PUBLISHING OR PUBLISHING AND PRINTING [2731] IRS NUMBER: 131026995 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-01023 FILM NUMBER: 97563539 BUSINESS ADDRESS: STREET 1: 1221 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2125122000 FORMER COMPANY: FORMER CONFORMED NAME: MCGRAW HILL INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: HILL PUBLISHING CO DATE OF NAME CHANGE: 19670327 FORMER COMPANY: FORMER CONFORMED NAME: MCGRAW PUBLISHING CO DATE OF NAME CHANGE: 19670327 10-K405 1 THE MCGRAW HILL COMPANIES, INC. FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from---------------to--------------- Commission File Number 1-1023 THE McGRAW-HILL COMPANIES, INC. ---------------------------------------------------------- (Exact name of registrant as specified in its charter) NEW YORK 13-1026995 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1221 AVENUE OF THE AMERICAS, NEW YORK, N.Y. 10020 ------------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 512-2000 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common stock - $1 par value New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---------------- (Title of class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The aggregate market value of voting stock held by nonaffiliates of the registrant as of February 28, 1997, was $5,149,580,214. The number of shares of common stock of the registrant outstanding as of February 28, 1997 was 99,872,292 shares. Part I, Part II and Part IV incorporate information by reference from the Annual Report to Shareholders for the year ended December 31, 1996. Part III incorporates information by reference from the definitive proxy statement mailed to shareholders March 25, 1997 for the annual meeting of shareholders to be held on April 30, 1997. 2 TABLE OF CONTENTS ----------------- PART I -----------
Item Page - ---- ---- 1. Business..................................................... 1 2. Properties................................................... 2 - 4 3. Legal proceedings............................................ 5 4. Submission of matters to a vote of security holders ......... 5 Executive officers of the registrant.............................. 6 PART II ----------- 5. Market for the registrant's common stock and related stockholder matters.......................................... 7 6. Selected financial data...................................... 7 7. Management's discussion and analysis of financial condition and results of operations.......................... 7 8. Consolidated financial statements and supplementary data......................................................... 7 9. Changes in and disagreements with accountants on accounting and financial disclosure..................................... 7 PART III ----------- 10. Directors and executive officers of the registrant........... 8 11. Executive compensation....................................... 8 12. Security ownership of certain beneficial owners and management............................................... 8 13. Certain relationships and related transactions............... 8 PART IV ---------- 14. Exhibits, financial statement schedules, and reports on Form 8-K.......................................... 9 - 12 Signatures ....................................................... 13 - 15 Exhibits..................................................... 16 - 72 Consent of Independent Auditors - Ernst & Young LLP............... 73 Financial Data Schedule........................................... 74 Supplementary schedule............................................ 75
3 PART I Item 1. Business - ------- -------- The Registrant, incorporated in December 1925, serves business, professional and educational markets around the world with information products and services. Key markets include finance, business, education, construction, medical and health, computers and communications, aerospace and defense. As a multimedia publishing and information company, the Registrant employs a broad range of media, including books, magazines, newsletters, software, on-line data services, CD-ROMs, facsimile and television broadcasting. Most of the Registrant's products and services face substantial competition from a variety of sources. The Registrant's 16,220 employees are located worldwide. They perform the vital functions of analyzing the nature of changing demands for information and of channeling the resources necessary to fill those demands. By virtue of the numerous copyrights and licensing, trade, and other agreements, which are essential to such a business, the Registrant is able to collect, compile, and disseminate this information. All book manufacturing and magazine printing is handled through a number of independent contractors. The Registrant's principal raw material is paper, and the Registrant has assured sources of supply, at competitive prices, adequate for its business needs. Descriptions of the company's principal products, broad services and markets, and significant achievements are hereby incorporated by reference from Exhibit (13), pages 4 to 21 and pages 24 to 25 (textual material) of the Registrant's 1996 Annual Report to Shareholders. Information as to Industry Segments - ----------------------------------- The relative contribution of the industry segments of the Registrant and its subsidiaries to operating revenue and operating profit and geographic information for the three years ended December 31, 1996 and the identifiable assets of each segment at the end of each year, are included in Exhibit (13), on pages 39 to 40 in the Registrant's 1996 Annual Report to Shareholders and is hereby incorporated by reference. -1- 4 Item 2. Properties - ------- ---------- The Registrant leases office facilities at 389 locations: 290 are in the United States. In addition, the Registrant owns real property at 25 locations: 22 are in the United States. The principal facilities of the Registrant are as follows:
Owned Square or Feet Domestic Leased (thousands) Business Unit - -------- ------ ----------- ------------- New York, NY leased 1,538 See Explanation Below New York, NY leased 504 Financial Services owned 346 Financial Services New York, NY leased 64 Various Publishing Units Hightstown, NJ owned See Explanation Below Office and Data Ctr. 490 Warehouse 412 100% Leased to Non- McGraw-Hill Tenant Delran, NJ leased 106 Datapro Denver, CO owned 88 Broadcasting San Diego, CA owned 43 Broadcasting Indianapolis, IN leased 54 Broadcasting Englewood, CO owned 133 Financial Services Lexington, MA owned 53 Partially Vacant with Non-McGraw-Hill Tenant leased 122 Various Operating Units and Non-McGraw-Hill Subtenants Blue Ridge Summit, PA owned Vacant Office 52 Book Dist. Ctr. 106 Peterborough, NH owned 51 Byte Chicago, IL leased 68 Various Operating Units and Non-McGraw-Hill Subtenants Washington, DC leased 73 Various Operating Units Kent, WA leased Tower Group International Warehouse/Dist. Ctr. 79 Office 6
-2- 5
Owned Square or Feet Domestic (Cont.) Leased (thousands) Business Unit - ---------------- ------ ----------- ------------- Redondo Beach, CA leased 50 Tower Group International Burr Ridge, IL leased 115 Various Publishing Units See Explanation Below Dubuque, IA owned Higher Education Office 107 Warehouse 279 Monterey, CA owned 270 CTB/McGraw-Hill School Systems Blacklick (Gahanna), OH owned Various Operating Units Book Dist. Ctr. 558 Office 73 Westerville, OH owned 59 Glencoe Grove City, OH Warehouse leased 160 School Dallas, TX leased School Assembly Plant 148 Warehouse 72 Desoto, TX Book Dist. Ctr. leased 382 School Foreign - ------- Whitby, Canada owned McGraw-Hill Ryerson Ltd./ Office 80 Non-McGraw-Hill Tenant Book Dist. Ctr. 80 Maidenhead, England leased 85 McGraw-Hill International (U.K.) Ltd.
The Registrant's major lease covers space in its headquarters building in New York City. The building is owned by Rock-McGraw, Inc., a corporation in which the Registrant and Rockefeller Group, Inc. are the sole shareholders. The Registrant occupies approximately 830,000 square feet of the rentable space under a 30-year lease expiring June 30, 2002, which includes renewal options for two additional 15-year periods. In addition, the Registrant subleases for its own account approximately 708,000 square feet of space for periods up to 25 years. -3- 6 The largest complex owned by the Registrant is located in Hightstown, NJ which houses the offices for accounting operations, data processing services, other service departments and a warehouse. The Registrant has consolidated its domestic book distribution operations by consolidating the distribution operations in Blue Ridge Summit, PA and Hightstown, NJ to Westerville and Blacklick, OH. The company also has a warehouse in Dubuque, IA that was acquired with the Times Mirror Higher Education Group in October 1996. The warehouse in Hightstown, NJ is leased to a tenant. The warehouse in Blue Ridge Summit, PA is vacant. The Registrant leases approximately 75 percent of a building in Burr Ridge, Illinois. The building is owned by Burr Ridge Parkway Limited Partnership, in which the Registrant has a 50 percent ownership interest. The leased space is occupied by the higher education business that was acquired by the Registrant in October, 1996 from Times Mirror. The Registrant has the option to sell its interest in the limited partnership in January 1998 to Times Mirror for $10.5 million. -4- 7 PART II Other Information Item 3. Legal Proceedings - ------- ----------------- In Item 1 of Part II of Registrant's Form 10-Q for the quarter ended June 30, 1996, Registrant reported that a Complaint had been filed on June 11, 1996 in the United States Bankruptcy Court, Central District of California, in an action captioned County of Orange v. McGraw-Hill Companies, Inc., ------------------------------- ----------------- d/b/a Standard & Poor's (Case No. SA 94-22272-JR; Adversary No. SA ----------------------- 96-01624- JR). The Complaint alleges that Standard & Poor's breached its contracts with Orange County, was professionally negligent and aided and abetted the County's officers in breaching their fiduciary duty by, inter alia, ----- ---- assigning unduly high ratings to debt instruments issued by the County and by failing to advise the County's Board of Supervisors of the illegal acts being committed by the County's officers. On October 17, 1996, the United States District Court, Central District of California, granted Registrant's motion to withdraw the Bankruptcy Court reference. The action was transferred to the United States District Court for the Central District of California (Case No. SA CV 96-765-GLT) upon the filing on December 4, 1996 of the Bankruptcy Court's ruling on Registrant's motion to dismiss the Complaint. In that ruling, the Bankruptcy Court granted Registrant's motion to dismiss the County's aiding and abetting claim, but denied it as to the breach of contract and professional negligence claims. The Bankruptcy Court's ruling will be reviewed de novo by the District Court. The -- ---- Registrant continues to believe that the allegations of the Complaint lack merit and intends to vigorously contest the action. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- No matters were submitted to a vote of Registrant's security holders during the last quarter of the period covered by this Report. -5- 8 Executive Officers of Registrant --------------------------------
Name Age Position ---- --- -------- Joseph L. Dionne 63 Chairman and Chief Executive Officer Harold McGraw III 48 President and Chief Operating Officer Robert J. Bahash 51 Executive Vice President and Chief Financial Officer Jeffrey Williams 45 Executive Vice President, Global Markets and Strategic Development Scott L. Bennett 47 Senior Vice President, Secretary and Associate General Counsel Frank J. Kaufman 52 Senior Vice President, Taxes Barbara B. Maddock 46 Senior Vice President, Human Resources Barbara A. Munder 51 Senior Vice President, Corporate Affairs Frank D. Penglase 56 Senior Vice President, Treasury Operations Kenneth M. Vittor 47 Senior Vice President and General Counsel Thomas J. Kilkenny 38 Vice President and Controller
All of the above executive officers of the Registrant have been full-time employees of the Registrant for more than five years except for Barbara B. Maddock and Jeffrey Williams. Ms. Maddock, prior to her becoming an officer of the Registrant on August 1, 1994, was Senior Vice President, Human Resources for Cigna Healthcare from July 1993 through July 1994. Previously, she was with Philip Morris Companies, Inc. where she held a number of Human Resources positions from 1980 through 1993. Mr. Williams, prior to his becoming an officer of the Registrant on September 25, 1996, was with Morgan Stanley for 17 years where he held numerous senior management positions, most recently in the Investment Banking Department as Managing Director, Global Telecommunications and Media since 1991. -6- 9 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters - ------- ------------------------------------------------------------------------ The approximate number of holders of the Company's common stock as of February 28, 1997 was 5,655.
1996 1995 ---- ---- Dividends per share of common stock: $.33 per quarter in 1996 $1.32 $.30 per quarter in 1995 $1.20
Note: The dividends per share of common stock reflect a 2-for-1 stock split approved by the Board of Directors on January 31, 1996. All prior periods have been restated to reflect the split. Information concerning other matters is incorporated herein by reference from Exhibit (13), from page 48 of the 1996 Annual Report to Shareholders. Item 6. Selected Financial Data - ------- ----------------------- Incorporated herein by reference from Exhibit (13), from the 1996 Annual Report to Shareholders, page 46 and page 47. Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations --------------------- Incorporated herein by reference from Exhibit (13), from the 1996 Annual Report to Shareholders, pages 26 to 32. Item 8. Consolidated Financial Statements and Supplementary Data - ------- -------------------------------------------------------- Incorporated herein by reference from Exhibit (13), from the 1996 Annual Report to Shareholders, pages 33 to 44 and page 48. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure -------------------- None -7- 10 PART III Item 10. Directors and Executive Officers of the Registrant - -------- -------------------------------------------------- Information concerning directors is incorporated herein by reference from the Registrant's definitive proxy statement dated March 25, 1997 for the annual meeting of shareholders to be held on April 30, 1997. Item 11. Executive Compensation - -------- ---------------------- Incorporated herein by reference from the Registrant's definitive proxy statement dated March 25, 1997 for the annual meeting of shareholders to be held on April 30, 1997. Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- -------------------------------------------------------------- Incorporated herein by reference from the Registrant's definitive proxy statement dated March 25, 1997 for the annual meeting of shareholders to be held April 30, 1997. Item 13. Certain Relationships and Related Transactions - -------- ---------------------------------------------- Incorporated herein by reference from the Registrant's definitive proxy statement dated March 25, 1997 for the annual meeting of shareholders to be held April 30, 1997. -8- 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
Reference ------------------------ Annual Report Form to Share- 10-K holders (page) ---- -------------- Data incorporated by reference from Annual Report to Shareholders: Report of Independent Auditors..................... 45 Consolidated balance sheet at December 31, 1996 and 1995...................... 34-35 Consolidated statement of income for each of the three years in the period ended December 31, 1996.............. 33 Consolidated statement of cash flows for each of the three years in the period ended December 31, 1996.................. 36 Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 1996.............. 37 Notes to consolidated financial statements...................................... 38-44 Quarterly financial information.................... 48 Consent of Independent Auditors.................... 73 Consolidated schedule for each of the three years in the period ended December 31, 1996: II - Reserves for doubtful accounts and sales returns........................ 75
-9- 12 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. The financial statements listed in the above index which are included in the Annual Report to Shareholders for the year ended December 31, 1996 are hereby incorporated by reference in Exhibit (13). With the exception of the pages listed in the above index, the 1996 Annual Report to Shareholders is not to be deemed filed as part of Item 14 (a)(1). (a) (3)Exhibits. (2) Exchange Agreement dated as of July 3, 1996 between The Times Mirror Company, Mosby-Year Book, Inc., and The McGraw-Hill Companies, Inc., as amended as of October 15, 1996, incorporated by reference from Registrant's Form 8-K filed October 29, 1996. (3) Articles of Incorporation of Registrant incorporated by reference from Registrant's Form 10-K for the year ended December 31, 1995. (3) By-laws of Registrant. (4) Indenture dated as of June 15, 1990 between the Registrant, as issuer, and the Bank of New York, as trustee, incorporated by reference from registrant's Form SE filed August 3, 1990 in connection with Registrant's Form 10-Q for the quarter ended June 30, 1990. (4) Instrument defining the rights of security holders, certificate setting forth the terms of the Registrant's 9.43% Notes due 2000, incorporated by reference from Registrant's Form SE filed August 3, 1990 in connection with Registrant's Form 10-Q for the quarter ended June 30, 1990. (4) Instrument defining the rights of security holders, certificate setting forth the terms of the Registrant's Medium-Term Notes, Series A, incorporated by reference from Registrant's Form SE filed November 15, 1990 in connection with Registrant's Form 10-Q for the quarter ended September 30, 1990. (10) Rights Agreement dated as of October 25, 1989 between Registrant and Manufacturers Hanover Trust Company, incorporated by reference from Registrant's Form SE dated October 26, 1989 in connection with Registrant's Form 8-A. (10)* Restricted Stock Award Agreement dated December 4, 1987 incorporated by reference from Registrant's Form SE filed March 30, 1988 in connection with Registrant's Form 10-K for the year ended December 31, 1987. (10)* Restricted Performance Share Award dated January 2, 1997. (10) Indemnification Agreements between Registrant and each of its directors and certain of its executive officers relating to said directors' and executive officers' services to the Registrant, incorporated by reference from Registrant's Form SE filed March 27, 1987 in connection with Registrant's Form 10-K for the year ended December 31, 1986. -10- 13 (10)* Registrant's 1983 Stock Option Plan for Officers and Key Employees, incorporated by reference from Registrant's Form SE filed March 29, 1990 in connection with Registrant's Form 10-K for the year ended December 31, 1989. (10)* Registrant's 1987 Key Employee Stock Incentive Plan, incorporated by reference from Registrant's Form 10-K for the year ended December 31, 1993. (10)* Registrant's 1993 Key Employee Stock Incentive Plan, incorporated by reference from Registrant's Form 10-K for the year ended December 31, 1993. (10)* Registrant's 1996 Key Executive Short Term Incentive Compensation Plan, incorporated by reference from Registrant's Proxy Statement dated March 21, l996. (10)* Registrant's Key Executive Short-Term Incentive Deferred Compensation Plan. (10)* Registrant's Executive Deferred Compensation Plan, incorporated by reference from Registrant's Form SE filed March 28, 1991 in connection with Registrant's Form 10-K for the year ended December 31, 1990. (10)* Registrant's Senior Executive Severance Plan, incorporated by reference from Registrant's Form SE filed March 29, 1989 in connection with Registrant's Form 10-K for the year ended December 31, 1988. (10) Credit Agreement dated as of February 13, 1997 among the Registrant, the Banks' signatory thereto, and The Chase Manhattan Bank, as administrative agent incorporated by reference from Registrant's Form 8-K filed February 19, 1997. (10)* Registrant's Employee Retirement Account Plan Supplement, incorporated by reference from Registrant's Form SE filed March 28, 1991 in connection with Registrant's Form 10-K for the year ended December 31, 1990. (10)* Registrant's Employee Retirement Plan Supplement, incorporated by reference from Registrant's Form SE filed March 28, 1991 in connection with Registrant's Form 10-K for the year ended December 31, 1990. (10)* Registrant's Savings Incentive Plan Supplement, incorporated by reference from Registrant's Form SE filed March 28, 1991 in connection with Registrant's Form 10-K for the year ended December 31, 1990. (10)* Registrant's Senior Executive Supplemental Death, Disability & Retirement Benefits Plan, incorporated by reference from Registrant's Form SE filed March 26, 1992 in connection with Registrant's Form 10-K for the year ended December 31, 1991. (10)* Registrant's 1993 Stock Payment Plan for Directors, incorporated by reference from Registrant's Proxy Statement dated March 21, 1993. (10)* Resolutions Terminating Registrant's 1993 Stock Payment Plan for Directors, as adopted on January 31, 1996. (10)* Registrant's Director Retirement Plan, incorporated by reference from Registrant's Form SE filed March 29, 1990 in connection with Registrant's Form 10-K for the year ended December 31, 1989. -11- 14 (10)* Resolutions Freezing Existing Benefits and Terminating Additional Benefits under Registrant's Directors Retirement Plan, as adopted on January 31, 1996. (10)* Registrant's Director Deferred Compensation Plan, incorporated by reference from Registrant's Form 10-K for the year ended December 31, 1993. (10)* Director Deferred Stock Ownership Plan, incorporated by reference from Registrant's Proxy Statement dated March 21, 1996. (12) Computation of ratio of earnings to fixed charges. (13) Registrant's 1996 Annual Report to Shareholders. Such Report, except for those portions thereof which are expressly incorporated by reference in this Form 10-K, is furnished for the information of the Commission and is not deemed "filed" as part of this Form 10-K. (21) Subsidiaries of the Registrant. (23) Consent of Ernst & Young LLP, Independent Auditors. (27) Financial Data Schedule. (b) Reports on Form 8-K. A report on Form 8-K was filed by the Registrant on October 29, 1996. Item 2 and Item 7 were reported in said report on Form 8-K. ---------------- * These exhibits relate to management contracts or compensatory plan arrangements. -12- 15 Signatures ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. The McGraw-Hill Companies, Inc. - ------------------------------- Registrant By: /s/ Kenneth M. Vittor ------------------------------------------ Kenneth M. Vittor Senior Vice President and General Counsel March 26, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 26, 1997 on behalf of Registrant by the following persons who signed in the capacities as set forth below under their respective names. Registrant's board of directors is comprised of sixteen members and the signatures set forth below of individual board members, constitute at least a majority of such board. /s/ Joseph L. Dionne ------------------------------------------ Joseph L. Dionne Chairman and Chief Executive Officer Director /s/ Harold McGraw III ------------------------------------------ Harold McGraw III President and Chief Operating Officer Director /s/ Robert J. Bahash ------------------------------------------ Robert J. Bahash Executive Vice President and Chief Financial Officer -13- 16 /s/ Thomas J. Kilkenny ------------------------------------------ Thomas J. Kilkenny Vice President and Controller /s/ Pedro Aspe ------------------------------------------ Pedro Aspe Director /s/ Vartan Gregorian ------------------------------------------- Vartan Gregorian Director /s/ John T. Hartley ------------------------------------------- John T. Hartley Director /s/ George B. Harvey ------------------------------------------- George B. Harvey Director /s/ Richard H. Jenrette ------------------------------------------- Richard H. Jenrette Director /s/ Don Johnston ------------------------------------------- Don Johnston Director /s/ Peter O. Lawson-Johnston ------------------------------------------- Peter O. Lawson-Johnston Director /s/ Linda Koch Lorimer ------------------------------------------- Linda Koch Lorimer Director -14- 17 /s/ Robert P. McGraw -------------------------------------------- Robert P. McGraw Director /s/ Lois D. Rice -------------------------------------------- Lois D. Rice Director /s/ Paul J. Rizzo -------------------------------------------- Paul J. Rizzo Director /s/ James H. Ross -------------------------------------------- James H. Ross Director /s/ Sidney Taurel -------------------------------------------- Sidney Taurel Director /s/ Alva O. Way -------------------------------------------- Alva O. Way Director -15- 18 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- EXHIBITS AND FINANCIAL STATEMENTS TO ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 UNDER THE SECURITIES EXCHANGE ACT OF 1934 ----------------------------------- THE McGRAW-HILL COMPANIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 19 Table of Contents ----------------- EXHIBITS AND FINANCIAL STATEMENTS ----------------------------------
ITEM PAGE - ---- ---- (3) Amendment to By-Laws of Registrant................................ 16-39 (10) Restricted Perfomance Share Award dated January 2, 1997 .......... 40-51 (10) Registrant's Key Executive Short-Term Incentive Deferred Compensation Plan................................................. 52-66 (10) Resolutions Terminating 1993 Stock Payment for Directors.......... 67 (10) Resolutions Freezing Existing Benefits and Terminating Additional Benefits Under The McGraw-Hill Companies, Inc. Directors Retirement Plan................................................... 68 (12) Computation of Ratio of Earnings to Fixed Charges................. 69-70 (13) Registrant's 1996 Annual Report to Shareholders................... - (21) Subsidiaries of Registrant........................................ 71-72 (23) Consent of Ernst & Young LLP Independent Auditors................. 73 (27) Financial Data Schedule........................................... 74 Schedule II Reserves for Doubtful Accounts and Sales Returns................ 75
EX-3 2 AMENDMENT TO BY-LAWS OF REGISTRANT 1 Exhibit (3) THE McGRAW-HILL COMPANIES, INC. BY-LAWS ------- (As amended October 30,1996) -------------------------- ARTICLE I --------- STOCKHOLDERS ------------ 1. A meeting of the stockholders shall be held annually, wheresoever designated by the Board of Directors on the last Wednesday in April of each year or on such other date as a resolution of the Board of Directors may designate, for the purpose of electing directors, hearing the reports of officers and directors, and for the transaction of such other business required or authorized to be transacted by the stockholders. Any previously scheduled annual or special meeting of stockholders may be postponed by resolution of the Board of Directors, upon public notice given prior to the date scheduled for such meeting. 2. Unless waived in writing by all stockholders, notice of the time, place and object of such meeting shall be given by mailing, at least ten days previous to such meeting, postage prepaid, a copy of such notice, addressed to each stockholder at his address as the same appears on the books of the Company. 3. Special meetings of stockholders for whatsoever purpose shall be held at the principal office of the Company or at such other place as may be designated by a -16- 2 resolution of the Board of Directors and may only be called pursuant to a resolution approved by a majority of the Board of Directors. 4. Notice of each special meeting, except where otherwise expressly provided by statute, and unless waived in writing by every stockholder entitled to vote, stating the time, place and in general terms the purpose or purposes thereof, shall be mailed not less than thirty nor more than fifty days prior to the meeting to each stockholder at his address as the same appears on the books of the Company. 5. At a meeting of stockholders the holders of a majority of the shares entitled to vote, being present in person or represented by proxy, shall be a quorum for all purposes, except where otherwise provided by statute or by the certificate of incorporation. 6. If at any meeting a quorum shall fail to attend in person or by proxy, a majority in interest of stockholders entitled to vote present or represented by proxy at such meeting may adjourn the meeting from time to time without further notice until a quorum shall attend and thereupon any business may be transacted which might have been transacted at the meeting as originally called had the same been then held. The Chairman of a meeting of stockholders may adjourn such meeting from time to time, whether or not there is a quorum of stockholders at such meeting. -17- 3 7. The Chairman of the Board, and in his absence the President, and in his absence a Chairman appointed by the Board of Directors, shall call meetings of the stockholders to order and shall act as Chairman thereof. 8. The Secretary of the Company shall act as Secretary at all meetings of the stockholders and in his absence the Chairman of the meeting may appoint any person to act as Secretary. 9. At each meeting of stockholders every stockholder entitled to vote may vote in person or by proxy, and shall have one vote for each share of stock registered in his name. The Board of Directors may fix a day not more than fifty days prior to the day of holding any meeting of the stockholders as the day as of which stockholders entitled to notice of and to vote at such meeting shall be determined, and all persons who shall be holders of record of voting stock at such time and no other shall be entitled to notice of and to vote at such meeting. 10. At all elections of directors the polls shall be opened and closed, the proxies shall be received and taken in charge and all ballots shall be received and counted by two inspectors who shall be appointed by the Board. If any inspector shall fail to attend or refuse to act, the vacancy may be filled at the meeting by the -18- 4 Chairman of the meeting. No candidate for election as director shall be appointed an inspector. 11. The inspectors shall, before entering upon the discharge of their duties, be sworn to faithfully execute the duties of inspector at such meeting with strict impartiality and according to the best of their ability. ARTICLE I-A ----------- NOMINATION OF DIRECTORS AND PRESENTATION ---------------------------------------- OF BUSINESS AT STOCKHOLDER MEETINGS ---------------------------------------- 1. Nominations of persons for election to the Board of Directors of the Company and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Company's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Company who was a stockholder of record at the time of giving of notice provided for in this Article I-A, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Article I-A. 2. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of Section 1 of this Article I-A, the stockholder must have given timely notice thereof in writing to the Secretary of the -19- 5 Company. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (a) -20- 6 the name and address of such stockholder, as they appear on the Company's books, and of such beneficial owner and (b) the class and number of shares of the Company which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding anything in the second sentence of this Section 2 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Company is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Company at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the 10th day following the day on which such public announcement is first made by the Company. 3. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Company's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Company's notice of meeting (A) by or at the direction of -21- 7 the Board of Directors or (B) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Company who is a stockholder of record at the time of giving of notice provided for in this Article I-A, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Article I-A. In the event the Company calls a special meeting of stockholders for the purpose of electing one or more directors to the Board, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Company's notice of meeting, if the stockholder's notice required by Section 2 of this Article I-A shall be delivered to the Secretary at the principal executive offices of the Company not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. 4. Only such persons who are nominated in accordance with the procedures set forth in this Article I-A shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Article I-A. The Chairman of the meeting of stockholders shall have the power and duty to determine whether a nomination or any business proposed to be brought before the -22- 8 meeting was made in accordance with the procedures set forth in this Article I-A and, if any proposed nomination or business is not in compliance with this Article I-A, to declare that such defective nominations or proposal shall be disregarded. 5. For purposes of this Article I-A, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. 6. Notwithstanding the foregoing provisions of this Article I-A, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Article I-A. Nothing in this Article I-A shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act. -23- 9 ARTICLE II ---------- BOARD OF DIRECTORS ------------------ 1. The business and affairs of the corporation shall be managed under the direction of the Board of Directors. Unless and until changed as provided in this Section 1 of this Article II, the number of directors constituting the Board of Directors shall be sixteen (16). The Board of Directors shall have power from time to time and at any time, by vote of a majority of the total number of directors which the corporation would have if there were no vacancies on the Board, to increase or reduce the number of directors constituting the Board of Directors to such number (subject to any limits contained in the certificate of incorporation) as the Board of Directors shall determine, but in no event to less than twelve (12) or more than twenty-five (25). Subject to the express terms and conditions of the certificate of incorporation and these By-Laws, the directors shall have the usual and customary powers and duties of directors of a corporation; also any and all powers given and permitted by law; and also power to exercise any and all powers of the corporation, and to do any and all acts without any prior action taken or consent given by the stockholders, unless required by law, or the certificate of incorporation, or by these By-Laws; the directors may exercise all powers, and do all acts and things which are not, by statute or by the certificate of incorporation or these By-Laws, expressly directed or required to be exercised or done by the stockholders. -24- 10 2. Without prejudice to the general powers conferred by the last preceding section, and the other powers conferred by the certificate of incorporation and by these By-Laws, it is hereby expressly declared that the Board of Directors shall have the following powers, that is to say: FIRST: From time to time to make and change rules and regulations, not ----- inconsistent with these By-Laws, for the management of the Company's business and affairs. SECOND: To purchase or otherwise acquire for the Company and property, ------ rights or privileges which the Company is authorized to acquire, at such price and on such terms and conditions, and for such consideration, as they shall, from time to time, see fit. THIRD: At their discretion to pay for any property or rights acquired ----- by the Company, either wholly or partly, in money or in stocks, bonds, debentures or other securities of the Company. FOURTH: To appoint and at their discretion remove or suspend such ------ subordinate officers, agents or servants, permanently or temporarily, as they may, from time to time, think fit, and to determine their duties, and fix, and, from time to time, change their salaries or emoluments, and to require security in such instance and in such amounts as they think fit. FIFTH: To confer by resolution upon any elected or appointed officer of ----- the Company the power to choose, remove or suspend subordinate officers, agents or servants. SIXTH: To appoint any person or persons to accept and hold in trust for ----- the Company any property belonging to the Company, or in which it is interested, or for any other purpose, and to execute and do all such duties and things as may be requisite in relation to any such trust. SEVENTH: To determine who shall be authorized on the Company's behalf, ------- to sign bills, notes, receipts, acceptances, endorsements, checks, releases, contracts and documents. -25- 11 EIGHTH: From time to time to provide for the management of the affairs ------ of the Company, at home or abroad, in such manner as they see fit, and in particular, from time to time, to delegate any of the powers of the Board of Directors in the course of the current business of the Company, to any special or standing committee or to any officer or agent, and to appoint any persons to be the agents of the Company, with such powers (including the power to sub-delegate), and upon such terms, as may be thought fit. NINTH: To appoint an Executive Committee of three or more directors and ----- such other persons as may be added thereto by specific resolution of the Board, who may meet at stated times, or on notice to all by any of their own number; who shall generally perform such duties and exercise such powers as may be directed or delegated by the Board of Directors from time to time. The Board may delegate to such Committee authority to exercise the powers of the Board while the Board is not in session, except as otherwise provided by law. The Executive Committee shall keep regular minutes of its proceedings and report the same to the Board when required. 3. Each director shall serve for the term for which he shall be elected and until his successor shall be chosen and shall accept his election, but any director may resign at any time. 4. The directors may hold their meetings and may have an office and keep the books of the Company at such place or places as the Board from time to time may determine. 5. A regular meeting of the Board of Directors shall be held each year, either immediately following adjournment of the Annual Meeting of Stockholders or at such other time as may be fixed by the Chairman of the Board or the President but on a -26- 12 date no later than 60 days following the adjournment of the Annual Meeting of Stockholders, for the purpose of electing officers, members of the Executive Committee, members of the other committees of the Board, and to organize the Board for the ensuing year. Regular meetings of the Board of Directors shall also be held monthly at such time and place as may be fixed by the Chairman of the Board, or the President. Notice shall be given to each director of the date of each regular meeting by the Secretary in the same manner as provided in Article II, Section 7, of these By-Laws for notice of special meetings of directors. 6. Special meetings of the Board shall be held whenever called by the Chairman, or by the President, or by the Secretary upon receiving the written request of a majority of the directors of the Board then in office. If so specified in the notice thereof, any and all business may be transacted by a special meeting. 7. The Secretary shall give notice to each director of each special meeting by mailing the same, at least two days before the meeting, or by telegraphing or telephoning not later than the day before the meeting. If every director shall be present at any meeting any business may be transacted without previous notice. 8. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business, except where otherwise provided by statute or by the -27- 13 certificate of incorporation or by these By-Laws, and a majority of those present at the time and place of any regular or special meeting may adjourn the same from time to time without notice. 9. Any one or more members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. ARTICLE III ----------- COMMITTEES ---------- 1. The Board may appoint such committees, as it may deem advisable. Committees so appointed shall have such powers and duties as may be specified in the resolution of appointment. 2. Each committee shall keep regular minutes of its proceedings and report the same to the Board when required. 3. Any one or more members of any such committee may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear -28- 14 each other at the same time. Participation by such means shall constitute presence in person at a meeting. 4. Any action required or permitted to be taken at any meeting of any committee may be taken without a meeting, if all members of the committee consent in writing to the adoption of a resolution authorizing the action and if the resolution and the written consent thereto are filed with the proceedings of the committee. ARTICLE IV ---------- OFFICERS -------- 1. The elective officers of the Corporation other than directors shall be a Chairman of the Board of Directors, a President, one or more Vice-Presidents, a Secretary and a Treasurer. Any two of the aforesaid offices may be filled by the same person. For purposes of these By-Laws the office of Vice-President also may include one or more Executive Vice-Presidents and one or more Senior Vice-Presidents. The term of office of each of said officers shall continue until the next annual election of directors and the selection of his successor by the Board of Directors. Any officer may, at any time, with or without cause, be suspended or removed from office by the affirmative vote of a majority of the entire Board at a meeting thereof. The Chairman of the Board and the President shall be chosen from among the directors. -29- 15 2. The Chairman of the Board when present shall preside at all meetings of the Board of Directors and at all meetings of the stockholders. He shall perform all duties incident to the office of the Chairman of the Board. The Chairman also shall be the Chief Executive Officer of the Corporation and shall be responsible for the general and active supervision and direction of the business, policies and activities of the Corporation, subject to the control of the Board of Directors. He may execute on behalf of the Corporation all authorized deeds, bonds, mortgages, contracts, documents and papers and may affix thereto the corporate seal when required. He shall have power to sign debentures and certificates of stock of the Corporation. 3. The President shall be the Chief Operating Officer of the Corporation and shall have general responsibility for directing, administering and coordinating the operational phases of the Corporation's business, subject to the control of the Chairman and Chief Executive Officer. He shall have such duties as the Board may from time to time determine or as may be prescribed by these By-Laws. He shall be responsible for seeing that the orders and resolutions of the Board are carried into effect. He may execute on behalf of the Corporation all authorized deeds, bonds, mortgages, contracts, documents and papers and may affix thereto the corporate seal when required. He shall have power to sign debentures and certificates of stock of the Corporation. -30- 16 If the office of the Chairman of the Board shall be vacant, or if the person holding that office shall be absent, the President shall preside at meetings of stockholders and of the Board of Directors. 4. In the absence or inability to act of both the Chairman and the President, the Board may designate any senior corporate officer to perform the duties of temporary Chairman which shall include presiding at meetings of stockholders and of the Board of Directors. 5. The Board may elect or appoint one or more Vice-Presidents. Each Vice-President shall have such powers and shall perform such duties as may be assigned to him by the Board or by the President. In case of the absence or disability of the President the duties of that office shall be performed by whomever the Board shall determine by resolution. 6. The Secretary shall be sworn to the faithful discharge of his duties; he shall attend all meetings of the directors and stockholders, and shall record all the proceedings of such meetings in a book to be kept for that purpose, and shall perform like duties for standing committees when required. He shall have charge of the giving of notice of meetings of stockholders and directors, and perform all the duties assigned to him by the Board of Directors, or usual for the Secretary of a Corporation -31- 17 to perform. He, or the Treasurer shall, with the Chairman or President sign all debentures and stock certificates of the Company. 7. The Treasurer shall keep or cause to be kept full and true books of account and records of all receipts and disbursements, property, assets and liabilities of the Corporation, in books belonging to the Company, and shall deposit all moneys, securities, and valuables of the Corporation in the name of and to the credit of the Corporation, in such depositories as shall be designated by the Board of Directors. He shall disburse funds of the Company as ordered by the Board, taking proper vouchers therefor and shall render to the President and the Board of Directors, at regular meetings or whenever required, an account of all financial transactions of the Company. He shall also have power to sign debentures and certificates of stock of the Company, checks, notes, bills of exchange or other negotiable instruments for and in the name of the Company. He shall perform all other duties incident to the position of Treasurer, subject to the control of the Board. 8. The Board of Directors shall have power to appoint one or more Assistant Treasurers, Assistant Secretaries, Controller or Assistant Controllers who shall have such powers and perform such duties as may be designated by the Board. -32- 18 9. The amount of salaries, wages, or other compensation to be paid to the officers, employees and agents of the Company shall be determined from time to time by the Board or by an Executive Officer or Committee to whom this work shall be delegated. No officer shall be incapacitated to receive a regular salary or fixed compensation by reason of being a director of the Corporation. ARTICLE IV-A ------------ 1. Bank Accounts, Deposits, Checks, Drafts and Orders Issued in the Company's Name. Any two of the following officers: the Chairman, President, any Vice-President, and the Treasurer, Secretary or Controller may from time to time (1) open and keep in the name and on behalf of the Company, with such banks, trust companies or other depositories as they may designate, general and special bank accounts for the funds of the Company, and (2) terminate any such bank accounts. Any such action by two of the officers as specified above shall be made by an instrument in writing signed by such two officers and filed with the Secretary. A copy of such instrument, certified by the Secretary or an Assistant Secretary, shall be evidence to all concerned that the designations or terminations therein contained are duly authorized on behalf of the Company at the time of the certification. All funds and securities of the Company shall be deposited in such banks, trust companies or other depositories as are designated by the Board of Directors or -33- 19 by the aforesaid officers in the manner hereinabove provided, and for the purpose of such deposits, the Chairman, President, any Vice-President, the Secretary, the Controller, the Treasurer or an Assistant Treasurer, and each of them, or any other person or persons authorized by the Board of Directors, may endorse, assign and deliver checks, notes, drafts, and other orders for the payment of money which are payable to the Company. All checks, drafts, or orders for the payment of money, drawn in the name of the Company, may be signed by the Chairman, President, any Vice-President, the Secretary, the Treasurer or any Assistant Treasurer, or by any other officer or any employee of the Company who shall from time to time be designated to sign checks, drafts, or orders on all accounts or on any specific account of the Company by an "instrument of designation" signed by any two of the following officers: The Chairman, President, any Vice-President, and the Treasurer, and filed with the Secretary. The Secretary or any Assistant Secretary shall make certified copies of such instruments of designation and such certified copies shall be evidence to all concerned of the authority of the persons designated therein at the time of the certification. An instrument of designation may provide for (1) the facsimile signature of any person authorized to sign by such instrument or by this Section , or (2) the revocation of authority of any person (other than an officer named in this Section ) to sign checks, drafts or orders drawn in the name of the Company. -34- 20 ARTICLE IV-B ------------ INDEMNIFICATION --------------- 1. Any person made or threatened to be made a party to any action or proceeding, whether civil or criminal, by reason of the fact that such person or such person's testator or intestate is or was a director, officer or employee of the Corporation or serves or served any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity at the request of the Corporation shall be indemnified by the Corporation, and the Corporation may advance such person's related expenses, to the full extent permitted by law. For purposes of this section, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees, so that any person who is or was a director, officer or employee of such constituent corporation, or is or was serving at the request of such constituent corporation any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity at the request of the Corporation, shall stand in the same position under the provisions of this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. -35- 21 ARTICLE V --------- CAPITAL STOCK ------------- 2. The instruments of debentures, certificate of shares of the preferred, preference and common capital stock of the Company shall be in such form as shall be approved by the Board of Directors. The certificates shall be signed by the Chairman of the Board or the President and also by the Secretary or the Treasurer. The seal of the Corporation shall be affixed to all certificates. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. 2. All certificates shall be consecutively numbered, and the names of the owners, the number of shares and the date of issue, shall be entered in the Company's books. 3. The Company or its duly authorized stock transfer agent shall keep a book to be known as the stock book, containing the names, alphabetically arranged, of all persons who are stockholders of the Corporation, showing their places of residence, the number of shares of preferred, preference and common stock held by each respectively, and the time when each became the owner thereof, also entries showing from and to whom such shares shall be transferred, and the number and -36- 22 denomination of all revenue stamps used to evidence the payment of the stock transfer tax as required by the laws of the State of New York, which books shall be open daily, during usual business hours, for inspection by any person who shall have been a stockholder of record in such Corporation for a least six months immediately preceding his demand; or by any person holding or thereunto in writing authorized by the holders of at least five per centum of any class of its outstanding shares, upon at least five days written demand. Persons so entitled to inspect stock books may make extracts therefrom. 4. Shares shall be transferred only on the books of the Corporation by the holder thereof in person or by his attorney upon the surrender and cancellation of certificates for a like number of shares, and upon tender of stock transfer stamps or the equivalent in money sufficient to satisfy all legal requirements. 5. The Board may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock of the Company. 6. Certificates for shares of stock or for debentures in the Corporation may be issued in lieu of certificates alleged to have been lost, stolen, destroyed, mutilated, or abandoned, upon the receipt of (1) such evidence of loss, theft, destruction or -37- 23 mutilation and a bond of indemnity in such amount, upon such terms and with such surety, if any, as the Board of Directors may require in each specific case, or (2) a request by an appropriate governmental agency or representative for the reissuance of a stock certificate claimed to be abandoned or escheated in accordance with the abandoned property or similar law of the state, or (3) in accordance with general resolutions. ARTICLE VI ---------- SEAL ---- 1. The Board shall provide a suitable seal, containing the name of the Corporation, the year of its creation, and the words "Corporate Seal, N.Y." or other appropriate words, which seal shall be in charge of the Secretary, to be used as directed by the Board. ARTICLE VII ----------- FISCAL YEAR ----------- 1. The fiscal year of the Corporation shall begin the first business day in January. -38- 24 ARTICLE VIII ------------ NOTICE AND WAIVER OF NOTICE --------------------------- 1. Any notice required to be given by these By-Laws may be given by mailing the same addressed to the person entitled thereto at his address as shown on the Company's books, and such notice shall be deemed to be given at the time of such mailing. 2. Any stockholder, director or officer may waive any notice required to be given by these By-Laws. ARTICLE IX ---------- AMENDMENTS ---------- 1. Subject to the terms and conditions of the certificate of incorporation, the Board of Directors shall have power to make, amend, and repeal the By-Laws of the corporation, by a vote of the majority of all the directors present at any regular or special meeting of the Board, provided a quorum is in attendance and provided further that notice of intention to make, amend or repeal the By-Laws in whole or in part at such meeting shall have been previously given to each member of the Board. -39- EX-10.1 3 RESTRICTED PERFORMANCE SHARE AWARD DATED 1/02/1997 1 Exhibit (10) TERMS AND CONDITIONS OF RESTRICTED PERFORMANCE SHARE AWARD ---------------------------------------------------------- EPS GOAL -------- Restricted Performance Share Award made as of the second day of January 1997, (the "Award Date") by The McGraw-Hill Companies, Inc., a New York corporation (the "Company"). WHEREAS, the Board of Directors of the Company has designated the Compensation Committee of the Board (the "Committee") to administer the 1993 Key Employee Stock Incentive Plan (the "Plan") with respect to certain executives of the Company; and WHEREAS, capitalized terms not otherwise defined herein shall have the meanings set forth for such terms in the Plan. WHEREAS, the Committee has determined that the Employee should be granted a Restricted Performance Share Award under the Plan for the number of shares as specified in the Employee's Restricted Performance Share Award Document. WHEREAS, Employee is accepting the Restricted Performance Share Award subject to the terms and conditions set forth below: 1. Grant of Awards. (a) The grant of the Restricted Performance Share Award (the "Award") is subject to the terms and conditions hereinafter set forth with respect to the Restricted Performance shares of Common Stock, $1.00 par value, of the Company ("Stock"). -40- 2 (b) Subject to the terms and conditions of Section 10 hereof, the Employee shall be issued a stock certificate in respect of the Restricted Performance Shares of Stock covered by this Award. Such stock certificate shall be registered in the name of the Employee, and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to this Award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of The McGraw-Hill Companies, Inc. 1993 Key Employee Stock Incentive Plan, the Terms and Conditions and the Award Document dated as of January 2, 1997. Copies of the above mentioned documents are on file in the offices of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020." The stock certificate evidencing such shares shall be held in custody by the Company until the restrictions thereon shall have lapsed, and, as a condition of this Award, the Employee shall deliver to the Company a duly signed stock power, endorsed in blank, relating to the Restricted Performance Shares of Stock covered by this Award. With respect to the procedures set forth in this paragraph (b), the Company may, in its sole discretion, provide for the book entry on behalf of the Employee of the Restricted Performance Shares of Stock covered by this Award with the Company's Registrar and Transfer Agent in lieu of the issuance of a stock certificate to the Employee for all or a portion of the period extending from the date hereof until the lapse of -41- 3 restrictions upon such shares; provided, that such shares represented by said book-entry shall be (i) deemed to be held in custody by the Company until the restrictions thereon shall have lapsed, (ii) subject to the terms and conditions (including forfeiture) of The McGraw-Hill Companies, Inc. 1993 Key Employee Stock Incentive Plan, and (iii) the terms and conditions of this Award. 2. Performance Goals. The achievement of this Award shall be measured against a schedule of an Earnings Per Share (EPS) goal established by the Committee. This schedule will govern the determination of the Restricted Performance Shares payable on the date the Award matures. If EPS growth equals the targeted EPS growth goal, the Restricted Performance Share Award will be fully earned out, and the Employee shall receive 100% of the shares. For EPS growth between the zero payout level as established by the Committee and the targeted growth goal, the Employee shall receive a pro rata portion of the shares. For growth between the targeted goal and the 150% payout level, as established by the Committee, the Employee shall receive 100% of the shares at the targeted EPS growth plus a pro rata portion of the shares between the 100% and 150% payout levels. For EPS growth which equals or exceeds the 150% payout level, as established by the Committee, the Employee shall receive 150% of the shares payable at the 100% payout level. For growth at or below the zero payout level, all Restricted Performance Share Awards will be forfeited by the Employee. For purposes of this Award, EPS means earnings per share as shown on the Consolidated Statement of Income in the Company's Annual Report adjusted to exclude the following items: 1. Discontinued Operations, 2. Extraordinary Items of loss or expense and any other unusual or non-recurring items of loss or expense, -42- 4 3. The cumulative effect of changes in Accounting Principles, 4. The effect of changes in Federal Tax Rates, and 5. Any one-time charge, or dilution caused by seasonal impact or other factors, resulting from any acquisition or divestiture. The items in 1. through 3. above shall be taken into account as adjustments to EPS for purposes of calculating the amount of the Award earned by an Employee only to the extent that they are separately identified on the Consolidated Statement of Income in the Company's Annual Report. Item 5 shall be taken into account only if separately quantified in the acquisition or divestiture footnote to the Company's Annual Report. Notwithstanding anything contained herein, the Committee, in its sole discretion, reserves the right: (i) with respect to any Employee who is, in the year such Award becomes deductible by the Company, a "covered employee" within the meaning of Section 162(m)(3) of the Internal Revenue Code of 1986, to exclude from the computation of EPS all or any part of any item of extraordinary, unusual, non-recurring or special gain or income (but not any item of loss or expense), whether or not shown separately on the Consolidated Statement of Income, that the Committee considers appropriate to so exclude, (ii) with respect to any Employee, to exclude less than all of an item of loss or expense described in 1. through 5. above, and (iii) with respect to any Employee who is not, in the year such Award becomes deductible by the Company, a "covered employee" (or who is a "covered employee" but whose aggregate compensation, including this Award, is less than $1 million) within the meaning of Section 162(m)(3) of the Internal Revenue Code of 1986, to exclude from the computation of EPS all or any part of any item of extraordinary, unusual, non-recurring or special gain, income, loss or expense, whether or not shown separately on the Consolidated Statement of Income, that the Committee considers appropriate to so exclude. -43- 5 It is the intention of the Company that the share Award shall satisfy the requirements for "other performance based compensation" within the meaning of Section 162(m)(4)(C) of the Internal Revenue Code of 1986 and the Regulations thereunder. Such "other performance based compensation" is deductible by the Company notwithstanding the provisions of Section 162(m)(l) disallowing deductions for annual compensation in excess of $1 million paid or accrued to or for a "covered employee". In view of the present lack of clear and definitive legal guidance regarding the requirements for "other performance based compensation", the Company reserves the right, in the event that any share Award otherwise payable hereunder to a "covered employee" is ineligible for treatment as "other performance based compensation" and if, but only if, such ineligibility would result in the loss of tax deductions to the Company, to defer, in whole or in part, the Employee's receipt of such Award under the terms of the following paragraph. Under the circumstances described in the preceding paragraph, (a) the Employee will, but only to the extent necessary to avoid a deduction disallowance to the Company, forfeit all rights to Restricted Performance Shares covered by this Award and (b) the Company shall credit to the Employee's Deferred Account under The McGraw-Hill Companies, Inc. Key Executive Short-Term Incentive Deferred Compensation Plan an amount equal to the fair market value of such forfeited Shares as of the date such Shares are valued for other Employees. Said amount credited to the Employee's Deferred Account shall be paid in a lump sum on January 15 following the year the Employee is no longer a "covered employee" within the meaning of said Section 162(m) of the Internal Revenue Code. 3. Maturity Date. The maturity date of this Restricted Performance Share award will be December 31, in the third consecutive year of the cycle including, for this purpose, the year in which the restricted performance shares were awarded. -44- 6 4. Distribution Following Maturity Date of Award. If the Employee remains an employee of the Company through the Payment Date, as hereinafter defined, for the Award and the EPS objective is achieved in accordance with the payout schedule established by the Committee, the Restricted Performance Shares covered by such Award shall be earned out, and a share certificate for such shares shall be delivered to the Employee by March 15 of the year following the Maturity Date (the "Payment Date"). If applicable in accord with Section 1(b), the restrictive legend shall be removed from the certificate for such shares at the time of delivery to the Employee. Before the certificate is delivered to the Employee, the Company must withhold all applicable Federal, state and local income taxes. The Company will hold back a sufficient number of the unrestricted shares which would otherwise be delivered to the Employee to satisfy the required withholding obligation unless the Employee notifies the Company in writing on or before October 15 in the year the award matures that the Employee will submit a check to satisfy the tax obligation. 5. Termination of Employment Prior to Payment Date of Award. In the event of the termination of the Employee's employment with the Company prior to the Maturity Date for the Award due to Normal Retirement, Early Retirement, or Disability under the Company's or one of its subsidiaries' retirement or disability plans; death; or, with the approval of the Committee, in connection with a "no fault" termination as provided in the Corporation's policies and procedures (for example, a reduction in force or a change in job requirements), the Employee shall be eligible to receive a pro rata portion of the Restricted Performance Shares covered by such Award. In the event an Employee voluntarily resigns his employment with the Company or is involuntarily -45- 7 terminated by the Company for Cause (as defined in the Plan) prior to the Maturity Date for the Award, or following the Maturity Date but prior to the Payment Date for such Award, the Employee shall forfeit the right to the shares of stock covered by such Award. a) Determination of Pro Rata Award Opportunity. The pro rata portion of the shares to be earned out by the Employee if he or she terminates because of Normal Retirement, Early Retirement, or Disability under the Company's or one of its subsidiaries' retirement or disability plans; or death, shall be determined (a) first, by multiplying the number of restricted performance shares awarded by a fraction, the numerator of which is the number of years completed during the performance period (counting the year of termination as a completed year) and the denominator of which is the total number of years in the performance period; (b) second, by measuring the cumulative compound growth from the Award cycle base year through the end of the year in which termination occurs; and (C) by awarding the number of shares determined in (a) based on the degree to which the cumulative compound growth calculated in (b) achieves the cumulative compound growth goals established for the Award, subject to the limits set forth in the goal and payout schedule established for this Award and to the provisions of Section 2 hereof. The pro rata portion of the shares to be earned out by the Employee, with the approval of the Committee, in connection with a "no fault" termination, shall be determined (a) first, by multiplying the number of restricted performance shares awarded by a fraction, the numerator of which is the number of full months during the performance period in which Employee participated and the denominator of which is 36 months; (b) second, by measuring the cumulative compound growth from the Award cycle base year through the end of the year in which termination occurs; and (c) by awarding the number of shares determined in (a) based -46- 8 on the degree to which the cumulative compound growth calculated in (b) achieves the cumulative compound growth goals established for the Award, subject to the limits set forth in the goal and payout schedule established for this Award and to the provisions of Section 2 hereof. 6. Voting and Dividend Rights. Subject to the terms and conditions of Section 10 hereof, the Employee shall have the right to vote any Restricted Performance Shares of stock covered by this Award and to receive any dividends with respect to such shares. 7. Transfer Restrictions. This Award and the shares of Restricted Performance Stock which have not yet become unrestricted and earned out are nontransferable (other than by will or by the laws of descent and distribution), and may not be transferred, sold, assigned, pledged or hypothecated and shall not be subject to execution, attachment or similar process. Any attempt to effect any of the foregoing shall be null and void. 8. Miscellaneous. The terms of this Award document (a) shall be binding upon and inure to the benefit of any successor of the Company, (b) shall be governed by the laws of the State of New York, and any applicable laws of the United States, and (c) may not be amended without the written consent of both the Company and the Employee. No contract or right of employment shall be implied by this Award document. If the Award is assumed or a new award is substituted therefor in any corporate reorganization (including, but not limited to, any transaction of the type referred to in Section 425(a) of the Internal Revenue Code of 1986, as amended), employment by such assuming or substituting corporation or by a parent corporation or subsidiary thereof shall be considered for all purposes of this Award to be employment by the Company. -47- 9 9. Change in Control. In the event of a Change in Control, as defined in the Plan, the following shall apply: a) The target EPS goal hereunder shall be deemed to have been 100% achieved for the outstanding Restricted Performance Share Award. b) (i) The restrictions applicable to the Restricted Performance Shares shall lapse and a pro rata portion of the restricted shares as determined in 9(b)(ii) below shall be distributed immediately to the Employee in the form of unrestricted shares. (ii) Calculation of the pro rata unrestricted shares to be distributed to the Employee hereunder shall be determined solely by multiplying the number of shares in the Restricted Performance Share Award by a fraction, (x) the numerator of which is the number of calendar quarters of the 12 quarter cycle for the award which have occurred from the date hereof up to and including the calendar quarter in which the Change in Control occurred and (y) the denominator of which is 12 quarters. c) (i) The other restricted shares not distributed to the Employee as unrestricted shares pursuant to Section 9(b)(i) above will be converted into cash by the Company as of the date such Change in Control is determined to have occurred. The converted cash amount for each restricted share shall be the Change in Control Price. For purposes of this paragraph, the "Change in Control Price" means the highest cash -48- 10 price per share paid by an acquirer related to a Change in Control for the Company's common stock in any transaction reported on the New York Stock Exchange Composite Index, or paid or offered in any bona fide transaction related to a Change in Control of the Company at any time during the preceding sixty-day period as determined by the Committee. Such cash amounts for these restricted shares will be retained by the Company for the benefit of the Employee and thereafter will be distributed by the Company to the Employee following the Maturity Date of the award. (ii) If the payment to the shareholders of The McGraw-Hill Companies in connection with the transaction giving rise to a Change in Control is in the form of securities, either in whole or in part, then for the purpose of determining the Change in Control Price such securities will be deemed converted immediately by the Company into a cash equivalent amount as of the date of the Change in Control. The determination of such cash equivalent amount for such securities shall be made by an independent investment banking firm selected by the Company. The determination of the cash equivalent amount by this independent investment banking firm shall be conclusive. All fees incurred in retaining this investment banking firm will be paid for by the Company. These cash amounts so determined as a cash equivalent in the manner provided herein, together with the cash derived from converting the unrestricted shares into cash under 9(c)(i) above, will be retained by the Company for the benefit of the Employee and thereafter will be distributed by the Company to the Employee following the Maturity Date of the award. -49- 11 (iii) Notwithstanding anything herein to the contrary in 9(c)(i) and 9(c)(ii) above, if in connection with a Change in Control the Company elects to fund other payments due senior executives of the Company pursuant to various management and benefit plans by effecting payments to the "rabbi trust" for which the Bank of New York acts as trustee or through some other comparable vehicle in order to protect these payments for the benefit of the senior executives, the Company in such instance will immediately fund the cash payments referred to herein on the same basis, for example, using a rabbi trust or other comparable vehicle, that are provided for other payments due senior executives of the Company. (iv) If Employee is terminated involuntarily (except for Cause) prior to the Maturity Date of the Award, Employee shall receive a cash payment computed as provided in Section 9(c)(i), (ii) and (iii) with respect to the Restricted Shares which were not converted into common stock and distributed to the Employee pursuant to Section 9(a) and (b)(i) calculated as of the date such Change in Control is determined to have occurred, upon such termination. (v) If the employment of Employee is terminated voluntarily and Employee receives severance in accordance with any of the provisions of the severance plan in which Employee participates at the time of a Change in Control, Employee shall receive a cash payment computed as provided in Section 9(c)(i), (ii) and (iii) with respect to the Restricted Shares which were not converted into common stock and distributed to the Employee pursuant to Section 9(a) and (b)(i) calculated as of the date such Change in -50- 12 Control is determined to have occurred, upon such termination. (vi) If the employment of Employee is terminated due to death, or Retirement or Disability under the Company's or one of its subsidiaries' retirement or disability plans prior to the Maturity Date of the Award, Employee shall receive a cash payment computed as provided in Section 9(c)(i), (ii) and (iii) with respect to the Restricted Shares which were not converted into common stock and distributed to the Employee pursuant to Section 9(a) and (b)(i) calculated as of the date such Change in Control is determined to have occurred, upon such termination. d) If in the event of a Change in Control no listing or registration statement is in effect pursuant to Section 10 below, the Company shall distribute to the Employee a cash equivalent amount representing the shares of common stock to be distributed to the Employee. 10. Securities Law Requirements. The Company shall not be required to issue shares of common stock pursuant to this Award unless and until (a) such shares have been duly listed upon each stock exchange on which the Company's Common Stock is then registered; and (b) a registration statement under the Securities Act of 1933 with respect to such shares is then effective. 11. Incorporation of Plan Provisions. This Award is made pursuant to the Plan except where specifically noted as if the same were fully set forth herein. Capitalized terms not otherwise defined herein shall have the meanings set forth for such terms in the Plan. 51 EX-10.2 4 SHORT-TERM DEFERRED COMPENSATION PLAN 1 Exhibit (10) THE MCGRAW-HILL COMPANIES, INC. KEY EXECUTIVE SHORT-TERM INCENTIVE DEFERRED COMPENSATION PLAN -52- 2 ARTICLE I PURPOSE The purpose of The McGraw-Hill Companies, Inc. Key Executive Short-Term Incentive Deferred Compensation Plan (hereinafter referred to as the "Plan") is to provide funds for retirement or other expenses for executive employees (and their beneficiaries) of The McGraw-Hill Companies, Inc. and its subsidiaries. It is intended that the Plan will aid in retaining and attracting employees by providing such employees with a means to defer receipt of short-term incentive compensation to a future date. -53- 3 ARTICLE II DEFINITIONS For the purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: Section 2.01 BENEFICIARY. "Beneficiary" means the person, persons or entity designated by the Participant to receive any benefits payable under the Plan. Any Participant Beneficiary designation shall be made in a written instrument filed with the Company and shall become effective only when received, accepted and acknowledged in writing by the Company. Section 2.02 BOARD. "Board" means the Board of Directors of McGraw-Hill, Inc. Section 2.03 CHANGE OF CONTROL. For purposes of this Plan, the term "Change of Control" shall mean any of the following: (i) The acquisition (other than from the Company) by any person, entity or "group", within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934 (the "Exchange Act"), (excluding, for this purpose, the Company or its subsidiaries, or any employee benefit plan of the Company or its subsidiaries) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors; or (ii) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director during such period whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened -54- 4 election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board; or (iii) Approval by the stockholders of the Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were the stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own, directly or indirectly, more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, or a liquidation or dissolution of the Company or of the sale of all or substantially all of the assets of the Company. Section 2.04 COMMITTEE. "Committee" means the Compensation Committee of the Board. Section 2.05 COMPANY. "Company" means The McGraw-Hill Companies, Inc., its successors, any subsidiary or affiliated organizations authorized by the Board of Directors of The McGraw-Hill Companies, Inc. or the Committee to participate in the Plan and any organization into which or with which the Company may merge or consolidate or to which all or substantially all of its assets may be transferred. Section 2.06 DEFERRED ACCOUNT. "Deferred Account" means the account maintained on the books of account of the Company for each Participant pursuant to Article VI. Separate Deferred Accounts shall be maintained for each Participant. More than one Deferred Account may be maintained for each Participant as necessary to reflect (a) various interest credits and/or (b) separate year deferral elections. A Participant's Deferred Account shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan. A Participant's Deferred Account shall not constitute or be treated as a trust fund of any kind. Section 2.07 DETERMINATION DATE. "Determination Date" means the date on which the amount of a Participant's Deferred Account is determined as provided in Article VI hereof. The last day of each calendar month shall be a Determination Date. -55- 5 Section 2.08 DISABILITY. "Disability" or "Disabled Participant" means eligibility for disability benefits under the terms of the Company's Long-Term Disability Plan in effect at the time the Participant becomes disabled. Section 2.09 INCENTIVE COMPENSATION. "Incentive Compensation" means any short-term incentive compensation cash award payable by the Company to a Participant in a Plan Year pursuant to the provisions of the The McGraw-Hill Companies, Inc. Key Executive Short-Term Incentive Compensation Plans. Section 2.10 PARTICIPANT. "Participant" means any individual who is designated by the Committee to participate in this Plan and who elects to participate by filing a Participation Agreement as provided in Article IV. Section 2.11 PARTICIPATION AGREEMENT. "Participation Agreement" means the agreement filed by a Participant prior to the beginning of the first period for which the Participant's Incentive Compensation is to be deferred pursuant to the Plan and the Participation Agreement. Notwithstanding the foregoing sentence, the Participation Agreement for the first Plan Year of the Plan may be filed no later than August 31, 1990. A new Participation Agreement shall be filed by the Participant for each separate Incentive Compensation deferral election. Section 2.12 PLAN ADMINISTRATOR. "Plan Administrator" means the Senior Vice President, Human Resources of The McGraw-Hill Companies, Inc. or a designee. Section 2.13 PLAN YEAR. "Plan Year" means a twelve month period commencing January 1 and ending the following December 31. The first Plan Year shall commence on January 1, 1990. Section 2.14 RETIREMENT DATE. "Retirement Date" means the date on which the Participant actually terminates employment due to retirement on or after the first day of the month coincident with or next following a Participant's attainment of age fifty-five (55). -56- 6 ARTICLE III ADMINISTRATION Section 3.01 PLAN ADMINISTRATOR; COMMITTEE; DUTIES. This Plan shall be administered by the Plan Administrator. Decisions of the Plan Administrator shall be reviewable by the Committee. The Committee shall also have the authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions, including interpretations of this Plan, as may arise in connection with the Plan. Section 3.02 BINDING EFFECT OF DECISIONS. The decision or action of the Committee in respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in the Plan, unless a written appeal is received by the Committee within sixty days of the disputed action. The appeal will be reviewed by the Committee and the decision of the Committee shall be final, conclusive and binding on the Participant and all persons claiming by, through or under the Participant. -57- 7 ARTICLE IV PARTICIPATION Section 4.01 PARTICIPATION. Participation in the Plan shall be limited to executives selected by the Committee who elect to participate in the Plan by filing a Participation Agreement with the Company. Except as provided below, a Participation Agreement must be filed prior to December 15th immediately preceding the Plan Year in which the Participant's participation under the Agreement will commence, and the election to participate shall be effective on the first day following receipt by the Company of a properly completed and executed Participation Agreement. The Participation Agreement for the first Plan Year of the Plan must be filed no later than August 31, 1990. Section 4.02 DEFERRAL AMOUNT. A Participant may elect in any Participation Agreement to defer all or a portion of his Incentive Compensation. Section 4.02 (a) With respect to Incentive Compensation deferrals, the deferral selected in each Participation Agreement shall apply only to the Participant's Incentive Compensation paid for the Plan Year for which the respective Participation Agreement is applicable. Section 4.02 (b) From time to time, the Committee may increase or decrease the period for which the deferrals are effective by giving reasonable written notice to the affected Participants. Such changes shall be effective for all Participation Agreements filed thereafter. Section 4.02 (c) A Participant's election to defer his Incentive Compensation shall be irrevocable upon the filing of the respective Participation Agreement; provided, however, that the deferral under any Participation Agreement may be terminated or amended as provided in paragraphs 9.01 and 9.02. Section 4.02 (d) With respect to Incentive Compensation deferrals, to the extent the Participant participates in the Company's qualified Employee Retirement Plan (ERP), Employee Retirement Account Plan (ERAP), and Savings Incentive Plan (SIP), such deferrals will be credited with Company contributions under non-qualified accounts for the ERP, ERAP and SIP Plans. -58- 8 Section 4.03 ADDITIONAL PARTICIPATION AGREEMENT. A Participant may enter into additional Participation Agreements if authorized to do so by the Committee by filing a Participation Agreement with the Company prior to December 15th of any calendar year, stating the amount that the Participant elects to have deferred for the next Plan Year. Such additional agreements shall be effective as to Incentive Compensation paid in the Plan Year beginning after the last day of the Plan Year in which the respective agreement is filed with the Company. -59- 9 ARTICLE V DEFERRED INCENTIVE COMPENSATION Section 5.01 ELECTIVE DEFERRED INCENTIVE COMPENSATION. The amount of Incentive Compensation that a Participant elects to defer in the Participation Agreement executed by the Participant, with respect to each Plan Year of participation in the Plan, shall be credited by the Company to the Participant's Deferred Account. To the extent that the Company is required to withhold any taxes or other amounts from the employee's deferred wages pursuant to any state, Federal or local law, such amounts shall be taken out of the portion of the Participant's Incentive Compensation which is not deferred under this Plan, or the Participant's base salary. Section 5.02 VESTING OF DEFERRED ACCOUNT. A Participant shall be 100% vested in his/her Deferred Account at all times. -60- 10 ARTICLE VI DEFERRED ACCOUNT Section 6.01 DETERMINATION OF ACCOUNT. Each Participant's Deferred Account, as of each Determination Date, shall consist of the balance of the Participant's Deferred Account as of the immediately preceding Determination Date. The Deferred Account of each Participant shall be reduced by the amount of all distributions, if any, made from such Deferred Account since the preceding Determination Date. Section 6.02 INTEREST CREDIT. As of each Determination Date, the Participant's Deferred Account shall be increased by the amount of interest earned since the preceding Determination Date. Interest shall be credited at a rate determined to be in effect for each Plan Year, as determined by the Committee based on the interest rate payable on the Company's long-term debt securities. Notwithstanding the foregoing, if a Participant's Deferred Account is paid in installments, interest shall be credited, (i) for retired Participants, at the rate determined to be in effect during the Plan Year in which the Participant retires, and (ii) for all other installment payments, at the rate determined to be in effect during the Plan Year in which such payments commence. Section 6.03 STATEMENT OF ACCOUNTS. The Company shall submit to each Participant, by July 1 following the close of each Plan Year, a statement in such form as the Company deems desirable, setting forth the balance to the credit of such Participant in his Deferred Account as of the last day of the preceding Plan Year. -61- 11 ARTICLE VII BENEFITS Section 7.01 TIME OF PAYMENT. A Participant may elect in any Participation Agreement whether payment of the balance to the credit of his Deferred Account shall be paid or commence to be paid (i) on a date specified by the Participant, or (ii) upon the earlier of the Participant's (A) Retirement Date or (B) termination of employment other than death, disability, or retirement. In either case, the Participant shall be entitled to the balance to the credit of his Deferred Account determined under Section 6.01, which shall be payable under Section 7.04 as of the Determination Date coincident with or immediately following such date or event. No change in a Participant's election shall be valid unless it is made in a Participation Agreement which is filed with the Committee prior to the Plan Year preceding the Plan Year in which payment of the Participant's Deferred Account would otherwise have been made or commenced. Section 7.02 DEATH. If a Participant dies after the commencement of payments of his Deferred Account, or if a Participant while employed dies prior to any payments of his Deferred Account, his Beneficiary shall receive a lump-sum payment equal to his Deferred Account as of the Determination Date coincident with or immediately following such death. Section 7.03 DISABILITY. In the event of Disability prior to retirement or termination of employment, the Disabled Participant, unless he otherwise elects under this paragraph, shall have payment of his Deferred Account made or commenced in accordance with the Participation Agreement filed by the Participant. Before payments commence or are made under the preceding sentence, a Disabled Participant may elect, subject to Committee approval upon good cause shown, to have payments (i) made as soon as practicable in a lump sum, or (ii) commence as soon as practicable in equal annual installments over a period not in excess of 15 years. Section 7.04 FORM OF PAYMENT. Upon the happening of the date or event described in Sections 7.01 or 7.03, the Company shall pay to the Participant the balance to the credit of his Deferred Account in a lump sum or in equal annual installments as elected in the Participation Agreement filed by the Participant. -62- 12 If a Participant elects to receive payments in installments, payment of the Deferred Account shall be in an amount which amortizes the Deferred Account balance in equal annual payments of principal and interest over a period not to exceed 15 years. For purposes of determining the amount of the annual payment, the assumed rate of interest shall be the rate under the terms of Section 6.02. No change in a Participant's election shall be valid unless it is made in a Participation Agreement which is filed with the Committee prior to the Plan Year preceding the Plan Year in which payment of the Participant's Deferred Account would otherwise have been made or commenced. Section 7.05 LUMP-SUM PAYMENT. Notwithstanding Section 7.04, in its sole discretion the Committee may direct that the Company make a lump-sum payment of the balance credited to a Participant's Deferred Account. Section 7.06 WITHHOLDING OF TAXES. To the extent required by the law in effect at the time payments are made, the Company shall withhold from payments made hereunder any taxes required to be withheld from an employee's wages for the Federal or any state or local government. Section 7.07 COMMENCEMENT OF PAYMENTS. Commencement of payments under this Plan shall be made following the earlier of (i) the date specified in the Participation Agreement filed by the Participant or (ii) receipt of notice by the Plan Administrator of the event which entitles a Participant (or a Beneficiary) to payments under this Plan. All payments shall be made as of the first day of the month. Section 7.08 PAYMENTS IN CONNECTION WITH CHANGE OF CONTROL. Notwithstanding anything contained in the Plan to the contrary, in the event of a Change of Control of the Corporation the company shall immediately pay to each Participant in a lump sum the then remaining balance in his/her Deferred Account. The terms of sections 9.01 and 9.02 shall not be applicable following a Change of Control of the Corporation. The reasonable legal fees incurred by any Participant to enforce his/her valid rights hereunder shall be paid for by the Company to the Participant in addition to sums otherwise due hereunder, whether or not the Participant is successful in enforcing his/her rights or whether or not the matter is settled. -63- 13 ARTICLE VIII BENEFICIARY DESIGNATION Section 8.01 BENEFICIARY DESIGNATION. Each Participant shall have the right, at any time, to designate any person, persons or entity as his Beneficiary or Beneficiaries (both principal as well as contingent) to whom payment under this Plan shall be paid in the event of his death prior to complete distribution to the Participant of the benefits due him under the Plan. Section 8.02 AMENDMENTS. Any Beneficiary designation may be changed by a Participant by the written filing of such change on a form prescribed by the Company. The filing of a new Beneficiary designation form will cancel all Beneficiary designations previously filed. Section 8.03 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant, then any amounts to be paid to the Participant's Beneficiary shall be paid to the Participant's estate. Section 8.04 EFFECT OF PAYMENT. The payment to the deemed Beneficiary shall completely discharge the Company's obligations under this Plan with respect to the Participant. -64- 14 ARTICLE IX AMENDMENT AND TERMINATION OF PLAN Section 9.01 AMENDMENT. The Board or the Committee may at any time amend the Plan in whole or in part, provided, however, that no amendment shall be effective to decrease or restrict any Deferred Account at the time of such amendment. Section 9.02 COMPANY'S RIGHT TO TERMINATE. The Board or the Committee may at any time terminate the Plan with respect to new elections to defer if, in its judgment, the continuance of the Plan, the tax, accounting, or other effects thereof, or potential payments thereunder would not be in the best interests of the Company. The Board or the Committee may also terminate the Plan in its entirety at any time, and upon any such termination, the Company shall immediately pay to each Participant in a lump sum the then remaining balance in his Deferred Account. -65- 15 ARTICLE X MISCELLANEOUS Section 10.01 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries shall have no legal or equitable rights, interest or claims in any property or assets of the Company. Any and all of the Company's assets shall be, and remain, the general, unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. Section 10.02 NONASSIGNABILITY. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. Section 10.03 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between the Company and the Participant, and the Participant (or his Beneficiary) shall have no rights against the Company except as may otherwise be specifically provided herein. Moreover, nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of the Company or to interfere with the right of the Company to discipline or discharge him at any time. Section 10.04 PROTECTIVE PROVISIONS. A Participant will cooperate with the Company by furnishing any and all information requested by the Company, in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Company may deem necessary and taking such other action as may be requested by the Company. As amended: October 27, 1993 January 25, 1995 July 31, 1996 -66- EX-10.3 5 RESOLUTIONS TERMINATING 1993 STOCK PAYMENT PLAN 1 EXHIBIT (10) RESOLUTIONS TERMINATING 1993 STOCK PAYMENT PLAN FOR DIRECTORS RESOLVED: That the 1993 McGraw-Hill Stock Payment Plan for Directors (the "Plan") is hereby terminated as of June 30, 1996, subject to the approval by the shareholders at the annual meeting to be held on April 24, 1996 of the Director Deferred Stock Ownership Plan; and it is FURTHER RESOLVED: That in connection with the foregoing termination, the period from January 1 through June 30, 1996 shall be deemed to be a plan year pursuant to the Plan and all payments under the Plan shall be accordingly pro rated for such period, with shares payable thereunder to be distributed on August 15; and it is FURTHER RESOLVED: That the officers of the Corporation be, and each of them hereby is, authorized and directed to do or cause to be done any and all such further acts and things, to provide appropriate notices, and to execute and deliver any and all such documents, papers and instruments, with the advice of counsel, as they may deem necessary or desirable in order to carry into effect the purpose and intent of the foregoing resolutions. -67- EX-10.4 6 RESOLUTIONS FREEZING AND TERMINATING BENEFITS 1 EXHIBIT (10) RESOLUTIONS FREEZING EXISTING BENEFITS AND TERMINATING ADDITIONAL BENEFITS UNDER THE MCGRAW-HILL COMPANIES, INC. DIRECTORS RETIREMENT PLAN RESOLVED: That, effective June 30, 1996, current members of the Board of Directors of the Corporation participating in The McGraw-Hill Companies, Inc. Directors Retirement Plan (the "Plan") shall not accrue additional benefits thereunder for subsequent years of Service, as defined in the Plan, and the Retainer, as defined in the Plan, shall be the Retainer in effect on June 30, 1996; and it is FURTHER RESOLVED: That future members of the Board of Directors of the Corporation shall not be participants in the Plan; and it is FURTHER RESOLVED: That the officers of the Corporation be, and each of them hereby is, authorized and directed to do or cause to be done any and all such further acts and things, to provide appropriate notices, and to execute and deliver any and all such documents, papers and instruments, with the advice of counsel, as they may deem necessary or desirable in order to carry into effect the purpose and intent of the foregoing resolutions. -68- EX-12 7 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit (12) THE McGRAW-HILL COMPANIES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31 --------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands of dollars) Earnings Earnings from continuing operations before income tax expense, cumulative effect on prior years of changes in accounting in 1992, unusual charges in 1993 and 1996, and gain on exchange of Shepard's/ McGraw-Hill in 1996 (a)(b)(c)(d) $415,974 $ 382,126 $ 341,816 $ 293,243 $ 264,877 Fixed charges 77,563 90,382 83,219 75,930 81,724 Capitalized interest -- (421) (353) (536) (836) -------- --------- --------- --------- --------- Total Earnings $493,537 $ 472,087 $ 424,682 $ 368,637 $ 345,765 ======== ========= ========= ========= ========= Earnings from continuing operations before income tax expense and cumulative effect on prior years of changes in accounting in 1992 (c)(d) $809,705 $ 382,126 $ 341,816 $ 63,443 $ 264,877 Fixed charges 77,563 90,382 83,219 75,930 81,724 Capitalized interest -- (421) (353) (536) (836) -------- --------- --------- --------- --------- Total Earnings $887,268 $ 472,087 $ 424,682 $ 138,837 $ 345,765 ======== ========= ========= ========= ========= Fixed Charges(c) Interest expense $ 51,347 $ 63,832 $ 55,650 $ 46,998 $ 49,935 Portion of rental payments deemed to be interest 26,216 26,550 27,569 28,932 31,789 -------- --------- --------- --------- --------- Total Fixed Charges $ 77,563 $ 90,382 $ 83,219 $ 75,930 $ 81,724 ======== ========= ========= ========= ========= Ratio of Earnings to Fixed charges: Before unusual charges, gain on exchange of Shepard's/McGraw- Hill and cumulative adjustment 6.4x 5.2x 5.1x 4.9x 4.2x After unusual charges, gain on exchange of Shepard's/McGraw- Hill but before cumulative adjustment 11.4x 5.2x 5.1x 1.8x 4.2x
- --------------- (a) On October 15, 1996, the company completed the exchange of its Shepard's/ McGraw-Hill legal publishing unit for the Times Mirror Higher Education Group. The exchange resulted in a pre-tax gain of $418.7 million and a one- time charge of $25 million for costs of integrating the company's College division with the acquired higher education business. -69- 2 (b) Unusual charges in 1993 totaled $229.8 million before taxes in connection with the purchase of the remaining 50% interest in the Macmillan/McGraw-Hill School Publishing Company previously owned by Macmillan for $337.5 million in cash. The unusual charges consisted of $199.8 million primarily to adjust the company's original investment to values established in the purchase transaction. The charge was allocated primarily to goodwill and intangibles. The company also recorded a provision of $30 million relating to the consolidation of certain functions of Macmillan/McGraw-Hill and the company's book publishing operations. (c) For purposes of computing the ratio of earnings to fixed charges, "earnings from continuing operations before income taxes" excludes undistributed equity in income of less than 50%-owned companies. "Fixed charges" consist of (1) interest on debt and capital leases, (2) the portion of the company's rental expense deemed representative of the interest factor in rental expense, and (3) the company's proportionate share of such fixed charges of the Macmillan/McGraw-Hill joint venture through September 30, 1993. Effective October 1, 1993, Macmillan/McGraw-Hill's results are consolidated in the company's results. (d) The cumulative adjustment in 1992 reflects the adoption of FAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", $183.5 million pretax, and FAS 112, "Employers' Accounting for Postemployment Benefits", $25.3 million pretax. -70- EX-13 8 PORTIONS OF 1996 ANNUAL REPORT TO SHAREHOLDERS 1
PAGE IN ANNUAL REPORT ------------- Business (Textual Material) 4 through 20 24 and 25 Management's Discussion and Analysis 26 to 32 Consoldiated Statement of Income 33 Consolidated Balance Sheet 34 and 35 Consolidated Statement of Cash Flow 36 Consolidated Statement of Shareholders' Equity 37 Notes to Consolidated Financial Statements 38 to 44 Report of Management 45 Report of Independent Auditors 45 Eleven-Year Financial Review 46 and 47 Supplemental Financial Information 48
2 [GRAPHIC] THREE CORE BUSINESSES WITH THREE STRATEGIC THRUSTS 4 - ------------- 5 [#3 LOGO] In the 1990s the relative impact of our three core businesses on overall results has changed dramatically, reflecting both the transformation of The McGraw-Hill Companies and an array of external factors. In 1996 Financial Services produced 49% of our operating profit compared with 34% in 1990, and Educational and Professional Publishing generated 29% versus 19% six years ago. Understandably, the contribution from Information and Media Services has declined to 22% from 47%. The 1996 percentages exclude the net gain from the Shepard's/Times Mirror Higher Education exchange transaction. Growth is projected in each business segment but at differing increments. While strategies vary, they share a common foundation. Over the past two years three words have dominated discussions of our progress and plans: global, innovation, management. Each capsulizes a driving force underlying our actions: GLOBAL - to extend our international reach, with particular emphasis on growth stemming from opportunities in financial services and publishing; INNOVATION - to use our assets more creatively and make them work more productively; MANAGEMENT - to nurture talent, expand capabilities and execute our initiatives still more effectively. This annual report is structured around those themes, evident in the performance of each of our business segments in 1996. (A detailed discussion of 1996 results is presented in the Financial Review and Analysis on pages 26 - 32.) 3 FINANCIAL SERVICES: SPEARHEADING OUR GROWTH. Up 13.5%, operating profit again reached a record high, even though new issue dollar volume in the U.S. bond market has not returned to its 1993 peak. Standard & Poor's Ratings Services, continuing to reduce its reliance on new issue volume, contributed significantly to the gain. Its strong performance stemmed from robust growth in global markets, continued success with new products in nontraditional markets, increased market share in the public finance market, a strong structured finance business and the increased issuance of high-yield bonds. At Standard & Poor's Financial Information Services the continuing global expansion of financial data services and growing sales in retail and institutional sectors helped produce improved results. Operating with new leadership and a new framework based on five core customer groups, Financial Information Services added "Standard & Poor's" to its name and those of most of its units. The move capitalizes on the brand's longstanding power in the financial marketplace. EDUCATIONAL AND PROFESSIONAL PUBLISHING:A GOOD YEAR. In a period of decreased state adoption activity at the elementary grade level, this business segment nearly matched 1995's earnings excluding special items. Operating profit in 1996 excluding special items was down only 1.3%. Results reflected gains in educational publishing and higher education offset by a decline in professional publishing's domestic operations and the impact of development costs for McGraw-Hill Home Interactive. Comparative results don't tell the year's real story, however. Our Shepard's legal publishing operations, which we swapped last fall for the Times Mirror Higher Education Group, had annualized sales of less than $80 million compared with the $220 million of the Times Mirror operations, and only 11 weeks of those results (dating from the October 15 completion of the agreement) are included in our 1996 financial reporting. The added operations, which provide a near-perfect complement to our existing higher education offerings, have much better growth prospects than we envisioned at Shepard's and provide an opportunity to increase the operating profit margin and global reach of our higher education business. INFORMATION AND MEDIA SERVICES:A STRONG FINISH. Operating profit rose 1.5% as a fourth-quarter rebound counteracted the year's disappointing start. The Business Week Group and Tower Group International again posted banner years, while electronic products and cost reductions contributed to gains at the McGraw-Hill Construction Information Group. Results in the Publication Services Group were mixed, with advances in the aviation and healthcare sectors but a decline in the science and technology category. Our information technology and communications publications and Datapro groups are adjusting to an industry-wide shakeout. Our Broadcasting Group experienced a downturn due to a softer San Diego market and lower ABC ratings, which were adversely affected by NBC's primetime success and the draw of the Olympics. AND NOW A CONSUMER DIMENSION The stature of The McGraw-Hill Companies is built on the respect we have earned within the business, financial and education marketplaces. Now we're taking our trusted name and brands into the homes of consumers as well. In time for the 1996 holiday season McGraw-Hill Home Interactive launched its first four multimedia CD-ROM titles, targeted to children ages 8 to 14. They were praised in trade publications and recognized for their outstanding quality and entertainment value by The National Parenting Center, The Family Channel and ComputEd Learning Lab. For children ages 10 and up the unit also introduced a World Wide Web site that allows information to be tailored to personal tastes. For adult consumers we plan to introduce a Standard & Poor's investor network in mid-1997 on the Internet. This product serves rapidly growing demand for information as individuals take a more active role in decisions affecting their retirement income. A full-scale, subscription-based consumer service, the Standard & Poor's investor network will provide financial planning guidance, investment information and research, help in facilitating transactions, and ongoing portfolio monitoring and maintenance. A broader consumer market sector is now using the Business Week Online product, which is available via America Online and on the Internet. This service has helped extend the publication's consumer audience in the U.S. and globally. 4 [GRAPHIC] GLOBAL GROWTH GROWTH IN INTERNATIONAL MARKETS OUTSTRIPS OUR GAINS IN THE U.S., AND WE EXPECT THAT PATTERN TO CONTINUE. The climate has never been better for global growth. World financial markets continue to expand robustly, and emerging nations increasingly recognize they need thoroughly trained executives and better educated work forces for long-term success. We're building our international presence aggressively. To our corporate staff we've added a new management team and structure specifically to identify opportunities and direct our global expansion. It includes an executive vice president of global markets and strategic development and roles for three regional directors - for Asia, Europe and Latin America. Strategies vary, reflecting differences in market characteristics and national business environments. Meanwhile, Standard & Poor's Financial Information Services has centered overall direction of global business development in a new post and appointed a veteran company executive with extensive experience outside the U.S. to fill it. Expansion in Southeast Asia and Europe are immediate priorities. In 1996 revenue from international sources, which includes international sales by our U.S. operations, rose 10.8% compared with a U.S. gain of 3.5%. International markets now account for 18.5% of total revenue. THIRTY PERCENT OF REVENUE from international sources by 2000 is among the primary goals of Standard & Poor's Ratings Services. International markets provide a buffer against peaks and valleys in domestic sales. While stressing the enhancement of technological capabilities, Standard & Poor's Ratings Services believes that direct customer contact is equally important - as a mark of accessibility and to encourage a free flow of information. In addition to its 11 offices and 300 employees outside the U.S., the division continues to expand its network of affiliations with well-regarded ratings services in emerging market countries. In 1996 it announced relationships in Argentina, Chile, India and Indonesia. It expects to establish similar collaborations in other countries in 1997. OVER 60 COUNTRIES ARE ON THE LIST of sovereign ratings issued by Standard & Poor's Ratings Services. The unit also sees substantial opportunities in the private sector in emerging markets. As in the U.S., many corporations and financial institutions in other countries have begun to use ratings not only to assess credit quality but also to benchmark their overall financial performance. Such market influences inspired the consolidation of 15-year-old CreditWeek and 12-year-old CreditWeek International into "the first and only weekly publication produced by a rating agency that is dedicated to covering the global credit markets." The new CreditWeek provides expanded editorial content, structured to increase readability. 5 GLOBAL GROWTH 8 - ------------ 9 THE 23 PUBLISHING CENTERS our Professional Publishing Group operates outside the U.S., either directly or through co-publishing agreements, produce titles in 16 languages. Overall, we sell more books in more languages than any of our competitors. International markets typically account for nearly two-thirds of the group's sales. Asia-Pacific is the geographic territory with the strongest potential for growth. We also have groups in Canada, Europe (including Eastern Europe and Russia) and Latin America. We expect to bring additional subsidiaries into our network in Asia, Eastern Europe and South America as conditions merit such action. A new avenue to growth opened when the Times Mirror Higher Education Group was acquired. It is strong in business and science - subjects that sell well in global markets. Our traditional strength in international college sales will quickly extend the reach of the former Times Mirror titles. ONE HUNDRED FIFTY THOUSAND CIRCULATION (of 1,025,000 in total) is now the international rate base Business Week guarantees to advertisers, topping any other U.S.-based business publication. Business Week has the largest global business circulation of any periodical. Its ongoing global expansion is visible in other ways as well. For example, the Asia edition of Business Week International, one of three English-language regional versions, began printing in Singapore to enable further customizing of editorial content. 6 BETTER AND BROADER INFORMATION on companies and financial markets outside the U.S. are priorities on Standard & Poor's Financial Information Services' agenda. - - Standard & Poor's Compustat (financial databases and advanced PC-based software for financial analysis) initiated direct compilation of key financial data on 12,000 international companies, further enhancing its level of trust and reliability among its customers. It also substantially updated its popular PC Plus software, adding several new features, including real-time prices and market data as well as value-added input from other Standard & Poor's units. - - Standard & Poor's MMS (information on debt and currency markets) now provides market analysis and economic forecasts covering 16 markets in Europe, Asia and Latin America - the fastest, most extensive such service available. It also launched a daily faxed newsletter called Global Markets Today. - - Standard & Poor's Platt's (market intelligence and pricing for commodities traders in the energy, chemicals and metals markets) launched two new services focusing on shipping and the recently deregulated electricity market. The electricity product is a joint venture with The McGraw-Hill Companies' Energy and Business Newsletters. Three of the group's other units also extended their global scope: Standard & Poor's ComStock launched a new quote and news service with a Dutch financial information company, DRI/McGraw-Hill joined a Hong Kong-based company in the exclusive distribution of an economic and financial database covering 12 Asian countries, and Standard & Poor's Equity Services opened participation in its corporate information program to companies based in Australia. 7 [GRAPHIC] INCREASING INNOVATION INCREASING INNOVATION IS BOTH AN OVERARCHING GOAL AND AN APT DESCRIPTION OF THE PERFORMANCE WE'RE SEEING IN OUR OPERATIONS. Tapping creativity more deeply, doing more with the resources we have and augmenting our capabilities have helped speed the pace and broaden the dimensions of innovation at The McGraw-Hill Companies. We've launched a concerted drive to strengthen our technological expertise measurably. We're staffing and equipping ourselves to take full advantage of digital-based product opportunities. Innovation is evident in new alliances and partnerships, new ventures, new customer relationships, and entry into markets we haven't served before. It's reflected in an array of changes in managerial systems and procedures and increased collaboration among our units. The flow of new products, product enhancements and product extensions has increased - most visibly in our expanding family of Web sites, other online services and CD-ROM titles. Transformation of traditional print content into digitally-based information has opened new sales channels. IN AN INNOVATIVE PUBLIC-PRIVATE collaboration, DRI/McGraw-Hill (global provider of economic analysis and industry reports) along with Standard & Poor's Equity Services and the McGraw-Hill Professional Book Group will begin publishing in mid-1997 the U.S. Industrial Outlook, the U.S. Department of Commerce's definitive outlook report. DRI has also launched electronic versions of its most popular forecast publications, delivered via corporate networks. Standard & Poor's Equity Services (information and analysis focused on U.S. equity markets) introduced a new system of industry groups for its four principal indexes, the S&P 500, S&P MidCap 400, S&P SmallCap 600 and S&P 1500 SuperComposite. Indexed mutual funds based on the S&P 500 experienced explosive growth in 1996. In 1997, Equity Services will premiere the Standard & Poor's Bank Investment Center, which will supply information to banks providing investment services to retail customers. Standard &Poor's J.J. Kenny (information on fixed-income securities and inter-dealer municipal bond trading) made The Blue List, the primary monitor of municipal and corporate bond offerings in the U.S., available on the Internet, along with Standard & Poor's J.J. Kenny Drake Market Data (monitoring the secondary municipal bond market). Both are subscription-based services. 8 INCREASING INNOVATION 12 - ------------- 13 IN JUST 100 DAYS from start to finish the McGraw-Hill Construction Information Group (CIG) developed a Windows version of Dodge DataLine (online information on construction projects and activity). Aggressive promotion led to instant success. It was the latest innovation for CIG, the world's leading provider of industry-specific information and analysis, available in print and electronic form and customized to meet clients' needs. Meanwhile, F.W. Dodge centralized at one location (Orlando) information compilation formerly dispersed among 22 sites. Such steps helped spark revenue and productivity gains at the unit for the first time in several years. - - Sweet's (information to assist product selection) sustained its earnings growth with the help of new products such as Design Blocks, a notable 1996 introduction. Developed with software leader Autodesk, the CD-ROM provides building product CAD drawings that can be incorporated directly into architectural plans. Streamlining its operations as well, Sweet's has eliminated 17 field offices by equipping its sales force with laptop computers. - - Engineering News-Record and Architectural Record unveiled redesigns that raised the quality and volume of information provided. AR introduced its new look as it became the official publication of the American Institute of Architects in January 1997. That alliance, which nearly doubled AR's circulation, is one of several currently evolving with both national and regional trade associations. Among the newest is an agreement with the Construction Specification Institute focused primarily on professional education programs. - - Online inquiries to the Sweet's Web site from architects around the world have dramatically exceeded expectations, and ENR's Web site, introduced early in 1996, began generating profits in September. 9 MORE THAN 2,000 CREDIT RATINGS of financial institutions, plus detailed reports on more than 600 banks in 50 nations and analysis of national banking systems, are offered through the Bank Ratings Service, introduced by Standard & Poor's Ratings Services in March 1996. Available in print, via fax, on CD-ROM and online, its information covers emerging and developed nations, organized by region. Standard & Poor's Ratings Services wants to double the contribution from such nontraditional services to 25% of total revenues within four years. Given its leadership status, it is well-positioned to reach this goal. The nontraditional category already includes ratings of insurance companies, mutual funds, project financings, derivative products and corporate credit ratings. Because these ratings aren't tied to capital markets, they aren't driven by interest rates or new issue volume, and they're growing at significant rates - higher than the traditional business of U.S. corporate and municipal bond ratings. 10 INCREASING INNOVATION 14 - ------------ 15 [VLS LOGO] DEVELOPING PRODUCTS for emerging curriculum trends and instructional approaches is a cornerstone strength of our education operations - as demonstrated by our Versatile Learning System (VLS). Combining resources of The McGraw-Hill Companies, VLS is a comprehensive learning system that integrates print and electronic materials in a balanced multimedia presentation easy for teachers to use on a daily basis. As they become familiar with the new systems, teachers discover how much value multimedia can add to their students' learning experience. As a result, VLS has assumed a significant role in advancing the acceptance of technology - and the leadership of our brands - among teachers in U.S. schools. AN ELECTRONIC COMMERCE SYSTEM developed by Tower Group International allows FedEx International Priority shipments to clear through U.S. Customs at the sprawling FedEx hub in Indianapolis without traditional paperwork. The system, the first of its kind and designed in collaboration with the U.S. Customs Service and FedEx, uses document imaging technology to enable computer screen review of required information, significantly speeding the movement of packages. Tower Group International is one of the leading providers of logistics management and trade information management services in North America. 11 [GRAPHIC] MULTIDIMENSIONAL LEADERSHIP THE MANAGEMENT TEAM LEADING OUR TRANSFORMATION IS TRANSFORMING ITSELF AS WELL. IT'S PREPARED TO BROADEN OUR MARKET LEADERSHIP INTO NEW TERRITORIES - AROUND THE GLOBE AND ACROSS THE MEDIA SPECTRUM. No management mission is more important than guiding change effectively - and we think that is happening throughout The McGraw-Hill Companies. It is evident every February and March when we present our annual Excellence in Management Awards and Corporate Achievement Awards. The men and women who receive those honors demonstrate leadership in what they do, and help build the leadership positions we hold in so many of our markets. Reinforcing and expanding management strengths - throughout our business units - has been a special emphasis. There has been a wealth of new appointments over the past three years, drawing from talent both inside and outside our organization. More than 60% of our top 120 executive positions are in new hands. Our management team is a good blend of company veterans and newcomers. The leadership we see is multidimensional. Some examples follow. BREAKAWAY GLOBAL LEADERSHIP in risk evaluations is one goal of Standard & Poor's Ratings Services - with a target date of 2000. Already the world's leading credit rating agency, it is widening the gap not only through international initiatives and innovation but also through multifaceted training programs. Similar efforts are under way at other business units. In April, Standard & Poor's Ratings Services inaugurated a customized three-week management development program at the University of Virginia's Darden School of Business Administration. Thirty key managers from its worldwide branch network participated in the first three sessions. Standard & Poor's Financial Information Services will begin a similar program in 1997. LEADERSHIP POSITIONS WERE EXPANDED by Standard & Poor's Financial Information Services' units in 1996. Standard & Poor's ComStock (up-to-the-minute quotes and other information delivered online) completed agreements with America Online and Time Warner's Pathfinder service and three popular financial news Web sites (joining arrangements with Prodigy and CNN). Now the leading provider of financial data on the Internet, it also introduced its own fee-based Internet service. ACQUISITIONS in business books and trade magazine publishing augment our product development opportunities and our ability to track innovations in the dynamic arenas of business, finance and healthcare. The combination of Irwin Professional Publishing (acquired with the Times Mirror Higher Education Group) and Business/McGraw-Hill gives us clear-cut market leadership in business books. We have particularly strong lists in professional and consumer financial and investment books. The Publication Services Group now has five healthcare publications and has become a leader in serving the information needs of the industry. In 1996 it acquired Healthcare Informatics and InfoCare, which cover the use of information technology in healthcare. WINNING THE MOST PRESTIGIOUS AWARD in magazine publishing further validates the leadership in journalism long associated with Business Week. Last April, for the second time in three years, it received the National Magazine Award for General Excellence in the one million-plus circulation category. Revenue gains have accompanied editorial achievement. Advertising volume and circulation are up, and advertising and subscription rate increases are charted for 1997. 12 MULTIDIMENSIONAL LEADERSHIP 18 - ------------ 19 [#1 LOGO] STATUS AS THE "BIBLE" of an industry is another indicator of leadership, and Aviation Week & Space Technology clearly holds that position, alongside other members of the Publication Services Group. The Aviation Week Group has taken a variety of actions to propel its success higher. During 1996 it introduced a new annual industry reference in print and CD-ROM editions, gave its flagship magazine a new look during that publication's 80th anniversary, spun off an editorial section into a separate magazine (Overhaul and Maintenance), launched the first cable-TV program devoted to aerospace news, and expanded its ambitious conference schedule by co-producing the first executive symposium on information management in aerospace. NUMBER ONE IN EDUCATIONAL PUBLISHING became our ranking worldwide when we acquired the Times Mirror Higher Education Group in 1996 as a synergistic companion to our own College Division. We merged two companies that had more than 1,700 employees and arrived at a combined group - McGraw-Hill Higher Education - with approximately 1,200 employees. We now hold leadership positions in 12 higher education disciplines, including accounting, biology, economics, finance and psychology. We brought our global marketing strength to the domestically oriented Times Mirror operations. New strategic alliances and multimedia products are also contributing significantly to rising higher education sales. For example, with the Graduate Management Admissions Council we are developing and marketing interactive CD-ROM programs designed for students pursuing a master's degree in business administration. 13 DELIVERING LOCAL NEWS IN NONTRADITIONAL TIME PERIODS and on added channels is a key Broadcasting Group strategy to reach more viewers, who increasingly want local news on demand. The group expects to attain long-term goals through leadership in local news and its affiliation with ABC. - - In San Diego, KGTV joined Cox Cable to launch the first local TV news service airing 24 hours a day. The service will reach 648,000 cable households by mid-1997. - - In Denver, KMGH-TV plans to expand its local newscasts to the 4-5 p.m. time period. - - In Indianapolis, WRTV collaborated with five Indiana PBS stations to air continuous election night coverage from 7 to 9:30 p.m. and recently launched a local weekend newscast on its own channel. - - In addition, KGTV became the exclusive local TV news provider for a new America Online service called Digital City San Diego. 14 MULTIDIMENSIONAL LEADERSHIP 20 - ------------ 21 [#1 LOGO] OUR PREEMINENCE in kindergarten through twelfth grade classrooms reflects the ongoing success of four divisions. - - The McGraw-Hill School Division's basal programs consistently rank among the top sellers in major state adoptions. In 1996, Share the Music for grades K-8 became the most widely used music series in the U.S., and its new social studies series, Adventures in Time and Place, developed in collaboration with the National Geographic Society, is continuing a tradition of leadership in that subject. - - Glencoe/McGraw-Hill, the nation's largest secondary publisher, now holds leading positions in nine of its 14 curriculum areas. Exemplifying that dominance, Glencoe's products generated sales well above all competitors combined in each of the seven states that adopted science programs in 1996. - - Our SRA/McGraw-Hill division's March 1996 acquisition of the educational assets of Open Court Publishing Company broadened its position as the nation's best-known publisher of supplementary, skills-based educational materials. The acquisition included phonics-based reading, language arts and mathematics instructional programs for the K-8 market. - - CTB/McGraw-Hill's addition of TerraNova, a ground-breaking test series, reinforced its standing as the U.S. leader in primary and secondary pupil-testing programs. CTB currently has 15 statewide testing contracts, including seven awarded in 1996 - five for TerraNova. 15 THE MCGRAW-HILL COMPANIES AT-A-GLANCE
GROUP AND KEY MARKETS LEADING BRANDS - ---------------------------------------------------------------------------------------------------------------------------------- Financial STANDARD & POOR'S FINANCIAL Standard & Poor's Compustat Standard & Poor's Marketscope Services INFORMATION SERVICES Standard & Poor's ComStock Standard & Poor's MMS Investors, corporations, govern- Standard & Poor's Index Services Standard & Poor's Outlook ment agencies, financial institu- Standard & Poor's J.J. Kenny Drake Standard & Poor's Platt's tions, portfolio managers, brokers, Standard & Poor's J.J. Kenny Standard & Poor's Securities, Inc. unit investment trusts and mutual Evaluation Services Standard & Poor's Stock Reports funds managers, commodities, Standard & Poor's J.J. Kenny Standard & Poor's The Blue List securities and foreign exchange Information Services DRI/McGraw-Hill traders, and libraries Standard & Poor's KENNYBASE ---------------------------------------------------------------------------------------------------------------- STANDARD & POOR'S Corporate Ratings Sovereign Ratings RATINGS SERVICES Insurance Ratings Structured Finance Ratings Global capital markets and related Financial Institutions Ratings Project Finance Ratings risk assessments Managed Funds Ratings Ratings Information Services Public Finance Ratings - ---------------------------------------------------------------------------------------------------------------------------------- Educational and EDUCATIONAL PUBLISHING McGraw-Hill School Division SRA/McGraw-Hill Professional Elementary, secondary, testing, (formerly Macmillan/McGraw-Hill) McGraw-Hill School Systems Publishing vocational and postsecondary Glencoe/McGraw-Hill McGraw-Hill Home Interactive fields CTB/McGraw-Hill McGraw-Hill/London House ---------------------------------------------------------------------------------------------------------------- HIGHER EDUCATION AND McGraw-Hill Higher Education - Irwin/McGraw-Hill CONSUMER GROUP - McGraw-Hill College - Dushkin/McGraw-Hill College, postgraduate - WCB/McGraw-Hill and consumer markets ---------------------------------------------------------------------------------------------------------------- INTERNATIONAL PUBLISHING McGraw-Hill Interamericana Educational and professional McGraw-Hill Europe markets in Asia, Latin America, Tata McGraw-Hill Europe and Canada McGraw-Hill Ryerson ---------------------------------------------------------------------------------------------------------------- PROFESSIONAL PUBLISHING Professional Book Group Computing/McGraw-Hill Engineering, science, medicine, law Business/McGraw-Hill Continuing Education Center healthcare, computer technology, Osborne/McGraw-Hill business and government markets - ---------------------------------------------------------------------------------------------------------------------------------- Information and BROADCASTING GROUP KMGH-TV (Denver) KERO-TV (Bakersfield) Media Services Serving the Denver, Indianapolis, KGTV (San Diego) WRTV (Indianapolis) San Diego and Bakersfield, Calif. communities ---------------------------------------------------------------------------------------------------------------- BUSINESS WEEK GROUP Business Week Business professionals and Business Week International advertisers worldwide Business Week Online ---------------------------------------------------------------------------------------------------------------- MCGRAW-HILL CONSTRUCTION F.W. Dodge INFORMATION GROUP Sweet's Group Architects, engineers, contractors, Architectural Record real estate owners, developers Engineering News-Record and investors, building products manufacturers ---------------------------------------------------------------------------------------------------------------- DATAPRO INFORMATION Datapro Information Services BYTE SERVICES GROUP National Software Testing Data Communications/ INFORMATION TECHNOLOGY AND Laboratories Data Communications International COMMUNICATIONS GROUP Northern Business Information LAN Times Information technology market tele.com ---------------------------------------------------------------------------------------------------------------- PUBLICATIONS SERVICES GROUP Aviation Week & Space Technology Chemical Engineering Professionals and corporate Healthcare Informatics Electrical World executives around the world in Hospital Practice Modern Plastics aviation, healthcare, and science InfoCare Power and technology The Physician and Sportsmedicine Postgraduate Medicine ---------------------------------------------------------------------------------------------------------------- TOWER GROUP INTERNATIONAL Tower Group International Major North American importers Tower Group International Canada, Inc. and exporters - ----------------------------------------------------------------------------------------------------------------------------------
16 MARKET FACTORS - ----------------------------------------------------------------------------------------------------------------------------------- Strength of equity and bond markets, which affects major quote vendors, providing multiple and growing transaction volume and stimulates demand for distribution channels. SEC demand for greater price information. Growing global investments and popularity transparency in municipal bond market, creating new of mutual funds, creating demand for market information opportunities to reach the individual investor. and analysis. Worldwide installed base of screens from - ----------------------------------------------------------------------------------------------------------------------------------- Growth of global financial markets fueled by bank risk, asset-backed securities). New measurements of disintermediation, privatization of state-owned credit and market risk that are gaining wider enterprises, and establishment of market economies acceptance. Growing regulatory pressures/requirements throughout the world. Growth in nontraditional by SEC. Level of transaction volume in U.S. bond market. financial markets (e.g., project finance, counterparty Growth of indigenous local capital markets. - ----------------------------------------------------------------------------------------------------------------------------------- Improving standards of academic achievement. Increased million to 38.7 million by 1999, grades 9 - 12 enrollments spending on textbooks. Growing use of multimedia rising at about 1.7% a year from 14.4 million to 15.2 million technology in schools. Federal funding that continues by 1999. Fragmenting national testing marketplace, which puts to foster use of technology in education. Grades K - 8 more emphasis on state-specific customized programs. enrollments rising at about 1.3% a year from 35.5 - ----------------------------------------------------------------------------------------------------------------------------------- College enrollments rising at about 1.5% a year from 14.6 market. Soaring educational software market, up about 30% to million to 16 million by 2002. Increasing demand for $1.4 billion in 1996. customized course materials and multimedia products in college - ----------------------------------------------------------------------------------------------------------------------------------- Economic growth in Latin America, Asia and Europe. Dramatically Continued demand for English-language training material and increasing enrollments in secondary and college markets. technical and professional information in indigenous languages. - ----------------------------------------------------------------------------------------------------------------------------------- Rising demand for technical and professional information in New opportunities in online distribution of technical and medicine, engineering, business, science, computing and law. professional products. - ----------------------------------------------------------------------------------------------------------------------------------- Change in affiliation in Denver and Bakersfield (from CBS to consumer confidence, auto sales, and home sales levels, ABC), which is expected to improve ratings and increase which will be key determinants of total market advertising compensation over the long term. Political advertising, demand in 1997. - ----------------------------------------------------------------------------------------------------------------------------------- Corporate profits, which affect advertising expenditures. in Asia and Latin America. Growing sales of personal computers Moderate growth in domestic print advertising. New growth with modem and CD-ROM drives. Expansion of digital network. opportunities in international publishing, particularly Extension of franchises into nonmagazine formats. - ----------------------------------------------------------------------------------------------------------------------------------- Primary focus on nonresidential construction, which is less Delivery media to include online, CD-ROM and fax services, susceptible to shifts in interest rates. Increased demand as well as traditional print and microfilm. Information for timely delivery of information. Customers converting product growth that exceeds general construction growth. from print to electronic services. New products that reflect Intensifying competition in the marketplace. increased emphasis on speed, accuracy and ease of use. - ----------------------------------------------------------------------------------------------------------------------------------- Projected 10% annual growth in global information technology gains in computer and communications fields. Commercialization market for the rest of the decade. New product introductions of networks providing opportunity to reach new readers. and rapid growth of home computer market, which are key to - ----------------------------------------------------------------------------------------------------------------------------------- Growth in commercial and business aviation that will help provide clinical and business information. Growing worldwide offset slow growth in aerospace and cutbacks in defense. demand for information on plastics, chemicals and energy. Shift to managed care, which creates new opportunities to - ----------------------------------------------------------------------------------------------------------------------------------- Projected strong growth in international trade throughout GATT, which increase demand for logistics services. the rest of the decade. Rapid market growth for third party Modernization of U.S. Customs, which shifts focus from logistics management. North American Free Trade Zone and transaction-monitoring to audit-based system. - -----------------------------------------------------------------------------------------------------------------------------------
25 17 FINANCIAL REVIEW AND ANALYSIS Operating Results CONSOLIDATED REVIEW
(in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Operating Revenue $ 3,074.7 $ 2,935.3 $ 2,760.9 % Increase 4.7 6.3 25.8 - -------------------------------------------------------------------------------- Operating Profit $ 924.5(a) $ 508.6 $ 451.3 % Increase 81.8 12.7 28.0 - -------------------------------------------------------------------------------- % Operating Margin 30 17 16 - -------------------------------------------------------------------------------- Income before Taxes $ 814.8(a) $ 386.3 $ 345.4 - -------------------------------------------------------------------------------- Net Income $ 495.7(a) $ 227.1 $ 203.1 - --------------------------------------------------------------------------------
(a) Includes gain on the exchange of the Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher Education Group of $418.7 million ($260.5 million after taxes) and one-time charge of $25 million ($14.9 million after taxes) for costs to integrate the company's College Division with the acquired higher education business. REVENUE AND EARNINGS Operating revenue in 1996 grew to $3.1 billion, an increase of 4.7%. Net income was $495.7 million, or $4.96 per share. 1996 net income reflects the impact of the gain on the exchange of the Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher Education Group ($260.5 million, or $2.61 per share) and a one-time charge for costs to integrate the company's College Division with the acquired higher education business ($14.9 million, or 15 cents per share); excluding these items, net income was $250.1 million, or $2.50 per share, compared with $227.1 million, or $2.28 per share, in 1995. 1996 results reflect five cents dilution from the exchange transaction reflecting the timing of integration savings and the typical seasonal decline in higher education business earnings as compared with Shepard's. Operating revenue in 1995 increased $174.4 million, or 6.3%, over 1994 and net income increased $24 million, or 11.8%. Earnings per share reflects the two-for-one stock split of the company's common stock announced on January 31, 1996. On October 15, 1996, the company exchanged its Shepard's/ McGraw-Hill legal publishing unit for the Times Mirror Higher Education Group and other consideration, including $27 million in cash, subject to finalization of a post-closing adjustment. The valuation of the properties exchanged is $485 million, subject to completion of an independent appraisal in 1997. The divestiture of Shepard's and the acquisition of the Times Mirror properties reflect the company's strategy to focus investment and resources in businesses with significant growth opportunities and synergies with its core businesses. The acquisition of the Times Mirror Higher Education properties - Richard D. Irwin, William C. Brown, Brown & Benchmark, Irwin Professional Publishing and Mosby College - establishes the company as the world's largest educational publisher. The company is integrating the College Division with the acquired higher education businesses, encompassing the elimination of over 500 positions and the consolidation of facilities and systems. Most of the integration actions are expected to be completed by mid-1997. In 1995, the company recorded a $23.8 million pretax gain on the sale of the topical publishing division of Shepard's/McGraw-Hill; this gain is reflected as other income on the consolidated statement of income and is included in the operating profit of the Educational and Professional Publishing segment. 1995 earnings reflected a pretax charge of $26.8 million related to the company's "best practices" initiative to improve the efficiency and effectiveness of major systems and processes, including various administrative functions and related technology. The charge primarily represented the costs associated with the elimination of approximately 750 positions, or 5% of the company's work force. The 1995 operating profit of each segment and corporate expenses reflected the amount of the best practices charge associated with each segment. Under the best practices program, the company continued to review opportunities to improve its operations in 1996, including reinvestment in technology applications. Through the end of 1996 most of the targeted 750 positions had been eliminated. Income as a percent of revenue was 8.1% in 1996, excluding the gain and integration charge from the exchange transaction, compared with 7.7% in 1995. Return on average shareholders' equity, excluding the 1996 gain and integration charge from the exchange transaction, was 23.3% in 1996 and 1995. Operating revenue increased $139.4 million in 1996, or 4.7%, reflecting increases in all three operating segments. Educational and Professional Publishing revenue increased $42.3 million, or 3.4%, to $1,278 million, reflecting strong results in educational publishing and higher education offset by a decline in professional publishing's domestic operations. The exchange transaction did not significantly impact year-to-year revenue comparisons as the Times Mirror Higher Education units contributed $59 million in revenue while Shepard's revenue declined $53 million due to the exchange transaction and the divestiture of the topical publishing unit at the end of 1995. Financial Services' revenue increased $69.1 million, or 8.8%, to $856 million, reflecting another record year for Standard & Poor's Ratings Services as well as growth at Standard & Poor's Financial Information Services. Information and Media Services' revenue increased $28.0 million, or 3.1%, to $941 million, due to growth at Business Week, Tower Group International and the Construction Information Group, offsetting declines in Publication Services and Broadcasting. Operating profit for the company, excluding the gain and integration charge from the exchange transaction, improved $22.2 million, or 4.4%, primarily due to Financial Services. Financial Services' operating profit increased $31.2 million, or 13.5%. Operating profit for Standard & Poor's Ratings Services improved due to strong global growth, a strong bond market and new products. Standard & Poor's Financial Information Services also had operating profit growth. Educational and Professional Publishing operating profit, excluding the 1996 gain and integration charge from the 26 18 exchange transaction, was $151.9 million and, excluding 1995's gain from the sale of the Shepard's topical unit and the best practices charge, declined $2.0 million, or 1.3%. However, 1996's operating profit also reflects fourth-quarter dilution from the exchange transaction due to the timing of integration savings and the seasonal decline in earnings in the higher education business; excluding this dilution, segment operating profit would have increased. Operating profit reflects strong results in educational publishing and higher education offset by a decline in Professional Publishing's domestic operations and the impact of development costs for McGraw-Hill Home Interactive. In Information and Media Services, operating profits improved slightly, including last year's best practices charge, but declined when excluding the charge, as improved profits at Business Week and the McGraw-Hill Construction Information Group were offset by declines in Publication Services and Broadcasting. In 1995, operating revenue increased $174.4 million, or 6.3%, reflecting increases in all three operating segments. Educational and Professional Publishing revenues increased $73.4 million, or 6.3%, to $1,236 million, reflecting a strong performance in Educational Publishing. Financial Services' revenues increased $41.3 million, or 5.5%, to $787 million reflecting a then record year for Standard & Poor's Ratings Services, as new issue volume rebounded in the second half of the year due to declining interest rates. Information and Media Services' revenue increased $59.7 million, or 7.0%, to $913 million, due to strong results at Business Week and an acquisition in Tower Group International. Operating profit improved $57.3 million, or 12.7%, with improvement in all three segments. Educational and Professional Publishing had an increase of $36.8 million, reflecting the strong adoption year and the gain on the sale of the Shepard's topical publishing unit of $23.8 million, net of the segment's $15.1 million best practices charge. Financial Services' operating profit increased $13.7 million, or 6.3%, due to the strength at Standard & Poor's Ratings Services and growth at Financial Information Services. In Information and Media Services, operating profit improved $6.8 million, or 6.3%, as Business Week had an excellent year along with small gains at Broadcasting and the McGraw-Hill Construction Information Group. EXPENSES Operating expenses in 1996 increased $104.7 million, or 7.8%, reflecting volume increases associated with higher revenues, investments in new products and modest inflationary increases in key expense categories, such as compensation. Operating expenses include the $25 million one-time integration charge. Combined printing, paper and distribution prices were held to a 1% increase. Declining paper prices helped to lessen the impact of modest printing and distribution increases and the effect of higher priced 1995 inventory. Selling and general expenses increased $7.2 million, less than 1%, as costs associated with the increase in revenue were largely offset by nonvolume-related cost reductions. A significant portion of both operating and selling and general expenses is compensation, which increased approximately 5.4% to $850 million in 1996, reflecting primarily the impact of merit increases and expansion at Standard & Poor's Ratings Services, net of reduced headcount from the best practices program. Depreciation and amortization expense, including amortization of goodwill, intangible assets and prepublication costs, increased $7.2 million, or 3.1%, due primarily to the impact of the acquisition of the Times Mirror Higher Education Group. The ratio of operating, selling and general and amortization and depreciation expenses to total revenue in 1996 was 86.2% compared with 86.3% in 1995. In 1997, paper, printing and distribution prices are expected to decline slightly, due primarily to declining paper prices, successful negotiations with suppliers and increased leverage gained through the acquisition of the Times Mirror Higher Education Group. The impact of merit increases on compensation costs should approximate 4%. Amortization expenses will increase, reflecting the intangible assets associated with the acquisition of Times Mirror Higher Education and larger prepublication cost investment associated with the major school adoptions. Operating expenses in 1995 increased $92 million, or 7.4%, due to volume increases, higher paper costs, modest inflationary increases in key expense categories, such as compensation, and the best practices charge. Selling and general expenses increased $54 million, or 6.0%, due to increased revenues. Depreciation and amortization expenses were flat compared with the prior year. INTEREST EXPENSE Net interest expense in 1996 was $47.7 million compared with $58.8 million in 1995, a decrease of $11.1 million, resulting from a reduction in average commercial paper interest rates from 6.0% in 1995 to 5.4% in 1996 and reduced commercial paper borrowing levels from the prior year due to paydowns from the company's operating cash flow. In 1995, net interest expense increased $7.1 million, reflecting an increase in average commercial paper interest rates from 4.2% in 1994 to 6.0% in 1995, net of lower borrowing levels. PROVISION FOR INCOME TAXES The provision for taxes as a percent of income before taxes was 40.6% in 1996, excluding the gain on the exchange of the Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher Education Group. Including the gain on the exchange transaction, the effective tax rate was 39.2% due to a lower state tax rate on the gain. The effective tax rate was 41.2% in 1995 and 1994. The reduction in the effective tax rate to 40.6% reflects the declining impact of nondeductible goodwill amortization on higher pretax earnings as well as the favorable settlement of state tax audits. 27 19 FINANCIAL REVIEW AND ANALYSIS Segment Review EDUCATIONAL AND PROFESSIONAL PUBLISHING
(in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Operating Revenue $ 1,277.9 $ 1,235.6 $ 1,162.2 % Increase 3.4 6.3 74.1 - -------------------------------------------------------------------------------- Operating Profit $ 545.7(a) $ 162.6(b) $ 125.8 % Increase 235.6 29.3 154.7 - -------------------------------------------------------------------------------- % Operating Margin 43 13 11 - --------------------------------------------------------------------------------
(a) Includes the pretax gain on the exchange of Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher Education Group of $418.7 million and a one-time charge of $25 million for costs to integrate the company's College Division with the acquired higher education business. (b) Includes the pretax gain on the sale of the Shepard's/McGraw-Hill topical publishing unit of $23.8 million and a best practices charge of $15.1 million. The Educational and Professional Publishing segment consists of three operating groups: Educational Publishing; Higher Education; and Professional Publishing (including International Publishing, Continuing Education Center, Professional Book and Medical Publishing). On October 15, 1996, the company's Shepard's/ McGraw-Hill legal publishing unit was exchanged for the Times Mirror Higher Education Group, which is reflected from the date of acquisition in the company's Higher Education operating group. The Educational and Professional Publishing segment revenue increased $42.3 million, or 3.4%, in 1996. The increase reflects growth in educational, higher education and international publishing and the acquisition of Open Court Publishing, partially offset by a decline in Professional Publishing's domestic operations. Operating profit, excluding the unusual items in 1996 and 1995 noted above, of $151.9 million declined $2.0 million, or 1.3%, reflecting development costs for McGraw-Hill Home Interactive and dilution due to the timing of integration savings and the seasonal decline in earnings in the higher education business resulting from the exchange transaction. In 1995, segment revenue increased $73.4 million, or 6.3%, reflecting robust sales in the educational marketplace during the strong 1995 adoption year and growth in higher education, professional and legal publishing. 1995 operating profit, excluding the pretax gain on the sale of the Shepard's topical business and the best practices charge, improved $28.1 million, or 22.3%, to $153.9 million reflecting the strong revenue performance. EDUCATIONAL PUBLISHING The Educational Publishing Group primarily comprises five divisions: McGraw-Hill School, publisher of textbooks and instructional materials for elementary (grades K - 8) schools; Glencoe/McGraw-Hill, secondary school (grades 7 - 12) and postsecondary publisher; California Testing Bureau (CTB/McGraw-Hill), producer of publications and provider of scoring for standardized achievement tests, customized testing and specialized educational software products; Science Research Associates (SRA/McGraw-Hill), developer of supplementary elementary and secondary instructional materials; and McGraw-Hill Home Interactive, developer of educational products for the home. The Educational Publishing Group had revenues of $627 million in 1996, 49% of segment revenues. Revenues increased 5.1% from 1995. The Group had an excellent performance in 1996, despite an off-adoption year, as Glencoe/ McGraw-Hill achieved impressive revenue and profit growth through increased sales in both open territories and adoption states, particularly science, social studies and math. McGraw-Hill School revenues and profits declined from 1995, reflecting fall-off from last year's Texas music adoption. SRA/McGraw-Hill's results improved from last year's excellent performance as the acquisition of Open Court Publishing and sales of direct instruction materials more than offset revenue declines from last year's Texas Early Childhood adoption. CTB/McGraw-Hill's higher revenue and profits reflect growth in custom contracts and the introduction of the TerraNova testing series. McGraw-Hill Home Interactive launched four multimedia educational titles at the end of 1996 in the consumer retail market; this unit has been merged into the educational publishing operations in 1997 to leverage development and marketing resources. In 1997, the adoption cycle improves, with reading in California for McGraw-Hill School and SRA/McGraw-Hill and social studies in Texas for McGraw-Hill School. Glencoe/McGraw-Hill, having less adoption opportunity in 1997, will be more dependent on open territories. In 1995, Educational Publishing achieved double-digit increases in revenues and profit as Glencoe/McGraw-Hill had then record-setting revenues and profits; McGraw-Hill School sales showed modest growth, aided by strong music revenues in Texas; and SRA/McGraw-Hill had a very significant increase in revenues and profits due to Early Childhood program sales in Texas. HIGHER EDUCATION The Higher Education Group - McGraw-Hill's College Division and the recently acquired Times Mirror Higher Education Group - reported 1996 revenues of $205 million, 16% of segment revenues. McGraw-Hill's College Division had higher revenues in 1996, reflecting stronger frontlist sales, including McConnell's Economics and Meigs & Meigs' Accounting revisions; higher backlist sales, particularly social sciences and humanities; and double-digit revenue growth in Primis Custom Publishing. The former Times Mirror Higher Education college units contributed $54 million in revenue since the acquisition in mid-October. Higher Education profits improved significantly from 1995 due to the revenue increase and continued expense controls. In 1997, the Higher Education Group will continue the integration program begun in 1996 with the elimination of more than 500 positions and the consolidation of facilities and systems. Revenues and profits are expected to improve, reflecting the full year impact of the former Times Mirror units. Enrollment trends are improving; however, students remain sensitive to the perceived high prices of books, and used books continue to be a factor in the marketplace. 28 20 In 1995, Higher Education's revenue increased, driven by a strong frontlist performance and growth in Primis Custom Publishing; profit improvement reflected the increased revenue, expense controls and savings associated with consolidation of certain book operating functions. PROFESSIONAL PUBLISHING The Professional Publishing Group had revenues of $389 million in 1996, 30% of segment revenue. 1996's revenue increased approximately 1% as increased international revenues were offset by a decline in domestic revenues, reflecting a difficult retail book market, a reduced publishing program, and lower completion rates at the Continuing Education Center. Internationally, despite a slow recovery in Mexico, where the company has a significant publishing presence, revenues and profits improved due to excellent results in the secondary school market in Spain and $5 million in sales of Times Mirror products in the fourth quarter. 1996 profits declined due to the domestic operating performance. In 1997, the Professional Publishing Group will benefit from the international sales potential of the former Times Mirror titles and an increased publishing plan, including the 8th edition of the Encyclopedia of Science and Technology and the 14th edition of Harrison's Principles of Internal Medicine. In 1995, the Professional Publishing Group achieved modest revenue growth despite the negative economic conditions experienced in Mexico as the Asia Pacific and non-Mexican Spanish language markets were vigorously pursued and domestic revenues benefited from expanded publishing in the business, computing and engineering lines. 1995 profits increased as a result of continued margin improvement and focus on operating efficiencies. SHEPARD'S/MCGRAW-HILL The Legal Information Group (Shepard's/McGraw-Hill) had revenues of $57 million in 1996, 5% of segment revenues. 1996 revenue declined $53 million, or 48%, from 1995 reflecting the divestiture of the topical publishing unit at the end of 1995, the 1995 publication of the Federal Citations, and the exchange for the Times Mirror Higher Education Group on October 15, 1996. 1996 profits declined accordingly. FINANCIAL SERVICES
(in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Operating Revenue $ 855.9 $ 786.8 $ 745.5 % Increase 8.8 5.5 7.0 - -------------------------------------------------------------------------------- Operating Profit $ 262.1 $ 230.9 $ 217.2 % Increase 13.5 6.3 8.1 - -------------------------------------------------------------------------------- % Operating Margin 31 29 29 - --------------------------------------------------------------------------------
The Financial Services segment consists of two operating groups: Standard & Poor's Ratings Services and Standard & Poor's Financial Information Services, which comprises Financial Data Services (Standard & Poor's MMS, Standard & Poor's Platt's, and Standard & Poor's ComStock); Equity Services (Standard & Poor's Equity Investor Services, Standard & Poor's Compustat and Standard & Poor's Securities, Inc.); Municipal Securities Services (Standard & Poor's J.J. Kenny Drake, Standard & Poor's J.J. Kenny Evaluation Services, Standard & Poor's J.J. Kenny Information Services and CUSIP Service Bureau) and DRI/McGraw-Hill. Financial Services revenue increased 8.8% to $856 million and operating profit rose 13.5% to $262.1 million in 1996. In 1995, the segment's revenue grew 5.5% and operating profit rose 6.3% to $230.9 million. 1995 operating profit reflects a $4.1 million best practices charge. STANDARD & POOR'S RATINGS SERVICES Standard & Poor's Ratings Services revenue rose in 1996 on higher bond market issuance in the U.S. municipal, corporate and structured markets, primarily reflecting a favorable interest rate environment and increasing demand for funds by noninvestment grade issuers. Structured Finance revenues grew, reflecting strong issuance in asset-backed and commercial real estate markets. Nontraditional revenues also continued to grow in areas such as corporate credit ratings, insurance ratings and mutual fund ratings along with continued product line diversification. International revenue also grew, substantially in 1996, reflecting the now 100% ownership of Standard & Poor's ADEF, the former 50% joint venture in France, as well as continued global growth, particularly in Asia and Europe. Standard & Poor's Ratings expansion of its global franchise continued with cooperative agreements signed with Pefindo in Indonesia and Feller-Rate in Chile. Regional expansion in the U.S. continued with the opening of an office in Dallas to serve southwestern states. Operating profits also rose significantly, reflecting the higher revenues, while funding increased investments in global expansion and product diversification. In 1997, Ratings Services anticipates another strong year, dependent on a continuation of the favorable interest rate environment and healthy bond market issuance, including noninvestment grade corporate debt. Investment in growth areas will continue in 1997. In 1995, Standard & Poor's Ratings Services revenue increased over 1994 despite a decline in municipal bond issuance and early year softness in the corporate bond market. As interest rates declined during the year, new issuance volume in the corporate bond market rebounded. Increases in asset-backed securities volume enabled the Structured Finance unit to post excellent financial results, despite a significant decline in mortgage-backed securities volume. Worldwide expansion continued with a cooperation agreement with CRISIL, India's leading rating agency, and the opening of new offices in Hong Kong and Singapore. Product line diversification also contributed as new products and initiatives produced solid growth. 1995 operating profits improved, reflecting the increased revenues net of continuing investments. 29 21 FINANCIAL REVIEW AND ANALYSIS Segment Review (continued) STANDARD & POOR'S FINANCIAL INFORMATION SERVICES Standard & Poor's Financial Information Services' 1996 revenue grew at a modest rate. Despite downward pressure in certain market segments, year-to-year revenue growth was fueled primarily by international market expansion and a healthy demand for equity-related information and services stimulated by the continued growth of the stock market. The Group also experienced increased demand in electronic subscription products, which continue to supplant a larger portion of print product. Increased sales of data products have been a significant contributor to revenue growth at Standard & Poor's ComStock, Standard & Poor's Compustat and the nonconsulting business at DRI/McGraw-Hill. Standard & Poor's Platt's and Standard & Poor's MMS had higher revenue where demand for electronic delivered information on fixed income securities and energy services drove year-to-year growth. Negatively influencing revenue performance during the year was a continued contraction in the domestic municipal bond market. The trend of higher redemptions by state and local municipalities caused a decline at Municipal Securities Services. Greater competitive pressure in the corporate market and reduced government contracts have hampered demand for consulting services offered by DRI/McGraw-Hill, resulting in a revenue decline. Operating profit grew at a greater rate than revenue due to strong expense controls. In 1997, Standard & Poor's Financial Information Services will sharpen its focus toward its core customer base through a realignment of the operating units which will focus on five customer segments: Retail, Consumer, Broker/Dealer, Money Manager and Corporate with strategic focus on the informational needs of investors and international product development. In 1995, Standard & Poor's Financial Information Services experienced increases in revenue and operating profit reflecting growth in international markets, as domestic revenue growth was negatively impacted by a severe contraction in the municipal securities market and weaker demand for print-based subscription products. INFORMATION AND MEDIA SERVICES
(in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Operating Revenue $ 940.9 $ 912.9 $ 853.2 % Increase 3.1 7.0 2.7 - -------------------------------------------------------------------------------- Operating Profit $ 116.8 $ 115.1 $ 108.3 % Increase 1.5 6.3 5.9 - -------------------------------------------------------------------------------- % Operating Margin 12 13 13 - --------------------------------------------------------------------------------
The Information and Media Services segment comprises three operating groups: Information Services (Business Week, Publication Services, Information Technology and Communications, Datapro Information Services and Tower Group International); McGraw-Hill Construction Information Group and Broadcasting. The Information and Media Services segment's revenues increased 3.1% to $941 million in 1996 and operating profit increased $1.7 million, or 1.5%, to $116.8 million. In 1995, revenue increased 7.0% and operating profit increased $6.8 million, or 6.3%, to $115.1 million. 1995 operating profit reflects a best practice charge of $6.3 million. INFORMATION SERVICES The Information Services Group had 1996 revenues of $565 million, 60% of segment revenues. Revenues increased $24 million, or 4.3%. Business Week revenue and operating profit grew in 1996 as advertising and circulation margins increased significantly versus 1995. Investment in technology, electronic publishing and international circulation continued. North American advertising pages, as measured by the Publishers Information Bureau, were up 1.9%. A successful 1997 is dependent upon continued strength in the domestic advertising market and continued success in the expansion in international markets. In 1995, revenues and margins were up substantially despite large paper price increases. North American advertising pages were up 4.8% and significant investments in technology and international circulation were made. Publication Services comprises the Aviation Week, Healthcare Publications and Science and Technology groups. The Aviation Week Group's revenue grew in 1996, reflecting increased advertising pages and the successful launching of several multimedia products and services. The Healthcare Publications revenue grew significantly in 1996 due to a strong advertising market, several new ancillary products and services, and the acquisition of Healthcare Informatics and InfoCare magazines late in the year. The Science and Technology Group's revenue declined in 1996 due to a fall in advertising from major chemical and plastics exhibitions held in 1995 and not in 1996, in addition to a declining utility advertising marketplace. Operating profit in 1996 increased modestly, reflecting the revenue increase partially offset by additional investments. In 1997, Publication Services expects to expand its portfolio of multimedia products and should benefit from the full year impact of the 1996 Healthcare Publications acquisitions. In 1995, Publication Services revenues increased, reflecting the acquisition of Hospital Practice magazine and strong advertising growth at Modern Plastics International; profits increased modestly. The Information Technology and Communications and the Datapro Information Services groups revenue declined in 1996. Data Communications magazine grew slightly while LAN Times, BYTE and Datapro declined. Operating profit declined significantly, reflecting the revenue decline and investments, including the launch of tele.com magazine. In 1997, these groups will continue to focus on electronic media and new services and growth in circulation. In 1995, revenue and profit were flat as growth for LAN Times and Data Communications was offset by a decline in advertising pages for BYTE and the shutdown of Open Computing. 30 22 Tower Group International revenue and operating profit increased in 1996 due to strong growth from the expansion of inbound air transportation, drawback and professional advisory services. Additional revenue was generated by key national accounts in the expanded San Francisco office and new offices in Indianapolis and Philadelphia. The full year impact of the April 1995 acquisition of UCB Canada also contributed. In 1997, import activity is expected to grow at a comparable rate to 1996 and the Group intends to continue to invest in expanded service offerings. In 1995 Tower Group International experienced significant revenue growth as a result of the acquisition of UCB Canada, expansion of service capabilities and generally favorable market conditions for core import services. 1995 operating profit declined slightly as investments in new logistics services and products combined with the development of a national sales and marketing organization offset the year-to-year revenue growth. CONSTRUCTION INFORMATION The McGraw-Hill Construction Information Group had 1996 revenue of $260 million, 28% of segment revenues. Revenue increased due to gains at F.W. Dodge, Sweet's, Architectural Record and Engineering News-Record. F.W. Dodge's revenue growth outpaced its 1995 growth rate, Sweet's revenue growth came from electronic products, and the construction magazines had an increase in advertising pages. Operating profit increased over 1995 due to the revenue growth and expense savings. Total U.S. construction contract value was up 6% versus the prior year; however, the key nonresidential sector reported an increase of only one-half of one percent. Electronic products continued to show strong growth in 1996 with Dodge Dataline and Sweet's electronic products growing approximately 15%. In 1997, the contract value of total nonresidential building is expected to rise, fostering a more positive environment. New electronic products, product extensions and enhancements and opportunity-based partnerships and alliances should benefit the Group. In 1995, revenues increased primarily due to Sweet's advertising page and electronic revenue growth, while Dodge had a small increase in revenue and advertising revenue for the construction magazines was down slightly. 1995 profits increased modestly. BROADCASTING Broadcasting had 1996 revenue of $116 million, 12% of segment revenue. The Broadcasting Group operates four television stations: VHF stations in Denver, Indianapolis and San Diego and a UHF station in Bakersfield, California. All four stations are ABC affiliates. Broadcasting revenue for 1996 was slightly lower than the record level achieved in 1995 as performance was hampered by declining ratings in ABC network prime time and early morning programs. Advertiser spending in the San Diego market was also below expectations. Political advertising in all four markets was strong and reached a record level in 1996. In 1997, the Broadcasting Group will face the loss of political advertising. Substantial cost savings measures have been implemented in anticipation of that revenue loss in order to seek profit improvement during 1997. In 1995, revenue and operating profit increased modestly to record levels, despite the lack of political advertising following a strong 1994 election year. 1995 performance was enhanced by increased network compensation for the Denver station and the switch in Denver's affiliation in September from CBS to ABC. LIQUIDITY AND CAPITAL RESOURCES
(in millions) 1996 1995 - --------------------------------------------------------------------- Working Capital $ 130.9 $ 193.3 - --------------------------------------------------------------------- Total Debt $ 581.4 $ 628.7 - --------------------------------------------------------------------- Accounts Receivable (before reserves) $1,041.7 $ 935.4 % Increase 11 12 - --------------------------------------------------------------------- Inventories $ 273.2 $ 238.0 % Increase 15 12 - --------------------------------------------------------------------- Investment in Prepublication Costs $ 183.0 $ 134.1 % Increase 36 13 - --------------------------------------------------------------------- Purchases of Property and Equipment $ 63.3 $ 58.8 % Increase/(Decrease) 8 (24) - ---------------------------------------------------------------------
The company continues to maintain a strong financial position. Cash flow from operations increased to $460.2 million in 1996, an increase of $26.9 million, which was sufficient to cover dividends, outlays for the purchase of property and equipment, investment in publishing programs, and the repurchase of common shares while also reducing commercial paper borrowings. 1995's cash flow from operations was $433 million, an increase of $19.3 million from 1994. Working capital at the end of 1996 of $131 million was $62 million below the level at the end of 1995, primarily reflecting income taxes payable on the gain on exchange of Shepard's/McGraw-Hill and the impact of integration and acquisition liabilities partially offset by the excess of Times Mirror Higher Education's current assets over liabilities. The company's earnings and cash flow are significantly impacted by the seasonality of some of its businesses, particularly educational publishing. The first quarter is the least significant to the company, accounting for 19% of revenues and only 6% of income in 1996 excluding the net one-time gain from the exchange transaction. The third quarter of the year is the most significant to the company, generating nearly half of full year earnings. This seasonality also impacts cash flow and related borrowing patterns. The company typically borrows in the first half of the fiscal year and generates cash in the second half of the year, primarily from fourth quarter collections from customers in the education markets. This pattern is magnified in years where there is significant state adoption activity, such as in 1995 and 1997, 31 23 FINANCIAL REVIEW AND ANALYSIS Liquidity and Capital Resources (continued) where there are significant sales and marketing expenses in the first half of the year. The acquisition of the Times Mirror Higher Education Group will further impact the seasonality of the company's results. In 1996, total debt decreased $47.3 million, reflecting the retirement of commercial paper borrowings resulting from the company's positive cash flow. Total debt as a percentage of total capital improved to 29.9% at the end of 1996 from 37.8% at the end of 1995. In 1995, total debt decreased $134.1 million, reflecting the retirement of commercial paper borrowings resulting from the company's positive cash flow. The company's commercial paper borrowings at December 31, 1996 were $322.1 million. Commercial paper debt is supported by a $800 million revolving credit agreement with a group of banks terminating in February 2002, and $300 million has been classified as long-term. There are no amounts outstanding under this agreement. The company has $250 million of 9.43% senior notes due in the year 2000. Under a shelf registration that became effective with the Securities and Exchange Commission in mid-1990, the company can issue an additional $250 million of debt securities. The new debt could be used to replace a portion of the commercial paper borrowings with longer term securities, when and if interest rates are attractive and markets are favorable. Accounts receivable (before reserves) increased $106.4 million, or 11.4%, primarily as a result of increased revenues and the acquisitions of Times Mirror Higher Education and Open Court. The increase in the accounts receivable reserve, which includes the allowance for sales returns in 1996 and 1995, reflects the acquisition of Times Mirror Higher Education. The year-to-year increase was effectively controlled through timely collections. A portion of the increase was in international markets, where terms of sale and repayment are traditionally longer. Number of days sales outstanding, a key indicator of collection efficiency, decreased four days at year end due to improved billing and collection efforts at various business units. Finished goods and work-in-process inventories increased $37.9 million, or 18.8%, primarily due to the addition of Times Mirror Higher Education and Open Court inventory. Raw material inventory, primarily paper, declined $2.8 million, reflecting the timing of paper purchases. Capital expenditures for the purchase of property and equipment totaled $63.3 million in 1996 compared with $58.8 million in 1995. In 1996 and 1995, expenditures were primarily for computer equipment for business units and corporate departments. In 1997, purchases of property and equipment are expected to increase in the range of 20%-30% as the company continues the integration of the Times Mirror Higher Education Group. Net prepublication costs increased to $353.1 million at December 31, 1996, as 1996 spending exceeded amortization expense and Times Mirror Higher Education and Open Court prepublication costs were added. Prepublication investment totaled $183.0 million in 1996, an increase over 1995 of $48.9 million, reflecting spending for the 1997 and 1998 adoption year programs as well as Higher Education and Professional Publishing titles. 1997 prepublication spending is expected to increase approximately 10%-20% from 1996 levels, reflecting the addition of Times Mirror Higher Education. On January 31, 1996, the company's Board of Directors approved a stock repurchase program authorizing the purchase of up to four million shares of the company's common stock. As of December 31, 1996, 1.4 million common shares have been repurchased at a cost of $63.3 million. The repurchased shares were financed from internally generated funds. The repurchased shares will be used for general corporate purposes, including the issuance of shares for the exercise of employee stock options. On January 29, 1997, the company announced an increase in the quarterly common stock dividend of three cents, or 9.1%, to 36 cents per share. In 1997, the company expects that cash flow from operations will be sufficient to cover dividends, outlays for the purchase of property and equipment and investment in publishing programs, and spending associated with integration actions. Debt levels will be impacted by borrowings for the tax payment on the gain from the exchange transaction of approximately $170 million in March 1997 and expenditures related to the share repurchase program. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This section, as well as other portions of this document, includes certain forward-looking statements about the company's business, new products, sales, expenses, cash flows and operating and capital requirements. Such forward-looking statements include, but are not limited to: the timing of integration actions related to the Times Mirror Higher Education Group; future paper, printing and distribution prices; future compensation cost merit increase rates; Educational Publishing's level of success in 1997 adoptions; the contribution to revenue and profit increases from the former Times Mirror Higher Education businesses; the strength of profit levels at Standard & Poor's Ratings Services; Business Week's success in expansion into international markets; the strength of the domestic advertising market; the level of import activity; the contract value of nonresidential building; McGraw-Hill Construction Information Group's ability to introduce new electronic products, product extensions and enhancements; Broadcasting's ability to reduce costs and achieve profit improvement; the level of future cash flow, debt levels, capital expenditures and prepublication cost investment. Actual results may differ materially from those in any forward-looking statements because any such statements involve risks and uncertainties and are subject to change based on various important factors, including but not limited to worldwide economic and political conditions, the health of capital and equity markets, the successful marketing of new products, the effect of competitive products and pricing, and the timing of reducing costs in the newly merged higher education businesses. 32 24 CONSOLIDATED STATEMENT OF INCOME
Years ended December 31 (in thousands, except per-share data) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- OPERATING REVENUE $3,074,697 $2,935,283 $2,760,869 - ---------------------------------------------------------------------------------------------------------------------- EXPENSES: Operating 1,445,028 1,340,348 1,248,306 Selling and general 968,103 960,875 906,878 Depreciation and amortization 238,558 231,408 230,026 - ---------------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES 2,651,689 2,532,631 2,385,210 Gain on exchange of Shepard's/McGraw-Hill (Note 3) 418,731 -- -- Other income - net (Note 2) 20,724 42,385 21,527 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 862,463 445,037 397,186 Interest expense - net 47,656 58,766 51,746 - ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES ON INCOME 814,807 386,271 345,440 Provision for taxes on income (Note 7) 319,074 159,144 142,321 - ---------------------------------------------------------------------------------------------------------------------- NET INCOME $ 495,733 $ 227,127 $ 203,119 - ---------------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE (NOTE 1) $ 4.96 $ 2.28 $ 2.05 Average number of common shares outstanding during year (Note 1) 99,997 99,752 98,998 - ----------------------------------------------------------------------------------------------------------------------
See accompanying notes. 33 25 CONSOLIDATED BALANCE SHEET
December 31 (in thousands, except share data) 1996 1995 - ------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and equivalents (Note 1) $ 3,430 $ 10,250 Accounts receivable (net of allowances for doubtful accounts and sales returns: 1996 - $162,260; 1995 - $127,202) 879,466 808,150 Receivable from broker-dealers and dealer banks (Note 1) 2,473 9,674 Inventories: Finished goods 219,295 185,608 Work-in-process 19,887 15,675 Paper and other materials 33,976 36,747 - ------------------------------------------------------------------------------------------------------------------- Total inventories 273,158 238,030 Prepaid income taxes 106,464 67,128 Prepaid and other current assets 84,592 59,351 - ------------------------------------------------------------------------------------------------------------------- Total current assets 1,349,583 1,192,583 - ------------------------------------------------------------------------------------------------------------------- PREPUBLICATION COSTS (net of accumulated amortization: 1996 - $486,960; 1995 - $391,384) (Note 1) 353,064 268,200 INVESTMENTS AND OTHER ASSETS Investment in Rock-McGraw, Inc. - at equity (Note 6) 66,899 61,797 Prepaid pension expense 104,515 98,177 Other 150,373 141,861 - ------------------------------------------------------------------------------------------------------------------- Total investments and other assets 321,787 301,835 - ------------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT - AT COST Land 19,196 19,365 Buildings and leasehold improvements 285,123 297,796 Equipment and furniture 531,361 510,146 - ------------------------------------------------------------------------------------------------------------------- Total property and equipment 835,680 827,307 Less - accumulated depreciation 524,187 491,178 - ------------------------------------------------------------------------------------------------------------------- Net property and equipment 311,493 336,129 - ------------------------------------------------------------------------------------------------------------------- GOODWILL AND OTHER INTANGIBLE ASSETS - AT COST (net of accumulated amortization: 1996 - $411,606; 1995 - $366,277) (Notes 1 and 3) 1,306,312 958,420 - ------------------------------------------------------------------------------------------------------------------- $3,642,239 $3,057,167 - -------------------------------------------------------------------------------------------------------------------
See accompanying notes. 34 26
1996 1995 - ----------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable (Note 5) $ 24,518 $ 71,299 Accounts payable 241,736 215,179 Payable to broker-dealers and dealer banks (Note 1) 2,400 7,469 Accrued royalties 89,789 63,582 Accrued compensation and contributions to retirement plans 142,235 124,800 Income taxes currently payable 235,573 70,405 Unearned revenue 229,216 241,816 Other current liabilities 253,196 204,687 - ----------------------------------------------------------------------------------------------------------- Total current liabilities 1,218,663 999,237 - ----------------------------------------------------------------------------------------------------------- OTHER LIABILITIES Long-term debt (Note 5) 556,850 557,365 Deferred income taxes 150,319 140,531 Accrued postretirement healthcare and other benefits 198,709 200,100 Other non-current liabilities 156,580 124,868 - ----------------------------------------------------------------------------------------------------------- Total other liabilities 1,062,458 1,022,864 - ----------------------------------------------------------------------------------------------------------- Total liabilities 2,281,121 2,022,101 - ----------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 8) - ----------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY (Notes 9 and 10) $1.20 preference stock, $10 par value: authorized - 891,256 shares; outstanding - 1,388 shares in 1996 and 1,416 in 1995 14 14 Common stock, $1 par value: authorized - 150,000,000 shares; issued - 102,919,060 shares in 1996 and 102,918,876 in 1995 102,919 102,919 Additional paid-in capital 37,473 26,740 Retained income 1,394,884 1,030,526 Foreign currency translation adjustments (57,302) (56,247) - ----------------------------------------------------------------------------------------------------------- Less - common stock in treasury - at cost (3,388,398 shares in 1996 and 2,775,996 in 1995) 107,410 60,778 Unearned compensation on restricted stock 9,460 8,108 - ----------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,361,118 1,035,066 - ----------------------------------------------------------------------------------------------------------- $ 3,642,239 $ 3,057,167 - -----------------------------------------------------------------------------------------------------------
35 27 CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31 (in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 495,733 $ 227,127 $ 203,119 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 71,097 67,916 64,281 Amortization of goodwill and intangibles 39,190 38,548 37,489 Amortization of prepublication costs 128,271 124,944 128,256 Provision for losses on accounts receivable 65,116 65,385 67,508 Gain on exchange of Shepard's/McGraw-Hill for the Times Mirror Higher Education Group (418,731) -- -- Gain on sale of topical publishing -- (23,782) -- Provision for one-time integration costs 25,000 -- -- Other 5,839 6,120 3,862 Change in assets and liabilities net of effect of acquisitions and dispositions: Increase in accounts receivable (118,235) (144,007) (117,139) (Increase)/decrease in inventories 4,000 (30,804) (7,026) Increase in prepaid and other current assets (15,880) (7,957) (6,549) Increase/(decrease) in accounts payable and accrued expenses 40,717 51,697 (7,460) Increase/(decrease) in unearned revenue 13,770 2,894 (9,088) Increase/(decrease) in other current liabilities (11,010) 6,670 2,935 Increase in interest and income taxes currently payable 166,646 23,913 12,293 Increase/(decrease) in prepaid/deferred income taxes (24,807) 18,913 39,048 Net change in other assets and liabilities (6,564) 5,659 2,390 - ----------------------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 460,152 433,236 413,919 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Investment in prepublication costs (182,978) (134,118) (118,377) Purchase of property and equipment (63,313) (58,776) (77,068) Acquisition of businesses and equity interests (31,195) (36,246) (1,219) Proceeds from exchange of Shepard's/McGraw-Hill for the Times Mirror Higher Education Group 27,258 -- -- Disposition of property, equipment and businesses 9,352 35,481 12,962 Other 689 700 2,655 - ----------------------------------------------------------------------------------------------------------------------------------- Cash used for investing activities (240,187) (192,959) (181,047) - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Dividends paid to shareholders (131,375) (119,653) (114,317) Repayment of commercial paper and other short-term debt - net (46,696) (133,700) (165,785) Repurchase of treasury shares (63,314) -- -- Exercise of stock options 19,869 20,616 13,983 Other (4,928) (3,133) (1,767) - ----------------------------------------------------------------------------------------------------------------------------------- Cash used for financing activities (226,444) (235,870) (267,886) - ----------------------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (341) (2,213) (4,883) - ----------------------------------------------------------------------------------------------------------------------------------- Net change in cash and equivalents (6,820) 2,194 (39,897) Cash and equivalents at beginning of year 10,250 8,056 47,953 - ----------------------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $ 3,430 $ 10,250 $ 8,056 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes. 36 28 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended December 31, 1996, 1995 and 1994
Foreign Less - $1.20 Additional currency common stock preference Common paid-in Retained translation in treasury (in thousands, except per-share data) $10 par $1 par capital income adjustments at cost - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 $ 16 $102,918 $12,053 $ 834,250 $(28,577) $ 87,687 Net income -- -- -- 203,119 -- -- Dividends ($1.16 per share) -- -- -- (114,317) -- -- Exercise of stock options -- -- 3,513 -- -- (10,470) Restricted stock -- -- 2,242 -- -- (707) Foreign currency translation adjustments - net -- -- -- -- (16,647) -- Other (1) -- 47 -- -- 477 - ------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1994 15 102,918 17,855 923,052 (45,224) 76,987 Net income -- -- -- 227,127 -- -- Dividends ($1.20 per share) -- -- -- (119,653) -- -- Exercise of stock options -- -- 5,685 -- -- (14,931) Restricted stock -- -- 3,152 -- -- (1,539) Foreign currency translation adjustments - net -- -- -- -- (11,023) -- Other (1) 1 48 -- -- 261 - ------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1995 14 102,919 26,740 1,030,526 (56,247) 60,778 Net income -- -- -- 495,733 -- -- Dividends ($1.32 per share) -- -- -- (131,375) -- -- Share repurchase -- -- -- -- -- 63,314 Exercise of stock options -- -- 3,886 -- -- (15,983) Restricted stock -- -- 6,756 -- -- (1,096) Foreign currency translation adjustments - net -- -- -- -- (1,055) -- Other -- -- 91 -- -- 397 - ------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1996 $ 14 $102,919 $37,473 $1,394,884 $(57,302) $ 107,410 - ------------------------------------------------------------------------------------------------------------------------
Less - unearned compensation on restricted stock Total - ----------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 $ 9,965 $ 823,008 Net income -- 203,119 Dividends ($1.16 per share) -- (114,317) Exercise of stock options -- 13,983 Restricted stock (1,388) 4,337 Foreign currency translation adjustments - net -- (16,647) Other -- (431) - ----------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 8,577 913,052 Net income -- 227,127 Dividends ($1.20 per share) -- (119,653) Exercise of stock options -- 20,616 Restricted stock (469) 5,160 Foreign currency translation adjustments - net -- (11,023) Other -- (213) - ----------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 8,108 1,035,066 Net income -- 495,733 Dividends ($1.32 per share) -- (131,375) Share repurchase -- (63,314) Exercise of stock options -- 19,869 Restricted stock 1,352 6,500 Foreign currency translation adjustments - net -- (1,055) Other -- (306) - ----------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 $ 9,460 $1,361,118 - -----------------------------------------------------------------------
See accompanying notes. 37 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Principles of consolidation. The consolidated financial statements include the accounts of all subsidiaries and the company's share of earnings or losses of joint ventures and affiliated companies under the equity method of accounting. All significant intercompany accounts and transactions have been eliminated. Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash equivalents. Cash equivalents consist of highly liquid investments with maturities of three months or less at the time of purchase. Inventories. Inventories are stated at the lower of cost (principally first-in, first-out) or market. Prepublication costs. Prepublication costs, principally outside preparation costs, are amortized from the year of publication over their estimated useful lives, primarily three to five years, using either the sum-of-the-years-digits or the straight-line method. It is the company's policy to evaluate the remaining lives and recoverability of such costs, which is often dependent upon program acceptance by state adoption authorities. Goodwill and other intangible assets. Goodwill and other intangible assets that arose from acquisitions either consummated or initiated prior to November 1, 1970 are not amortized unless there has been a reduction in the value of the related assets. Goodwill and other intangible assets arising subsequent to November 1, 1970 of $1.7 billion at December 31, 1996 and $1.3 billion at December 31, 1995 are being amortized over periods of up to 40 years. The company periodically reviews its goodwill to determine if any impairment exists based upon projected, undiscounted net cash flows of the related business unit. Receivable from/payable to broker-dealers and dealer banks. A subsidiary of J.J. Kenny Co. acts as an undisclosed agent in the purchase and sale of municipal securities for broker-dealers and dealer banks, and the company had matched purchase and sale commitments of $117.1 million and $198.1 million at December 31, 1996 and 1995, respectively. Only those transactions not closed at the settlement date are reflected in the balance sheet as receivables and payables. Foreign currency translation. Assets and liabilities are translated using current exchange rates, except certain accounts of units whose functional currency is the U.S. dollar, and translation adjustments are accumulated in a separate component of shareholders' equity. Inventory, prepublication costs and property and equipment accounts of units whose functional currency is the U.S. dollar are translated using historical exchange rates and translation adjustments are charged and credited to income. Revenue. Tuition revenue from home-study courses is recorded when the contracts are accepted. At the same time, provisions for cancellation and uncollectible accounts, and estimated costs to service the contracts, are recorded. Units whose revenues are principally from subscription income and service contracts record revenue as earned. Units whose revenues are principally from advertising generally record subscription income as received. Costs related to subscriptions generally are expensed as incurred. Depreciation. The costs of property and equipment are depreciated using the straight-line method based upon the following estimated useful lives: Buildings and leasehold improvements - 15 to 40 years Equipment and furniture - 3 to 10 years Advertising expense. The cost of advertising is expensed as incurred. The company incurred $62 million, $63 million and $58 million in advertising costs in 1996, 1995 and 1994, respectively. Earnings per common share. Earnings per common share and common share equivalents are based on the average number of such shares outstanding during the year. Common share equivalents consist of $1.20 preference stock, stock options and restricted performance incentive shares. The number of shares issuable upon exercise of stock options has been reduced by the number of common shares assumed to have been purchased with the proceeds from the exercise of the options. The number of restricted performance shares issued has been reduced by the number of shares assumed to have been repurchased using unearned compensation as exercise proceeds. Stock based compensation. The company grants options for a fixed number of shares to employees with the exercise price equal to the fair value of the shares at the date of grant. The company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. Stock split. On January 31, 1996, the Board of Directors declared a two-for-one stock split of the company's common stock, which was distributed on April 26, 1996 to all shareholders of record on March 28, 1996. Accordingly, all references in the financial statements and notes to common share data have been restated to reflect that split. 38 30 Reclassification. Certain prior-year amounts have been reclassified for comparability purposes. 2. ACQUISITIONS AND DISPOSITIONS Acquisitions. In 1996, excluding the exchange of Shepard's/McGraw-Hill for the Times Mirror Higher Education Group (TMHE), the company made four acquisitions, including Open Court Publishing, for $31.2 million in cash, net of cash acquired. See Note 3 for details of the Shepard's/McGraw-Hill - TMHE exchange. In 1995, the company made six acquisitions, including UCB Canada, Inc., for $36.2 million in cash. In 1994, the company made five small acquisitions totaling $1.2 million. The effect of these acquisitions on the results of operations for the years presented was not material. Noncash Investing Activities. Liabilities assumed in conjunction with the acquisition of businesses, including TMHE, are as follows:
(in thousands) 1996 1995 1994 - ------------------------------------------------------------- Fair value of assets acquired $583,460 $ 58,152 $ 1,520 Cash paid (net of cash acquired) 3,937 36,246 1,219 Fair value of business exchanged 485,000 -- -- - ------------------------------------------------------------- Liabilities assumed $ 94,523 $21,906 $ 301 - -------------------------------------------------------------
Dispositions. Other than the Shepard's/McGraw-Hill - TMHE exchange discussed in Note 3, there were no significant dispositions in 1996. In 1995, the company sold the topical publishing business of Shepard's/McGraw-Hill. The pretax gain on this disposition was $23.8 million, which was included in other income. After taxes, the gain was $15.1 million. In 1994 there were no significant dispositions. 3. EXCHANGE OF SHEPARD'S/MCGRAW-HILL FOR TIMES MIRROR HIGHER EDUCATION GROUP On October 15, 1996, The McGraw-Hill Companies completed the exchange of its Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher Education Group (TMHE) and other consideration, including approximately $27 million in cash, subject to finalization of a post-closing adjustment. The valuation of the properties exchanged is $485 million, subject to finalization that will be based upon independent appraisals. The acquisition of TMHE was accounted for as a purchase and the net assets and results of operations of TMHE have been included in the consolidated financial statements since the date of acquisition. The excess of the transaction value over the tangible assets acquired was allocated to identifiable publishing intangible assets ($231 million) being amortized over 18 to 30 years and goodwill ($175 million) being amortized over 40 years. The company recorded a pretax gain on the sale of Shepard's/ McGraw-Hill of $418.7 million ($260.5 million net of taxes, or $2.61 per share). 1996 earnings reflect dilution of five cents per share from the transaction, reflecting the timing of integration savings and the typical seasonal decline in higher education business earnings as compared with Shepard's/McGraw-Hill. In connection with the acquisition of TMHE, the company recorded acquisition reserves of $26.6 million. Such costs were primarily for employee severance as well as professional fees and various other costs associated with the acquisition. Remaining reserves of $25.9 million at December 31, 1996 will be expended within the next year. In addition to the above, one-time charges of $25 million related to the integration of the company's College Division with the acquired TMHE business were recorded in 1996. Such costs were attributed to employee severance, asset write-offs and other costs to integrate and consolidate the operations. The balance of the integration reserves of $18.6 million at December 31, 1996 will also be expended within the next year. The following unaudited pro forma information presents the consolidated results of operations of the company for 1996 and 1995, as if the exchange of businesses had occurred at the beginning of 1995.
(in millions, except per share data) 1996 1995 - ------------------------------------------------------------ Operating revenue $ 3,186.4 $ 3,073.1 Net income 225.4 172.7 Earnings per common share $ 2.25 $ 1.73 - ------------------------------------------------------------
These pro forma results are not necessarily indicative of those that would have occurred had the exchange of businesses taken place at the beginning of 1995. 4. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION A description of each of the company's three segments and their products, services and markets served is included on the inside back cover of this annual report. Operating profit by segment and geographic area is total operating revenue less expenses that are deemed to be related to the unit's operating revenue. Identifiable assets by segment and geographic area are those assets that are used in the operation of that unit. Corporate assets consist principally of cash and equivalents, investment in Rock-McGraw, Inc., prepaid pension expense and income taxes and leasehold improvements related to subleased areas. Foreign revenue and profits are from book publishing and financial and information services operations in 32 countries. Transfers between geographic areas are recorded at cost plus a markup and intercompany revenue and profits are eliminated. 39 31 A summary of information about the company's operations by segment and geographic area follows:
Operating Operating Assets at Depreciation and Capital (in thousands) revenue profit December 31 amortization+ expenditures++ - -------------------------------------------------------------------------------------------------------------------------------- 1996 Educational and Professional Publishing $1,277,895 $545,652v $2,085,540 $172,306 $201,211 Financial Services 855,925 262,085 561,128 30,478 20,155 Information and Media Services 940,877 116,799 626,324 34,635 24,925 - -------------------------------------------------------------------------------------------------------------------------------- Total operating segments 3,074,697 924,536 3,272,992 237,419 246,291 Corporate - (62,073) 369,247 1,139 - Interest expense - net - (47,656) - - - - -------------------------------------------------------------------------------------------------------------------------------- Total company $3,074,697 $814,807* $3,642,239 $238,558 $246,291 - -------------------------------------------------------------------------------------------------------------------------------- 1995 Educational and Professional Publishing $1,235,578 $162,604 $1,573,601 $166,847 $154,560 Financial Services 786,786 230,934 562,742 29,331 19,960 Information and Media Services 912,919 115,069 620,114 33,086 18,048 - -------------------------------------------------------------------------------------------------------------------------------- Total operating segments 2,935,283 508,607 2,756,457 229,264 192,568 Corporate - (63,570) 300,710 2,144 326 Interest expense - net - (58,766) - - - - -------------------------------------------------------------------------------------------------------------------------------- Total company $2,935,283 $386,271* $3,057,167 $231,408 $192,894 - -------------------------------------------------------------------------------------------------------------------------------- 1994 Educational and Professional Publishing $1,162,157 $125,765 $1,567,224 $171,249 $144,414 Financial Services 745,480 217,212 553,240 29,027 34,613 Information and Media Services 853,232 108,343 564,530 28,550 15,358 - -------------------------------------------------------------------------------------------------------------------------------- Total operating segments 2,760,869 451,320 2,684,994 228,826 194,385 Corporate - (54,134) 275,291 1,200 1,060 Interest expense - net - (51,746) - - - - -------------------------------------------------------------------------------------------------------------------------------- Total company $2,760,869 $345,440* $2,960,285 $230,026 $195,445 - -------------------------------------------------------------------------------------------------------------------------------- 1996 United States $2,624,703 $853,061 $3,274,513 Foreign 449,994 71,475 367,726 - -------------------------------------------------------------------------------------------------------------------------------- 1995 United States $2,528,553 $448,876 $2,707,536 Foreign 406,730 59,731 349,631 - -------------------------------------------------------------------------------------------------------------------------------- 1994 United States $2,402,976 $408,846 $2,644,014 Foreign 357,893 42,474 316,271 - --------------------------------------------------------------------------------------------------------------------------------
* Income before taxes on income. + Includes amortization of goodwill and intangible assets and prepublication costs. ++ Includes purchases of property and equipment and investments in prepublication costs. v Operating profit includes a pretax gain on exchange of Shepard's/McGraw-Hill for the Times Mirror Higher Education Group of $418.7 million and a one-time charge of $25 million for costs of integrating the company's College Division with the acquired higher education business. 5. DEBT At December 31, 1996, the company had short-term borrowings of $325 million, primarily representing domestic commercial paper borrowings at an average interest rate of 5.4% maturing at various dates during 1997. The commercial paper borrowings are supported by the revolving credit agreement described below, and $300 million has been classified as long-term. The company has an $800 million revolving credit agreement with a group of banks terminating in February 2002. Interest rates on amounts borrowed vary depending upon the source and are based on either the Eurodollar or a bank base rate, at the company's option. The credit agreement contains various warranties and covenants that must be complied with on a continuing basis. The agreement requires a commitment fee on the unused portion of the credit line. At December 31, 1996, there were no borrowings under the agreement. In 1990, the company issued $250 million of 9.43% senior notes due September 1, 2000. The notes are unsecured obligations of the company and are not redeemable by the company prior to the maturity date. At December 31, 1995, the company had short-term borrowings of $371 million, primarily representing domestic commercial paper borrowings at an average interest rate of 6.0% maturing at various dates during 1996. The commercial paper borrowings were supported by the revolving credit agreement noted above and $300 million of the commercial paper borrowings was classified as long-term. A summary of long-term debt at December 31 follows: (in thousands) 1996 1995 - ------------------------------------------------------------ 9.43% senior notes due 2000 $250,000 $250,000 Commercial paper supported by bank revolving credit agreement 300,000 300,000 Other 6,850 7,365 - ------------------------------------------------------------ Total long-term debt $556,850 $557,365 - ------------------------------------------------------------ 40 32 The company paid interest on its debt totaling $50.1 million in 1996, $58.6 million in 1995 and $51.7 million in 1994. The carrying amount of the company's commercial paper borrowings approximates fair value. The fair value of the company's 9.43% senior notes and other long-term debt at December 31, 1996 and 1995, totaling $256.9 million and $257.4 million, respectively, based on current borrowing rates for debt with similar terms and maturities, is estimated to be $282.5 million and $294 million, respectively. 6. INVESTMENT IN ROCK-MCGRAW, INC. Rock-McGraw owns the company's headquarters building in New York City. It is owned 45% by the company and 55% by Rockefeller Group, Inc. The company currently occupies a significant portion of the rentable space. The lease is for 30 years ending in the year 2002 and includes renewal options for two additional 15-year periods. In 1996, the company paid Rock-McGraw gross annual rentals of $18.8 million (including various escalation payments) for the occupied space and $14.2 million for space that it has sublet. Over the lease term, the company is recovering a portion of the rentals through its share of earnings of Rock-McGraw. A summary of significant financial information for Rock-McGraw follows:
(in millions) 1996 1995 1994 - -------------------------------------------------------------- Revenue $ 63.7 $ 62.7 $ 61.8 - -------------------------------------------------------------- Net income 11.2 9.7 10.0 - -------------------------------------------------------------- Depreciation expense 6.5 6.4 6.4 - -------------------------------------------------------------- Total assets 208.8 200.7 198.0 - -------------------------------------------------------------- Mortgage payable 23.8 27.5 31.2 - -------------------------------------------------------------- Total liabilities $ 60.0 $ 63.0 $ 70.1 - --------------------------------------------------------------
The building is financed by an 8 1/8%, 25-year mortgage repayable in quarterly installments of $.9 million plus interest, with the balance of $18.3 million due at maturity in 1998. 7. TAXES ON INCOME Income before taxes on income resulted from domestic operations (including foreign branches) and foreign subsidiaries' operations as follows:
(in millions) 1996 1995 1994 - -------------------------------------------------------------- Domestic operations $783.6 $356.1 $319.3 Foreign operations 31.2 30.2 26.1 - -------------------------------------------------------------- Total income before taxes $814.8 $386.3 $345.4 - --------------------------------------------------------------
A reconciliation of the U.S. statutory tax rate to the company's effective tax rate for financial reporting purposes follows:
1996 1995 1994 - -------------------------------------------------------------- U.S. statutory rate 35.0% 35.0% 35.0% Goodwill amortization 0.7 1.7 1.9 Effect of state and local income taxes 3.7 5.5 6.1 Other - net (0.2) (1.0) (1.8) - -------------------------------------------------------------- Effective tax rate 39.2% 41.2% 41.2% - --------------------------------------------------------------
The provision for taxes on income consists of the following:
(in millions) 1996 1995 1994 - -------------------------------------------------------------- Federal: Current $281.4 $104.9 $ 75.8 Deferred (19.3) 11.9 28.5 - -------------------------------------------------------------- Total federal 262.1 116.8 104.3 - -------------------------------------------------------------- Foreign: Current 11.8 7.3 8.8 Deferred (0.7) 2.3 (3.2) - -------------------------------------------------------------- Total foreign 11.1 9.6 5.6 - -------------------------------------------------------------- State and local: Current 48.8 28.0 20.9 Deferred (2.9) 4.7 11.5 - -------------------------------------------------------------- Total state and local 45.9 32.7 32.4 - -------------------------------------------------------------- Total provision for taxes $319.1 $159.1 $142.3 - --------------------------------------------------------------
The principal temporary differences between the accounting for income and expenses for financial reporting and income tax purposes as of December 31 follow:
(in millions) 1996 1995 - -------------------------------------------------------------- Fixed assets and intangible assets $ 138.8 $ 125.9 Prepaid pension and other expenses 70.2 65.6 Unearned revenue 41.2 36.0 Reserves and accruals (152.7) (117.7) Postretirement and postemployment benefits (95.9) (95.1) Other - net 42.3 58.7 - -------------------------------------------------------------- Deferred tax liability - net $ 43.9 $ 73.4 - --------------------------------------------------------------
The company made net income tax payments totaling $170.6 million in 1996, $111.4 million in 1995 and $83.9 million in 1994. The company has not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. Undistributed earnings amounted to approximately $65 million at December 31, 1996, excluding amounts that, if remitted, generally would not result in any additional U.S. income taxes because of available foreign tax credits. If the earnings of such foreign subsidiaries were not indefinitely reinvested, a deferred tax liability of approximately $17 million would have been required. 41 33 8. RENTAL EXPENSE AND LEASE OBLIGATIONS Rental expense for property and equipment under all operating lease agreements was as follows:
(in millions) 1996 1995 1994 - -------------------------------------------------------------- Gross rental expense $107.1 $105.7 $109.1 Less: sublease revenue 28.5 26.1 26.4 - -------------------------------------------------------------- Net rental expense $ 78.6 $ 79.6 $ 82.7 - --------------------------------------------------------------
The company is committed under lease arrangements covering property, computer systems and office equipment. Certain lease arrangements, including the lease for the company's headquarters building, contain escalation clauses covering increased costs for real estate taxes and operating services. Minimum rental commitments under existing noncancelable leases with a remaining term of more than one year, including the company's headquarters building referred to in Note 6, are shown in the following table. The annual rental commitments for real estate through the year 2002 have been reduced by approximately $19 million of revenue from existing noncancelable subleases.
(in millions) - -------------------------------------------------------------- 1997 $ 55.8 1998 46.5 1999 36.0 2000 25.1 2001 24.3 2002 and beyond 71.2 - -------------------------------------------------------------- Total $258.9 - --------------------------------------------------------------
9. CAPITAL STOCK The $1.20 convertible preference stock may be converted into common stock at the option of the shareholder at the rate of one share of preference stock for 6.6 shares of common stock. The number of common shares reserved for issuance for employee stock plan awards was 6,350,994 at December 31, 1996 and 7,208,178 at December 31, 1995. Under the Director Deferred Stock Ownership Plan and its predecessor plan, the Directors' Stock Payment Plan, 160,000 common shares were reserved for issuance at December 31, 1996 and 37,048 at December 31, 1995. On January 31, 1996, the Board of Directors approved a stock repurchase program authorizing the company to purchase up to four million shares of the company's common stock. Through December 31, 1996, the company had repurchased 1,362,900 shares of common stock at a total cost of $63.3 million. The repurchased shares may be used for general corporate purposes, including the issuance of shares for the exercise of stock options. Two million shares of preferred stock, par value $1 per share, are authorized; none have been issued. 600,000 shares have been reserved for issuance under a Preferred Share Purchase Rights Plan adopted by the company's Board of Directors on October 25, 1989. Under the Plan, one right for each share of common stock outstanding was granted to shareholders of record on November 6, 1989. Each right entitles shareholders to buy a 1/200th interest in a share of a series of preferred stock at an exercise price of $137.50 per right. The rights will not be exercisable or transferable until a party either acquires beneficial ownership of 20% or more of the company's common shares or announces a tender offer for 20% or more of the common shares. In the event the company is a party to a merger, reverse merger or other business combination, each right will entitle its holder to purchase, at the exercise price of the right, a number of shares of common stock of the surviving company having a market value of two times the exercise price of the right. The Plan also gives the Board of Directors the option to exchange one share of common stock of the company for each right (not owned by the acquirer) after an acquirer holds 20% but less than 50% of the outstanding shares of common stock. The rights are redeemable at one-half cent per right until a party acquires 20% or more of the company's common shares, and expire November 6, 1999. 10. STOCK PLAN AWARDS The company applies the provisions of Accounting Principles Board Opinion (APBO) No. 25, Accounting for Stock Issued to Employees, in accounting for its stock-based awards. Accordingly, no compensation cost has been recognized for its stock option plans and the compensation cost that has been recognized for its restricted stock performance awards continues under APBO No. 25. The company has three stock option plans: the 1993 and 1987 Key Employee Stock Incentive Plans and the 1983 Stock Option Plan. The 1983 Plan, which provided for the granting of incentive stock options and nonqualified stock options to purchase 2,400,000 shares of the company's common stock, expired January 25, 1993 except as to options then outstanding. The 1993 and 1987 Key Employee Stock Incentive Plans provide for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, deferred stock (applicable to the 1987 Plan only) or other stock-based awards to purchase a total of 9,200,000 shares of the company's common stock - 4,600,000 shares under each plan. Stock options may not be granted at a price less than the fair market value of the company's common stock at date of grant, vest in two years in equal annual installments and have a maximum term of ten years. Had the company elected to apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, net income would have been reduced by $2.9 million, or $.03 per share, for 1996 and $1.8 million, or $.02 per share, for 1995 after accounting for stock-based compensation effective for awards made January 1, 1995 and thereafter. 42 34 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1996 and 1995, respectively: risk-free interest rate of 5.4% and 7.5%; dividend yield of 3.0% and 3.4%; volatility of 15% for both years and expected life of five years for both years. A summary of the status of the company's stock option plans as of December 31 and activity during the year follows:
1996 1995 - --------------------------------------------------------------------------- Weighted Weighted average average exercise exercise (in thousands of shares) Shares price Shares price - --------------------------------------------------------------------------- Outstanding at beginning of year 3,108 $31.67 3,034 $30.86 Options granted 988 43.48 878 33.57 Options exercised (654) 30.82 (698) 29.79 Options cancelled and expired (142) 39.06 (106) 34.00 - --------------------------------------------------------------------------- Outstanding at end of year 3,300 $34.88 3,108 $31.67 - --------------------------------------------------------------------------- Exercisable at end of year 2,076 $31.51 1,955 $30.48 - --------------------------------------------------------------------------- Weighted average fair value of options granted during the year $ 6.92 $ 6.38 - ---------------------------------------------------------------------------
A summary of information about stock options outstanding and options exercisable at December 31, 1996 follows:
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 - --------------------------------------------------------------------------- $24.84 to $34.87 2,398 5.8 years $31.64 2,041 $31.30 $42.37 to $48.25 902 8.9 years 43.48 35 43.41 - --------------------------------------------------------------------------- $24.84 to $48.25 3,300 6.7 years $34.88 2,076 $31.51 - ---------------------------------------------------------------------------
The 1993 Directors' Stock Payment Plan, which required that 20% of eligible Directors' annual retainer be paid in common stock beginning in 1994, was terminated June 30, 1996. The Plan provided for the issuance of a total of 40,000 shares of stock. The Director Deferred Stock Ownership Plan, which was approved by the shareholders in April 1996, replaced the 1993 Directors' Stock Payment Plan and the Directors' Retirement Plan effective July 1, 1996. Under this Plan, a total of 160,000 shares of common stock was reserved for issuance on July 1, 1996 and may be credited to deferred stock accounts for eligible Directors. In general, the Plan requires that 50% of eligible Directors' annual compensation plus dividend equivalents be credited to deferred stock accounts. Each Director may also elect to defer all or a portion of the remaining compensation and have an equivalent number of shares credited to the deferred stock account. Recipients under this Plan are not required to provide consideration to the company other than rendering service. Shares will be delivered as of the date a recipient ceases to be a member of the Board of Directors or within five years thereafter, if so elected. The Plan will remain in effect until terminated by the Board of Directors or until no shares of stock remain available under the Plan. Restricted stock performance awards have been granted under the 1993 and 1987 Plans. These restricted stock awards will vest only if the company achieves certain financial goals over various vesting periods. Recipients are not required to provide consideration to the company other than rendering service and have the right to vote the shares and to receive dividends. Under SFAS No. 123, compensation cost is recognized for the fair value of the restricted stock awarded, which is its market value without restrictions at the date of grant. For performance incentive shares, adjustments are made for achievement of goals but not for subsequent changes in the market value of the stock. A total of 289,358 restricted shares was issued at an average market value of $43.79 in 1996. In 1995, 282,468 restricted shares were issued at an average market value of $33.68. The awards are recorded at the market value on the date of grant. Initially the total market value of the shares is treated as unearned compensation and is charged to expense over the respective vesting periods. Under APBO No. 25, for performance incentive shares, adjustments are also made to expense for changes in market value and achievement of financial goals. Unearned compensation charged to expense was $8.5 million for 1996, $7.2 million for 1995 and $5.2 million for 1994. Restricted shares outstanding at the end of the year were 545,679 in 1996, 539,356 in 1995 and 549,894 shares in 1994. 11. RETIREMENT PLANS The company and its subsidiaries have a number of defined benefit pension plans and defined contribution plans covering substantially all employees. The company's primary pension plan is a noncontributory plan under which benefits are based on employee career employment compensation. The company also has a voluntary deferred compensation plan under which the company matches employee contributions up to certain levels of compensation and an Employee Retirement Account Plan under which the company contributes a percentage of eligible employees' compensation to the employees' accounts. For purposes of determining annual pension cost, prior service costs and the net asset at January 1, 1986 are being amortized straight-line over the average remaining service period of employees expected to receive benefits. The assumed return on plan assets of 9.5% is based on a calculated market-related value of assets, which recognizes changes in market value over five years. 43 35 A summary of pension cost for the company's domestic defined benefit plans follows:
(in millions) 1996 1995 1994 - -------------------------------------------------------------- Service cost $ 16.9 $ 13.2 $ 16.4 Interest cost 30.8 28.5 27.7 Return on assets: Actual return (103.4) (122.2) (7.4) Deferred 52.9 75.7 (37.5) - -------------------------------------------------------------- Recognized (50.5) (46.5) (44.9) Amortization of net asset at 1/1/86 (3.0) (6.1) (6.1) Net amortization and deferral 0.9 (2.1) 1.2 - -------------------------------------------------------------- Net negative pension cost $ (4.9) $ (13.0) $ (5.7) - -------------------------------------------------------------- Assumed rates - January 1: Discount rate (interest cost) 7 1/4% 8 1/2% 7 1/4% Compensation increase factor 5 1/2 5 1/2 6 Return on assets 9 1/2 9 1/2 9 1/2 - --------------------------------------------------------------
The company also has an unfunded supplemental benefits plan to provide senior management with supplemental retirement, disability and death benefits. Supplemental retirement benefits are based on final monthly earnings. Pension cost was $2.4 million for 1996, $2.0 million for 1995 and $2.4 million for 1994. The accumulated benefit obligation as of December 31, 1996 was $17.0 million, including vested benefits of $16.0 million, and the projected benefit obligation was $18.1 million. Total retirement plans cost was $40.0 million for 1996, $31.3 million for 1995 and $36.7 million for 1994. The funded status of the domestic defined benefit plans as of December 31 follows:
(in millions) 1996 1995 - ---------------------------------------------------------------------- Actuarial present value of pension benefits: Vested benefits $(376.5) $(362.5) Nonvested benefits (17.4) (19.4) - ---------------------------------------------------------------------- Accumulated benefit obligation (393.9) (381.9) Additional amount related to projected compensation increases (30.6) (28.1) - ---------------------------------------------------------------------- Projected benefit obligation (424.5) (410.0) Plan assets at market value - primarily listed stocks and U.S. government obligations 665.7 585.4 - ---------------------------------------------------------------------- Excess of assets over projected benefit obligation 241.2 175.4 Unrecognized net asset at 1/1/86 (1.6) (4.6) Unrecognized prior service cost 6.6 7.6 Unrecognized net gain (141.7) (80.2) - ---------------------------------------------------------------------- Prepaid pension cost at December 31 $ 104.5 $ 98.2 - ---------------------------------------------------------------------- Assumed rates - December 31: Discount rate 7 3/4% 7 1/4% Compensation increase factor 5 1/2 5 1/2 - ----------------------------------------------------------------------
The company has several foreign pension plans that do not determine the accumulated benefits or net assets available for benefits as disclosed above. The amounts involved are not material and are therefore not included. 12. POSTRETIREMENT HEALTHCARE AND OTHER BENEFITS The company and some of its domestic subsidiaries provide certain medical, dental and life insurance benefits for retired employees and eligible dependents. The medical and dental plans are contributory while the life insurance plan is noncontributory. The company currently does not fund any of these plans. Postretirement benefits cost was $8.3 million in 1996, $7.1 million in 1995 and $9.3 million in 1994. A summary of the components of the cost in 1996, 1995 and 1994 follows:
(in millions) 1996 1995 1994 - -------------------------------------------------------------- Service cost $ 2.5 $ 2.0 $ 2.2 Interest cost 10.0 10.4 10.6 Net amortization and deferral (4.2) (5.3) (3.5) - -------------------------------------------------------------- Postretirement benefits cost $ 8.3 $ 7.1 $ 9.3 - --------------------------------------------------------------
A summary of the components of the unfunded postretirement benefit obligation as of December 31 follows:
(in millions) 1996 1995 - -------------------------------------------------------------- Retirees $ (98.0) $(103.8) Fully eligible plan participants (14.0) (14.9) Other active plan participants (23.0) (22.1) - -------------------------------------------------------------- Total accumulated postretirement benefit obligation (135.0) (140.8) Unrecognized net gain (44.2) (37.2) Unrecognized prior service cost (19.5) (22.1) - -------------------------------------------------------------- Accrued postretirement benefit obligation $(198.7) $(200.1) - --------------------------------------------------------------
The assumed weighted average healthcare cost trend rate ranges from 8.0% in 1997 decreasing ratably to 5.5% in 2002 and remains at that level thereafter. Increasing the assumed healthcare cost trend rate by one percentage point in each future year would increase the accumulated postretirement benefit obligation at December 31, 1996 by $10.5 million and 1996 benefit expense by $1.0 million. The weighted average discount rate used to measure expense was 7.25% in 1996 and 8.5% in 1995; the rate used to measure the accumulated postretirement benefit obligation was 7.75% in 1996 and 7.25% in 1995. 44 36 REPORT OF MANAGEMENT TO THE SHAREHOLDERS OF THE MCGRAW-HILL COMPANIES, INC. The financial statements in this report were prepared by the management of The McGraw-Hill Companies, Inc., which is responsible for their integrity and objectivity. These statements, prepared in conformity with generally accepted accounting principles and including amounts based on management's best estimates and judgments, present fairly The McGraw-Hill Companies' financial condition and the results of the company's operations. Other financial information given in this report is consistent with these statements. The McGraw-Hill Companies' management maintains a system of internal accounting controls designed to provide reasonable assurance that the financial records accurately reflect the company's operations and that the company's assets are protected against loss. Consistent with the concept of reasonable assurance, the company recognizes that the relative costs of these controls should not exceed the expected benefits in maintaining these controls. It further assures the quality of the financial records in several ways: a program of internal audits, the careful selection and training of management personnel, maintaining an organizational structure that provides an appropriate division of financial responsibilities, and communicating financial and other relevant policies throughout the corporation. The financial statements in this report have been audited by Ernst & Young LLP, independent auditors, in accordance with generally accepted auditing standards. The independent auditors were retained to express an opinion on the financial statements, which appears in the next column. The McGraw-Hill Companies' Board of Directors, through its Audit Committee, composed entirely of outside directors, is responsible for reviewing and monitoring the company's financial reporting and accounting practices. The Audit Committee meets periodically with management, the company's internal auditors and the independent auditors to ensure that each group is carrying out its respective responsibilities. In addition, the independent auditors have full and free access to the Audit Committee and meet with it with no representatives from management present. /s/ Joseph L. Dionne Joseph L. Dionne Chairman and Chief Executive Officer /s/ Robert J. Bahash Robert J. Bahash Executive Vice President and Chief Financial Officer REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE MCGRAW-HILL COMPANIES, INC. We have audited the accompanying consolidated balance sheets of The McGraw-Hill Companies, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The McGraw-Hill Companies, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/Ernst and Young LLP New York, New York January 28, 1997 45 37 ELEVEN-YEAR FINANCIAL REVIEW
(in thousands, except per-share data) 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS BY SEGMENT AND INCOME STATISTICS OPERATING REVENUE Educational and Professional Publishing $1,277,895 $1,235,578 $1,162,157 $ 667,444 Financial Services 855,925 786,786 745,480 696,933 Information and Media Services 940,877 912,919 853,232 831,076 - --------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING REVENUE 3,074,697 2,935,283 2,760,869 2,195,453 - --------------------------------------------------------------------------------------------------------------------------- OPERATING PROFIT(e) Educational and Professional Publishing(a) 151,921 162,604 125,765 49,374 Financial Services 262,085 230,934 217,212 200,865 Information and Media Services 116,799 115,069 108,343 102,344 - --------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING PROFIT 530,805 508,607 451,320 352,583 Share of profit of Macmillan/McGraw-Hill School Publishing Company (c,e) -- -- -- 28,376 Unusual charges (a,d and e) (25,000) -- -- (229,800) Gain on exchange of Shepard's/McGraw-Hill (a) 418,731 -- -- -- Gain on sale of interest in Nikkei/McGraw-Hill (f) -- -- -- -- General corporate (expense)/income (e and g) (62,073) (63,570) (54,134) (48,538) Interest (expense)/income - net (47,656) (58,766) (51,746) (36,342) - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES ON INCOME (b) 814,807 386,271 345,440 66,279 Provision for taxes on income 319,074 159,144 142,321 54,838 - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE ADJUSTMENT 495,733 227,127 203,119 11,441 - --------------------------------------------------------------------------------------------------------------------------- Cumulative effect on prior years of changes in accounting (h) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 495,733 $ 227,127 $ 203,119 $ 11,441 - --------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Income before cumulative adjustment $ 4.96 $ 2.28 $ 2.05 $ 0.12 Cumulative adjustment (h) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 4.96 $ 2.28 $ 2.05 $ 0.12 Shares used to calculate earnings per share 99,997 99,752 98,998 98,378 Dividends per share of common stock $ 1.32 $ 1.20 $ 1.16 $ 1.14 - --------------------------------------------------------------------------------------------------------------------------- OPERATING STATISTICS Return on average shareholders' equity 41.4% 23.3% 23.4% 1.3% Income before taxes as a percent of revenue 26.5 13.2 12.5 3.0 Income before cumulative adjustment as a percent of revenue 16.1 7.7 7.4 0.5 - --------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Working capital $ 130,920 $ 193,346 $ 130,272 $ 62,887 Total assets 3,642,239 3,057,167 2,960,285 3,043,232 Total debt 581,368 628,664 762,805 928,710 Shareholders' equity 1,361,118 1,035,066 913,052 823,008 - --------------------------------------------------------------------------------------------------------------------------- NUMBER OF EMPLOYEES 16,220 15,452 15,339 15,661 - ---------------------------------------------------------------------------------------------------------------------------
(a) 1996 operating profit excludes a net gain on the exchange of Shepard's/ McGraw-Hill for the Times Mirror Higher Education Group comprising a $418.7 million gain on the exchange and a $25 million one-time charge for integration costs. (b) 1995 income before taxes on income reflects a $26.8 million provision for best practice initiatives and a $23.8 million gain on sale of the topical publishing division of Shepard's/McGraw-Hill. (c) Reflects The McGraw-Hill Companies' share of profit of Macmillan/ McGraw-Hill School Publishing Company through September 30, 1993. Macmillan/ McGraw-Hill results are consolidated effective October 1, 1993 in the Educational and Professional Publishing segment. (d) 1993 amount reflects unusual charges in connection with the acquisition of the additional 50% interest in Macmillan/McGraw-Hill. (e) 1989 and 1988 operating profit excludes unusual charges of $220 million and $149.6 million, respectively, as follows:
1989 1988 - ----------------------------------------------------------------- Educational and Professional Publishing $33,140 $20,534 Financial Services 94,899 67,155 Information and Media Services 15,554 29,009 - ------------------------------------------------------------------- Total operating segments 143,593 116,698 Macmillan/McGraw-Hill joint venture units - 7,866 Corporate expense 76,407 25,000 - ------------------------------------------------------------------- Total company $220,000 $149,564 - -------------------------------------------------------------------
46 38
(in thousands, except per-share data) 1992 1991 1990 1989 - --------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS BY SEGMENT AND INCOME STATISTICS OPERATING REVENUE Educational and Professional Publishing $ 567,363 $ 532,438 $ 534,724 $ 483,666 Financial Services 617,555 555,820 505,641 432,314 Information and Media Services 865,573 854,754 898,273 872,983 - --------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING REVENUE 2,050,491 1,943,012 1,938,638 1,788,963 - --------------------------------------------------------------------------------------------------------------------------- OPERATING PROFIT(e) Educational and Professional Publishing(a) 62,746 48,928 70,196 44,107 Financial Services 168,394 143,056 123,999 85,081 Information and Media Services 113,198 120,242 170,788 192,254 - --------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING PROFIT 344,338 312,226 364,983 321,442 Share of profit of Macmillan/McGraw-Hill School Publishing Company (c,e) 11,280 27,483 21,601 13,688 Unusual charges (a,d and e) -- -- -- (220,000) Gain on exchange of Shepard's/McGraw-Hill (a) -- -- -- -- Gain on sale of interest in Nikkei/McGraw-Hill (f) -- -- -- -- General corporate (expense)/income (e and g) (50,774) (34,415) (28,370) 6,546 Interest (expense)/income - net (37,557) (46,987) (55,627) (35,038) - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES ON INCOME (b) 267,287 258,307 302,587 86,638 Provision for taxes on income 114,132 110,297 130,112 46,847 - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE ADJUSTMENT 153,155 148,010 172,475 39,791 - --------------------------------------------------------------------------------------------------------------------------- Cumulative effect on prior years of changes in accounting (h) (124,587) -- -- 8,000 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 28,568 $ 148,010 $ 172,475 $ 47,791 - --------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Income before cumulative adjustment $ 1.57 $ 1.52 $ 1.77 $ 0.41 Cumulative adjustment (h) (1.28) -- -- 0.08 - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 0.29 $ 1.52 $ 1.77 $ 0.49 Shares used to calculate earnings per share 97,778 97,642 97,638 97,450 Dividends per share of common stock $ 1.12 $ 1.10 $ 1.08 $ 1.00 - --------------------------------------------------------------------------------------------------------------------------- OPERATING STATISTICS Return on average shareholders' equity 3.0% 15.2% 18.8% 5.3% Income before taxes as a percent of revenue 13.0 13.3 15.6 4.8 Income before cumulative adjustment as a percent of revenue 7.5 7.6 8.9 2.7 - --------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Working capital $ (19,596) $ 29,543 $ 44,193 $ 22,743 Total assets 2,473,021 2,482,679 2,501,130 2,181,718 Total debt 482,991 568,159 622,372 503,434 Shareholders' equity 908,760 998,975 954,260 880,154 - --------------------------------------------------------------------------------------------------------------------------- NUMBER OF EMPLOYEES 13,393 13,539 13,868 13,741 - ---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per-share data) 1988 1987 1986 - --------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS BY SEGMENT AND INCOME STATISTICS OPERATING REVENUE Educational and Professional Publishing $ 437,590 $ 408,252 $ 327,903 Financial Services 399,242 390,131 357,998 Information and Media Services 836,734 801,352 741,891 - --------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING REVENUE 1,673,566 1,599,735 1,427,792 - --------------------------------------------------------------------------------------------------------------------- OPERATING PROFIT(e) Educational and Professional Publishing(a) 48,185 30,464 37,109 Financial Services 81,765 81,557 81,558 Information and Media Services 175,384 176,564 166,679 - --------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING PROFIT 305,334 288,585 285,346 Share of profit of Macmillan/McGraw-Hill School Publishing Company (c,e) 2,349 11,585 30,037 Unusual charges (a,d and e) (149,564) -- -- Gain on exchange of Shepard's/McGraw-Hill (a) -- -- -- Gain on sale of interest in Nikkei/McGraw-Hill (f) 221,783 -- -- General corporate (expense)/income (e and g) 5,005 3,418 (23,519) Interest (expense)/income - net (5,290) (4,506) 3,915 - --------------------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES ON INCOME (b) 379,617 299,082 295,779 Provision for taxes on income 194,112 134,288 141,770 - --------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE ADJUSTMENT 185,505 164,794 154,009 - --------------------------------------------------------------------------------------------------------------------- Cumulative effect on prior years of changes in accounting (h) -- -- -- - --------------------------------------------------------------------------------------------------------------------- NET INCOME $ 185,505 $ 164,794 $ 154,009 - --------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Income before cumulative adjustment $ 1.92 $ 1.64 $ 1.52 Cumulative adjustment (h) -- -- -- - --------------------------------------------------------------------------------------------------------------------- Net Income $ 1.92 $ 1.64 $ 1.52 Shares used to calculate earnings per share 96,950 100,820 101,302 Dividends per share of common stock $ 0.92 $ 0.84 $ 0.76 - --------------------------------------------------------------------------------------------------------------------- OPERATING STATISTICS Return on average shareholders' equity 21.2% 19.5% 18.8% Income before taxes as a percent of revenue 22.7 18.7 20.7 Income before cumulative adjustment as a percent of revenue 11.1 10.3 10.8 - --------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Working capital $ (72,023) $ (66,214) $ 65,641 Total assets 1,705,547 1,602,181 1,431,888 Total debt 148,434 186,476 56,403 Shareholders' equity 922,803 825,265 861,418 - --------------------------------------------------------------------------------------------------------------------- NUMBER OF EMPLOYEES 13,891 13,879 13,257 - ---------------------------------------------------------------------------------------------------------------------
(f) In May 1988, the company sold its 49% interest in Nikkei/McGraw-Hill, Inc., a magazine publishing operation in Japan, for $283.1 million. The gain on sale was $221.8 million ($109.8 million after taxes). (g) General corporate income for 1989 includes gains on dispositions of businesses totaling $48.8 million. 1988 includes gains on dispositions of $26.5 million and 1987 includes gains from the settlement of a portion of the company's pension obligation of $20.1 million. (h) The cumulative adjustment in 1992 reflects the adoption of the provisions of Statement of Financial Accounting Standards (SFAS) No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 112, Employers' Accounting for Postemployment Benefits. In 1989, the company recognized the cumulative effect of a change in accounting for income taxes under SFAS No. 96. 47 39 SUPPLEMENTAL FINANCIAL INFORMATION QUARTERLY FINANCIAL INFORMATION (unaudited)
First Second Third Fourth Total (in thousands, except per-share data) quarter quarter quarter quarter year - --------------------------------------------------------------------------------------------------------------------------- 1996 Operating revenue $583,851 $710,934 $949,009 $830,903 $3,074,697 Income before taxes (Note a) 27,259 96,240 192,773 498,535 814,807 Net income (Note a) 16,192 57,166 114,508 307,867 495,733 Earnings per share (Notes a and b) 0.16 0.57 1.15 3.08 4.96 - --------------------------------------------------------------------------------------------------------------------------- 1995 Operating revenue $568,548 $712,782 $904,351 $749,602 $2,935,283 Income before taxes 23,727 89,864 179,970 92,710 386,271 Net income 13,951 52,841 105,822 54,513 227,127 Earnings per share (Note b) 0.14 0.53 1.06 0.55 2.28 - --------------------------------------------------------------------------------------------------------------------------- 1994 Operating revenue $559,774 $648,279 $855,517 $697,299 $2,760,869 Income before taxes 25,454 81,702 153,338 84,946 345,440 Net income 14,967 48,041 90,162 49,949 203,119 Earnings per share (Note b) 0.15 0.49 0.91 0.50 2.05 - ---------------------------------------------------------------------------------------------------------------------------
(a) The fourth quarter of 1996 includes a gain on exchange of Shepard's/McGraw-Hill for the Times Mirror Higher Education Group of $418.7 million ($260.5 million after taxes, or $2.61 per share) and a one-time charge of $25 million ($14.9 million after taxes, or 15 cents per share) for costs of integrating the company's College Division with the acquired higher education business. (b) Earnings per share reflect a two-for-one stock split approved by the company's Board of Directors on January 31, 1996. All prior periods have been restated to reflect the split. HIGH AND LOW SALES PRICES OF THE MCGRAW-HILL COMPANIES COMMON STOCK ON THE NEW YORK STOCK EXCHANGE* (NOTE a)
1996 1995 1994 - ------------------------------------------------------------------------ First quarter $46 1/4 - 42 3/4 $36 5/8 - 31 7/8 $36 1/2 - 32 1/4 Second quarter 49 1/4 - 42 1/8 38 7/8 - 35 5/8 35 - 31 1/4 Third quarter 45 7/8 - 37 1/4 42 3/8 - 37 5/8 38 5/8 - 33 1/8 Fourth quarter 48 1/4 - 42 1/2 43 7/8 - 39 1/2 37 3/8 - 32 - ------------------------------------------------------------------------- Year 49 1/4 - 37 1/4 43 7/8 - 31 7/8 38 5/8 - 31 1/4 - -------------------------------------------------------------------------
*The New York Stock Exchange is the principal market on which the company's shares are traded. (a) High and low sales prices were adjusted to reflect the two-for-one stock split approved by the company's Board of Directors on January 31, 1996. All prior periods have been restated to reflect the split. 48 EX-21 9 SUBSIDIARIES OF REGISTRANT 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.
State or Percentage Jurisdiction of Voting of Securities Incorporation Owned ------------- ---------- The McGraw-Hill Companies, Inc. New York Registrant CM Research, Inc. New York 100 Capitol Radio Engineering Institute, Inc. Delaware 100 *National Radio Institute Delaware 100 Computer and Communications Information Group, Inc. New Jersey l00 DRI Europe, Inc. Delaware 100 International Advertising/ McGraw-Hill, Inc. Delaware 100 J.J. Kenny Company, Inc. New York 100 *J.J. Kenny Drake, Inc. New York 100 *Kenny Services, Inc. New York 100 *Liberty Brokerage Investment Corp. Delaware 25 McGraw-Hill Broadcasting Company, Inc. New York 100 McGraw-Hill Capital Corporation Delaware 100 McGraw-Hill Capital, Inc. New York l00 *International Valuation Services, Inc. Delaware 40 McGraw-Hill Financial Publications, Inc. Delaware 100 McGraw-Hill Interamericana, Inc. New York 100 McGraw-Hill International Enterprises, Inc. New York 100 *McGraw-Hill Korea, Inc. Korea 100 *McGraw-Hill (Malaysia) Sdn.Bhd Malaysia 100 McGraw-Hill News Bureaus, Inc. New York 100 McGraw-Hill Publications Overseas Corporation New York 100 McGraw-Hill Real Estate, Inc. New York 100 MMS International Nevada 100 Money Market Directories, Inc. New York l00 Rock-McGraw, Inc. New York 45 S&P ComStock, Inc. New York 100 Standard & Poor's International Ratings, Ltd. New York 100 Standard & Poor's Investment Advisory Services, Inc. Delaware 100 Standard & Poor's Ltd. Delaware 100 Standard & Poor's Securities, Inc. Delaware l00
-71- 2
State or Percentage Jurisdiction of Voting of Securities Incorporation Owned ------------- ---------- Tower Group International, Inc. New York 100 *Tower Group International Canada Inc. Canada 100 Columbia Administration Software Publishing Corporation British Columbia 100 *Columbia Computing Services, Ltd. Canada 100 Editora McGraw-Hill de Portugal, Ltda. Portugal 100 Editorial Interamericana, S.A. Colombia 100 Editoriales Pedagogicas Associadas, S.A. Guatemala 100 McGraw-Hill Book Company Australia Pty. Limited Australia 100 *McGraw-Hill Book Company New Zealand, Pty. Limited New Zealand 100 *Standard & Poor's (Australia) Pty. Ltd. Australia 100 McGraw-Hill Data Services - Ireland, Ltd. Ireland 100 McGraw-Hill Holdings (U.K.) Limited Great Britain 100 *McGraw-Hill International (U.K.) Limited Great Britain 100 McGraw-Hill Information Systems Company of Canada Limited Ontario, Canada 100 McGraw-Hill/Interamericana de Chile Limitada Chile 100 McGraw-Hill/Interamericana de Espana, S.A. Spain 100 *Standard & Poor's Espana, S.A. Spain 100 McGraw-Hill/Interamericana de Venezuela S.A. Venezuela 100 McGraw-Hill/Interamericana Editores, S.A. de C.V. Mexico 100 *Ediciones Pedagogicas, S.A. de C.V. Mexico 100 McGraw-Hill/Interamericana, S.A. Panama 100 *Editora McGraw-Hill de Espana S.A. Panama 100 McGraw-Hill Libri Italia Italy 100 McGraw-Hill Ryerson Limited Ontario, Canada 70 Medical China Publishing Limited Hong Kong 25 MHFSCO, Ltd. U.S. Virgin Islands 100 Science Research Associates, Pty., Ltd. Australia 100 Science Research Associates, Limited United Kingdom 100 Standard & Poor's - ADEF France 100 Standard & Poor's International, S.A. Belgium 100 Standard & Poor's - Nordisk Rating AB Sweden 100 Standard & Poor's, S.A. de C.V. Mexico 100 Tata McGraw-Hill Publishing Company Private Limited India 66
*Subsidiary of a subsidiary. -72- EX-23 10 CONSENT OF ERNST & YOUNG LLP 1 Exhibit (23) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of The McGraw-Hill Companies, Inc. ("Company") of our report dated January 28, 1997, included in the 1996 Annual Report to Shareholders of The McGraw-Hill Companies, Inc. Our audits also included the consolidated financial statement schedule of The McGraw-Hill Companies, Inc. listed in Item 14 (a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We also consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 33-33667) pertaining to the Debt Securities of The McGraw-Hill Companies, Inc. and in the Registration Statements on Form S-8 pertaining to the 1983 Stock Option Plan for Officers and Key Employees (No. 2-84058), the 1987 Key Employee Stock Incentive Plan (No. 33-22344), the 1993 Key Employee Stock Incentive Plan (No. 33-49743), the Director Deferred Stock Ownership Plan (No. 33-06871) and The Savings Incentive Plan of McGraw-Hill, Inc. and Its Subsidiaries, The Employee Retirement Account Plan of McGraw-Hill, Inc. and Its Subsidiaries, The Standard & Poor's Savings Incentive Plan for Represented Employees, The Standard & Poor's Employee Retirement Account Plan for Represented Employees, The Employees' Investment Plan of McGraw-Hill Broadcasting Company, Inc. and Its Subsidiaries (No. 33-50856) and in the related prospectuses of our report dated January 28, 1997 with respect to the consolidated financial statements incorporated therein by reference, and our report included above with respect to the consolidated financial statement schedule included in this Annual Report (Form 10-K) of The McGraw-Hill Companies, Inc. ERNST & YOUNG LLP /s/ Ernst & Young LLP - -------------------------- New York, New York March 26, 1997 -73- EX-27 11 ARTICLE 5 FDS FOR 10-K
5 1,000 YEAR DEC-31-1996 DEC-31-1996 3,430 0 1,041,726 162,260 273,158 1,349,583 835,680 524,187 3,642,239 1,218,663 0 14 0 102,919 0 3,642,239 3,074,697 3,074,697 2,651,689 2,651,689 0 65,116 47,656 814,807 319,074 495,733 0 0 0 495,733 4.96 4.96
EX-99 12 SCHED. II-RESERVES FOR DOUBTFUL ACC'TS & SALES RE. 1 THE McGRAW-HILL COMPANIES, INC. SCHEDULE II - RESERVES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS (Thousands of dollars)
Balance at Additions Balance beginning charged at end of year to income Deductions Other of year -------- -------- -------- -------- -------- (A) (B) Year ended 12/31/96 Allowance for doubtful accounts $ 79,980 $ 65,116 $ 67,237 $ 8,106 $ 85,965 Allowance for returns 47,222 8,296 20,777 76,295 -------- -------- -------- -------- -------- $127,202 $ 73,412 $ 67,237 $ 28,883 $162,260 ======== ======== ======== ======== ======== Year ended 12/31/95 Allowance for doubtful accounts $ 78,732 $ 65,385 $ 64,137 $ $ 79,980 Allowance for returns 44,078 3,144 47,222 -------- -------- -------- -------- -------- $122,810 $ 68,529 $ 64,137 $ $127,202 ======== ======== ======== ======== ======== Year ended 12/31/94 Allowance for doubtful accounts $ 79,461 $ 67,508 $ 68,237 $ $ 78,732 Allowance for returns 40,912 3,166 44,078 -------- -------- -------- -------- -------- $120,373 $ 70,674 $ 68,237 $ $122,810 ======== ======== ======== ======== ========
(A) Accounts written off, less recoveries. (B) Reserves acquired in connection with the purchase of the Times Mirror Higher Education Group. -75- -----END PRIVACY-ENHANCED MESSAGE-----