-----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, H+c4PbICRkSL7m969LPqyfGlcWE8nVm0DLLR0Eyx9F7P9+OISu1LbsggS+vDp1wf f4br25s9smBB2nblTCuR4A== 0000950123-96-001306.txt : 19960327 0000950123-96-001306.hdr.sgml : 19960327 ACCESSION NUMBER: 0000950123-96-001306 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01023 FILM NUMBER: 96538363 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-K 1 MCGRAW-HILL 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, 1995 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. --- 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 29, 1996, was $4,366,913,290. The number of shares of common stock of the registrant outstanding as of February 29, 1996 was 50,288,399 shares (100,576,798 shares after the two-for-one stock split approved by the company's Board of Directors on January 31, 1996). Part I, Part II and Part IV incorporate information by reference from the Annual Report to Shareholders for the year ended December 31, 1995. Part III incorporates information by reference from the definitive proxy statement mailed to shareholders March 21, 1996 for the annual meeting of shareholders to be held on April 24, 1996. 2 TABLE OF CONTENTS ----------------- PART I -------
Item Page - ---- ---- 1. Business.................................................................................. 1 2. Properties................................................................................ 2 - 4 3. Legal proceedings......................................................................... 4 4. Submission of matters to a vote of security holders ...................................... 4 Executive officers of the registrant............................................................... 5 PART II ----------- 5. Market for the registrant's common stock and related stockholder matters....................................................................... 6 6. Selected financial data................................................................... 6 7. Management's discussion and analysis of financial condition and results of operations....................................................... 6 8. Consolidated financial statements and supplementary data...................................................................................... 6 9. Changes in and disagreements with accountants on accounting and financial disclosure.................................................................. 6 PART III ----------- 10. Directors and executive officers of the registrant. ...................................... 7 11. Executive compensation.................................................................... 7 12. Security ownership of certain beneficial owners and management............................................................................ 7 13. Certain relationships and related transactions............................................ 7 PART IV ------------ 14. Exhibits, financial statement schedules, and reports on Form 8-K....................................................................... 8 - 11 Signatures......................................................................................... 12 - 14 Exhibits.................................................................................. 15 - 99 Consent of Independent Auditors - Ernst & Young LLP................................................ 100 Financial Data Schedule............................................................................ 101 Supplementary schedule............................................................................. 102
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, law, construction, medical and health, computers and communications, aerospace and defense. As a multimedia publishing and information company, the Registrant employs a broad range of media, including books, magazines, newsletters, software, on-line data services, CD-ROMs, facsimile and television broadcasting. Most of the Registrant's products and services face substantial competition from a variety of sources. The Registrant's 15,004 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. Substantially 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 through 24 (textual material) of the Registrant's 1995 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, 1995 and the identifiable assets of each segment at the end of each year, are included in Exhibit (13), on page 42 in the Registrant's 1995 Annual Report to Shareholders and is hereby incorporated by reference. -1- 4 Item 2. Properties - ------- ---------- The Registrant leases office facilities at 393 locations, 294 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 1,635 See Explanation Below Hightstown, NJ owned See Explanation Below Office and Data Ctr. 490 Warehouse 412 New York, NY leased 504 Financial Services owned 346 Financial Services Delran, NJ leased 106 Datapro Colorado Springs, CO owned Shepard's/McGraw-Hill Office 181 Manufacturing Plant 63 Denver, CO owned 88 Broadcasting Indianapolis, IN leased 58 Broadcasting Englewood, CO owned Rocky Mt. Data Ctr. 14 Financial Services Office 119 Financial Services Lexington, MA owned 53 Vacant leased 122 Various Operating Units Blue Ridge Summit, PA owned TAB Books Office 67 Book Dist. Ctr. 114 Vacant Peterborough, NH owned 51 Byte Chicago, IL leased 68 Various Operating Units Redondo Beach, CA leased 50 Tower
-2- 5
Owned Square or Feet Domestic Leased (thousands) Business Unit - -------- ------ ----------- ------------- Washington, DC leased 73 Various Operating Units Kent, WA leased C.J. Tower Warehouse/Dist. Ctr 79 Office 6 Monterey, CA owned 270 CTB/McGraw-Hill School Systems Blacklick (Gahanna), OH owned Book Dist. Ctr. 558 Various Operating Units Office 73 Westerville, OH owned 59 Glencoe New York, NY leased 64 Professional Publishing Grove City, OH Warehouse leased 160 School Dallas, TX leased Assembly Plant 148 School Warehouse 72 Desoto, TX leased Book Dist. Ctr. 382 School Foreign - ------- Whitby, Canada owned McGraw-Hill Ryerson Ltd. Office 80 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 941,000 square feet of the rentable space under a 30-year lease which includes renewal options for two additional 15-year periods. In addition, the Registrant subleases for its own account approximately 694,000 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 warehouse in Hightstown, NJ is leased to a tenant. The warehouse in Blue Ridge Summit, PA is vacant. Item 3. Legal Proceedings - ------- ----------------- While the Registrant and its subsidiaries are defendants in numerous legal proceedings in the United States and abroad, neither the Registrant nor its subsidiaries are a party to, nor are any of their properties subject to, any known material pending legal proceedings which Registrant believes will result in a material adverse effect on Registrant's financial statements or business operations. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- No matters were submitted to a vote of Registrant's security holders during the last quarter of the period covered by this Report. -4- 7 Executive Officers of Registrant --------------------------------
Name Age Position ---- --- -------- Joseph L. Dionne 62 Chairman and Chief Executive Officer Harold McGraw III 47 President and Chief Operating Officer Robert J. Bahash 50 Executive Vice President and Chief Financial Officer Robert E. Evanson 59 Executive Vice President, Corporate Development Robert N. Landes 65 Senior Executive Vice President and Secretary Thomas J. Sullivan 60 Executive Vice President, Administration Frank J. Kaufman 51 Senior Vice President, Taxes Barbara B. Maddock 45 Senior Vice President, Human Resources Barbara A. Munder 50 Senior Vice President, Corporate Affairs Frank D. Penglase 55 Senior Vice President, Treasury Operations Kenneth M. Vittor 46 Senior Vice President and General Counsel Thomas J. Kilkenny 37 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 Robert E. Evanson, Thomas J. Kilkenny and Barbara B. Maddock. Mr. Evanson, prior to his becoming an officer of the Registrant on February 22, 1995, was executive vice president, finance and operations for the Registrant's Educational and Professional Publishing Group since October 1993. Previously, he was executive vice president and chief financial officer of the Macmillan/McGraw- Hill School Publishing Company from July 1992 to October 1993, and held various executive positions at Harcourt Brace Jovanovich, Inc. from 1985 to 1992. Mr. Kilkenny, prior to his becoming an officer of the Registrant on December 1, 1993, was director of the Registrant's Corporate Audit Department since October 1, 1991. Previously he was with Ernst & Young LLP from 1980 through 1991. 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. Landes retired as an officer of the Registrant on December 31, 1995. -5- 8 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder - ------- ---------------------------------------------------------------- Matters ------- The approximate number of holders of the Company's common stock as of February 29, 1996 was 5,717.
1995 1994 ---- ---- Dividends per share of common stock: $.30 per quarter in 1995 $1.20 $.29 per quarter in 1994 $1.16
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 1995 Annual Report to Shareholders. Item 6. Selected Financial Data - ------- ----------------------- Incorporated herein by reference from Exhibit (13), from the 1995 Annual Report to Shareholders, page 32 and page 33. Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations --------------------- Incorporated herein by reference from Exhibit (13), from the 1995 Annual Report to Shareholders, pages 26 to 31 and page 34. Item 8. Consolidated Financial Statements and Supplementary Data - ------- -------------------------------------------------------- Incorporated herein by reference from Exhibit (13), from the 1995 Annual Report to Shareholders, pages 35 to 46 and page 48. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure -------------------- None -6- 9 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 21, 1996 for the annual meeting of shareholders to be held on April 24, 1996. Item 11. Executive Compensation - -------- ---------------------- Incorporated herein by reference from the Registrant's definitive proxy statement dated March 21, 1996 for the annual meeting of shareholders to be held on April 24, 1996. Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- -------------------------------------------------------------- Incorporated herein by reference from the Registrant's definitive proxy statement dated March 21, 1996 for the annual meeting of shareholders to be held April 24, 1996. Item 13. Certain Relationships and Related Transactions - -------- ---------------------------------------------- Incorporated herein by reference from the Registrant's definitive proxy statement dated March 21, 1996 for the annual meeting of shareholders to be held April 24, 1996. -7- 10 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......................................... 47 Consolidated balance sheet at December 31, 1995 and 1994........................................ 36-37 Consolidated statement of income for each of the three years in the period ended December 31, 1995................................ 35 Consolidated statement of cash flows for each of the three years in the period ended December 31, 1995.................................... 38 Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 1995................................ 39 Notes to consolidated financial statements........................................................ 40-46 Quarterly financial information........................................ 48 Consent of Independent Auditors............................................ 100 Consolidated schedule for each of the three years in the period ended December 31, 1995: II - Reserve for doubtful accounts..................................... 102
-8- 11 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, 1995 are hereby incorporated by reference in Exhibit (13). With the exception of the pages listed in the above index, the 1995 Annual Report to Shareholders is not to be deemed filed as part of Item 14 (a)(1). (a) (3) Exhibits. (3) Articles of Incorporation of Registrant. (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) 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)* 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. -9- 12 (10)* Registrant's 1995 Key Executive Short Term Incentive Compensation Plan, incorporated by reference from Registrant's Form 10-K for the year ended December 31, l994. (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 November 12, 1991 among the Registrant, the Banks' signatory thereto, and Bankers Trust Company, as Agent incorporated by reference from Registrant's Form SE filed November 18, 1991 in connection with Registrant's Form 8-K dated November 19, 1991. (10) First Amendment to Credit Agreement dated as of November 8, 1993 among the Registrant, the Banks' signatory thereto, and Bankers Trust Company, as agent, incorporated by reference from Registrant's Form 8-K dated November 15, 1993. (10) Second Amendment to Credit Agreement dated as of November 7, 1994 among the Registrant, the Banks' signatory thereto and Bankers Trust Company, as agent, incorporated by reference from Registrant's Form 8-K dated November 15, 1994. (10) Partnership Interest Purchase Agreement, dated as of October 4, 1993, with respect to the partnership interest of Macmillan School Publishing, Inc. in Macmillan/McGraw-Hill School Publishing Company incorporated by reference from Registrant's Form 8-K dated October 18, 1993. (10) Trademark Purchase and Sale Agreement (Macmillan), dated as of October 4, 1993, incorporated by reference from Registrant's Form 8-K dated October 18, 1993. (10) Trademark Purchase and Sale Agreement (Merrill), dated as of October 4, 1993, incorporated by reference from Registrant's Form 8-K dated October 18, 1993. (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- 13 (10)* Registrant's 1993 Stock Payment Plan for Directors, incorporated by reference from Registrant's Proxy Statement dated March 21, 1993. (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. (10)* Registrant's Director Deferred Compensation Plan, incorporated by reference from Registrant's Form 10-K for the year ended December 31, 1993. (12) Computation of ratio of earnings to fixed charges. (13) Registrant's 1995 Annual Report to Shareholders. Such Report, except for those portions thereof which are expressly incorporated by reference in this Form 10-K, is furnished for the information of the Commission and is not deemed "filed" as part of this Form 10-K. (21) Subsidiaries of the Registrant. (23) Consent of Ernst & Young LLP, Independent Auditors. (27) Financial Data Schedule. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the last quarter of 1995. ---------------- * These exhibits relate to management contracts or compensatory plan arrangements. -11- 14 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, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 26, 1996 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 fifteen 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 -12- 15 /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 0. Lawson-Johnston ------------------------------------------- Peter 0. Lawson-Johnston Director /s/ Linda Koch Lorimer ------------------------------------------- Linda Koch Lorimer Director -13- 16 /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/ Alva 0. Way --------------------------------------------- Alva 0. Way Director -14- 17 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- (3) Articles of Incorporation of Registrant. (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) 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)* 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 1995 Key Executive Short Term Incentive Compensation Plan, incorporated by reference from Registrant's Form 10-K for the year ended December 31, l994. (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 November 12, 1991 among the Registrant, the Banks' signatory thereto, and Bankers Trust Company, as Agent incorporated by reference from Registrant's Form SE filed November 18, 1991 in connection with Registrant's Form 8-K dated November 19, 1991. (10) First Amendment to Credit Agreement dated as of November 8, 1993 among the Registrant, the Banks' signatory thereto, and Bankers Trust Company, as agent, incorporated by reference from Registrant's Form 8-K dated November 15, 1993. (10) Second Amendment to Credit Agreement dated as of November 7, 1994 among the Registrant, the Banks' signatory thereto and Bankers Trust Company, as agent, incorporated by reference from Registrant's Form 8-K dated November 15, 1994. (10) Partnership Interest Purchase Agreement, dated as of October 4, 1993, with respect to the partnership interest of Macmillan School Publishing, Inc. in Macmillan/McGraw-Hill School Publishing Company incorporated by reference from Registrant's Form 8-K dated October 18, 1993. (10) Trademark Purchase and Sale Agreement (Macmillan), dated as of October 4, 1993, incorporated by reference from Registrant's Form 8-K dated October 18, 1993. (10) Trademark Purchase and Sale Agreement (Merrill), dated as of October 4, 1993, incorporated by reference from Registrant's Form 8-K dated October 18, 1993. (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- (10)* Registrant's 1993 Stock Payment Plan for Directors, incorporated by reference from Registrant's Proxy Statement dated March 21, 1993. (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. (10)* Registrant's Director Deferred Compensation Plan, incorporated by reference from Registrant's Form 10-K for the year ended December 31, 1993. (12) Computation of ratio of earnings to fixed charges. (13) Registrant's 1995 Annual Report to Shareholders. Such Report, except for those portions thereof which are expressly incorporated by reference in this Form 10-K, is furnished for the information of the Commission and is not deemed "filed" as part of this Form 10-K. (21) Subsidiaries of the Registrant. (23) Consent of Ernst & Young LLP, Independent Auditors. (27) Financial Data Schedule. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the last quarter of 1995. ---------------- * These exhibits relate to management contracts or compensatory plan arrangements. EX-3 2 ARTICLES OF INCORPORATION 1 Exhibit (3) RESTATED CERTIFICATE OF INCORPORATION OF McGRAW-HILL, INC. ----------------------- Under Section 807 of the Business Corporation Law ----------------------- Pursuant to the provisions of Section 807 of the Business Corporation Law, the undersigned hereby certify: 1.The name of the Corporation is McGraw-Hill, Inc. The name under which the Corporation was formed is McGraw-Hill Publishing Company, Inc., which name was changed to McGraw-Hill, Inc. on January 2, 1964. 2.The Certificate of Incorporation of the Corporation was filed by the Department of State on the 29th of December, 1925. 3.The text of the Certificate of Incorporation of the Corporation, as heretofore amended, is hereby restated without further amendment or change to read as herein set forth in full: ARTICLE I. The corporate name shall be: McGRAW-HILL, INC. ARTICLE II. The purposes for which the Corporation is to be formed are: To manufacture, print, publish, bind, conduct, circulate, sell, distribute, deliver and otherwise deal in and with magazines, periodicals, journals, and other publications and books of any and every description whatsoever, and generally to carry on the business of magazines, periodicals, journal. and book proprietors and publishers and that of general publishers and printers, to undertake and carry on all kinds of business relative to the dissemination of information of every nature and kind; to carry on the stationery business and any other merchandising business, book printing, book manufacturing, book binding and book selling, designing, engraving, lithographing, etching, wood typing, stereotyping, electroplating and photographing, and the making and printing of illustrations and letter press of every nature and kind, by and with every process whatsoever now existing or at any time hereafter to be discovered, incidental to and necessary for a general publishing business and for such purpose to purchase or lease or otherwise acquire, build, construct, maintain and operate and in any way to utilize building structures, manufactories, machinery, storehouses and warehouses, and any and all other personal property, rights and privileges necessary or convenient in connection with any of the purposes herein mentioned, and to mortgage, improve and otherwise -15- 2 deal in and with the same without limit as to the amount, and to carry on the above business or any other business directly or indirectly connected therewith, and in carrying on its business for the purpose of attaining or furthering any of its obligations, express or implied, to do any and all acts and things, to carry on any business and to exercise any and all powers which a natural person could do and exercise, provided such business is not of the nature which can be carried on only by Corporations organized under the Banking, the Insurance, the Educational and the Transportation Corporation Laws. To enter into, make, perform and carry out contracts of every kind which a corporation organized under the Stock Corporation Law may enter into with any person, firm, association or corporation. To issue bonds, debentures, or obligations of the company from time to time, for any of the objects or purposes of the company and to secure the same by mortgage, pledge, deed of trust or otherwise as may be allowed by the laws of New York. To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage, or otherwise dispose of Letters Patent of the United States, or any foreign country, patents, patent rights, licenses and privileges, inventions, improvements and processes, trademarks and trade names relating to or useful in connection with any business of the Corporation, but always subject to statute. To purchase, acquire, hold and dispose of the shares of its capital stock in the manner and to the extent permitted by laws of New York. To conduct and transact business in any of the states, territories, colonies or dependencies of the United States, and in any and all foreign countries; to have one or more offices therein and therein to hold, purchase, mortgage, and convey real and personal property, without limit as to amount, but always subject to local laws. To purchase, acquire, hold, sell, assign, transfer, mortgage, pledge and otherwise dispose of the shares of capital stock, bonds, debentures or other evidences of indebtedness of any corporation, domestic or foreign, and while the holder thereof, to exercise all the rights and privileges of ownership, including the right to vote thereon, and to issue in exchange therefor its own stock, bonds and other obligations. The foregoing clauses shall be construed both as objects and powers, and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of the Corporation. In general, to carry on any other lawful business of the same general nature in connection with the foregoing whether manufacturing or otherwise, and to have and to exercise all the powers conferred by the laws of New York upon corporations formed under the act hereinafter referred to. ARTICLE III. The aggregate number of shares which the Corporation shall have authority to issue shall be 82,891,256 shares, 891,256 shares of which shall have a par value of $10 per share and 82,000,000 shares of which shall have a par value of $1 per share. All of these shares are to be classified and the designations, number of shares in each class and the par value of the shares shall be as follows: $1.20 Convertible Preference Stock, 891,256 shares of the par value of $10 per share; Series Preferred Stock, 2,000,000 shares of the par value of $1 per share; and Common Stock, 80,000,000 shares of the par value of $1 per share. -16- 3 A statement of the designations, preferences, privileges and voting powers of the shares of each class and the restrictions and qualifications thereof is as set forth below. All references to Convertible Preferred Stock apply to the $1.20 Convertible Preference Stock. A. CONVERTIBLE PREFERRED STOCK Dividends. The holders of Convertible Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative cash dividends from the last day of the month of March, June, September or December next preceding the date on which such stock is issued, at the rate of $1.20 per share per annum in the case of the $1.20 Convertible Preference Stock, and no more, payable quarterly on the first day of the months of January, April, July and October in the case of the $1.20 Convertible Preference Stock, but in no event shall such dividends accrue for any period prior to January 1, 1966 in the case of the $1.20 Convertible Preference Stock. In no event, so long as any Convertible Preferred Stock shall remain outstanding, shall any dividend whatsoever, other than a dividend payable in shares of junior stock, be declared or paid upon, nor shall any distribution be made upon, any junior stock, nor shall any shares of junior stock be purchased or redeemed by the Corporation otherwise than in connection with a refunding of junior stock through the issue of other junior stock, nor shall any moneys be paid to or made available for a sinking fund for the purchase or redemption of any junior stock, unless in each instance dividends on all outstanding shares of the Convertible Preferred Stock for all past dividend periods shall have been paid and the dividend on all outstanding shares of the Convertible Preferred Stock for the then current quarterly dividend period shall have been paid or declared and sufficient funds are available for the payment thereof. Subject to the foregoing, dividends may be paid upon junior stock as and when declared by the Board of Directors out of any funds of the Corporation legally available therefor. Redemption. The Corporation, at the option of the Board of Directors, at any time after January 1, 1972 in the case of the $1.20 Convertible Preference Stock, may redeem, in whole, or from time to time in part, the Convertible Preferred Stock, upon notice given as hereinafter provided, by paying for each share in cash the sum of Forty Dollars ($40) in the case of the $1.20 Convertible Preference Stock, plus in each case an amount equal to dividends accrued thereon to the date fixed for redemption. In case of the redemption of less than all of the outstanding shares of Convertible Preferred Stock, the shares to be redeemed shall be selected by lot or pro rata in such manner as the Board of Directors shall determine from among the outstanding shares of Convertible Preferred Stock. Not less than thirty (30) days' prior written notice shall be given by mail, postage prepaid, to the holders of record of the Convertible Preferred Stock to be redeemed, such notice to contain a statement of or reference to the conversion right set forth in the paragraph entitled 'Conversion' and to be addressed to each such shareholder at his post office address as shown by the records of the Corporation. If such notice of redemption shall have been duly given, and if on or before the redemption date specified in such notice the funds necessary for such redemption shall have been set aside so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, from and after such redemption date, the -17- 4 shares so called for redemption shall no longer be deemed outstanding, the dividends thereon shall cease to accrue, and all rights with respect to shares so called for redemption, including the rights, if any, to receive notices and to vote, shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable upon redemption thereof, without interest; provided, however, that if such notice of redemption shall have been duly given, and if on or before the redemption date specified in such notice, there shall have been deposited with a bank or trust company in the Borough of Manhattan, City and State of New York, having capital, surplus and undivided profits of at least Five Million Dollars ($5,000,000) in trust for the account of the holders of the shares so called for redemption which shall not have been surrendered for conversion pursuant to the paragraph entitled 'Conversion', the funds necessary for such redemption, then upon the making of such deposit in trust, the shares with respect to which such deposit shall have been made shall no longer be deemed to be outstanding, and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall forthwith cease and terminate, except only the right of the holders thereof to receive, out of the funds so deposited in trust, from and after the date of such deposit, the amount payable upon the redemption thereof, without interest, or to convert their shares up to the close of business on the third full business day prior to the date fixed for redemption, into Common Stock pursuant to the paragraph entitled 'Conversion'. Any funds so deposited which shall not be required for such redemption because of the exercise of any right of conversion or exchange or otherwise subsequent to the date of such deposit shall be returned to the Corporation forthwith. Any interest accrued on any funds so deposited shall belong to the Corporation and be paid to it from time to time. Any other funds so set aside or deposited by the Corporation and unclaimed at the end of six years from the date fixed for such redemption shall be repaid to the Corporation, upon its request, after which repayment the holders of such shares so called for redemption shall look only to the Corporation for the payment of the amount payable upon the redemption thereof. Subject to the provisions hereof the Board of Directors shall have authority to prescribe the manner in which the Convertible Preferred Stock shall be redeemed from time to time. All shares of Convertible Preferred Stock so redeemed shall be permanently retired and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized Convertible Preferred Stock accordingly. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, and after the holders of the Series Preferred Stock shall have been paid in full the amounts to which they shall be entitled. or after an amount sufficient to pay the aggregate amount to which the holders of the Series Preferred Stock shall be entitled shall have been deposited with a bank or trust company in the Borough of Manhattan, City and State of New York, having capital, surplus and undivided profits of at least Five Million Dollars ($5,000,000), in trust for the account of the holders of the Series Preferred Stock, the remaining net assets of the Corporation shall be distributed pro rata to the holders of the $1.20 Convertible Preference Stock and the Common Stock in proportion to the number of shares of each such class at the time outstanding. Written notice of such liquidation, dissolution or winding up, stating a payment date and the place where said sums shall be payable and containing a statement of or reference to the conversion right set forth in the paragraph entitled 'Conversion', shall be given by mail, postage prepaid, not less than thirty (30) days prior to the payment date stated therein, to the holders of record of the Convertible Preferred Stock, such notice to be addressed to each such shareholder at his post office address as shown by the records of the Corporation. Neither the consolidation or merger of the Corporation into or with any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of any of the provisions of this paragraph. -18- 5 Conversion. (1) Any share or shares of Convertible Preferred Stock may be converted, at the option of the holder thereof, in the manner hereinafter provided, into full-paid and non-assessable shares of Common Stock of the Corporation; provided, however, that (a) as to any share of Convertible Preferred Stock which shall have been called for redemption, the right of conversion shall terminate at the close of business on the third full business day prior to the date fixed for redemption, and (b) on any liquidation of the Corporation the right of conversion shall terminate at the close of business on the third full business day before the date fixed for the initial payment of distributable amounts on the Convertible Preferred Stock. (2)[Deleted] (3)The conversion rate with respect to the $1.20 Convertible Preference Stock shall be .825 of a share of Common Stock for each one share of such $1.20 Convertible Preference Stock surrendered for conversion, subject to adjustment as hereinafter provided. (a)In case at any time shares of Common Stock outstanding shall be combined into a lesser number of shares, whether by reclassification, recapitalization, reduction of capital stock or otherwise, the conversion rate shall be propor tionately decreased, (b)In case the shares of Common Stock at any time outstanding shall, at any time after December 31, 1965, be subdivided, by reclassification, recapitalization or otherwise (including the issuance of shares of Common Stock as a dividend on the Common Stock), into a greater number of shares without the actual receipt by the Corporation of any consideration for the additional number of shares so issued, the conversion rate shall be proportionately increased. (4) Any conversion rate determined or adjusted as herein provided shall remain in effect until further adjustment as required herein. Upon each adjustment of the conversion rate a written instrument signed by an officer of the Corporation, setting forth such adjustment and the computation and a summary of the facts upon which it is based, shall forthwith be filed with the principal transfer agent for the Convertible Preferred Stock of the class or classes affected and made available for inspection by the shareholders, and any adjustment so evidenced, made in good faith, shall be binding upon all shareholders and upon the Corporation. Upon any conversion fractional shares shall not be issued but any fractions shall be adjusted in cash, unless the Board of Directors shall determine to adjust them by the issue of fractional scrip certificates or in some other manner. Upon any conversion, no adjustment shall be made for dividends on the Convertible Preferred Stock surrendered for conversion or on the Common Stock delivered The Corporation shall pay all issue taxes, if any, incurred in respect of the issue of the Common Stock on conversion, provided, however, that the Corporation shall not be required to pay any transfer or other taxes incurred by reason of the issuance of such Common Stock in names other than those in which the Convertible Preferred Stock surrendered for conversion may stand. (5) Any conversion of Convertible Preferred Stock into shares of Common Stock shall be made by the surrender to the Corporation, at the office of any transfer agent for the Convertible Preferred Stock, of the certificate or certificates representing the share or shares of Convertible Preferred Stock to be converted, duly endorsed or assigned (unless such endorsement or assignment be waived by the Corporation), together with a written request for conversion. -19- 6 (6)All shares of Convertible Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall forthwith cease and terminate except only the right of the holders thereof to receive Common Stock in exchange therefor. Any shares of Convertible Preferred Stock so converted shall be permanently retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized Convertible Preferred Stock accordingly. (7)In case of any reclassification or change of outstanding shares of Common Stock of the class issuable upon conversion of the shares of Convertible Preferred Stock, or in case of any consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation of the property of the Corporation as an entirety or substantially as an entirety, the holder of each share of Convertible Preferred Stock then outstanding shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable, upon such reclassification, change, consolidation, merger, sale or conveyance, by a holder of the number of shares of Common Stock (whole or fractional) of the Corporation into which such share of Convertible Preferred Stock might have been converted immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. In the event of any such consolidation, merger, sale or conveyance (a) effective provision shall be made, in the charter of the continuing or successor Corporation or otherwise, so that in the opinion of the Board of Directors of the Corporation, the provisions set forth herein for the protection of the conversion rights of the Convertible Preferred Stock shall thereafter be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities and property deliverable upon conversion of the Convertible Preferred Stock remaining outstanding or other Convertible Preferred Stock received by the holders in place thereof, and (b) any such continuing or successor Corporation shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, such shares, securities or property as the holders of shares of the Convertible Preferred Stock remaining outstanding, or other convertible preferred stock received by the holders in place thereof, shall be entitled to receive pursuant to the provisions hereof, and to make provision for the protection of the conversion right as above provided. In case securities or property other than Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all references in this paragraph entitled 'Conversion' shall be deemed to apply so far as appropriate and as nearly as may be, to such other securities or property. (8)A number of shares of authorized Common Stock sufficient to provide for the conversion of the Convertible Preferred Stock outstanding upon the basis hereinbefore provided shall at all times be reserved for such conversion. If the Corporation shall propose to make any change in its capital structure which would change the number of shares of Common Stock into which each share of the Convertible Preferred Stock shall be convertible as herein provided, the Corporation shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved for conversion of the outstanding Convertible Preferred Stock on the new basis. Voting Rights. Each holder of Convertible Preferred Stock shall be entitled to one vote for each share held and, except as otherwise by law provided or as provided with respect to any series of the Series Preferred Stocks, the Convertible Preferred Stock, the shares of any series of the Series Preferred Stock having general voting rights and the Common Stock of the Corporation shall vote together as one class. -20- 7 Denial of Preemptive Rights. No holder of the Convertible Preferred Stock shall be entitled, as such, as a matter of right, to subscribe for or to purchase any part of any new or additional issue of stock of any class whatsoever or of securities convertible into stock of any class whatsoever, whether now or hereafter authorized, or whether issued for cash or other consideration, or by way of dividend. Notwithstanding the foregoing, or the provisions of Section E of this Article III, in the event that the Corporation grants to the holders of its Common Stock generally rights to subscribe for or purchase any stock or securities, the Corporation shall also grant to the holders of the Convertible Preferred Stock rights to subscribe for or purchase, on the same terms as such stock or securities are offered to the holders of the Common Stock, an amount of such stock or securities equal to the amount which they would be entitled to purchase if the Convertible Preferred Stock had been converted into Common Stock at the then applicable conversion rate. B. SERIES PREFERRED STOCK 1. Board Authority. The Series Preferred Stock may be issued from time to time as herein provided in one or more series. The designations, relative rights, preferences and limitations of the Series Preferred Stock, and particularly of the shares of each series thereof, may, to the extent permitted by law, be similar to or differ from those of any other series. The Board of Directors of the Corporation is hereby expressly granted authority, subject to the provisions of this Article III, to fix from time to time before issuance thereof the number of shares in each series of such class and all designations, relative rights, preferences and limitations of the shares in each such series, including, but without limiting the generality of the foregoing, the following: (i)The number of shares to constitute such series and the distinctive designation thereof; (ii)The dividend rate on the shares of such series, whether or not dividends on the shares shall be cumulative, and the date or dates, if any, from which dividends thereon shall be cumulative; (iii)Whether or not the shares of such series shall be redeemable, and, if redeemable, the date or dates upon or after which they shall be redeemable, the amount per share payable thereon in the case of the redemption thereof, which amount may vary at different redemption dates or otherwise as permitted by law; (iv)Whether or not the shares of such series shall be subject to the operation of a retirement or sinking fund to be applied to the purchase or redemption of such shares for retirement and, if such retirement or sinking fund be established, the amount thereof, and the terms and provisions relative to the operation thereof; (v)The right, if any, of holders of shares of such series to convert the same into or exchange the same for Common Stock, and the terms and conditions of such conversion or exchange, as well as provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine; (vi)The amount per share payable on the shares of such series upon the voluntary and involuntary liquidation, dissolution or winding up of the Corporation; -21- 8 (vii)Whether the holders of shares of such series shall have voting power, full or limited, in addition to the voting powers provided by law, and in case additional voting powers are accorded to fix the extent thereof; and (viii)Generally to fix the other rights and privileges and any qualifications, limitations or restrictions of such rights and privileges of such series, provided, however, that no such rights, privileges, qualifications, limitations or restrictions shall be in conflict with the Certificate of Incorporation of the Corporation or with the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of which there are shares then outstanding. All shares of Series Preferred Stock of the same series shall be identical in all respects, except that shares of any one series issued at different times may differ as to dates, if any, from which dividends thereon may accumulate. All shares of Series Preferred Stock of all series shall be of equal rank (ranking equally as to dividends with the $1.20 Convertible Preference Stock) and shall be identical in all respects except that to the extent not otherwise limited in this Article III any series may differ from any other series with respect to any one or more of the designations, relative rights, preferences and limitations described or referred to in subparagraphs (i) to (viii) inclusive above. 2. Dividends. The holders of shares of the Series Preferred Stock of each series shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, dividends at the rates fixed by the Board of Directors for such series, and no more, before any dividends, other than dividends payable in Common Stock, shall be declared and paid, or set apart for payment, on the Common Stock with respect to the same dividend period. All shares of Series Preferred Stock of all series shall be of equal rank, preference and priority as to dividends irrespective of whether or not the rates of dividends to which the same shall be entitled shall be the same and when the stated dividends are not paid in full, the shares of all series of the Series Preferred Stock shall share ratably in the payment thereof in accordance with the sums which would be payable on such shares if all dividends were paid in full, provided, however, that any two or more series of the Series Preferred Stock may differ from each other as to the existence and extent of the right to cumulative dividends, as aforesaid. 3. Voting Rights. Except as otherwise specifically provided in the certificate filed pursuant to law with respect to any series of the Series Preferred Stock, or as otherwise provided by law, the Series Preferred Stock shall not have any right to vote for the election of directors or for any other purpose and the Convertible Preferred Stock and the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes. 4. Liquidation. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each series of the Series Preferred Stock shall have preference and priority over the $1.20 Convertible Preference Stock and the Common Stock for payment of the amount to which each outstanding series of the Series Preferred Stock shall be entitled in accordance with the provisions thereof and each holder of the Series Preferred -22- 9 Stock shall be entitled to be paid in full such amounts, or have a sum sufficient for the payment in full set aside, before any payments shall be made to the holders of the $1.20 Convertible Preference Stock or the Common Stock. If, upon liquidation, dissolution or winding up of the Corporation, the assets of the Corporation or proceeds thereof, distributable among the holders of the shares of all series of the Series Preferred Stock shall be insufficient to pay in full the preferential amounts aforesaid, then such assets, or the proceeds thereof, shall be distributed among such holders ratably in accordance with the respective amounts which would be payable if all amounts payable thereon were paid in full. After the payment to the holders of the Series Preferred Stock of all such amounts to which they are entitled, as above provided, the remaining assets and funds of the Corporation shall be divided and paid to the holders of the $1.20 Convertible Preference Stock and the Common Stock. Neither the consolidation or merger of the Corporation into or with any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of any of the provisions of this paragraph. 5. Redemption. In the event that the Series Preferred Stock of any series shall be made redeemable as provided in clause (iii) of paragraph 1 of this Section B of Article III, the Corporation, at the option of the Board of Directors, may redeem at any time or times, and from time to time, all or any part of any one or more series of Series Preferred Stock outstanding, upon notice and terms as may be specifically provided in the certificate filed pursuant to law with respect to the series, by paying for each share the then applicable redemption price fixed by the Board of Directors plus an amount equal to accrued and unpaid dividends to the date fixed for redemption. C. COMMON STOCK Dividends.Subject to all of the rights of the Convertible Preferred Stock and the rights of the Series Preferred Stock, dividends may be paid upon the Common Stock as and when declared by the Board of Directors out of any funds legally available for the payment of dividends. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary and after the holders of the Series Preferred Stock shall have been paid in full amounts to which they respectively shall be entitled, or an amount sufficient to pay the aggregate amount to which the holders of the Series Preferred Stock shall be entitled shall have been deposited with a bank or trust company having its principal office in the Borough of Manhattan, The City of New York, and having capital, surplus and undivided profits of at least Five Million Dollars ($5,000,000), as a trust fund for the benefit of the holders of the Series Preferred Stock, the remaining net assets of the Corporation shall be distributed pro rata to the holders of the $1.20 Convertible Preference Stock and the Common stock in proportion to the number of shares of each such class at the time outstanding. Voting Rights. Each holder of Common Stock of the Corporation shall be entitled to one vote for each share held and, except as otherwise by law provided or as provided with respect to any series of the Series Preferred Stock, the Convertible Preferred Stock, the shares of any series of Series Preferred Stock having general voting rights and the Common Stock of the Corporation shall vote together as one class. -23- 10 D. CERTAIN DEFINITIONS For the purposes of this Article III the following terms shall be deemed to have the meanings specified below: The terms "dividends accrued" and "an amount equal to dividends accrued," whenever used herein with reference to shares of Convertible Preferred stock, shall mean an amount per share computed at the annual rate set forth in the paragraph entitled "Dividends" under "Convertible Preferred Stock" above, or a quarterly rate equal to one-fourth (1/4) of such annual rate, from and including the dividend payment date to which the dividends on such share have been paid, to but not including the date to which dividends are to be accrued. The amount per share for less than a full quarterly dividend period shall be computed by (a) assuming that there are 90 days in such full quarterly dividend period, (b) determining the number of days from and including the next preceding dividend payment date, to but not including the date to which the dividend is to be accrued, and (c) multiplying the applicable quarterly dividend rate by a fraction, the numerator of which shall be the number of days of the accrual as in (b) and the denominator of which shall be 90, but in no event shall such accrual be more than such applicable quarterly dividend rate. The term "junior stock" shall mean the Common Stock and any other stock ranking junior to the Convertible Preferred Stock in respect of the payment of dividends or of payment in liquidation, or both, in accordance with the subject matter of the context, provided that the $1.20 Convertible Preference Stock shall not be deemed to be "junior stock" for the purposes of the paragraph entitled "Dividends" under "Convertible Preferred Stock" above. E. WAIVER OF PREEMPTIVE RIGHTS No holder of Convertible Preferred Stock, Series Preferred Stock or Common Stock shall be entitled as of right to purchase or subscribe for any part of any unissued stock of any class or of any additional Convertible Preferred Stock, Series Preferred Stock or Common Stock to be issued by reason of any increase of the authorized capital stock of the Corporation of any class, or of bonds, certificates of indebtedness, debentures or other securities convertible into stock of the Corporation, but any such unissued stock or such additional authorized issue of new stock or of other securities convertible into stock may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations and upon such terms as may be deemed advisable by the Board of Directors in the exercise of their discretion. F. SCRIP In no case shall fractions of shares of any class be issued by the Corporation, but in lieu thereof the Corporation may issue fractional Scrip Certificates, in either bearer or registered form, and in such denominations as shall be determined by the Board of Directors. Such Scrip Certificates shall be exchangeable on or before such date as the Board of Directors may fix, when surrendered with other similar Scrip Certificates in sufficient aggregate -24- 11 amounts, for certificates for full paid and non-assessable shares of the stock for which such Scrip Certificates are exchangeable, and the amount of dividends theretofore paid upon such full shares, and new Scrip Certificates of a like tenor for the remaining fraction of a share, if any. Such Scrip Certificates shall not entitle any holder thereof to voting rights, dividend rights or any other right of a shareholder or any rights other than the rights herein set forth, and no dividend or interest shall be payable or shall accrue with respect to the Scrip Certificates or the interests represented thereby. All such Scrip Certificates which are not surrendered in exchange for shares of stock on or before such date as the Board of Directors may fix, shall thereafter be void and of no effect whatever, except that the holders thereof shall be entitled to receive their pro rata share of the proceeds resulting from the sale of the full shares of stock for which such Scrip Certificates are exchangeable, together with their pro rata share of dividends theretofore paid upon such full shares; such sale (which may be effected either publicly or privately at the current market price, and as to which the Corporation may be the purchaser) to be made by the Corporation or by an agent of the Corporation (which agent may be a transfer agent or registrar of the shares for which such Scrip Certificates are exchangeable), as agent and on behalf of the holders of the Scrip Certificates. ARTICLE IV. The company may use and apply its surplus earnings or accumulated profits to the purchase or acquisition of property and to the purchase and acquisition of its own capital stock from time to time, to such extent and in such manner, and upon such terms as its Board of Directors shall determine, and neither the property nor the capital stock so purchased and acquired shall be regarded as profits for the purpose of declaration or payment of dividends, unless otherwise determined by a majority of the Board of Directors. ARTICLE V. [Deleted] ARTICLE VI. The office of the Corporation is to be located in the Borough of Manhattan, City, County and State of New York. ARTICLE VII. The duration of the Corporation is to be perpetual. ARTICLE VIII. A. Number, Election and Terms of Directors. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors which, subject to any rights of the holders of any series of Preferred Stock then outstanding to elect additional directors under specified circumstances, shall consist of not less than twelve (12) nor more than twenty-five (25) persons. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be determined from time to time by the affirmative vote of (i) a majority of the Board of Directors, or (ii) the holders of at least 80% of the voting power of all of the shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. At the 1985 Annual Meeting of Shareholders, the directors shall be divided into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1986 Annual Meeting of Shareholders, the term of office of the second class to expire at the 1987 Annual -25- 12 Meeting of Shareholders and the term of office of the third class to expire at the 1988 Annual Meeting of Shareholders, and with the members of each class to hold office until their successors have been duly elected and qualified. At each Annual Meeting of Shareholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding Annual Meeting of Shareholders after their election and after their successors have been duly elected and qualified. B. Newly Created Directorships and Vacancies. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors and any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by a majority vote of the directors then in office (even though less than a quorum of the Board of Directors), and directors so chosen shall hold office for a term expiring at the next Annual Meeting of Shareholders and after their successors have been duly elected and qualified. If the number of directors is increased by the Board of Directors and the newly created directorship is filled by the Board, there shall be no classification of the additional directors so chosen until the next Annual Meeting of Shareholders at which time a majority of the Board shall designate the class of the director to be elected to fill such directorship by the shareholders. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. C. Removal. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any director or directors may be removed from office at any time, but only for cause and only by the affirmative vote of (i) the holders of at least 80% of the voting power of all of the shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, or (ii) a majority of the Board of Directors. D. Special Meetings of Shareholders. Special meetings of Shareholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by a majority of the Board of Directors, upon not less than 30 nor more than 50 days' written notice. E. Amendment, Repeal, Etc. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all of the shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article Eighth. ARTICLE IX. A. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS 1. Higher Vote for Certain Business Combinations. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in Section B of this Article Ninth: (a)any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Shareholder (as hereinafter defined) or (ii) any other Corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or -26- 13 (b)any sale, lease, license, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $1,000,000 or more; or (c)the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder having an aggregate Fair Market Value of $1,000,000 or more; or (d)the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder; or (e)any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder; shall require the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), voting together as a single class (it being understood that for purposes of this Article Ninth, each share of the Voting Stock shall have the number of votes granted to it pursuant to Article Third of this Certificate of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. 2. Definition of "Business Combination". The term "Business Combination" as used in this Article Ninth shall mean any transaction which is referred to in any one or more of clauses (a) through (e) of paragraph 1 of this Section A of Article Ninth. B. WHEN HIGHER VOTE IS NOT REQUIRED The provisions of Section A of this Article Ninth shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Certificate of Incorporation, if all of the conditions specified in either of the following paragraphs 1 or 2 are met: 1. Approval by Disinterested Directors. The Business Combination shall have been approved by a majority of the total number of Disinterested Directors (as hereinafter defined). 2. Price and Procedural Requirements. All of the following conditions shall have been met: -27- 14 (a)The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: (i)(if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; and (ii)the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date is referred to in this Article Ninth as the "Determination Date"), whichever is higher. (b)The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class of outstanding Voting Stock (other than Institutional Voting Stock, as hereinafter defined) shall be at least equal to the highest of the following (it being intended that the requirements of this clause (b) shall be required to be met with respect to every class of outstanding Voting Stock (other than Institutional Voting Stock), whether or not the Interested Shareholder has previously acquired any shares of a particular class of Voting Stock): (i)(if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of such class of Voting Stock acquired by it (x) within the two-year period immediately prior to the Announcement Date or (y) in the transaction in which it became an Interested Shareholder, whichever is higher; (ii)the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; and (iii)(if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. (c)The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class of Voting Stock. If the Interested Shareholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. (d)After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (i) except as approved by a majority of the total number of Disinterested Directors, there shall have been no failure to declare and pay at the -28- 15 regular date therefor any full quarterly dividends (whether or not cumulative) on the outstanding preferred stock of the Corporation; (ii) there shall have been (x) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock) except as approved by a majority of the total number of Disinterested Directors, and (y) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the total number of Disinterested Directors; and (iii) such Interested Shareholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder. (e)After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans,advances, guarantees pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f)A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public shareholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). (g)The holders of all outstanding shares of Voting Stock not beneficially owned by the Interested Shareholder prior to the consummation of any Business Combination shall be entitled to receive in such Business Combination cash or other consideration for their shares of such Voting Stock in compliance with paragraphs 2(a), (b) and (c) of this Section B (provided, however, that the failure of any such holders who are exercising their statutory rights to dissent from such Business Combination and receive payment of the fair value of their shares to exchange their shares in such Business Combination shall not be deemed to have prevented the condition set forth in this paragraph 2(g) from being satisfied). C. CERTAIN DEFINITIONS For the purposes of this Article Ninth the following terms shall be deemed to have the meanings specified below: 1. The term "person" shall mean any individual, firm, Corporation or other entity. 2. The term "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (a)is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the then outstanding Voting Stock; or -29- 16 (b)is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or (c)is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 3. A person shall be deemed a "beneficial owner" of any Voting Stock: (a)which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (b)which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or under standing or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or (c)which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. 4. For the purpose of determining whether a person is an Interested Shareholder pursuant to paragraph 2 of this Section C of this Article Ninth, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph 3 of this Section C of this Article Ninth but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 5. The terms "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on November 28, 1984. 6. The term "Subsidiary" shall mean any Corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided however, that for the purposes of the definition of Interested Shareholder set forth in paragraph 2 of this Section C of this Article Ninth, the term "Subsidiary" shall mean only a Corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. 7. The term "Fair Market Value" shall mean: (a)in the case of stock, the highest closing sale price during the 30- day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed -30- 17 on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the total number of Disinterested Directors in good faith, in each case with respect to any class of such stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock; and (b) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the total number of Disinterested Directors in good faith. 8. The term "Institutional Voting Stock" shall mean any class of Voting Stock which was issued to and continues to be held solely by one or more insurance companies, pension funds, commercial banks, savings banks or similar financial institutions or institutional investors. 9. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in clauses (a) and (b) of paragraph 2 of Section B of this Article Ninth shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. 10. The term "Disinterested Director" shall mean any member of the Board of Directors of the Corporation who is unaffiliated with the Interested Shareholder and who was a member of the Board of Directors prior to the Determination Date, and any successor of a Disinterested Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Disinterested Director by a majority of the total number of Disinterested Directors then on the Board of Directors. 11. References to "highest per share price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. D. POWERS OF THE BOARD OF DIRECTORS A majority of the Board of Directors of the Corporation shall have the power and duty to determine for the purposes of this Article Ninth on the basis of information known to them after reasonable inquiry, whether a person is an Interested Shareholder. Once the Board of Directors has made a determination, pursuant to the preceding sentence, that a person is an Interested Shareholder, a majority of the total number of Directors of the Corporation who would qualify as Disinterested Directors shall have the power and duty to interpret all of the terms and provisions of this Article Ninth, and to determine on the basis of in formation known to them after reasonable inquiry all facts necessary to ascertain compliance with this Article Ninth, including, without limitation, (A) the number of shares of Voting Stock beneficially owned by any person, (B) whether a person -31- 18 is an Affiliate or Associate of another, (C) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more and (D) whether all of the applicable conditions set forth in paragraph 2 of Section B of this Article Ninth have been met with respect to any Business Combination. Any determination pursuant to this Section D of this Article Ninth made in good faith shall be binding and conclusive on all parties. E. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED SHAREHOLDERS Nothing contained in this Article Ninth shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. F. AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the ByLaws of the Corporation), the affirmative vote of the holders of 80% or more of the outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article Ninth of this Certificate of Incorporation. ARTICLE X. The Corporation hereby designates the Secretary of State of the State of New York as its agent upon whom process in any action or proceeding against it may be served within the State of New York. The address to which the Secretary of State shall mail a copy of any process against the Corporation which may be served upon him pursuant to law is 1221 Avenue of the Americas, New York, New York. The restatement of the Certificate of Incorporation was authorized by vote of the Board of Directors of the Corporation at a meeting of the Board of Directors held on July 31, 1985. IN WITNESS WHEREOF, this certificate has been signed this 31st day of July 31, 1985. /s/ Robert N. Landes --------------------------- Robert N. Landes Executive Vice President /s/ Kurt D. Steele --------------------------- Kurt D. Steele Assistant Secretary -32- 19 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF McGRAW-HILL, INC. ---------------- Under Section 805 of the Business Corporation Law ---------------- Pursuant to the provisions of Sections 502 and 805 of the Business Corporation Law, the undersigned hereby certify: 1. The name of the Corporation is McGraw-Hill, Inc. The name under which the Corporation was formed is McGraw-Hill Publishing Company, Inc., which name was changed to McGraw-Hill, Inc. on January 2, 1964. 2. The Certificate of Incorporation of the Corporation was filed by the Department of State on the 29th of December, 1925. 3. The [_____________] Certificate of Incorporation of the Corporation is hereby amended by the addition of the following provision stating the number, designations, relative rights, preferences and limitations of a series of Series Preferred Stock of the Corporation, designated as Series A Preferred Stock, as fixed by the Board of Directors of the Corporation pursuant to the authority vested in it by the Restated Certificate of Incorporation of the Corporation: SERIES A PREFERRED STOCK 1. Designation and Amount. The shares of such series shall be designated as "Series A Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting such series shall be 600,000. 2. Dividends and Distributions. (i) The holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the fifteenth day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $25 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a -33- 20 dividend payable in shares of Common Stock of the Corporation or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Divided Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time after the date hereof declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (ii) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in subparagraph (i) of this paragraph 2 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $25 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (iii) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue of a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (i) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time after the date hereof declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately -34- 21 prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (ii) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital Stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (iii) Except as set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock and any other capital stock of the Corporation having general voting rights as set forth herein) for taking any corporate action. 4. Certain Restrictions. (i) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in paragraph 2 of this Section are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (a) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (b) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution of winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (c) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (d) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (ii) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under subparagraph (i) of this paragraph 4, purchase or otherwise acquire such shares at such time and in such manner. -35- 22 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Series Preferred Stock and may be reissued as part of a new series of Series Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (b) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after the date hereof declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (a) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed in the amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the date hereof declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. -36- 23 9. Amendment. The ____________ Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. The foregoing amendment to the ____________ Certificate of Incorporation was authorized by the Board of Directors of the Corporation, pursuant to the authority vested in it by the Restated Certificate of Incorporation of the Corporation and Section 502 of the Business Corporation Law, at a meeting of the Board duly held on the 29th day of January, 1986. IN WITNESS WHEREOF, we have executed and subscribed this Certificate of Amendment, and do affirm the foregoing as true, this 29th day of January , 1986. /s/ Robert N. Landes -------------------------- Robert N. Landes Executive Vice President /s/ Scott L. Bennett -------------------------- Scott L. Bennett Assistant Secretary -37- 24 CERTIFICATE OF MERGER OF CYMA CORPORATION AND AARDVARK SOFTWARE, INC. McGRAW-HILL, INC. UNDER SECTION 905 OF THE BUSINESS CORPORATION LAW ---------------------------------- It is hereby certified by the corporation named herein as the surviving corporation as follows: FIRST: The Board of Directors of the corporation named herein as the surviving corporation has adopted a Plan of Merger setting forth the terms and conditions of merging the corporations named herein as the subsidiary corporations into said surviving corporation. SECOND: The laws of the jurisdiction of incorporation of the corporations named herein as the subsidiary corporations permit a merger of the kind certified herein. THIRD: The names of the subsidiary corporations to be merged are Cyma Corporation, which corporation was organized under the laws of the state of Arizona on August 19, 1980 ("Cyma"), and Aardvark Software, Inc., which corporation was organized under the laws of the state of Wisconsin on October 1, 1979 ("Aardvark"). FOURTH: The name of the surviving corporation, the certificate of incorporation of which was filed by the Department of State on December 29, 1925 is McGraw-Hill, Inc. The name under which said corporation was formed was McGraw-Hill Publishing Company, Inc. FIFTH: The designation and number of outstanding shares of each class of the subsidiary corporations and the number of such shares owned by the surviving corporation, as set forth in the plan of merger are as follows: -38- 25
SUBSIDIARY NUMBER OWNED BY CORPORATION DESIGNATION NUMBER SURVIVING CORPORATION - ----------- ----------- ------ --------------------- Cyma Common Stock 1,334 1,334 Par Value $1.00 Aardvark Common Stock 77,422 77,422 Par Value $.10\
SIXTH: McGraw-Hill, Inc. in its capacity as the holder of all of the outstanding shares of Cyma and Aardvark has waived the mailing of and its right to receive a copy of the Plan of Merger. SEVENTH: The merger of the subsidiary corporations into the surviving corporation has been authorized under the laws of the jurisdictions of incorporation of the subsidiary corporations. EIGHTH: The effective date of the merger herein certified, insofar as the provisions of the New York Business Corporation Law govern such effective date shall be the 28th day of February, 1986. IN WITNESS WHEREOF, this Certificate of Merger has been signed on the 26th day of March, 1986, and the statements contained herein are affirmed as true under penalty of perjury. McGRAW-HILL, INC. /s/ Robert N. Landes ---------------------------------------- Robert N. Landes, Executive Vice President /s/ Scott L. Bennett ------------------------------------ Scott L. Bennett, Assistant Secretary -39- 26 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF McGRAW-HILL, INC. UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW --------------------------------------------------------- It is hereby certified that: (1) The name of the Corporation is McGRAW-HILL, INC. The name under which the Corporation was formed was McGraw-Hill Publishing Company, Inc. which name was changed to McGraw-Hill, Inc. on January 2, 1964. (2) The Certificate of Incorporation of the Corporation was filed by the Department of State on December 29, 1925. (3) Article III of the Certificate of Incorporation of the Corporation is hereby amended to effect an increase in the number of authorized shares of Common Stock, par value $1 per share, from 80,000,000 shares to 150,000,000 shares. The first paragraph of Article III of the Certificate of Incorporation of the Corporation is hereby amended to read as follows: "ARTICLE III. The aggregate number of shares which the Corporation shall have authority to issue shall be 152,891,256 shares, 891,256 shares of which shall have a par value of $10 per share and 152,000,000 shares of which shall have a par value of $1 per share. All of these shares are to be classified and the designations, number of shares in each class and the par value of the shares shall be as follows: $1.20 Convertible Preference Stock, 891,256 shares of the par value of $10 per share; Series Preferred Stock, 2,000,000 shares of the par value of $1 per share; and Common Stock, 150,000,000 shares of the par value of $1 per share." -40- 27 (4) The Certificate of the Incorporation of the Corporation is hereby amended with respect to the elimination of directors' liability under certain circumstances. The Certificate of Incorporation is hereby amended to add a new Article XI to read in its entirety, as follows: "ARTICLE ELEVENTH: No director of the Corporation shall be personally liable to the Corporation or its shareholders for damages for any breach of duty in such capacity except to the extent that such elimination or limitation of liability is expressly prohibited by the Business Corporation Law of the State of New York as currently in effect or as the same may hereafter be amended. No amendment, modification or repeal of this Article shall adversely affect any right or protection of any director that exists at the time of such amendment, modification or repeal." (5) This amendment to the Certificate of Incorporation of the Corporation was properly authorized by vote at a meeting of the board of directors, followed by vote of the holders of a majority of all outstanding shares entitled to vote thereon at the Annual Meeting of Shareholders of the Corporation duly held on April 27, 1988, IN WITNESS WHEREOF, this Certificate has been signed this 27th day of April, 1988. /s/ Robert N. Landes ------------------------ Robert N. Landes, Executive Vice President /s/ Scott L. Bennett ------------------------ Scott L. Bennett, Assistant Secretary -41- 28 CERTIFICATE OF MERGER OF ELECTRONIC MARKETS AND INFORMATION SYSTEMS, INC. INTO McGRAW-HILL, INC. (Under Section 905 of the Business Corporation Law) It is hereby certified by the corporation named herein as the surviving corporation as follows: FIRST: The Board of Directors of the corporation named herein as the surviving corporation has adopted a plan of merger setting forth the terms and conditions of merging the corporation named herein as the subsidiary corporation into said surviving corporation. SECOND: The name of the subsidiary corporation to be merged, the certificate of incorporation of which was filed by the Department of State on October 5, 1982, is Electronic Markets and Information Systems, Inc. THIRD: The name of the surviving corporation, the certificate of incorporation of which was filed by the Department of State on December 29, 1925, is McGraw-Hill, Inc. The name under which said corporation was formed is McGraw-Hill Publishing Company, Inc. FOURTH: The designation and number of outstanding shares of each class of the subsidiary corporation, all of which are owned by the surviving corporation, as set forth in the Plan of Merger, are as follows:
Designation Number Class A Common Stock 600 Class B Common Stock 400
The effective date of the merger herein certified shall be the 28th day of February, 1991. IN WITNESS WHEREOF, we have subscribed this document on the date set opposite each of our names below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. Date: February 27, 1991 /s/ Frank J. Kaufman - ------------------------------ Frank J. Kaufman Vice President of the surviving corporation /s/ Scott L. Bennett - ------------------------------ Scott L. Bennett Assistant Secretary of the surviving corporation -42- 29 Certificate of Merger of Computer Aided Planning, Inc. and Construction Data & News Corporation and National Software Testing Laboratories, Inc. and Leaman-Spear Information Systems, Inc. and Tech Valley Publishing into McGraw-Hill, Inc. (Under Section 905 of the Business Corporation Law) It is hereby certified, upon behalf of each of the constituent corporations herein named as follows: FIRST: The Board of Directors of the corporation named herein as the surviving corporation has adopted a plan of merger setting forth the terms and conditions of merging the corporations named herein as the subsidiary corporations into said surviving corporation. SECOND: The laws of the jurisdiction of incorporation of the corporations named herein as the subsidiary corporations permit a merger of the kind certified herein. THIRD: The name of the domestic constituent corporation, which is to be the surviving corporation, and which is hereinafter sometimes referred to as the "surviving corporation", is McGraw-Hill, Inc. and the name under which it was formed is McGraw-Hill Publishing Company, Inc. The date upon which its certificate of incorporation was filed by the Department of State is December 29, 1925. FOURTH: There are five foreign subsidiary corporations, all of which are being merged into the surviving corporation, and which are hereinafter sometimes referred to as the "subsidiary corporations." The name of the first foreign subsidiary corporation is Computer Aided Planning, Inc. The jurisdiction of its incorporation is Michigan; and the date of its incorporation therein is October 1, 1984. The name of the second foreign subsidiary corporation is Construction Data & News Corporation. The jurisdiction of its incorporation is Oregon; and the date of its incorporation therein is March 31, 1981. -43- 30 The name of the third foreign subsidiary corporation is National Software Testing Laboratories, Inc. The jurisdiction of its incorporation is Pennsylvania; and the date of its incorporation therein is July 23, 1984. The name of the fourth foreign subsidiary corporation is Leaman-Spear Information Systems, Inc. The jurisdiction of its incorporation is Maryland; and the date of its incorporation therein is January 18, 1972. The name of the fifth foreign subsidiary corporation is Tech Valley Publishing. The jurisdiction of its incorporation is California; and the date of its incorporation therein is September 2, 1983. No Application for Authority in the State of New York of the subsidiary corporations to transact business as a foreign corporation therein was filed by the Department of State of the State of New York. FIFTH: The designation and number of outstanding shares of each class of the subsidiary corporations, all of which are owned by the surviving corporation, as set forth in the plan of merger, are as follows: -44- 31 Computer Aided Planning, Inc.
DESIGNATION NUMBER Class A Voting 100,000 Common Class B Non- 16,445 Voting Common
Construction Data & News Corporation
DESIGNATION NUMBER Common 500
National Software Testing Laboratories, Inc.
DESIGNATION NUMBER Common 100
Leaman-Spear Information Systems, Inc.
DESIGNATION NUMBER Common 72,000
-45- 32 Tech Valley Publishing
DESIGNATION NUMBER Common 17,128,776
SIXTH: The merger of the subsidiary corporations into the surviving corporation has been authorized under the laws of the jurisdiction of incorporation of the subsidiary corporations. SEVENTH: The effective date of the merger herein certified, insofar as the provisions of the New York Business Corporation Law govern such effective date, shall be on March 31, 1993. IN WITNESS WHEREOF, we have subscribed this document on the date set forth below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. Date: March 31, 1993 McGRAW-HILL, INC. By: /s/ Frank Kaufman --------------------- Frank Kaufman Vice President By: /s/ Robert N. Landes --------------------- Robert N. Landes Secretary -46- 33 Certificate of Merger of Standard & Poor's Compustat Services, Inc. into McGraw-Hill, Inc. (Under Section 905 of the Business Corporation Law) It is hereby certified by the corporation named herein as the surviving corporation as follows: FIRST: The Board of Directors of the corporation named herein as the surviving corporation has adopted a plan of merger setting forth the terms and conditions of merging the corporation named herein as the subsidiary corporation into said surviving corporation. SECOND: The name of the subsidiary corporation to be merged, the certificate of incorporation of which was filed by the Department of State on November 28, 1936, is Standard & Poor's Compustat Services, Inc. The name under which said corporation was formed is Social Security Statistical Corporation. THIRD: The name of the surviving corporation, the certificate of incorporation of which was filed by the Department of State on December 29, 1925, is McGraw-Hill, Inc.. The name under which said corporation was formed is McGraw-Hill Publishing Company, Inc. FOURTH: The designation and number of outstanding shares of each class of the subsidiary corporation, all of which are owned by the surviving corporation, as set forth in the plan of merger, are as follows:
DESIGNATION NUMBER Common Stock 100
-47- 34 FIFTH: The effective date of the merger herein certified shall be on April 30, 1993. IN WITNESS WHEREOF, we have subscribed this document on the date set forth below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. Date: April 30, 1993 McGRAW-HILL, INC. By: /s/ Frank Kaufman --------------------- Name: Frank Kaufman Title: Vice President By: /s/ Robert N. Landes --------------------- Name: Robert N. Landes Title: Secretary -48- 35 Certificate of Merger of McGraw-Hill School Publishing, Inc. into McGraw-Hill, Inc. (Under Section 905 of the Business Corporation Law) It is hereby certified by the corporation named herein as the surviving corporation as follows: FIRST: The Board of Directors of the corporation named herein as the surviving corporation has adopted a plan of merger setting forth the terms and conditions of merging the corporation named herein as the subsidiary corporation into said surviving corporation. SECOND: The laws of the jurisdiction of the corporation named herein as the subsidiary corporation permit a merger of the kind certified herein. THIRD: The name of the subsidiary corporation to be merged, which was organized under the laws of the State of Delaware on May 12, 1989, is McGraw-Hill School Publishing, Inc. The Application for Authority in the State of New York of said corporation to transact business as a foreign corporation therein was filed by the Department of State of the State of New York on October 31, 1989. FOURTH: The name of the surviving corporation, the certificate of incorporation of which was filed by the Department of State on December 29, 1925, is McGraw-Hill, Inc.. The name under which said corporation was formed is McGraw-Hill Publishing Company, Inc. FIFTH: The designation and number of outstanding shares of each class of the subsidiary corporation, all of which are owned by the surviving corporation, as set forth in the plan of merger, are as follows:
DESIGNATION NUMBER Common Stock 1000
SIXTH: The merger of the subsidiary corporation into the surviving corporation has been authorized under the laws of the jurisdiction of incorporation of the subsidiary corporation. SEVENTH: The effective date of the merger herein certified shall be on December 31, 1993. -49- 36 IN WITNESS WHEREOF, we have subscribed this document on the date set forth below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. Date: December 2, 1993 McGRAW-HILL, INC. By: /s/ Frank Kaufman -------------------- Name: Frank Kaufman Title: Vice President By: /s/ Robert N. Landes -------------------- Name: Robert N. Landes Title: Secretary -50- 37 Certificate of Merger of Macmillan/McGraw-Hill Joint Venture Holding Corporation Into McGraw-Hill, Inc. UNDER SECTION 905 OF THE BUSINESS CORPORATION LAW Prepared By: Jeffrey L. Mitnick, Esq. McGraw-Hill, Inc. 1221 Avenue of the Americas New York, New York 10020 -51- 38 Certificate of Merger of Macmillan/McGraw-Hill Joint Venture Holding Corporation into McGraw-Hill, Inc. (Under Section 905 of the Business Corporation Law) It is hereby certified by the corporation named herein as the surviving corporation as follows: FIRST: The Board of Directors of the corporation named herein as the surviving corporation has adopted a plan of merger setting forth the terms and conditions of merging the corporation named herein as the subsidiary corporation into said surviving corporation. SECOND: The laws of the jurisdiction of the corporation named herein as the subsidiary corporation permit a merger of the kind certified herein. THIRD: The name of the subsidiary corporation to be merged, which was organized under the laws of the State of Delaware on August 2, 1989, is Macmillan/McGraw-Hill Joint Venture Holding Corporation. No Application for Authority in the State of New York of said corporation to transact business as a foreign corporation therein was filed by the Department of State of the State of New York. FOURTH: The name of the surviving corporation, the certificate of incorporation of which was filed by the Department of State on December 29, 1925, is McGraw-Hill, Inc. The name under which said corporation was formed is McGraw-Hill Publishing Company, Inc. FIFTH: The designation and number of outstanding shares of each class of the subsidiary corporation, all of which are owned by the surviving corporation, as set forth in the plan of merger, are as follows:
DESIGNATION NUMBER Common Stock 100
SIXTH: The merger of the subsidiary corporation into the surviving corporation has been authorized under the laws of the jurisdiction of incorporation of the subsidiary corporation. SEVENTH: The effective date of the merger herein certified shall be on December 31, 1994. -52- 39 IN WITNESS WHEREOF, we have subscribed this document on the date set forth below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. Date: December 16, 1994 McGRAW-HILL, INC. By: /s/ Frank Kaufman ---------------------- Name: Frank Kaufman Title: Vice President By: /s/ Robert N. Landes ---------------------- Name: Robert N. Landes Title: Secretary -53- 40 Certificate of Merger of Columbia Acquisition Corporation Into McGraw-Hill, Inc. UNDER SECTION 905 OF THE BUSINESS CORPORATION LAW Prepared By: Jeffrey L. Mitnick, Esq. McGraw-Hill, Inc. 1221 Avenue of the Americas New York, New York 10020 -54- 41 Certificate of Merger of Columbia Acquisition Corporation into McGraw-Hill, Inc. (Under Section 905 of the Business Corporation Law) It is hereby certified by the corporation named herein as the surviving corporation as follows: FIRST: The Board of Directors of the corporation named herein as the surviving corporation has adopted a plan of merger setting forth the terms and conditions of merging the corporation named herein as the subsidiary corporation into said surviving corporation. SECOND: The laws of the jurisdiction of the corporation named herein as the subsidiary corporation permit a merger of the kind certified herein. THIRD: The name of the subsidiary corporation to be merged, which was organized under the laws of the State of Delaware on March 19, 1990, is Columbia Acquisition Corporation. No Application for Authority in the State of New York of said corporation to transact business as a foreign corporation therein was filed by the Department of State of the State of New York. FOURTH: The name of the surviving corporation, the certificate of incorporation of which was filed by the Department of State on December 29, 1925, is McGraw-Hill, Inc. The name under which said corporation was formed is McGraw-Hill Publishing Company, Inc. FIFTH: The designation and number of outstanding shares of each class of the subsidiary corporation, all of which are owned by the surviving corporation, as set forth in the plan of merger, are as follows:
DESIGNATION NUMBER Common Stock 110
SIXTH: The merger of the subsidiary corporation into the surviving corporation has been authorized under the laws of the jurisdiction of incorporation of the subsidiary corporation. SEVENTH: The effective date of the merger herein certified shall be on December 31, 1994. -55- 42 IN WITNESS WHEREOF, we have subscribed this document on the date set forth below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. Date: December 16, 1994 McGRAW-HILL, INC. By: /s/ Frank Kaufman -------------------- Name: Frank Kaufman Title: Vice President By: /s/ Robert N. Landes ------------------- Name: Robert N. Landes Title: Secretary -56- 43 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF McGRAW-HILL, INC. UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW --------------------------------------------------------- It is hereby certified that: (1) The name of the Corporation is McGRAW-HILL, INC. The name under which the Corporation was formed was McGraw-Hill Publishing Company, Inc. which name was changed to McGraw-Hill, Inc. on January 2, 1964. (2) The Certificate of Incorporation of the Corporation was filed by the Department of State on December 29, 1925. (3) Article I of the Certificate of Incorporation of the Corporation is hereby amended to effect a change in the Corporation's name from "McGraw-Hill, Inc." to "The McGraw-Hill Companies, Inc." Article I of the Certificate of Incorporation of the Corporation is hereby amended to read as follows: "ARTICLE I. The Corporate name shall be: The McGraw-Hill Companies, Inc." (4) This Amendment to the Certificate of Incorporation of the Corporation was properly authorized by vote at a meeting of the board of directors, duly held on January 25, 1995, followed by the vote of the holders of at least a majority of all outstanding shares of Common Stock and $1.20 Convertible Preference Stock, voting together as a single class, entitled to vote thereon on the Annual Meeting of Shareholders of the Corporation duly held on April 26, 1995. -57- 44 IN WITNESS WHEREOF, this Certificate has been signed this 26th day of April, 1995. /s/ Robert N. Landes --------------------------------- Robert N. Landes Executive Vice President /s/ Scott L. Bennett --------------------------------- Scott L. Bennett Assistant Secretary -58- EX-3 3 BY-LAWS OF THE REGISTRANT 1 Exhibit (3) THE McGRAW-HILL COMPANIES, INC. BY-LAWS (As amended July 26, 1995) 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 resolution of the Board of Directors and may only be called pursuant to a resolution approved by a majority of the Board of Directors. -59- 2 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. 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. -60- 3 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 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. -61- 4 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 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) 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. -62- 5 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 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 -63- 6 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 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. -64- 7 ARTICLE II BOARD OF DIRECTORS 1. The business and affairs of the corporation shall be managed under the direction of the Board of Directors. Unless and until changed as provided in this Section 1 of this Article II, the number of directors constituting the Board of Directors shall be fourteen (14). The Board of Directors shall have power from time to time and at any time, by vote of a majority of the total number of directors which the corporation would have if there were no vacancies on the Board, to increase or reduce the number of directors constituting the Board of Directors to such number (subject to any limits contained in the certificate of incorporation) as the Board of Directors shall determine, but in no event to less than twelve (12) or more than twenty-five (25). Subject to the express terms and conditions of the certificate of incorporation and these By-Laws, the directors shall have the usual and customary powers and duties of directors of a corporation; also any and all powers given and permitted by law; and also power to exercise any and all powers of the corporation, and to do any and all acts without any prior action taken or consent given by the stockholders, unless required by law, or the certificate of incorporation, or by these By-Laws; the directors may exercise all powers, and do all acts and things which are not, by statute or by the certificate of incorporation or these By-Laws, expressly directed or required to be exercised or done by the stockholders. -65- 8 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. 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. -66- 9 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 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. -67- 10 6. Special meetings of the Board shall be held whenever called by the Chairman, or by the President, or by the Secretary upon receiving the written request of a majority of the directors of the Board then in office. If so specified in the notice thereof, any and all business may be transacted by a special meeting. 7. The Secretary shall give notice to each director of each special meeting by mailing the same, at least two days before the meeting, or by telegraphing or telephoning not later than the day before the meeting. If every director shall be present at any meeting any business may be transacted without previous notice. 8. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business, except where otherwise provided by statute or by the certificate 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. -68- 11 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 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. -69- 12 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. 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. -70- 13 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. 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. -71- 14 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 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. -72- 15 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 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. -73- 16 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. 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. -74- 17 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. ARTICLE V CAPITAL STOCK 1. The instruments of debentures, certificate of shares of the preferred, preference and common capital stock of the Company shall be in such form as shall be approved by the Board of Directors. The certificates shall be signed by the Chairman of the Board or the President and also by the Secretary or the Treasurer. The seal of the Corporation shall be affixed to all certificates. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. 2. All certificates shall be consecutively numbered, and the names of the owners, the number of shares and the date of issue, shall be entered in the Company's books. -75- 18 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 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. -76- 19 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 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. 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. -77- 20 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. -78- EX-10 4 SHORT TERM INCENTIVE DEFERED COMPENSATION PLAN 1 Exhibit (10) McGRAW-HILL, INC. KEY EXECUTIVE SHORT-TERM INCENTIVE DEFERRED COMPENSATION PLAN -79- 2 Article I PURPOSE The purpose of the McGraw-Hill, 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 McGraw-Hill, 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. -80- 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 -81- 4 (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 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 Management Compensation Committee of the Board. -82- 5 Section 2.05 Company. "Company" means McGraw-Hill, Inc., its successors, any subsidiary or affiliated organizations authorized by the Board of Directors of McGraw-Hill, 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. 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 McGraw-Hill, Inc. 1990 and 1995 Key Executive Short-Term Incentive Compensation Plans. -83- 6 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 Executive Vice President, Administration of McGraw-Hill, Inc. or his 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). -84- 7 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. -85- 8 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. -86- 9 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. 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. 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 -87- 10 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. 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 -88- 11 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. 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. -89- 12 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. 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 -90- 13 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. -91- 14 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. 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. -92- 15 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. 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. -93- 16 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. -94- 17 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 -95- EX-12 5 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 ---------------------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (In thousands of dollars) Earnings Earnings from continuing operations before income tax expense, cumulative effect on prior years of changes in accounting in 1992, and unusual charges in 1993 (a)(b)(c) $382,126 $341,816 $293,243 $264,877 $255,608 Fixed charges 92,490 85,897 75,930 81,724 89,050 Capitalized interest (421) (353) (536) (836) (507) -------- -------- -------- -------- -------- Total Earnings $474,195 $427,360 $368,637 $345,765 $344,151 ======== ======== ======== ======== ======== Earnings from continuing operations before income tax expense and cumulative effect on prior years of changes in accounting in 1992 (b)(c) $382,126 $341,816 $ 63,443 $264,877 $255,608 Fixed charges 92,490 85,897 75,930 81,724 89,050 Capitalized interest (421) (353) (536) (836) (507) -------- -------- -------- -------- -------- Total Earnings $474,195 $427,360 $138,837 $345,765 $344,151 ======== ======== ======== ======== ======== Fixed Charges(b) Interest expense $ 63,832 $ 55,650 $ 46,998 $ 49,935 $ 59,350 Portion of rental payments deemed to be interest 28,658 30,247 28,932 31,789 29,700 -------- -------- -------- -------- -------- Total Fixed Charges $ 92,490 $ 85,897 $ 75,930 $ 81,724 $ 89,050 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges: Before unusual charges and cumulative adjustment 5.1x 5.0x 4.9x 4.2x 3.9x After unusual charges but before cumulative adjustment 5.1x 5.0x 1.8x 4.2x 3.9x
- -------------- (a) 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. -96- 2 (b) 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. (c) 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. -97- EX-13 6 PORTIONS OF 1995 ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit (13)
PAGE IN ANNUAL REPORT --------------- Business (Textual Material) 4 through 24 Management's Discussion and Analysis 26 to 31 and 34 Eleven Year Financing Review 32 and 33 Consoldiated Statement of Income 35 Consolidated Balance Sheet 36 and 37 Consolidated Statement of Cash Flows 38 Consolidated Statement of Shareholders' Equity 39 Notes to Consolidated Financial Statements 40 to 46 Reports of Management 47 Report of Independent Auditors 47 Supplemental Financial Information 48
2 THE MCGRAW-HILL COMPANIES AT-A-GLANCE
GROUP AND KEY MARKETS LEADING BRANDS ================================================================================================================================= FINANCIAL SERVICES FINANCIAL INFORMATION Standard & Poor's Compustat J.J. Kenny Evaluation Services SERVICES GROUP Standard & Poor's ComStock J.J. Kenny Information Services Investors, corporations, govern- CUSIP Service Bureau MMS International ment agencies, financial institu- DRI/McGraw-Hill Platt's tions, brokers, unit investment Standard & Poor's Equity Services Standard & Poor's Securities, Inc. trusts, commodity, securities and J.J. Kenny Drake foreign exchange traders, libraries. - --------------------------------------------------------------------------------------------------------------------------------- STANDARD & POOR'S Corporate Ratings Public Finance Ratings RATINGS SERVICES Financial Institutions Ratings Ratings Information Services Global capital markets and Insurance Ratings Structured Finance Ratings related risk assessments. International Ratings ================================================================================================================================= EDUCATIONAL EDUCATIONAL PUBLISHING Macmillan/McGraw-Hill McGraw-Hill/London House AND PROFESSIONAL Elementary, secondary, testing, Glencoe/McGraw-Hill McGraw-Hill School Systems PUBLISHING vocational, post-secondary, and CTB/McGraw-Hill McGraw-Hill College Division college fields. SRA/McGraw-Hill - --------------------------------------------------------------------------------------------------------------------------------- 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 Continuing Education Center Engineering, science, medicine, Business/McGraw-Hill Shepard's/McGraw-Hill law, healthcare, computer techn- Osborne/McGraw-Hill ology, business, and government. Computing/McGraw-Hill ================================================================================================================================= INFORMATION AND BROADCASTING GROUP KMGH-TV (Denver) KERO-TV (Bakersfield) MEDIA SERVICES Network-affiliated stations in KGTV (San Diego) WRTV (Indianapolis) Denver, Indianapolis, San Diego and Bakersfield. - --------------------------------------------------------------------------------------------------------------------------------- BUSINESS WEEK GROUP Business Week Business professionals and Business Week International advertisers worldwide. Business Week Online - --------------------------------------------------------------------------------------------------------------------------------- CONSTRUCTION INFORMATION F. W. Dodge Construction News Publishing Network GROUP Sweet's Group Architects, engineers, contractors, Architectural Record real estate owners, developers, Engineering News-Record investors, and building products manufacturers. - --------------------------------------------------------------------------------------------------------------------------------- PUBLICATION SERVICES Aviation Week & Space Electrical World GROUP Technology Postgraduate Medicine Professionals and corporate execu- BYTE The Physician and Sportsmedicine tives around the world in aviation, LAN Times Hospital Practice computers and communications, Data Communications Datapro Information Services Group healthcare, and science and tech- Chemical Engineering National Software Testing nology markets. Modern Plastics Laboratories, Inc. Power Northern Business Information - --------------------------------------------------------------------------------------------------------------------------------- TOWER GROUP Tower Group INTERNATIONAL Tower Group International Canada, Major North American importers Inc. and exporters. - ---------------------------------------------------------------------------------------------------------------------------------
4 3 MARKET FACTORS ========================================================================== Strength of equity and bond markets to impact transaction volume and stimulate demand for information. Growing global investments and popularity of mutual funds create demand for market information and analysis. Worldwide installed base of screens from major quote vendors provides multiple and growing distribution channels. SEC demand for greater price transparency in municipal bond market creates new opportunities to reach individual investors. - -------------------------------------------------------------------------- Growth of global financial markets fueled by bank disintermediation; privatization of state-owned enterprises; and establishment of market economies throughout the world. Growth in nontraditional financial markets (e.g., project finance, counterparty risk, asset-backed securities). New measurements of credit and market risk gain wider acceptance. Growing regulatory pressures/requirements by SEC. Level of transaction volume in U.S. bond market. Growth of indigenous local capital markets. ========================================================================== Improving standards of academic achievement. Spending on textbooks is increasing. Growing use of multimedia technology in schools. Federal funding will continue to foster use of technology in education. Enrollments will increase: K-8 will grow to 38.8 million in 1999; 9-12 will climb to 15.5 million in the same period. Fragmenting national testing marketplace will put more emphasis on state-specific customized programs. College enrollments will remain flat at 15 million through 1997, then grow to nearly 16 million by 2002. Increasing demand for customized course materials and multimedia products in college markets. - -------------------------------------------------------------------------- Economic growth in Latin America, Asia and Europe. Enrollments in secondary and college markets increasing dramatically. Continued demand for English language training material and technical and professional information in indigenous languages. - -------------------------------------------------------------------------- Demand for technical and professional information in medicine, engineering, business, science, computing and law is increasing. New opportunities in online distribution of technical and professional products. ========================================================================== Changing affiliation in Denver and Bakersfield (from CBS to ABC) will improve demographic ratings as well as increase network compensation. Political advertising will add to overall demand in each of our markets. Consumer confidence, auto sales, and home sales levels will be key determinants of total market advertising demand in 1996. - -------------------------------------------------------------------------- Corporate profits impact advertising expenditures. Moderate growth in domestic print advertising. New growth opportunities in international publishing, particularly in Asia and Latin America. Growing sales of personal computers with modem and CD-ROM drives and digital network expansion will create opportunities. Extend franchises into non-magazine formats. - -------------------------------------------------------------------------- Primary business focused on non-residential construction which is less susceptible to shifts in interest rates. Increased demand for timely delivery of information; customers converting from print to electronic services. New products reflect increased emphasis on speed, accuracy and ease of use. Delivery media now include on-line, CD-ROM and fax, as well as traditional print and microfilm. Information product growth to exceed general construction growth. Intensifying competition in the marketplace. - -------------------------------------------------------------------------- Global information technology market projected to grow 10% annually for rest of decade. New product introductions, rapid growth of home computer market key to gains in computer and communications field. Growth in commercial and business aviation to help offset slow growth in aerospace and cut backs in defense. Shift to managed care creates new opportunities to provide clinical and business information. Growing worldwide demand for information on plastics, chemicals, energy. Commercialization of networks provides opportunity to reach new readers. - -------------------------------------------------------------------------- Projected strong growth in international trade throughout the rest of the decade. Market for third party logistics management continues to grow rapidly. Advent of North American Free Trade Zone and GATT will increase demand for logistic services. Modernization of U.S. Customs will shift focus from transaction-monitoring to audit-based system. - -------------------------------------------------------------------------- 5 4 FINANCIAL SERVICES 6 5 VITAL TO THE VIGOROUS GLOBAL FINANCIAL MARKETPLACE AND FLOURISHING AS A RESULT "Another record-breaking day." In the news reports on U.S. equity markets that statement was heard more often than ever before in 1995. Investment activity boomed and the volume of financial information -- covering an ever-increasing array of financial instruments and financial markets -- mounted to unparalleled proportions. Could the global economy operate without financial services from The McGraw-Hill Companies? Not easily. The information and analysis provided are vital. The reputations of the brand names underlying that information and analysis are peerless. Many of those brands rank number one in their market segments. The financial services of The McGraw-Hill Companies encompass stocks, bonds and other debt, currency exchange and commodities. Financial services units assess the investment quality of and outlook for individual issues, well-established and emerging industries, nations and geographic regions -- well-developed and developing. They continue to create a broader portfolio of risk evaluation products and expand information services. The revenue of the Financial Services business segment rose 5.5% to $786.8 million, while operating profit increased 6.3% to $230.9 million -- both record highs. There was notable progress in international markets. Offices were added, and marketing reach was extended in other ways. Financial Services operations now have a substantial number of offices and employees outside the U.S. FINANCIAL INFORMATION SERVICES GROUP Favorable trends in most of its markets and the turnaround of a key operation led to significant revenue and profit gains in the Financial Information Services Group. The continuing evolution to an open distribution policy helped spur the group's growth in 1995. The group reached more computer terminals than ever before -- and provided more data and analysis, as a result of new products and development of new markets. 7 6 EQUITY SERVICES: MORE DATA, MORE CHOICES Equity Services has flourished along with the equity marketplace its units serve by delivering more data in more forms and creating new indices to track investment performance. In addition to vastly improving the print edition of its popular Standard & Poor's Stock Reports, Standard & Poor's inaugurated an electronic version. It later made its Standard & Poor's Research Reports available online to users of IBM-compatible computers. The Standard & Poor's family of index products also continued to grow -- and spawn novel ways for money managers to fine-tune their portfolios. - The S&P 1500 Super Composite Index, which debuted in May, was developed to provide a broad overview of stock market activity. - A new series of portfolio depository receipts called Midcap SPDRs began trading on the American Stock Exchange in May, and the Chicago Board Options Exchange (CBOE) introduced options on the S&P SmallCap 600 Index in June. - Two other index products were added in November: S&P-BARRA Growth and Value Index futures, traded on the Chicago Mercantile Exchange, and options, traded on the CBOE. Such new applications of the Standard & Poor's brand generate new revenues through license fees and royalties. Development of industry sector, country and geographic region indices is under way in response to the demand for new benchmarking data and investment vehicles identified by the brand. Standard & Poor's pre-eminence also sparked several new alliances. - Bear, Stearns & Co., one of Wall Street's top firms, launched a new mutual fund in April under an exclusive licensing agreement with Standard & Poor's. Called the S&P STARS Portfolio, it is the only fund 8 7 using S&P's five-point Stock Appreciation Ranking System (STARS) to determine investment opportunities. - The Financial Times, one of the world's leading business newspapers, and Goldman Sachs & Co., a prominent global investment banking firm, invited Standard & Poor's to join them as co-publisher of a key, internationally recognized group of indices -- now called The Financial Times/Standard & Poor's Actuaries World Indices. - Reuters Money Network, the largest online service dedicated to personal investing, introduced the Standard & Poor's On-Line Adviser to its subscribers. Standard & Poor's Compustat also turned in a stellar performance. It achieved double- digit earnings gains, benefiting from improved versions of its successful software products and expanded sales efforts in international markets. Compustat's definitive database of information on more than 22,000 companies around the globe draws heavily from other nonproprietary Standard & Poor's resources. FINANCIAL DATA SERVICES: NEW CHANNELS TO GLOBAL GROWTH The most global unit of The McGraw-Hill Companies, Financial Data Services extended its leadership positions and reach further in 1995. Exemplifying the group's worldwide presence, in China it provides its products in Mandarin Chinese for that country's rapidly growing financial markets. MMS International, which offers up-to-the-minute market moving analysis, data and news on debt and currency markets worldwide, opened its 13th office (in Shanghai, China). It also added products in emerging Asian, European and Latin American markets and initiated coverage in South Africa. MMS has become the number one service of its kind on the Bloomberg, Knight Ridder, Reuters and Telerate networks, reaching some 340,000 screens. Platt's implemented the open distribution policy Financial Information Services adopted in 1994, and its services are now available on the same networks that MMS serves, substantially increasing its presence worldwide. Platt's services formerly were available only on Standard & Poor's ComStock. 9 8 In addition, Platt's launched the first daily news service for the petroleum industry in Latin America and extended its coverage of commodities markets to include electricity futures. Platt's is the leading source of oil product price data, news and other petroleum industry information. Standard & Poor's ComStock, which provides real-time data from more than 80 markets and exchanges worldwide, plans to increase its redistribution channels, which already include CNN and Prodigy. It expects to tap other Standard & Poor's resources to continuously augment its databases and develop applications tailored to customer needs. MUNICIPAL SECURITIES SERVICES: SUCCESS IN A DOWNSIZED MARKET The stature and scope of Municipal Securities Services -- provided under the J.J. Kenny banner -- sustained their success despite a contracting marketplace, both in terms of dealer participants and new issues. Several leading investment banking firms have closed or downsized municipal finance departments. Reflecting new steps to extend online distribution from the unmatched Kenny database, the "J.J. Kenny Drake Digital Data Feed" began supplying the internal networks of client brokerage firms. Later, in cooperation with Reuters, Kenny introduced a new municipal securities information service (MuniMarket) for users of Reuters terminals. It is the first of several new joint services the companies envision. In addition, KENNYBASE data are now available to Bloomberg subscribers. In response to the Securities and Exchange Commission's call for improved information disclosure in municipal bond trading, the Public Securities Association (PSA) selected J.J. Kenny to develop and operate a new service, called Standard & Poor's/PSA Municipal Bond Service. For a small fee, individual investors can obtain price information on municipal bonds by calling: 1-800-BOND INFO. 10 9 The PSA is an international trade association of banks and brokerage firms. On January 1, 1996, new SEC rules expanding disclosure requirements for municipal bond dealers went into effect. Kenny and Standard & Poor's Ratings Services have jointly introduced products to help dealers monitor developments affecting issues and meet the new standards. The CUSIP Service Bureau, operated by Standard & Poor's for the American Bankers Association, introduced a CD-ROM directory product and an electronic application filing service. The standard identification system it provides for the securities industry is extending its universe as global financial markets expand. DRI/MCGRAW-HILL: PROFITS FROM A NEW PERSPECTIVE DRI/McGraw-Hill's program to broaden the customer base for its economics-driven information and consulting services helped put the unit back on a growth path in 1995 -- with favorable prospects. Increasingly, DRI is meeting the business planning, forecasting and benchmarking needs of operating unit presidents, chief financial officers and marketing departments. Economists and strategic planners had been its prime focus in the corporate market. It also has improved the integration of its operations -- now almost equally divided among publications, data services and consulting. Meanwhile, DRI achieved robust gains in services to the auto industry and added substantial new contracts in the public sector, two of its traditional strengths. In April it was awarded the largest consulting contract in its 27-year history -- an assignment to help the Malaysian government chart a 10-year master plan for its thriving economy. It also won a contract to help guide Morocco's economy over the next decade. 11 10 STANDARD & POOR'S RATINGS SERVICES In the face of challenging market conditions worldwide, Standard & Poor's Ratings Services -- the world's leading credit rating agency -- posted record revenues and profits in 1995. Those gains reflected the success of Ratings Services' efforts to diversify its product line and revenue base, continuing to reduce its reliance on debt issues. The global scope of its activities has been another significant plus. While the first half of 1995 witnessed sluggish debt issuance in most U.S. markets, falling interest rates in the second half contributed to a strong rebound among corporate issuers. The public finance market was down 4% from 1994. In structured finance, asset-backed volume reached a record, but that was offset by a severe decline in mortgage-backed issuance. Outside the U.S. the picture was also challenging, especially in the emerging markets sector, slow to rebound from problems in Mexico. In addition, several banking systems, including those in Japan and France, faced challenges that strained capital market conditions further. Interest rates fell in Europe in the second half of the year, fueling Eurobond issuance, and there were some encouraging signs in Latin America and Asia. Importantly, the number of sovereign ratings rose substantially in 1995, a positive sign for further rating activity. Nontraditional ratings continued to play a key role in company growth. Demand for ratings of insurance company debt and claims paying ability was strong, and Ratings Services enhanced its quantitative rating system of life/health and property/casualty companies to include the full scale from AAA to D. It now rates more insurance companies worldwide than any other agency. 12 11 In addition, several other products showed gains: - Ratings of derivative product companies, which are structured to engage in sophisticated investment management activities; - Market risk ratings of mutual funds, in both U.S. and international markets; - Project finance ratings (which focus on such infrastructure needs as electric power and telecommunications facilities), especially in Asia; - Corporate credit ratings used for purposes other than debt issuance; - Private placement ratings. Other efforts to diversify Ratings Services' product line and meet the needs stemming from changing market conditions included: - Introduction of Standard & Poor's Bank Loan Rating Service, the first rating scale designed specifically for the $665 billion bank loan market (the service takes into account the value of collateral and other protective features commonly provided to bank lenders); - A joint venture with another unit of The McGraw-Hill Companies, J.J. Kenny, to meet new SEC disclosure requirements for secondary market trading in public finance. A traditional business added an electronic product. Ratings Services signed an agreement with Disclosure Progress Corporation to provide ratings information on CD-ROM, to be updated monthly, covering about 20,000 municipal bond issuers. Meanwhile, Standard & Poor's Ratings Information Services posted strong growth in its publishing activities to meet the wide array of information needs of investors and other market participants. Ratings Services took several steps to further improve its position in global capital markets. In late 1995 it acquired the 50% interest it didn't own in S&P-ADEF, the leading rating agency in France; opened a Singapore office, its fourth in the Pacific Basin; and continued to develop affiliate relationships with rating agencies in emerging markets. It currently works with local agencies in Argentina, India and Thailand, and expects to announce additional relationships in 1996. The widespread acceptance of Standard & Poor's Ratings Services in U.S. capital markets, combined with its increasing presence worldwide and commitment to expand its product line, provides a solid foundation for continued growth. It is positioned to be the breakaway leader by the turn of the century not only in ratings but also in risk evaluations and related information products. 13 12 EDUCATIONAL AND PROFESSIONAL PUBLISHING 14 13 BASIC STRENGTHS AND THE SEARCH FOR NEW WAYS TO SERVE A UNIVERSAL NEED LEAD TO RISING PROFITS While teaching theories and practices change, belief in the pre-eminent value of education persists worldwide -- and the importance of lifelong learning has never been more widely recognized. The McGraw-Hill Companies, a longstanding leader in education, has never had more opportunities. In 1995 the grades on Educational and Professional Publishing's report card were commendable. This business segment achieved an operating profit increase of 29.3% to $162.6 million, while revenue climbed 6.3% to $1.2 billion. If not for the economic problems that beset Mexico, where Educational and Professional Publishing has a strong and sizable presence, the gains would have been even more impressive. A realigned management team continued to integrate operations and implement efficiencies that improved margins. Results also benefited from substantial ongoing investments in product development as well as favorable trends in most key markets. CD-ROM, online, video and other nonprint products again accounted for a rising share of total revenue. International sales, excluding Mexico, continued to rise, and the outlook for global growth is particularly bright. EDUCATIONAL PUBLISHING: STAYING AT THE TOP OF THE CLASS The outlook for The McGraw-Hill Companies, the largest elementary and high school publisher in the U.S., is clearly positive. Most regions of the country are in sound fiscal health, of key importance since state and local funds account for more than 90% of the spending for elementary and high school education. El-hi enrollment is rising more than 1.5% annually, and education is a priority -- with renewed emphasis on skills and core subjects. Year-to-year changes in buying patterns affect industry-wide educational sales. In 20 states (called "adoption" states), school districts buy books, in multi-year cycles, guided by state-approved lists. In 30 states ("open territory") school districts or schools plan their purchases of educational materials individually. There was a busy schedule of purchases in key adoption states during 1995, and the elementary and secondary publishing division competed very well. It posted double-digit gains in both sales and earnings. Adoption activity will slow in 1996 and resurge in 1997, with the long-term trend of sales firmly upward. 15 14 The College Division, among the leaders in college publishing, competes in a very different environment. Its marketplace is under pressure because of minimal enrollment growth, budget strains on students, availability of used books, book sharing, and the rapid evolution of information technology. Nevertheless, it has armed itself to surpass industry performance in 1996 and beyond. ELEMENTARY AND SECONDARY DIVISION -- HIGH SCORES A leader across the board in the core curriculum areas -- reading, math, science, social studies -- as well as music and health studies, the Elementary and Secondary Division scored a series of adoption successes during 1995. Texas alone, one of the three biggest textbook markets, accounted for $62 million in revenue, a 27% market share, leading all competitors. In open territory states, sales performance outpaced the industry. Because of its product breadth, the division has a larger sales force and stronger open territory sales coverage than its competitors -- advantages becoming even more important as an increasing number of school districts switch to a school-by-school textbook selection process. It already is ahead of competitors in integrating print, software and video solutions to meet educational needs -- with a growing list of products. Macmillan/McGraw-Hill, the elementary school unit, is adding to a multimedia literature program for grades 3-6 with a program for grades 1-2. A social studies CD-ROM for grades 3-6 and social studies video disks for grades K-6 are slated for 1996 introduction. Glencoe/McGraw-Hill, the secondary school publishing unit, is publishing new CD-ROM products in biology, chemistry, foreign language instruction and social studies. Investments in market research and product development escalated in 1995 in preparation for 1997 adoptions. A new generation of elementary school reading and social studies programs and secondary 16 15 school math, science, social studies and foreign language programs will be introduced. The division's in-house desktop publishing unit, started several years ago, has become one of the industry's largest and most productive. In addition to controlling costs, it allows fast response to emerging market opportunities. For example, a math program produced quickly at low cost in 1995 won a leading share of the California middle school adoption. COLLEGE DIVISION -- BETTER GRADES The College Division posted a second year of improved results. Through more effective marketing, a revitalized sales effort, reduction of expenses and increased distribution efficiency, profits improved significantly. Most important, the division strengthened its product lines- in the number and quality of new titles, in the quality of textbook revisions, and in the breadth of alternative media. The number of new titles planned for publication rose 25%. In 1996 the division will offer more new titles than at any time in its history. To meet its objectives, the division is emphasizing quick identification of changing needs, fast action and innovation -- in product development, marketing and distribution. On scores of campuses it is establishing long-term consulting relationships that better serve customer needs and broaden sales opportunities. The division is in the forefront of initiatives to increase electronic dissemination of educational information -- in partnership with institutions and bookstores -- while using complementary print media more efficiently. The databases of The McGraw-Hill Companies provide a significant competitive advantage. The pioneering Primis Custom Publishing division, started four years ago, is the College Division's fastest growing business and the market leader. More than 1,400 institutions now use Primis products, and over 2,400 institutions have been served by its other custom products. PROFESSIONAL PUBLISHING: STRONG SALES IN ASIA With 23 publishing centers around the globe providing products in 16 languages, the Professional Publishing Group is the leading U.S. publisher of educational products for international markets. But an important strength became a temporary liability in 1995. Because of the leadership position of The McGraw-Hill Companies in Spanish-language publishing, Mexico's problems translated into an adverse short-term impact. Asia, in contrast, was the scene of continuing gains, aided by favorable market dynamics, 17 16 titles in demand and a strong sales force advantageously structured into specialty areas. Strengthening its position in Asia further, the group will increase its stake in a co-venture in India to a majority equity interest in 1996. India has become an important publishing center. The group works closely with other units of The McGraw-Hill Companies in product development and uses their circulation databases in its marketing efforts. The availability on the Internet of the group's catalog (with information on more than 9,000 titles), along with effective telemarketing and direct mail campaigns, has helped spur sales. The group has also responded to surging use of the Internet by publishing successful titles on the subject. Now in its third edition (with more than one million copies in print), The Internet Yellow Pages, the best-selling book about the Internet, spawned three special editions-one focused on health, fitness and medicine; one on science, research and technology; and the third for children and their parents. Meanwhile, the group has been steadily building a profitable CD-ROM product list, now numbering in the hundreds. It introduced a CD-ROM edition of Harrison's Principles of Internal Medicine, the best-selling medical textbook in the world, plus a version linked to U.S. Pharmacopeia's extensive drug-information database. Both products exceeded sales targets. Other notable successes included two CD-ROM products introduced in 1994 primarily for the library market: McGraw-Hill's Multimedia Encyclopedia of Science and Technology, and Science Navigator. Stretching to another important audience, the group launched a new imprint, Training McGraw-Hill, with immediate success. Twenty titles for corporate trainers and organizational consultants were published during 1995 in association with the American Society for Training & Development. 18 17 LEGAL INFORMATION: STRESSING CORE STRENGTHS At midyear Shepard's/ McGraw-Hill, one of the nation's leading providers of legal information, announced its intention to focus totally on its core citations business and divest its other, lower-margin products (principally newsletters, treatises and software). The divestiture of those products was completed in December. Shepard's has broadened and upgraded its core products significantly over the 1993-95 period, reflecting an ongoing multimillion-dollar commitment by The McGraw Hill Companies to enhance its computing power, database and electronic media. The Shepard's database currently contains more than 250 million citations (court records) tracing the history of all decisions in all state and federal appellate courts. In September, Shepard's issued a revised Federal Citator, a major product covering all federal courts except the Supreme Court, in a 21-volume print edition and a CD-ROM version with an update feature. At year-end the Shepard's product list included CD-ROM editions covering all 50 states, plus federal courts. They are updated and issued monthly. Several new electronic products will reach the market in 1996. In addition, Shepard's products are available through the Lexis/Nexis and Westlaw online services and through "ShepNet," a bulletin board service on the Internet. 19 18 INFORMATION AND MEDIA SERVICES 20 19 A WEALTH OF RESOURCES EXTENDS THE DEFINITION AND DIMENSIONS OF MULTIMEDIA The Information and Media Services business segment posted gains for the second straight year. Operating profit rose 6.3% to $115.1 million on a revenue increase of 7.0% to $912.9 million. An upturn in advertising revenues and new advertisers -- particularly in the high tech sector -- helped boost results, while the drive to reduce dependence on advertising dollars made notable progress. The units in this business segment, at the forefront in providing vital information and analysis in the industries and fields they cover, also stand in the technological vanguard -- a strength now seen throughout The McGraw-Hill Companies. They not only report on the Information Age revolution with particular insight but are active participants -- and frequently leaders -- in it as well. They use all of the electronic avenues to information gathering, storage, interpretation, packaging and dissemination, and the share of their revenues generated by nonprint media continues to increase. At the same time, they prove the enduring power of print and face-to-face communication. As they present more conferences and chat sessions online, they are sustaining a robust schedule of successful "live" conferences and symposiums. BUSINESS WEEK: AN OUTSTANDING YEAR Business Week wrote an upbeat performance story in 1995: higher circulation, substantially higher ad volume and net advertising revenues, more editions targeted to specialized audience segments, and auspicious journalistic accomplishments. That all added up to the best year for Business Week since 1990. With its first 1996 issue Business Week began to deliver a guaranteed worldwide rate base of one million, the only business magazine to attain that milestone. The total reflects an 870,000-copy North American and 130,000-copy international rate base. Global expansion is accelerating in several ways. Business Week International is available in the English language in four regions: Asia, Europe, Latin America and the Middle East. Nearly half of the content of the Asian, European and Latin American editions is customized to the international region served. In addition, licensees publish monthly local-language edit-ions in China, Poland and Russia, and Le Point magazine in France includes a special 16-page Business Week section for 40,000 executive readers. Business Week also is extending its franchise in the U.S. During 1995 it produced three "Enterprise" editions (for 175,000 small-business readers, plus distribution of 100,000 copies through the Office Depot retail chain). Frequency will increase in 1996. 21 20 Meanwhile, both its "Elite" edition (tailored for 300,000 upper-tier net worth readers and appearing 13 times annually) and "Industrial Technology" edition (appearing 18 times annually) achieved record advertising revenues. Advertisers that appear in special editions and international editions pay premium rates. Other specialized editions are in development. In addition, the magazine's custom publishing unit and schedule of executive conferences, conducted with prominent co-sponsors, continue to expand. The 1995 gains allowed increases in both advertising rates and subscription fees beginning in 1996. Business Week is now promoting itself more aggressively. Its positioning: "Beyond news. Intelligence." Business Week Online, introduced in January 1995 on America Online, was awarded the 1995 Information Industry Association "Hot Shot Award" as the best online magazine, reflecting the success it has achieved. Business Week also has joined the growing family of The McGraw-Hill Companies' publications with World Wide Web sites on the Internet. PUBLICATION SERVICES: BUILDING ON A GLOBAL EDGE With approximately four million readers in more than 120 countries, editorial bureaus throughout the world, vast databases and publications ranking among the most authoritative within their purviews, Publication Services is the leading global business-to-business publisher. Information services not dependent on advertising revenues -- such as database-driven information products, newsletters, conferences, books and directories -- now account for about half of the group's revenues. 1995 additions included conferences presented by Aviation Week & Space Technology on CompuServe, an online service with subscribers worldwide, and a breakthrough CD-ROM from Datapro Information Services that contains more than 200 unclassified U.S. government documents and directives relating to electronic information security. Computer and communications technologies remain a core focus. In its 20th anniversary year BYTE magazine continued its international expansion, adding BYTE Romania and BYTE Venezuela to its roster of foreign-language editions produced under license; there are now 17. Data Communications introduced an Asia-Pacific edition and opened bureaus in Singapore and Israel, center of the largest grouping of networking vendors outside the U.S. A Data Communications offshoot, a magazine called tele.com, targeted to telecommunications executives and technical managers worldwide, will debut in April 1996. From the outset, tele.com will be accompanied by additional related products such as conferences, seminars and a newsletter. Publication Services reinforced its position in engineering and science, another core domain. A supplement to Chemical Engineering published since 1992, Environmental 22 21 Engineering World, became a stand-alone bimonthly. Modern Plastics International had a record year in revenue, profit and advertising pages. And the Energy Group continued to launch new products, including Information Technologies for Utilities and Electricity Alert, a real-time online electricity pricing product. The acquisition of Hospital Practice, a leading medical magazine, advanced the Healthcare Publications Group's efforts to serve the burgeoning managed care market, extending its presence in another area with strong growth projections. The group publishes two other medical publications, plus other informational materials and educational programs for physicians. In addition, Datapro's comprehensive database on information technology is being leveraged into markets such as aviation, healthcare, utilities and chemicals. An example is an alliance with MDB Information Network and Andersen Consulting to assist hospital managers responsible for information technology purchases and applications. CONSTRUCTION INFORMATION: A TRANSFORMATION MOVES FORWARD Building on a solid foundation of renowned brand names and services, the Construction Information Group continued its emphasis on electronic products and strategic alliances. The group posted gains in revenue, reversing the previous year's decline. It expects to benefit in 1996 from a more favorable level of construction contracts and heightened emphasis on its core competencies -- information acquisition and management, sales and marketing excellence, product management and customer relationship enhancement. F.W. Dodge's Dataline(2) -- the most extensively used online service in the construction industry -- is the group's fastest growing product. It covers 600,000 building projects. For the first time in several years the Sweet's Group, a provider of building product information, recorded gains in its print editions. At the same time, the growth of electronic products continued. SweetSource, the two-year-old CD-ROM, retained 75% of its advertisers and posted very strong growth in new sales. Reflecting Sweet's value to the architectural community, an alliance was initiated with 23 22 Autodesk, one of the world's largest software companies, to create a new CD-ROM product, Design Blocks. In joint development for 1996 introduction, it will allow architects to achieve new levels of productivity by speeding the process of integrating product information into CAD (computer-aided-design) drawings. The group's construction publications segment (Architectural Record, Engineering News- Record and the Construction News Publishing Network) achieved increases in the circulation of both Architectural Record and Engineering News-Record. Reach was expanded further through a long-term alliance with the American Institute of Architects (AIA). In 1997, Architectural Record will become the official member magazine of the AIA. In addition, the group and AIA will collaborate to better serve the architectural community through joint initiatives, awards programs, continuing education efforts, publishing ventures and other projects. BROADCASTING: COMPLETING A SWITCH TO ABC Though political advertising declined markedly, the four television stations of The McGraw-Hill Companies posted higher revenues and profits in 1995. They look ahead to the prospect of improved revenue growth in 1996 as federal elections take center stage and the California economy finally begins to rebound. In March 1996, KERO-TV in Bakersfield, Calif., completes the group's transition to affiliations with ABC. In September, KMGH-TV in Denver became an ABC affiliate and saw its audience shares rise immediately during most time periods. Similar gains are expected in Bakersfield. Moving quickly early in the year to establish a presence on the Internet, WRTV in Indianapolis and KGTV in San Diego became the first stations in their viewing areas to set up extensive World Wide Web sites. TOWER GROUP INTERNATIONAL: ADVANCING IN ELECTRONIC COMMERCE A pioneer in the complex logistics- and management-information industry, Tower Group International took major steps to expand service coverage and enhance information technology capabilities. The acquisition of UCB Canada, a leading Canadian customs brokerage and freight-forwarding company, further strengthened Tower's position to serve the North American market. Service locations now number 60, including the key trade gateways in Canada, the U.S.'s top trade partner. UCB's well-developed, value-added transportation services, particularly between Asia and Canada, complement Tower's offerings. The addition of such new clients as Chrysler Corporation also contributed significantly to revenue growth. In April, Tower launched a three-year program to transform its technology systems to be more compatible with open systems standards. The initiative will accelerate development and facilitate information flows with customers and other logistics service providers. In October, it completed a major upgrade of its PC-based TowerNet import management software for use with Windows 95(R). As Tower guides its customers toward paper-free trade, it is also developing new ways to create and use database information for clients. Providing improved information on shipment status, carrier performance and costs is among its aims. 24 23 FINANCIAL REVIEW AND ANALYSIS Operating Results
CONSOLIDATED REVIEW (in millions) 1995 1994 1993 - ---------------------------------------------------------------- Operating Revenue $2,935.3 $2,760.9 $2,195.5 % Increase 6.3 25.8 7.1 - ---------------------------------------------------------------- Operating Profit $ 508.6 $ 451.3 $ 352.6 % Increase 12.7 28.0 2.4 - ---------------------------------------------------------------- % Operating Margin 17 16 16 Share of Profit of Macmillan/McGraw-Hill Joint Venture(a) -- -- $ 28.4 Income before Taxes $ 386.3 $ 345.4 $ 66.3(b) - ---------------------------------------------------------------- Net Income $ 227.1 $ 203.1 $ 11.4(b) ================================================================
(a) Represents The McGraw-Hill Companies' 50% share of profits for the nine months ended September 30, 1993. Macmillan/McGraw-Hill School Publishing Company has been consolidated in The McGraw-Hill Companies' results beginning in the fourth quarter of 1993, reflecting The McGraw-Hill Companies' 100% ownership. (b) 1993 income before taxes and net income include unusual charges of $229.8 million ($160.8 million net of tax benefits) related to The McGraw-Hill Companies' acquisition of its partner's 50% interest in the Macmillan/McGraw-Hill School Publishing Company. REVENUE AND EARNINGS Operating revenue in 1995 grew to $2,935.3 million, an increase of 6.3%. Net income was $227.1 million, or $2.28 per share as compared with $203.1 million, or $2.05 per share in 1994. In 1994, operating revenue increased 25.8%, largely reflecting The McGraw-Hill Companies' first full year ownership in the former Macmillan/McGraw-Hill School Publishing Company. 1994 net income increased 17.9% over 1993, excluding the impact of 1993's unusual charges of $229.8 million ($160.8 million after taxes or $1.64 per share). In 1993, net income after unusual charges was $11.4 million, or 12 cents per share. All references to common share data, including earnings per share, reflect the two-for-one stock split of the company's common stock announced on January 31, 1996. In the fourth quarter of 1995, the company recorded a $23.8 million pre-tax gain on the sale of the topical publishing division of Shepard's/McGraw-Hill, the company's legal publisher. The gain is recorded as other income on the consolidated statement of income and is reflected in the operating profit of the Educational and Professional Publishing segment. 1995 earnings reflect a pre-tax charge of $26.8 million, recorded in the fourth quarter, related to the company's "best practices" initiative to improve efficiency and effectiveness. The company launched the best practices program to review major systems and processes, including various administrative functions and related technology. The charge primarily represents the costs associated with the elimination of approximately 750 positions, or 5% of the company's workforce, begun late in 1995 and continuing into 1996. The 1995 operating profit of each segment and corporate expenses reflect the amount of the best practices charge associated with each segment. Under the best practices program, the company will continue to review opportunities to improve its operations in 1996, including assessing technology applications. Net income as a percent of revenue was 7.7% in 1995, slightly improved over the 1994 ratio of 7.4%. Return on average shareholders' equity was 23.3% in 1995 compared with 23.4% in 1994. Operating revenue increased $174.4 million, or 6.3%, in 1995 reflecting increases in all three operating segments. Educational and Professional Publishing revenue increased $73.4 million, or 6.3%, to $1,235.6 million, reflecting a strong performance in educational publishing, with increases also in domestic professional publishing and international markets despite a decline in Mexico. Financial Services' revenue increased $41.3 million, or 5.5%, reflecting another record year for Standard & Poor's Ratings Services and the Financial Information Services Group. Information and Media Services' revenue increased $59.7 million, or 7.0%, largely due to Business Week and an acquisition by Tower Group International. Operating profit for the company improved $57.3 million, or 12.7%, reflecting improvement in all three segments led by Educational and Professional Publishing, with an increase of $36.8 million. Educational and Professional Publishing operating profit reflects the revenue increases associated with the strong adoption year, a strong domestic professional publishing program and improved international business, partially offset by reduced profits in Mexico, and the gain on the sale of the Shepard's topical 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%. Operating profit for Standard & Poor's Ratings Services improved as new bond issue volume rebounded in the second half of the year due to declining interest rates. The Financial Information Services Group also had operating profit growth. 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 Construction Information Group. In 1994, operating revenue increased $565.4 million, $459.4 million of which represents the inclusion of School Publishing for the first nine months of 1994. The remaining increase reflected expansion in international publishing, financial services and broadcasting. Operating profit for the three segments increased 28.0% in 1994, with Educational and Professional Publishing increasing $76.4 million, or 26 24 154.7%. Operating profit for this segment, excluding School Publishing, declined 6% due to the restructuring of certain international operations and competitive pressures in the home study market. Financial Services' operating profit improved 8.1% and Information and Media Services posted a gain of 5.9%. Financial Services' performance reflected a then record year in revenue by Standards & Poor's Ratings Services, with a modest decline in profits reflecting planned investments in new products and services. The Financial Information Services Group contributed solid revenue growth and significant gains in operating profit. Revenue and profits improved in Information and Media Services, led by Broadcasting, with gains in Tower Group International and the computers and communications unit of Publication Services, offset by a decline in the Construction Information Group. The company purchased the remaining 50% interest in the Macmillan/McGraw-Hill School Publishing Company owned by Macmillan for $337.5 million on October 4, 1993. The company thereby achieved 100% ownership of Macmillan/ McGraw-Hill and it was consolidated in The McGraw-Hill Companies' operations from the date of acquisition, in the Educational and Professional Publishing segment. The McGraw-Hill Companies' 50% share of the Macmillan/ McGraw-Hill School Publishing Company's profits for 1993 includes only the first three quarters prior to full ownership. The inclusion of Macmillan/McGraw-Hill in The McGraw-Hill Companies' consolidated results in 1993's fourth quarter increased 1993 revenues for the company by $90.7 million or 4.4%. Due to the seasonal nature of the school publishing business, 1993's fourth quarter income was negatively impacted by an incremental 4 cents per share due to the 100% ownership. In connection with the acquisition of Macmillan/ McGraw-Hill, the company recorded unusual charges of $229.8 million ($160.8 million net of tax benefits). The McGraw-Hill Companies' 1994 results reflected the first full year of its 100% ownership in its former joint venture, contributing $538 million in revenue. EXPENSES Operating expenses in 1995 increased $92.0 million, or 7.4%, reflecting volume increases associated with higher revenues, higher paper costs, modest inflationary increases in key expense categories, such as compensation, and the best practices charge. Negotiations with printing, paper and distribution suppliers helped to lessen the impact of rising postal and paper prices. Despite significant postal and paper price increases, manufacturing costs were held to an increase of approximately 9%. Selling and general expenses increased $54.0 million, or 6.0%, reflecting costs associated with the increase in revenue. A significant portion of both operating and selling and general expenses is compensation, which totaled $807 million in 1995. Compensation expense, excluding the impact of aquisitions, increased approximately 5% due to the impact of merit increases and higher sales commission expenses. Depreciation and amortization expense, including amortization of goodwill and intangible assets and prepublication costs, increased $1.4 million, or less than 1%. The ratio of operating, selling and general and amortization and depreciation expenses to total revenue in 1995 was 86.3% compared with 86.4% in 1994 as the impact of increased revenues was offset by the best practices charge. In 1996, printing, paper and distribution prices are expected to remain relatively stable. Overall manufacturing costs are estimated to increase 4% when taking into account the effect of prior year paper increases. The impact of merit increases on compensation costs should approximate 4%. The increase in 1994 expenses largely reflected the inclusion of School Publishing expenses for the entire year as compared with only the fourth quarter in 1993. In addition to the impact of School Publishing, the increase in operating expenses reflected volume increases and modest inflationary increases in key expense categories, such as compensation and fringe benefits expenses. In 1994, combined printing, binding, paper and distribution prices decreased in excess of 2% primarily due to successful negotiations with printing, paper, and distribution suppliers, aided in part by the increased leverage gained through the acquisition of the Macmillan/ McGraw-Hill School Publishing Company. The increase in depreciation and amortization expenses is almost entirely due to the amortization of goodwill, intangible assets and prepublication costs for School Publishing for the first nine months of 1994. INTEREST EXPENSE Net interest expense in 1995 was $58.8 million compared with $51.7 million in 1994, an increase of $7.1 million, reflecting higher commercial paper borrowing rates net of lower borrowing levels. The average commercial paper rate was 6.0% in 1995 and 4.2% in 1994. In 1994, net interest expense increased $15.4 million because of the full year impact of the 1993 borrowings from the acquisition of the additional 50% of the Macmillan/McGraw-Hill School Publishing Company and reflecting increases in interest rates on commercial paper borrowings, partially offset by reduced average commercial paper borrowing levels from the beginning of 1994. PROVISION FOR INCOME TAXES The provision for taxes as a percent of income before taxes was 41.2% in 1995 and 1994. The rate was 41.8% in 1993, excluding the impact of unusual charges and related tax benefits of $69 million. 27 25 FINANCIAL REVIEW ANALYSIS Segment Review EDUCATIONAL AND PROFESSIONAL PUBLISHING
(in millions) 1995 1994 1993(a) - ---------------------------------------------------------------- Operating Revenue $1,235.6 $1,162.2 $667.5 % Increase 6.3 74.1 17.6 - ---------------------------------------------------------------- Operating Profit $ 162.6 $ 125.8 $ 49.4 % Increase/(Decrease) 29.3 154.7 (21.2) - ---------------------------------------------------------------- % Operating Margin 13 11 7 ================================================================
(a) Includes School Publishing revenue of $90.7 million and operating loss of $13.8 million for the fourth quarter. The Educational and Professional Publishing segment consists of three operating groups: Educational Publishing (School Publishing and College); Legal Information; and Professional Publishing (including International Publishing, Continuing Education Center, Professional Book and Medical Publishing). School Publishing is included in the segment results beginning in the fourth quarter of 1993, when The McGraw-Hill Companies acquired 100% ownership. The Educational and Professional Publishing segment revenue increased $73.4 million, or 6.3%, in 1995. The increase in revenues reflects strong sales in the K-12 school marketplace during the 1995 adoption year, growth in College publishing and professional publishing and another strong performance in legal publishing. Operating profit improved $36.8 million, or 29.3%, to $162.6 million reflecting the strong sales and a gain on the sale of the Shepard's topical business of $23.8 million, partially offset by a best practices charge of $15.1 million. In 1994, segment revenues increased $494.7 million, or 74.1%; $459.4 million of the increase represented the inclusion of School Publishing for the entire year as opposed to only the fourth quarter in 1993. 1994 operating profit more than doubled to $125.8 million reflecting the inclusion of School Publishing for the entire year and improvement in College. The Educational Publishing Group is comprised primarily of six divisions: College; Macmillan/McGraw-Hill, publisher of textbooks and instructional materials for elementary (grades K-8) schools; Glencoe/McGraw-Hill, secondary school (grades 7-12) and postsecondary publisher; CTB/McGraw-Hill, producer of publications and provider of scoring for standardized achievement tests, customized testing and specialized educational software products; SRA/McGraw-Hill, developer of supplementary elementary and secondary instructional materials; and McGraw-Hill School Systems, provider of school administrative systems. The Educational Publishing Group had revenues of $743 million in 1995, 60% of segment revenues. Revenues increased approximately 10% from 1994. For 1995, the elementary and high school businesses achieved double digit increases in revenue and profits, enhancing its position as the largest U.S. school publisher. Profits were positively impacted by the revenue growth and the effect of integration savings. Glencoe/McGraw-Hill had an exceptional year, posting record-setting revenue and profits as a result of capturing extraordinarily high market shares, especially in the adoption states. Macmillan/ McGraw-Hill had increased sales and profits, aided by strong music revenues in Texas. SRA/McGraw-Hill had a significant increase in revenues and profits largely due to its successful campaign in Texas with its Early Childhood program. CTB/McGraw-Hill's revenue decreased slightly because of a decline in Title I funding for Norm Reference Testing. McGraw-Hill School Systems' revenue declined as the division gears up for a new product introduction in 1996. In comparison with 1995's strong performance, 1996 will be a challenging year for the School Publishing Group in an off-adoption year. Opportunities exist for another fine year due to strong publishing programs, but control of costs will be critical in 1996 to mitigate the lack of revenue growth posed by the adoption cycle. The adoption cycle turns favorable again in 1997. In 1994, School Publishing revenue declined compared with the full year 1993 due to an off-year in the elementary and secondary adoption cycle. In those states with adoptions, both Macmillan/McGraw-Hill and Glencoe/McGraw-Hill performed well. The gross margin impact on lower revenue was substantially offset by cost reductions and savings generated from integrating various operations. The College Division's 1995 revenue increased, driven by a strong frontlist performance and continued growth in Primis Custom Publishing. Substantial improvement in profits was attained through expense controls and savings associated with consolidation of certain book operating functions. For 1996, the College Division will continue to operate in a difficult business environment. Enrollments will be relatively flat, students remain sensitive to the perceived high prices of books, and used books continue to proliferate. Despite the environment, the College Division will strive to build upon its 1994 and 1995 successes through a larger 1996 frontlist, additional growth in Primis Custom Publishing and controlling operating expenses. In 1994, College revenue increased over 1993, driven largely by double-digit growth in Primis Custom Publishing and strong performances in economics and foreign language. Double-digit profit improvement was the result of the favorable sales performance in addition to expense reductions. Shepard's/McGraw-Hill, our legal publisher, had revenue of $109 million in 1995, 9% of segment revenue. Shepard's 1995 revenue grew 4.4% as a direct result of a re-negotiated on-line license agreement, continued strong performance of existing and new citation CD-ROM products; and the publication of a new 21-volume citation revision, Federal Citations. On December 28, 1995, Shepard's sold its non-citations product lines (Topical Publishing) which contributed $23 million to 1995 revenue. The products sold were treatises, desktop codes, newsletters, litigation reporters, and software productivity tools. The divestiture will enable Shepard's to focus investment on growing its core legal citations 28 26 business. Overall, 1995 profits grew at a greater rate than revenue due mostly to improved margins on higher sales volumes and expense saving initiatives. Shepard's projects growth in the rate of legal information spending in 1996. Attorneys are increasingly migrating away from print towards use of legal information in electronic form, thus accelerating the growth of on-line and CD-ROM citation sales. Historical print citation revisions are becoming less acceptable to customers. In response, Shepard's continues to improve the features, functionality, and currentness of citations information available in electronic form, and is developing new citations products and services. In 1994, Shepard's revenue grew significantly as a direct result of the publication of its single largest citation revision, the United States Citations; strong performance from CD-ROM products; and growth from primary law topical code products first published in late 1993. 1994 profits grew at a rate less than revenue due mainly to the heavy one-time investments required in the publication of non-citation products. The Professional Publishing Group had revenue of $384 million in 1995, 31% of segment revenue. In 1995, the Professional Publishing Group achieved revenue growth of 1.2% despite the negative economic conditions experienced in Mexico, where the Group has a significant publishing presence and estimates that it lost $15 million in business in 1995. Profits increased in 1995 as a result of continued margin improvement and focus on operating efficiencies. The International Publishing unit continued to perform well in the Asia Pacific and non-Mexican Spanish language markets as worldwide growth opportunities were vigorously pursued. The Medical Publishing unit revenues declined against 1994's release of the 13th edition of Harrison's Principles of Internal Medicine. However, profits grew as a result of the release of a CD-ROM version of Harrison's as well as French, Italian and German book translations. The Continuing Education Center unit increased revenue and profits with growth in computer related courses. The Professional Book unit achieved significant increases in the business, computing and engineering product lines. For 1996, further improvement in the international markets and expansion of publishing programs should position the Professional Publishing Group to take advantage of growth opportunities. The Group will be favorably affected if the Mexican economy shows even a partial recovery. In 1994, the Professional Publishing Group achieved a 10% increase in revenue, but profits declined due to higher operating costs and the company's write-downs for discontinuing a Canadian citations service and its Japanese operation. The International Publishing unit also had an excellent year, particularly in Asia and the Ibero-America sectors. The Medical Publishing unit achieved revenue and profit growth, aided by the revision of Harrison's Principles of Internal Medicine and continued focus on operational efficiencies. The Continuing Education Center revenue was flat compared with the prior year while costs increased. FINANCIAL SERVICES
(in millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Operating Revenue $786.8 $745.5 $696.9 % Increase 5.5 7.0 12.8 - -------------------------------------------------------------------------------- Operating Profit $230.9 $217.2 $200.9 % Increase 6.3 8.1 19.3 - -------------------------------------------------------------------------------- % Operating Margin 29 29 29 ================================================================================
The Financial Services segment consists of two operating groups: Standard & Poor's Ratings Services and the Financial Information Services Group, which comprises Financial Data Services (MMS International, Platt's, and Standard & Poor's ComStock); Equity Services (Standard & Poor's Equity Services, Standard & Poor's Compustat and Standard &Poor's Securities Inc.); Municipal Securities Services (J.J. Kenny Drake, J.J. Kenny Evaluation Services, J.J. Kenny Information Services and CUSIP Service Bureau) and DRI/McGraw-Hill. Financial Services revenue increased 5.5% to $786.8 million and operating profit rose 6.3% to $230.9 million in 1995. 1995 operating profit reflects a $4.1 million best practices charge. In 1994, the segment's revenue grew 7.0% and operating profit rose 8.1%. Standard & Poor's Ratings Services revenue increased in 1995 despite a decline in municipal bond issuance and early year softness in the corporate bond market. As interest rates declined, new issuance volume in the corporate bond market rebounded in the second half of the year. An increase of over 40% in Asset-Backed security volume enabled the Structured Finance unit to post excellent financial results, despite a 50% decline in Mortgaged-Backed securities volume. Worldwide expansion continues with the purchase of the remaining 50% of the Standard & Poor's-ADEF joint venture in Paris in December 1995, a cooperation agreement with CRISIL, India's leading rating agency, and the opening of a new office in Singapore. Product line diversification also continued in 1995. In June, the Bank Loan Rating initiative was launched, a product that extends the review of the risk of default to collateral and other protective features that are an integral part of many bank loans. Other new products and initiatives also produced solid growth. 1995 operating profits improved, reflecting the increased revenues net of continuing investments. Ratings Services anticipates moderate growth in 1996. The International, Structured Finance, and Insurance units anticipate growth while the core units - -- Corporate and Public Finance -- which are extremely dependent on the U.S. capital markets, should maintain 1995 levels. In 1994, Standard & Poor's Ratings Services revenue increased despite a 35% decline in corporate and municipal bond issuance. International, Insurance and Structured Finance posted excellent financial performance offsetting the downturn in core markets. New products, such as Bond Fund Risk ratings, and product extensions produced solid growth. Worldwide expansion continued in 1994 with the purchase of 100% of Iberating (Spanish Rating Agency) which the company previously owned 25%. 1994 profits declined slightly reflecting investments for expansion and new products and services. 29 27 FINANCIAL REVIEW AND ANALYSIS Segment Review (continued) The Financial Information Services Group's revenue grew in 1995 and operating profit increased at a greater rate. Despite robust growth in international markets as a result of firm end-user demand and new product introductions, domestic revenue growth was negatively impacted by a severe contraction in the municipal securities market and weaker demand for print based subscription products. MMS International, Platt's, Standard & Poor's ComStock and Standard &Poor's Compustat's globally targeted products were the key beneficiaries of the increased demand for global market information and analysis, especially in the world's emerging markets. Strong domestic demand for electronic products, particularly in the money management segment, was offset by a decline in print product demand. The municipal securities market, which in 1995 saw the exit of a number of major bond dealers, was an area of particular weakness. DRI/McGraw-Hill continues to capitalize on the global demand for its economic consulting, forecasting and data gathering expertise. New product initiatives and enhanced distribution capabilities should provide global opportunities in 1996. The Group will continue to adhere to its long-term open distribution strategy, using all available media -- including traditional quote vendor services, fax and CD-ROM as well as the Internet -- to deliver actionable, highly value-added information to a wide range of financial decision makers. In 1994, the Financial Information Services Group experienced significant revenue and earnings growth despite less than robust market conditions, reflecting depressed domestic bond and equity markets as a result of higher interest rates. INFORMATION AND MEDIA SERVICES
(in millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Operating Revenue $912.9 $853.2 $831.1 % Increase/(Decrease) 7.0 2.7 (4.0) - -------------------------------------------------------------------------------- Operating Profit $115.1 $108.3 $102.3 % Increase/(Decrease) 6.3 5.9 (9.6) - -------------------------------------------------------------------------------- % Operating Margin 13 13 12 ================================================================================
The Information and Media Services segment is comprised of three operating groups: Information Services (Business Week, Publication Services and Tower Group International); Construction Information and Broadcasting. The Information and Media Services segment's revenue increased 7.0% in 1995 and operating profit increased $6.8 million, or 6.3%, to $115.1 million. Operating profit reflects a best practices charge of $6.3 million. Excluding that charge, operating profits increased 12.1% and margins would have expanded from 12.7% in 1994 to 13.3% in 1995. In 1994, revenue increased 2.7% and operating profit increased $6.0 million, or 5.9%, to $108.3 million. The Information Services Group had 1995 revenue of $542 million, 59% of segment revenue. Revenue increased $51.1 million, or 10.4%. Excluding Tower Group International's acquisition of United Customs Brokers (UCB) Canada, the increase was 8.1%. Information Services' revenue increase is primarily due to Business Week which had a very successful year as revenues increased substantially, both domestically and internationally. North American advertising pages, as measured by the Publishers Information Bureau, were up 4.8%. International pages, as measured internally, were up 13.1%. Investments in technology and international circulation continued in 1995. Despite large paper price increases, operating profits improved dramatically. A successful 1996 for Business Week is dependent upon continued strength in the domestic advertising market and continued success in the expansion of the Group's international markets. In 1994, Business Week's revenues declined slightly due to a weak second half of the year in the domestic advertising market. 1994 profits were negatively impacted by the revenue decline, increased promotional expenses and investments in the Asian market. Publication Services is comprised of the Computers and Communications Information, Aviation Week, Healthcare Publications and the Science and Technology groups. 1995 revenue increased as the group increased market share for several publications and introduced new products and services globally both in print and electronically. The acquisition of Hospital Practice magazine also contributed to increased revenue. Operating profit improved over 1994. Computers and Communications revenue and profit were flat with last year. LAN Times and Data Communications grew significantly, driven by increased advertising pages, the introduction of new products and global expansion. Offsetting this growth was the decline in advertising pages in BYTE and the shutdown of Open Computing, which was discontinued in the fourth quarter. Datapro's revenue and profit grew reflecting the impact of electronic distribution. In 1996, the Group will continue to focus on increasing international revenue and will launch a new publication, tele.com. In 1994, revenue and profits grew due to increased advertising revenue for LAN Times and Data Communications and stringent expense control. The Aviation Week Group's revenue in 1995 grew slightly versus 1994. Aviation Week continues to increase market share in a declining advertising market in addition to successfully introducing new products at major airshows worldwide. Profits for the Group were up slightly versus the prior year. In 1996, the Aviation Week Group expects to maintain a significant presence in this market and plans several new product launches. In 1994, the Aviation Week Group grew its profit primarily through solid expense management. The Healthcare Publications' revenue grew significantly in 1995 primarily due to the acquisition of Hospital Practice early in the year which generated additional revenue along 30 28 with providing strong synergistic sales opportunities with the other healthcare publications. In 1996, the Healthcare Group will continue to focus on increasing its advertising revenue along with introducing new ancillary products and services. In 1994, Healthcare revenue and profits were lower than the previous year due to softness in the healthcare advertising market. The Science and Technology Group's revenue grew in 1995 due in part to a record-breaking advertising performance for Modern Plastics International. Also, Chemical Engineering advertising pages increased. However, profits were flat with 1994 due to softness in the Energy Group and investments in new products and services. The Science and Technology Group is focused on international expansion in 1996 and continued new product introduction. In 1994, the Group had revenue and profit growth due to a strong market share increase by the Plastics publications and the introduction of new conferences and newsletters in the Energy Group. Tower Group International experienced significant revenue growth in 1995 as a result of the acquisition of UCB Canada, expansion of service capabilities, and generally favorable market conditions for core import services. The Group acquired the assets of UCB Canada on April 1, 1995, extending its service capabilities into Canada. Tower Group International's 1995 operating profit declined as investments in new logistics services and products combined with costs associated with the development of a national sales and marketing organization offset the year-to-year revenue growth. In 1996, imports are expected to grow at approximately half the rate of the previous two years, with the strongest activity occurring from Asia and Latin America. The Group will continue to implement initiatives to enhance its sales and marketing capabilities, reengineer its core business processes, enhance its technology systems, and invest in value-added products and services. Tower experienced significant revenue growth in 1994 from increased import activity and growth in Tower's logistics and management services. 1994 profits also improved. The Construction Information Group had 1995 revenue of $253 million, 28% of segment revenue. Revenue increased in 1995 primarily due to a gain in Sweet's in both advertising pages and electronic revenue. Dodge had a small increase in revenue while advertising revenue for the construction magazines was down slightly. Profits for the Construction Information Group increased modestly. Total U.S. construction contract awards were up 1% versus the previous year, with the key non-residential sector reporting a healthy 8% increase. The contract value of total non-residential building is expected to continue its rise in 1996, fostering a more positive environment for the Group in the coming year. Electronic-based products continued to show strong growth in 1995 and should contribute significantly in 1996 as existing products are enhanced and the Group focuses on new electronic products. Sales force automation and other new sales and marketing initiatives will be rolled out to the Dodge and construction magazines' market in 1996. In 1994, revenue and profits for the Construction Information Group declined, despite strong growth in electronic products, as sales lagged behind a modest recovery in the construction market. Broadcasting had 1995 revenue of $118 million, or 13% 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. With the conversion of the Bakersfield station in 1996, all four stations will be ABC affiliates. The Broadcasting Group reported modest increases in revenue and operating profit in 1995 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. Political advertising is expected to enhance revenue in 1996 although political revenue is not expected to match 1994 levels because of the lack of either a gubernatorial or U.S. Senate race in California. Revenue and operating profit grew substantially in 1994 to then record levels based on strong political advertising and non-political sales, in particular automotive advertising. LIQUIDITY AND CAPITAL RESOURCES
(in millions) 1995 1994 - -------------------------------------------------------------------------------- Working Capital $193.3 $130.3 - -------------------------------------------------------------------------------- Total Debt $628.7 $762.8 - -------------------------------------------------------------------------------- Accounts Receivable (before reserves) $935.4 $836.7 % Increase 12 6 - -------------------------------------------------------------------------------- Inventories $238.0 $213.3 % Increase/(Decrease) 12 (1) - -------------------------------------------------------------------------------- Investment in Prepublication Costs $134.1 $118.4 % Increase 13 59 - -------------------------------------------------------------------------------- Purchases of Property and Equipment $ 58.8 $ 77.1 % Increase/(Decrease) (24) 55 ================================================================================
The company continues to maintain a strong financial position. Cash flow from operations increased to $433 million in 1995, an increase of $19 million, which was sufficient to cover dividends and outlays for the purchase of property and equipment, investment in publishing programs and also reduce commercial paper borrowings. 1994's cash flow from operations was $414 million, a decline of $52 million from 1993, reflecting the full year ownership of School Publishing compared to only the fourth quarter in 1993. 1993's cash flow had benefitted significantly from fourth quarter collections of School Publishing receivables, reflecting the seasonality of the school publishing business and the timing of the acquisition by the company. Working capital at the end of 1995 of $193 million was $63 million above the level at the end of 1994 reflecting reduced debt levels net of higher inventory balances. Continued on page 34 31 29 ELEVEN-YEAR FINANCIAL REVIEW
(in thousands, except per-share data) 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS BY SEGMENT AND INCOME STATISTICS OPERATING REVENUE Educational and Professional Publishing $1,235,578 $1,162,157 $ 667,444 $ 567,363 Financial Services 786,786 745,480 696,933 617,555 Information and Media Services 912,919 853,232 831,076 865,573 - ------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING REVENUE 2,935,283 2,760,869 2,195,453 2,050,491 - ------------------------------------------------------------------------------------------------------------------------- OPERATING PROFIT (Note d) Educational and Professional Publishing 162,604 125,765 49,374 62,746 Financial Services 230,934 217,212 200,865 168,394 Information and Media Services 115,069 108,343 102,344 113,198 - ------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING PROFIT 508,607 451,320 352,583 344,338 Share of profit of Macmillan/McGraw-Hill School Publishing Company (Notes b and d) -- -- 28,376 11,280 Unusual charges (Notes c and d) -- -- (229,800) -- Gain on sale of interest in Nikkei/McGraw-Hill (Note e) -- -- -- -- General corporate (expense)/income (Notes d and f) (63,570) (54,134) (48,538) (50,774) Interest (expense)/income -- net (58,766) (51,746) (36,342) (37,557) - ------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES ON INCOME (Note a) 386,271 345,440 66,279 267,287 Provision for taxes on income 159,144 142,321 54,838 114,132 - ------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE ADJUSTMENT 227,127 203,119 11,441 153,155 - ------------------------------------------------------------------------------------------------------------------------- Cumulative effect on prior years of changes in accounting (Note g) -- -- -- (124,587) - ------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 227,127 $ 203,119 $ 11,441 $ 28,568 - ------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Income before cumulative adjustment $ 2.28 $ 2.05 $ 0.12 $ 1.57 Cumulative adjustment (Note g) -- -- -- (1.28) - ------------------------------------------------------------------------------------------------------------------------- Net income $ 2.28 $ 2.05 $ 0.12 $ 0.29 Shares used to calculate earnings per share 99,752 98,998 98,378 97,778 Dividends per share of common stock $ 1.20 $ 1.16 $ 1.14 $ 1.12 - ------------------------------------------------------------------------------------------------------------------------- OPERATING STATISTICS Return on average shareholders' equity 23.3% 23.4% 1.3% 3.0% Income before taxes as a percent of revenue 13.2 12.5 3.0 13.0 Income before cumulative adjustment as a percent of revenue 7.7 7.4 0.5 7.5 - ------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Working capital $ 193,346 $ 130,272 $ 62,887 $ (19,596) Total assets 3,104,389 3,004,363 3,084,163 2,508,140 Total debt 628,664 762,805 928,710 482,991 Shareholders' equity 1,035,066 913,052 823,008 908,760 - ------------------------------------------------------------------------------------------------------------------------- NUMBER OF EMPLOYEES 15,004 15,339 15,661 13,393 =========================================================================================================================
(a) 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. (b) 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. (c) 1993 amount reflects unusual charges in connection with the acquisition of the additional 50% interest in Macmillan/McGraw-Hill. (d) 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
32 30
1991 1990 1989 1988 1987 1986 1985 - ----------------------------------------------------------------------------------------------------------------- $ 532,438 $ 534,724 $ 483,666 $ 437,590 $ 408,252 $ 327,903 $ 318,853 555,820 505,641 432,314 399,242 390,131 357,998 327,422 854,754 898,273 872,983 836,734 801,352 741,891 714,080 - ----------------------------------------------------------------------------------------------------------------- 1,943,012 1,938,638 1,788,963 1,673,566 1,599,735 1,427,792 1,360,355 - ----------------------------------------------------------------------------------------------------------------- 48,928 70,196 44,107 48,185 30,464 37,109 34,328 143,056 123,999 85,081 81,765 81,557 81,558 72,088 120,242 170,788 192,254 175,384 176,564 166,679 158,219 - ----------------------------------------------------------------------------------------------------------------- 312,226 364,983 321,442 305,334 288,585 285,346 264,635 27,483 21,601 13,688 2,349 11,585 30,037 29,461 -- -- (220,000) (149,564) -- -- -- -- -- -- 221,783 -- -- -- (34,415) (28,370) 6,546 5,005 3,418 (23,519) (17,609) (46,987) (55,627) (35,038) (5,290) (4,506) 3,915 7,840 - ----------------------------------------------------------------------------------------------------------------- 258,307 302,587 86,638 379,617 299,082 295,779 284,327 110,297 130,112 46,847 194,112 134,288 141,770 136,923 - ----------------------------------------------------------------------------------------------------------------- 148,010 172,475 39,791 185,505 164,794 154,009 147,404 - ----------------------------------------------------------------------------------------------------------------- -- -- 8,000 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- $ 148,010 $ 172,475 $ 47,791 $ 185,505 $ 164,794 $ 154,009 $ 147,404 - ----------------------------------------------------------------------------------------------------------------- $ 1.52 $ 1.77 $ 0.41 $ 1.92 $ 1.64 $ 1.52 $ 1.46 -- -- 0.08 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- $ 1.52 $ 1.77 $ 0.49 $ 1.92 $ 1.64 $ 1.52 $ 1.46 97,642 97,638 97,450 96,950 100,820 101,302 101,082 $ 1.10 $ 1.08 $ 1.00 $ 0.92 $ 0.84 $ 0.76 $ 0.70 - ----------------------------------------------------------------------------------------------------------------- 15.2 % 18.8 % 5.3 % 21.2 % 19.5 % 18.8 % 20.0 % 13.3 15.6 4.8 22.7 18.7 20.7 20.9 7.6 8.9 2.7 11.1 10.3 10.8 10.8 - ----------------------------------------------------------------------------------------------------------------- $ 29,543 $ 44,193 $ 22,743 $ (72,023) $ (66,214) $ 65,641 $ 163,236 2,515,544 2,534,708 2,208,249 1,729,562 1,619,935 1,446,588 1,257,735 568,159 622,372 503,434 148,434 186,476 56,403 5,932 998,975 954,260 880,154 922,803 825,265 861,418 776,674 - ----------------------------------------------------------------------------------------------------------------- 13,539 13,868 13,741 13,891 13,879 13,257 13,027 =================================================================================================================
(e) 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). (f) 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. (g) 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. 33 31 FINANCIAL REVIEW AND ANALYSIS Liquidity and Capital Resources (continued) The company's earnings and cash flow are significantly impacted by the seasonality of some of its businesses, particularly educational publishing, reflecting the acquisition of the Macmillan/McGraw-Hill School Publishing Company in 1993. The first quarter is the least significant to the company, accounting for 19% of revenues and only 6% of income in 1995. The third quarter of the year is the most significant to the company, although an earlier buying pattern by school districts in 1995 positively impacted the second quarter. This seasonality in revenue also impacts cash flow and related borrowing patterns. The company typically borrows in the first half of the 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. The early ordering in the school market in the second quarter accelerated some cash collections into the third quarter in 1995. In 1995, total debt decreased $134 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 37.8% at the end of 1995 from 45.5% at the end of 1994. In 1994, total debt decreased $166 million, reflecting a reduction in commercial paper borrowings resulting from the company's cash flow of $127 million and a reduction in the year-to-year cash balance of $39 million, reflecting the timing of cash collections relative to commercial paper maturities. The company's commercial paper borrowings at December 31, 1995 were $368.5 million. Commercial paper debt is supported by an $800 million revolving credit agreement with a group of banks terminating in November 1999, 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 which 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 $98.7 million, or 11.8%, primarily as a result of increased revenues and the acquisition of UCB Canada. 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, increased five days at year end due to a variety of factors, including the increase in international receivables. During the course of the year, average days sales outstanding was equal to the results achieved in 1994, demonstrating that receivables continue to be managed effectively despite the growth in international business. Finished goods and work-in-process inventories increased $13.3 million, or 7.1%, primarily at Glencoe/McGraw-Hill, reflecting its robust sales, and in certain international locations. Raw material inventory, primarily paper, increased $11.4 million due to higher paper prices and the maintenance of higher quantities reflecting greater demand. Capital expenditures for the purchase of property and equipment totaled $58.8 million in 1995 compared with $77.1 million in 1994. In 1995, expenditures were primarily for computer equipment for business units and corporate departments. In 1994, there were significant expenditures for the purchase of a building which houses some of the Financial Information Services Group's units in New York, leasehold improvements and equipment purchases for the move of the School Publishing operations in New York and computer equipment for the business units. In 1996, purchases of property and equipment are expected to increase in the range of 20-30% as the company begins to implement technology enhancements under the best practices program. Net prepublication costs declined approximately 1% to $268.2 million at December 31, 1995 as amortization expense exceeded 1995 spending, net of foreign exchange impacts. Prepublication investment totaled $134.1 million in 1995, an increase over 1994 of $15.7 million, reflecting spending for the 1997 adoption year programs as well as College and Professional Publishing titles. 1996 prepublication spending is expected to increase approximately 20-30% from 1995 levels, reflecting investment for the 1997 adoption year. On January 31, 1996, the company's Board of Directors approved a stock repurchase program authorizing the purchase of up to 4 million shares of the company's common stock. Financing for the buyback program will come from internally generated funds or from short-term borrowings. The repurchased shares will be used for general corporate purposes, including the issuance of shares for the exercise of employee stock options. On January 31, 1996, the company announced an increase in the quarterly common stock dividend of three cents, or 10%, to 33 cents per share. In 1996, 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. The level of additional debt retirement is dependent on the amount of expenditure related to the share repurchase program. 34 32 CONSOLIDATED STATEMENT OF INCOME
Years ended December 31 (in thousands, except per-share data) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- OPERATING REVENUE $2,935,283 $2,760,869 $2,195,453 - ---------------------------------------------------------------------------------------------------------- EXPENSES: Operating 1,340,348 1,248,306 1,055,845 Selling and general 960,875 906,878 707,277 Depreciation and amortization 231,408 230,026 139,619 - ---------------------------------------------------------------------------------------------------------- TOTAL EXPENSES 2,532,631 2,385,210 1,902,741 Share of profit of Macmillan/McGraw-Hill School Publishing Company (Note 3) -- -- 28,376 Unusual charges related to acquisition of additional 50% of Macmillan/McGraw-Hill School Publishing Company (Note 3) -- -- (229,800) Other income-- net (Note 2) 42,385 21,527 11,333 - ---------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 445,037 397,186 102,621 Interest expense-- net 58,766 51,746 36,342 - ---------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES ON INCOME 386,271 345,440 66,279 Provision for taxes on income (Note 5) 159,144 142,321 54,838 - ---------------------------------------------------------------------------------------------------------- NET INCOME $ 227,127 $ 203,119 $ 11,441 - ---------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE (Note 1) $ 2.28 $ 2.05 $ 0.12 Average number of common shares outstanding during year (Note 1) 99,752 98,998 98,378 ==========================================================================================================
See accompanying notes. 35 33 CONSOLIDATED BALANCE SHEET
December 31 (in thousands, except share data) 1995 1994 - ---------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and equivalents (Note 1) $ 10,250 $ 8,056 Accounts receivable (net of allowance for doubtful accounts: 1995-- $79,980; 1994-- $78,732) 855,372 757,949 Receivable from broker-dealers and dealer banks (Note 1) 9,674 23,047 Inventories: Finished goods 185,608 172,930 Work-in-process 15,675 15,033 Paper and other materials 36,747 25,290 - ---------------------------------------------------------------------------------------- Total inventories 238,030 213,253 Prepaid income taxes 67,128 70,556 Prepaid and other current assets 59,351 51,226 - ---------------------------------------------------------------------------------------- Total current assets 1,239,805 1,124,087 - ---------------------------------------------------------------------------------------- PREPUBLICATION COSTS (net of accumulated amortization: 1995-- $391,384; 1994-- $346,172) (Note 1) 268,200 270,506 INVESTMENTS AND OTHER ASSETS Investment in Rock-McGraw, Inc.-- at equity (Note 6) 61,797 57,652 Prepaid pension expense 98,177 84,782 Other 141,861 148,660 - ---------------------------------------------------------------------------------------- Total investments and other assets 301,835 291,094 - ---------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT-- AT COST Land 19,365 19,295 Buildings and leasehold improvements 297,796 291,554 Equipment and furniture 510,146 477,822 - ---------------------------------------------------------------------------------------- Total property and equipment 827,307 788,671 Less-- accumulated depreciation 491,178 442,889 - ---------------------------------------------------------------------------------------- Net property and equipment 336,129 345,782 - ---------------------------------------------------------------------------------------- GOODWILL AND OTHER INTANGIBLE ASSETS-- AT COST (net of accumulated amortization: 1995-- $366,277; 1994-- $336,523) (Notes 1 and 3) 958,420 972,894 - ---------------------------------------------------------------------------------------- $3,104,389 $3,004,363 ========================================================================================
See accompanying notes. 36 34
1995 1994 - ------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable (Note 7) $ 71,299 $ 105,288 Accounts payable 215,179 176,314 Payable to broker-dealers and dealer banks (Note 1) 7,469 21,909 Accrued royalties 63,582 58,707 Accrued compensation and contributions to retirement plans 124,800 114,295 Income taxes currently payable 70,405 54,300 Unearned revenue 241,816 239,715 Other current liabilities 251,909 223,287 - ------------------------------------------------------------------------------------------------- Total current liabilities 1,046,459 993,815 - ------------------------------------------------------------------------------------------------- OTHER LIABILITIES Long-term debt (Note 7) 557,365 657,517 Deferred income taxes 140,531 129,750 Accrued postretirement healthcare and other benefits 200,100 201,650 Other non-current liabilities 124,868 108,579 - ------------------------------------------------------------------------------------------------- Total other liabilities 1,022,864 1,097,496 - ------------------------------------------------------------------------------------------------- Total liabilities 2,069,323 2,091,311 - ------------------------------------------------------------------------------------------------- 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-- 1,416 shares in 1995 and 1,514 in 1994 14 15 Common stock, $1 par value: authorized-- 150,000,000 shares; issued-- 102,918,876 shares in 1995 and 102,918,232 in 1994 102,919 102,918 Additional paid-in capital 26,740 17,855 Retained income 1,030,526 923,052 Foreign currency translation adjustments (56,247) (45,224) - ------------------------------------------------------------------------------------------------- Less -- common stock in treasury -- at cost (2,775,996 shares in 1995 and 3,574,014 in 1994) 60,778 76,987 unearned compensation on restricted stock 8,108 8,577 - ------------------------------------------------------------------------------------------------- Total shareholders' equity 1,035,066 913,052 - ------------------------------------------------------------------------------------------------- $3,104,389 $3,004,363 =================================================================================================
37 35 CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31 (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- CASH FLOW FROM OPERATING ACTIVITIES Net income $ 227,127 $ 203,119 $ 11,441 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 67,916 64,281 54,941 Amortization of goodwill and intangibles 38,548 37,489 27,939 Amortization of prepublication costs 124,944 128,256 56,739 Provision for losses on accounts receivable 65,385 67,508 60,401 Gain on sale of topical publishing (23,782) -- -- Unusual charges related to acquisition of additional 50% of Macmillan/McGraw-Hill School Publishing Company (Note 3) -- -- 229,800 Undistributed share of profit of Macmillan/McGraw-Hill joint venture (Note 3) -- -- (26,318) Other 6,120 3,862 1,234 Change in assets and liabilities net of effect of acquisitions and dispositions: (Increase)/decrease in accounts receivable (147,151) (120,286) 79,403 (Increase)/decrease in inventories (30,804) (7,026) 11,258 (Increase)/decrease in prepaid and other current assets (7,957) (6,549) 6,909 Increase/(decrease) in accounts payable and accrued expenses 51,697 (7,460) 7,822 Increase/(decrease) in unearned revenue 2,894 (9,088) 17,376 Increase/(decrease) in other current liabilities 9,814 6,082 (15,636) Increase in interest and income taxes currently payable 23,913 12,293 4,746 Increase/(decrease) in prepaid/deferred income taxes 18,913 39,048 (39,141) Net change in other assets and liabilities 5,659 2,390 (23,358) - ------------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 433,236 413,919 465,556 - ------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Investment in prepublication costs (134,118) (118,377) (74,489) Purchase of property and equipment (58,776) (77,068) (49,808) Acquisition of businesses and equity interests (Note 2) (36,246) (1,219) (323,913) Disposition of property, equipment and businesses 35,481 12,962 492 Other 700 2,655 -- - ------------------------------------------------------------------------------------------------------------------------- Cash used for investing activities (192,959) (181,047) (447,718) - ------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Dividends paid to shareholders (119,653) (114,317) (111,833) Debt for acquisition of Macmillan/McGraw-Hill -- -- 337,500 Repayment of commercial paper and other short-term debt-- net (133,700) (165,785) (105,611) Repayment of long-term debt-- net (540) (317) (120,390) Exercise of stock options 20,616 13,983 19,047 Other (2,593) (1,450) (558) - ------------------------------------------------------------------------------------------------------------------------- Cash (used for)/provided by financing activities (235,870) (267,886) 18,155 - ------------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,213) (4,883) (1,268) - ------------------------------------------------------------------------------------------------------------------------- Net change in cash and equivalents 2,194 (39,897) 34,725 Cash and equivalents at beginning of year 8,056 47,953 13,228 - ------------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $ 10,250 $ 8,056 $ 47,953 =========================================================================================================================
See accompanying notes. 38 36 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended December 31, 1995, 1994 and 1993
$1.20 Additional preference Common paid-in Retained (in thousands, except per-share data) $10 par $1 par capital income - ------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1993 $16 $102,918 $ 7,945 $ 934,642 Net income -- -- -- 11,441 Dividends ($1.14 per share) -- -- -- (111,833) Exercise of stock options -- -- 4,348 -- Restricted stock -- -- (302) -- Foreign currency translation adjustments-- net -- -- -- -- Other -- -- 62 -- - ------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 16 102,918 12,053 834,250 Net income -- -- -- 203,119 Dividends ($1.16 per share) -- -- -- (114,317) Exercise of stock options -- -- 3,513 -- Restricted stock -- -- 2,093 -- Foreign currency translation adjustments-- net -- -- -- -- Other (1) -- 196 -- - ------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 15 102,918 17,855 923,052 Net income -- -- -- 227,127 Dividends ($1.20 per share) -- -- -- (119,653) Exercise of stock options -- -- 5,685 -- Restricted stock -- -- 2,556 -- Foreign currency translation adjustments-- net -- -- -- -- Other (1) 1 644 -- - ------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 $14 $102,919 $26,740 $1,030,526 =====================================================================================
Less-- Foreign Less-- unearned currency common stock compensation translation in treasury on restricted (in thousands, except per-share data) adjustments at cost stock Total - ---------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1993 $(21,751) $ 99,448 $15,562 $ 908,760 Net income -- -- -- 11,441 Dividends ($1.14 per share) -- -- -- (111,833) Exercise of stock options -- (14,699) -- 19,047 Restricted stock -- 2,272 (5,597) 3,023 Foreign currency translation adjustments-- net (6,826) -- -- (6,826) Other -- 666 -- (604) - ---------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 (28,577) 87,687 9,965 823,008 Net income -- -- -- 203,119 Dividends ($1.16 per share) -- -- -- (114,317) Exercise of stock options -- (10,470) -- 13,983 Restricted stock -- (1,569) (1,388) 5,050 Foreign currency translation adjustments-- net (16,647) -- -- (16,647) Other -- 1,339 -- (1,144) - ---------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 (45,224) 76,987 8,577 913,052 Net income -- -- -- 227,127 Dividends ($1.20 per share) -- -- -- (119,653) Exercise of stock options -- (14,931) -- 20,616 Restricted stock -- (4,204) (469) 7,229 Foreign currency translation adjustments-- net (11,023) -- -- (11,023) Other -- 2,926 -- (2,282) - ---------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 $(56,247) $ 60,778 $ 8,108 $1,035,066 ==============================================================================================
See accompanying notes. 39 37 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 3 to 5 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 which 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 $1.3 billion at December 31, 1995 and $1.2 billion at December 31, 1994, 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 $198.1 million and $311.1 million at December 31, 1995 and 1994, 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 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 contract is 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 $63 million, $58 million and $39 million in advertising costs in 1995, 1994 and 1993. 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. 40 38 Stock split. On January 31, 1996, the Board of Directors declared a two-for-one stock split of the company's common stock which will be 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. Reclassification. Certain prior year amounts have been reclassified for comparability purposes. 2. ACQUISITIONS AND DISPOSITIONS Acquisitions. 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. In 1993, excluding the acquisition of the Macmillan/McGraw-Hill Publishing Company, the company made six acquisitions totaling $23.1 million. The effect of these acquisitions on the results of operations for the years presented was not material. See Note 3 for details of the Macmillan/McGraw-Hill School Publishing acquisition. Non-cash Investing Activities. Liabilities assumed in conjunction with the acquisition of businesses are as follows:
(in thousands) 1995 1994 1993* - ------------------------------------------------------------------------------ Fair value of assets acquired $58,152 $1,520 $835,569** Cash paid (net of cash acquired) 36,246 1,219 323,913 - ------------------------------------------------------------------------------ Liabilities assumed $21,906 $ 301 $511,656 ==============================================================================
* Includes the impact of the Macmillan/McGraw-Hill School Publishing Company acquisition. ** Net of The McGraw-Hill Companies' investment in Macmillan/McGraw-Hill School Publishing Company. Dispositions. In 1995, the company sold the topical publishing business of Shepard's/McGraw-Hill. The pre-tax gain on this disposition was $23.8 million, which was included in other income. After taxes, the gain was $15.1 million. In 1994 and 1993 there were no significant dispositions. 3. MACMILLAN/MCGRAW-HILL SCHOOL PUBLISHING COMPANY On October 4, 1993, the company purchased the 50% interest in the Macmillan/McGraw-Hill School Publishing Company (Macmillan/McGraw-Hill) owned by Macmillan, a subsidiary of Maxwell Communication, Inc., for $337.5 million in cash. Macmillan/McGraw-Hill had been formed as a joint venture in 1989 to combine the company's and Macmillan's elementary, secondary, vocational education and test publishing businesses. The company thereby obtained 100% ownership of Macmillan/McGraw-Hill and it was consolidated in the company's operations from the date of acquisition of the additional 50% interest. Prior to obtaining full ownership, the company accounted for its 50% interest under the equity method. The acquisition was accounted for as a purchase and, accordingly, the purchase price was allocated to 50% of Macmillan/McGraw-Hill's assets and liabilities based on their estimated fair values at September 30, 1993. The excess of the purchase price over the estimated fair value of the net tangible assets acquired was recorded as identifiable intangibles ($148.6 million) and goodwill ($94.4 million), and is being amortized over 20 to 35 years and 23 to 38 years, respectively. In conjunction with the acquisition, the company recorded in the third quarter of 1993 a non-recurring charge of $199.8 million ($143.2 million net of tax benefits or $1.46 per share) primarily to adjust the company's original investment to values established in this transaction. This charge was allocated primarily to goodwill and intangibles. In addition, the company recorded a provision of $30 million ($17.6 million net of tax benefits or $.18 per share) related to the consolidation of certain functions of Macmillan/ McGraw-Hill and the company's book publishing operations. The following unaudited pro forma information presents the consolidated results of operations of the company for 1993, as if the acquisition of the additional 50% of Macmillan/McGraw-Hill had occurred at the beginning of 1993, after giving effect to certain adjustments, including amortization of goodwill and other intangibles, increased interest expense from debt issued to fund the acquisition and related income tax effects. The pro forma results exclude the total non-recurring charge of $160.8 million after taxes, but includes its effect on amortization. Pro forma results for 1993 are: operating revenue $2.7 billion; net income $184 million and earnings per common share $1.87. These pro forma results are not necessarily indicative of those that would have occurred had the acquisition taken place at the beginning of 1993. Actual unaudited operating results for Macmillan/ McGraw-Hill for the nine months ended September 30, 1993 were: operating revenue $526.7 million; operating profit $68.4 million and net profit before partners' income taxes $54.2 million. 41 39 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 which 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 24 countries. Transfers between geographic areas are recorded at cost plus a mark-up and intercompany revenue and profits are eliminated. 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++ - ---------------------------------------------------------------------------------------------------------------- 1995 Educational and Professional Publishing $1,235,578 $ 162,604 $1,620,823 $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 2,803,679 229,264 192,568 Corporate -- (63,570) 300,710 2,144 326 Interest expense-- net -- (58,766) -- -- -- - ---------------------------------------------------------------------------------------------------------------- Total company $2,935,283 $ 386,271* $3,104,389 $231,408 $192,894 - ---------------------------------------------------------------------------------------------------------------- 1994 Educational and Professional Publishing $1,162,157 $ 125,765 $1,611,302 $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 2,729,072 228,826 194,385 Corporate -- (54,134) 275,291 1,200 1,060 Interest expense-- net -- (51,746) -- -- -- - ---------------------------------------------------------------------------------------------------------------- Total company $2,760,869 $ 345,440* $3,004,363 $230,026 $195,445 - ---------------------------------------------------------------------------------------------------------------- 1993 Educational and Professional Publishing $ 667,444 $ 49,374 $1,619,932 $ 78,794 $ 87,473 Financial Services 696,933 200,865 542,774 28,027 21,321 Information and Media Services 831,076 102,344 591,034 31,409 15,371 - ---------------------------------------------------------------------------------------------------------------- Total operating segments 2,195,453 352,583 2,753,740 138,230 124,165 Macmillan/McGraw-Hill joint venture -- 28,376 -- -- -- Unusual charges related to acquisition of additional 50% of Macmillan/McGraw-Hill School Publishing Company -- (229,800) -- -- -- Corporate -- (48,538) 330,423 1,389 132 Interest expense-- net -- (36,342) -- -- -- - ---------------------------------------------------------------------------------------------------------------- Total company $2,195,453 $ 66,279* $3,084,163 $139,619 $124,297 - ---------------------------------------------------------------------------------------------------------------- 1995 United States $2,528,553 $ 448,876 $2,744,804 Foreign 406,730 59,731 359,585 - ------------------------------------------------------------------------------- 1994 United States $2,402,976 $ 408,846 $2,679,589 Foreign 357,893 42,474 324,774 - ------------------------------------------------------------------------------- 1993 United States $1,886,425 $ 316,830 $2,769,691 Foreign 309,028 35,753 314,472 =============================================================================== * 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.
42 40 5. TAXES ON INCOME Income before taxes on income resulted from domestic operations (including foreign branches) and foreign subsidiaries' operations as follows:
(in millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Domestic operations $356.1 $319.3 $38.7 Foreign operations 30.2 26.1 27.6 - -------------------------------------------------------------------------------- Total income before taxes $386.3 $345.4 $66.3 ================================================================================
A reconciliation of the U.S. statutory tax rate to the company's effective tax rate for financial reporting purposes follows:
1995 1994 1993 - ------------------------------------------------------------------------------- U.S. statutory rate 35.0% 35.0% 35.0% Unusual charges -- -- 33.5 Goodwill amortization 1.7 1.9 13.1 Effect of state and local income taxes 5.5 6.1 10.6 Other-- net (1.0) (1.8) (9.5) - ------------------------------------------------------------------------------- Effective tax rate 41.2% 41.2% 82.7%* =============================================================================== *Excluding unusual charges, the 1993 effective tax rate was 41.8%.
The provision for taxes on income consists of the following:
(in millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Federal: Current $104.9 $ 75.8 $62.8 Deferred 11.9 28.5 (25.8) - -------------------------------------------------------------------------------- Total federal 116.8 104.3 37.0 - -------------------------------------------------------------------------------- Foreign: Current 7.3 8.8 5.4 Deferred 2.3 (3.2) 1.6 - -------------------------------------------------------------------------------- Total foreign 9.6 5.6 7.0 - -------------------------------------------------------------------------------- State and local: Current 28.0 20.9 22.6 Deferred 4.7 11.5 (11.8) - -------------------------------------------------------------------------------- Total state and local 32.7 32.4 10.8 - -------------------------------------------------------------------------------- Total provision for taxes $159.1 $142.3 $54.8 ================================================================================
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) 1995 1994 - -------------------------------------------------------------------------------- Fixed assets and intangible assets $ 125.9 $ 117.6 Prepaid pension and other expenses 65.6 61.5 Unearned revenue 36.0 33.0 Reserves and accruals (117.7) (106.1) Postretirement and postemployment benefits (95.1) (92.4) Other-- net 58.7 45.6 - -------------------------------------------------------------------------------- Deferred tax liability-- net $ 73.4 $ 59.2 ================================================================================
The company made income tax payments totaling $111.4 million in 1995, $83.9 million in 1994 and $78.4 million in 1993. 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, 1995, excluding amounts which, 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. 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 1995, the company paid Rock-McGraw gross annual rentals of $19.4 million (including various escalation payments) for the occupied space and $13.7 million for space which 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) 1995 1994 1993 - -------------------------------------------------------------------------------- Revenue $ 62.7 $ 61.8 $ 52.4 - -------------------------------------------------------------------------------- Net income 9.7 10.0 5.3 - -------------------------------------------------------------------------------- Depreciation expense 6.4 6.4 5.2 - -------------------------------------------------------------------------------- Total assets 200.7 198.0 178.5 - -------------------------------------------------------------------------------- Mortgage payable 27.5 31.2 34.8 - -------------------------------------------------------------------------------- Total liabilities 63.0 70.1 60.7 ================================================================================
The building is financed by an 81/8%, 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. DEBT 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 are supported by the revolving credit agreement described below, and $300 million has been classified as long-term. 43 41 The company has an $800 million revolving credit agreement with a group of banks terminating in November 1999. Interest rates on amounts borrowed vary depending upon the source and are based on any one of the Eurodollar, Certificate of Deposit or prime rates, 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, 1995, 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 and unsubordinated obligations of the company and are not redeemable by the company prior to the maturity date. At December 31, 1994, the company had short-term borrowings of $505 million, primarily representing domestic commercial paper borrowings at an average interest rate of 5.9% maturing at various dates during 1995. The commercial paper borrowings were supported by the revolving credit agreement noted above and $400 million of the commercial paper borrowings was classified as long-term. A summary of long-term debt at December 31 follows:
(in thousands) 1995 1994 - -------------------------------------------------------------------------------- 9.43% senior notes due 2000 $250,000 $250,000 Commercial paper supported by bank revolving credit agreement 300,000 400,000 Other 7,365 7,517 - -------------------------------------------------------------------------------- Total long-term debt $557,365 $657,517 ================================================================================
The company paid interest on its debt totaling $58.6 million in 1995, $51.7 million in 1994 and $33.8 million in 1993. 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, 1995 and 1994 totaling $257.4 million and $257.5 million, respectively, based on current borrowing rates for debt with similar terms and maturities is estimated to be $294 million and $271 million, respectively. 8. RENTAL EXPENSE AND LEASE OBLIGATIONS Rental expense for property and equipment under all operating lease agreements was as follows:
(in millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Gross rental expense $112.1 $114.4 $100.3 Less: sublease revenue 26.1 23.7 22.0 - -------------------------------------------------------------------------------- Net rental expense $ 86.0 $ 90.7 $ 78.3 ================================================================================
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 $21 million of revenue from existing noncancelable subleases.
(in millions) - -------------------------------------------------------------------------------- 1996 $ 56.8 1997 49.6 1998 40.1 1999 29.9 2000 21.6 2001 and beyond 69.8 - -------------------------------------------------------------------------------- Total $267.8 ================================================================================
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 issuable for the exercise of stock options was 7,208,178 at December 31, 1995 and 8,110,228 at December 31, 1994. Under the Directors' Stock Payment Plan, 37,048 common shares were reserved for issuance at December 31, 1995 and 38,776 at December 31, 1994. 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. 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. 44 42 10. STOCK PLAN AWARDS 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. The 1993 Directors' Stock Payment Plan requires that 20% of eligible Directors' annual retainer be paid in common stock beginning in 1994. Under this Plan, a total of 40,000 shares of stock may be issued. Recipients of stock under this Plan 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. The term of the Plan is ten years. 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. 1995 option activity was as follows:
1993 Plan 1987 Plan 1983 Plan - -------------------------------------------------------------------------------- Outstanding at beginning of year -- 2,330,998 702,590 Options granted 568,200 310,100 -- Less: Options exercised -- 444,214 253,940 Options canceled and expired 43,550 56,176 6,066 - -------------------------------------------------------------------------------- Outstanding at end of year 524,650 2,140,708 442,584 - -------------------------------------------------------------------------------- Exercisable at end of year 7,600 1,504,758 442,584 - -------------------------------------------------------------------------------- Shares of common stock reserved for issuance at beginning of year 4,600,000 2,807,638 702,590 - -------------------------------------------------------------------------------- Shares of common stock reserved for issuance at end of year 4,400,384 2,365,210 442,584 - -------------------------------------------------------------------------------- Price range of options outstanding at end $33.56 to $26.22 to $24.84 to of year $34.88 $34.88 $33.69 - -------------------------------------------------------------------------------- Price range of options -- $26.22 to $22.06 to exercised during year $33.97 $33.69 ================================================================================
A total of 282,468 restricted shares were issued at an average market value of $33.68 in 1995. In 1994, 235,952 restricted shares were issued at an average market value of $33.94. 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. 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 $7.2 million for 1995, $5.2 million for 1994 and $3.0 million for 1993. Restricted shares outstanding at the end of the year were 539,356 shares in 1995, 549,894 shares in 1994, and 542,240 shares in 1993. 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. A summary of pension cost for the company's domestic defined benefit plans follows:
(in millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost $ 13.2 $ 16.4 $ 11.5 Interest cost 28.5 27.7 25.0 Return on assets: Actual return (122.2) (7.4) (45.9) Deferred 75.7 (37.5) 5.9 - -------------------------------------------------------------------------------- Recognized (46.5) (44.9) (40.0) Amortization of net asset at 1/1/86 (6.1) (6.1) (6.1) Net amortization and deferral (2.1) 1.2 1.1 - -------------------------------------------------------------------------------- Net negative pension cost $ (13.0) $ (5.7) $ (8.5) - -------------------------------------------------------------------------------- Assumed rates-- January 1: Discount rate (interest cost) 8 1/2% 7 1/4% 7 3/4% Compensation increase factor 5 1/2 6 6 Return on assets 9 1/2 9 1/2 9 1/2 ================================================================================
45 43 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 $2.0 million for 1995, $2.4 million for 1994, and $2.2 million for 1993. The accumulated benefit obligation as of December 31, 1995 was $16.0 million including vested benefits of $14.6 million and the projected benefit obligation was $17.5 million. Total retirement plans cost was $31.3 million for 1995, $36.7 million for 1994 and $25.7 million for 1993. The funded status of the domestic defined benefit plans as of December 31 follows:
(in millions) 1995 1994 - -------------------------------------------------------------------------------- Actuarial present value of pension benefits: Vested benefits $(362.5) $(309.2) Non-vested benefits (19.4) (13.9) - -------------------------------------------------------------------------------- Accumulated benefit obligation (381.9) (323.1) Additional amount related to projected compensation increases (28.1) (19.6) - -------------------------------------------------------------------------------- Projected benefit obligation (410.0) (342.7) Plan assets at market value -- primarily listed stocks and U.S. government obligations 585.4 486.1 - -------------------------------------------------------------------------------- Excess of assets over projected benefit obligation 175.4 143.4 Unrecognized net asset at 1/1/86 (4.6) (10.7) Unrecognized prior service cost 7.6 8.7 Unrecognized net gain (80.2) (56.6) - -------------------------------------------------------------------------------- Prepaid pension cost at December 31 $ 98.2 $ 84.8 - -------------------------------------------------------------------------------- Assumed rates-- December 31: Discount rate 7 1/4% 8 1/2% Compensation increase factor 5 1/2 5 1/2 ================================================================================
The company has several foreign pension plans which do not determine the accumulated benefits or net assets available for benefits as disclosed above. The amounts involved are not material and are therefore not included. 12. POSTRETIREMENT HEALTHCARE AND OTHER BENEFITS The company and some of its domestic subsidiaries provide certain medical, dental and life insurance benefits for retired employees and eligible dependents. The medical and dental plans are contributory while the life insurance plan is noncontributory. The company currently does not fund any of these plans. Postretirement benefits cost was $7.1 million in 1995, $9.3 million in 1994 and $12.6 million in 1993. A summary of the components of the cost in 1995, 1994 and 1993 follows:
(in millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost $ 2.0 $ 2.2 $ 2.4 Interest cost 10.4 10.6 12.8 Net amortization and deferral (5.3) (3.5) (2.6) - -------------------------------------------------------------------------------- Postretirement benefits cost $ 7.1 $ 9.3 $12.6 ================================================================================
A summary of the components of the unfunded postretirement benefit obligation as of December 31 follows:
(in millions) 1995 1994 - -------------------------------------------------------------------------------- Retirees $(103.8) $(100.9) Fully eligible plan participants (14.9) (12.8) Other active plan participants (22.1) (18.8) - -------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation (140.8) (132.5) Unrecognized net gain (37.2) (44.5) Unrecognized prior service cost (22.1) (24.7) - -------------------------------------------------------------------------------- Accrued postretirement benefit obligation $(200.1) $(201.7) ================================================================================
The assumed weighted average healthcare cost trend rate ranges from 9.0% in 1996 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, 1995 by $11.2 million and 1995 benefit expense by $1.2 million. The weighted average discount rate used to measure expense was 8.5% in 1995 and 7.5% in 1994; the rate used to measure the accumulated postretirement benefit obligation was 7.25% in 1995 and 8.5% in 1994. 46 44 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, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York January 31, 1996 47 45 SUPPLEMENTAL FINANCIAL INFORMATION Quarterly Financial Information (unaudited)
First Second Third Fourth Total (in thousands, except per-share data) quarter quarter quarter quarter year - ------------------------------------------------------------------------------------------- 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 a) 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 a) 0.15 0.49 0.91 0.50 2.05 - ------------------------------------------------------------------------------------------- 1993 Operating revenue $466,947 $490,907 $ 554,969 $682,630 $2,195,453 Income/(loss) before taxes (Note b) 26,614 71,748 (108,804) 76,721 66,279 Net income/(loss) (Note b) 15,250 43,177 (91,868) 44,882 11,441 Earnings per share (Note a) 0.15 0.44 (0.93) 0.46 0.12 =========================================================================================== (a) Earnings per share reflect a 2-for-1 stock split approved by the company's Board of Directors on January 31, 1996. All prior periods have been restated to reflect the split. (b) The third quarter of 1993 includes unusual charges related to the acquisition of the additional 50% of Macmillan/McGraw-Hill School Publishing Company of $229.8 million ($160.8 million after taxes, or $1.64 per share). See Note 3.
HIGH AND LOW SALES PRICES OF THE MCGRAW-HILL COMPANIES COMMON STOCK ON THE NEW YORK STOCK EXCHANGE* (NOTE A)
1995 1994 1993 - -------------------------------------------------------------------------------- First quarter $36 5/8-31 7/8 $36 1/2-32 1/4 $32 -28 1/4 Second quarter 38 7/8-35 5/8 35 -31 1/4 32 1/8-27 5/8 Third quarter 42 3/8-37 5/8 38 5/8-33 1/8 35 -29 1/8 Fourth quarter 43 7/8-39 1/2 37 3/8-32 37 5/8-32 7/8 - -------------------------------------------------------------------------------- Year 43 7/8-31 7/8 38 5/8-31 1/4 37 5/8-27 5/8 ================================================================================ *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 2-for-1 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 7 SUBSIDIARIES OF THE 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 of The McGraw-Hill Companies' 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 MMS International Nevada 100 Money Market Directories, Inc. New York l00 Rock-McGraw, Inc. New York 45 Shepard's/McGraw-Hill, Inc. Delaware 100 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 Tower Group International, Inc. New York 100 *Tower Group International Canada Inc. Canada 100
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State or Percentage Jurisdiction of Voting of Securities Incorporation Owned ------------- ----------- Calificadora de Valores, S.A. de C.V. Mexico 100 Columbia Administration Software Publishing Corporation British Columbia 100 *Columbia Computing Services, Inc. Delaware 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 Mexico, S.A. de C.V. Mexico 100 *Ediciones Pedagogicas, S.A. de C.V. Mexico 100 McGraw-Hill/Interamericana de Venezuela S.A. Venezuela 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 Nueva Editorial Interamericana, S.A. de C.V. Mexico 100 Standard & Poor's - Nordisk Rating AB Sweden 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 Tata McGraw-Hill Publishing Company Private Limited India 40
*Subsidiary of a subsidiary. -99- EX-23 8 CONSENT OF INDEPENDENT AUDITORS 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. of our report dated January 31, 1996, included in the 1995 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 1993 Stock Payment Plan for Directors (No. 33-49741), 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 31, 1996 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. /s/ ERNST & YOUNG LLP New York, New York March 26, 1996 -100- EX-27 9 ART. 5 FDS FOR 10-K
5 1,000 YEAR DEC-31-1995 DEC-31-1995 10,250 0 935,352 79,980 238,030 1,239,805 827,307 491,178 3,104,389 1,046,459 0 102,919 14 0 0 3,104,389 2,935,283 2,935,283 2,532,631 2,532,631 0 65,385 58,766 386,271 159,144 227,127 0 0 0 227,127 2.28 2.28
EX-99 10 SCHEDULE II - RESERVE FOR DOUBTFUL ACCOUNTS 1 THE MCGRAW-HILL COMPANIES, INC. SCHEDULE II - RESERVE FOR DOUBTFUL ACCOUNTS Years ended December 31, 1995, 1994 and 1993 (Thousands of dollars)
Balance at Additions Balance Beginning Charged at End Year of Year to Income Deductions Other of Year - ---- ---------- ---------- ---------- ----- ------- 1995 $78,732 $65,385 $64,137 $ - $79,980 1994 79,461 67,508 68,237 - 78,732 1993 80,768 60,401 65,534 3,826 (B) 79,461
(A) Accounts written off, less recoveries. (B) Reserves acquired in connection with the purchase of the MacMillan/McGraw-Hill School Publishing Co. -102- -----END PRIVACY-ENHANCED MESSAGE-----