<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 1996
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______.
Commission file number 0-7276
THE GOODHEART-WILLCOX COMPANY, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 36-2135994
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18604 W. Creek Drive, Tinley Park, Illinois 60477
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(708) 687-5000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
123 Taft Drive, South Holland, Illinois 60473
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
___ ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __ No __.
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: October 31, 1996 - 747,900 shares.
<PAGE> 2
INDEX
THE GOODHEART-WILLCOX COMPANY, INC.
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - October 31, 1996 and April 30, 1996 .... 3
Consolidated Statements of Earnings - Three Months Ended October 31,
1996 and 1995; Six Months Ended October 31, 1996 and 1995 ............ 5
Consolidated Statements of Stockholders' Equity - Six Months Ended
October 31, 1996 and 1995 ............................................ 6
Consolidated Statements of Cash Flows - Six Months Ended
October 31, 1996 and 1995 ............................................ 7
Notes to Consolidated Financial Statements - October 31, 1996 ........ 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 14
PART II. OTHER INFORMATION
- -------- -----------------
SIGNATURES ........................................................................... 18
Item 6. Exhibit 27 - Financial Data Schedule ................................. 19
</TABLE>
<PAGE> 3
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
October 31, April 30,
ASSETS 1996 1996
---------- ----------
(Note)
<S> <C> <C>
Current assets
Cash and cash equivalents ..................................... $5,581,000 $ 5,118,000
Accounts receivable - net of allowance for doubtful receivables
and sales returns of $233,000 and $207,000 .................. 2,755,000 1,421,000
Inventories ................................................... 1,838,000 1,967,000
Deferred income taxes ......................................... 476,000 476,000
Prepaid income taxes .......................................... - 36,000
Other ......................................................... 155,000 119,000
---------- ----------
Total current assets ..................................... 10,805,000 9,137,000
Investment in securities available for sale ..................... 91,000 91,000
Prepublication costs - net of accumulated amortization of $1,255,000
and $1,071,000 ................................................ 1,625,000 1,639,000
Property and equipment - net .................................... 4,586,000 2,253,000
Cash surrender value of life insurance
net of loans of $350,000 and $363,000 ......................... 665,000 585,000
Other assets .................................................... - -
---------- ----------
$17,772,000 $13,705,000
=========== ===========
Note: The consolidated balance sheet at April 30, 1996 has been taken from the audited financial statement at that date.
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
October 31, April 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1996
----------- ---------
(Note)
<S> <C> <C>
Current liabilities
Accounts payable ............................................. $1,356,000 $ 852,000
Accrued real estate taxes .................................... 92,000 89,000
Accrued compensation ......................................... 579,000 325,000
Accrued profit sharing contribution .......................... 169,000 -
Dividends payable ............................................ - 299,000
Royalties payable ............................................ 682,000 212,000
Income taxes payable ......................................... 830,000 -
----------- ---------
Total current liabilities ................................ 3,708,000 1,777,000
Deferred income taxes .......................................... 112,000 112,000
Commitments and contingencies .................................. - -
Redeemable common stock, 163,200 shares at estimated redeemable
value in excess of insurance proceeds, less cash surrender
value .................................................... 3,157,000 3,077,000
Stockholders' equity
Common stock - authorized, 1,000,000 shares of $1 par value;
issued 598,800 shares, exclusive of 163,200 redeemable shares 599,000 599,000
Retained earnings ............................................. 10,472,000 8,416,000
---------- ----------
11,071,000 9,015,000
Net unrealized gain on investment securities
available-for-sale ......................................... 6,000 6,000
Less cost of 14,100 shares of common stock held in treasury .. (282,000) (282,000)
---------- ----------
10,795,000 8,739,000
---------- ----------
$17,772,000 $13,705,000
=========== ===========
Note: The consolidated balance sheet at April 30, 1996 has been taken from the audited financial statement at that date.
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three months ended Six months ended
October 31, October 31,
---------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Sales ......................... $6,507,000 $5,111,000 $11,012,000 $9,484,000
Cost of goods ................. 2,018,000 1,783,000 3,447,000 3,046,000
---------- ---------- ----------- ----------
Gross profit ............. 4,489,000 3,328,000 7,565,000 6,438,000
Operating expenses
Selling, general and
administrative ............. 1,641,000 1,527,000 3,092,000 2,935,000
Royalties .................... 671,000 527,000 1,137,000 977,000
---------- ---------- ----------- ----------
2,312,000 2,054,000 4,229,000 3,912,000
---------- ---------- ----------- ----------
Operating profit ......... 2,177,000 1,274,000 3,336,000 2,526,000
Other income (expense)
Interest ..................... 21,000 49,000 46,000 100,000
Other ........................ 9,000 9,000 10,000 16,000
---------- ---------- ----------- ----------
30,000 58,000 56,000 116,000
---------- ---------- ----------- ----------
Earnings before income
taxes .................. 2,207,000 1,332,000 3,392,000 2,642,000
Income tax expense (benefit) .. 817,000 522,000 1,256,000 1,036,000
---------- ---------- ----------- ----------
NET EARNINGS ............. $1,390,000 $ 810,000 $ 2,136,000 $1,606,000
========== ========== =========== ==========
Earnings per share ............ $ 1.86 $ 1.09 $ 2.86 $ 2.15
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED OCTOBER 31, 1996 AND 1995
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Net
unrealized
gain (loss)
on investment
securities
Common Retained available Treasury
stock earnings for sale stock Total
-------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1996 .... $599,000 $8,416,000 $6,000 $(282,000) $8,739,000
Net earnings ................. - 2,136,000 - - 2,136,000
Change in estimated value of
redeemable common stock
in excess of insurance
proceeds based on increase
in cash surrender value
of life insurance .......... - (80,000) - - (80,000)
-------- ----------- ------------- ---------- -----------
Balance at October 31, 1996 .. $599,000 $10,472,000 $6,000 $(282,000) $10,795,000
======== =========== ============= ========== ===========
Balance at April 30, 1995 .... $599,000 $6,852,000 $ - $(282,000) $7,169,000
Net earnings ................. - 1,606,000 - - 1,606,000
Change in estimated value of
redeemable common stock
in excess of insurance
proceeds based on increase
in cash surrender value
of life insurance .......... - (26,000) - - (26,000)
-------- ----------- ------------- ---------- -----------
Balance at October 31, 1995 .. $599,000 $8,432,000 $ - $(282,000) $8,749,000
======== =========== ============= ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED OCTOBER 31,
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings .................................................. $2,136,000 $1,606,000
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation expense ...................................... 94,000 44,000
Amortization of prepublication costs ...................... 485,000 381,000
Deferred income taxes ..................................... - (8,000)
Other ..................................................... - -
Changes in operating assets and liabilities
Accounts receivable .................................... (1,334,000) (762,000)
Inventories ............................................ 129,000 (3,000)
Other assets ........................................... - (101,000)
Accounts payable ....................................... 504,000 (287,000)
Accrued expenses ....................................... 426,000 208,000
Royalties payable ...................................... 470,000 363,000
Income taxes ........................................... 830,000 313,000
----------- -----------
Net cash provided by operating activities ........... 3,740,000 1,754,000
Cash flows from investing activities:
Purchases of property and equipment ........................... (2,427,000) (773,000)
Purchases of prepublication costs ............................. (471,000) (505,000)
Increase in cash surrender value of officer's life insurance .. (80,000) (26,000)
----------- -----------
Net cash used in investing activities ............... (2,978,000) (1,304,000)
Cash flows from financing activities:
Dividends paid ................................................ (299,000) (299,000)
----------- -----------
Net cash used in financing activities ............... (299,000) (299,000)
----------- -----------
Increase in cash and cash equivalents ............... 463,000 151,000
Cash and cash equivalents at beginning of period ................ 5,118,000 7,460,000
----------- -----------
Cash and cash equivalents at end of period ...................... $5,581,000 $7,611,000
=========== ===========
Supplemental disclosure of cashflow information:
Cash paid during the year for Income taxes - net .............. $ 390,000 $ 712,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
(UNAUDITED)
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The Company's business is seasonal, and operating results for
the three months and six month period ended October 31, 1996 are not
necessarily indicative of the results that may be expected for the year ended
April 30, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended April 30, 1996.
BUSINESS ACTIVITY
The Company publishes textbooks on technology, trade and technical, home
economics and vocational subjects. The Company's activities include the search
for authors, the procurement and editing of manuscripts, and the design,
illustration and marketing of its textbooks. Printing and binding of books is
done by outside contractors.
The Company's sales are primarily domestic, and the Company's customer base
includes state schools and community colleges. Historically, the Company has
experienced its highest level of sales in its first and second quarter and its
lowest level in the fourth quarter. This pattern has resulted from purchasing
habits of its school customers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, G/W Investment Company, Inc. All significant
intercompany transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenue at time of shipment from Company warehouse or
outside depositories. A provision is made for estimated returns, consisting of
sales value less related inventory costs and royalty costs.
8
<PAGE> 9
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
OCTOBER 31, 1996
(UNAUDITED)
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVENTORIES
Inventories are valued at the lower of cost or market. Cost of inventories was
determined by the last-in, first-out (LIFO) and the first-in, first-out (FIFO)
methods as summarized below
(see note B):
<TABLE>
<CAPTION>
October 31, April 30,
1996 1996
----------- ----------
<S> <C> <C>
Last-in, first out method ... $1,769,000 $1,898,000
First-in, first out method .. 69,000 69,000
----------- ----------
$1,838,000 $1,967,000
=========== ==========
</TABLE>
Cost includes the purchase of paper, printing and binding from outside sources.
No allocation of selling and administrative expenses is included in
inventories.
Even though some books will not be sold in the current period, large quantities
of books are printed initially for stock, due to economies of scale.
Management feels that substantially all books will be sold in the current
period and, therefore, classifies all inventories as a current asset.
INVESTMENT SECURITIES
Available-for-sale securities are those that management designated as available
to be sold in response to changes in market interest rates or liquidity needs.
Investment securities available-for-sale are stated at fair value, with the
unrealized gains or losses shown as a component of stockholders' equity. Gains
or losses on disposition of these securities are determined using the specific
identification method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is provided on the straight-line and accelerated methods over the
estimated useful lives of the assets. Annual depreciation rates range from 20%
to 40% for equipment and from 3% to 20% for buildings and improvements.
9
<PAGE> 10
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
OCTOBER 31, 1996
(UNAUDITED)
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Expenditures for repairs and maintenance are charged against income when
incurred, and replacements are capitalized. Gains or losses on dispositions of
property and equipment are included in income.
PREPUBLICATION COSTS
The Company capitalizes certain outside contractor costs, primarily artwork,
film and preparation costs, associated with creation of the textbooks and
supplements. Prepublication costs are amortized over a period of three years,
under the straight-line method.
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
EDITORIAL COSTS
Editorial costs are charged to expense as incurred.
INCOME TAXES
The Company accounts for taxes under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". SFAS No.
109 utilizes the liability method, and deferred taxes are determined based on
the estimated future tax effects of differences between the financial statement
and tax bases of assets and liabilities given the provisions of the enacted tax
laws.
EARNINGS PER SHARE
Earnings per share is computed on the weighted average number of shares
outstanding of 747,900 for the periods ended October 31, 1996 and 1995.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The carrying value of
such assets approximates their fair value.
10
<PAGE> 11
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
OCTOBER 31, 1996
(UNAUDITED)
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
================================================================================
NOTE B - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31, April 30,
1996 1996
----------- ----------
<S> <C> <C>
Raw materials .... $44,000 $78,000
Work-in-process .. 69,000 69,000
Finished goods ... 1,725,000 1,820,000
----------- ----------
$1,838,000 $1,967,000
=========== ==========
</TABLE>
Inventories would have been $2,787,000 and $2,681,000 higher at October 31,
1996 and April 30, 1996, respectively, if the FIFO method of accounting had
been used on all inventories.
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on
management's estimates of expected year-end inventory levels and costs. Since
these are subject to many forces beyond management's control, interim results
are subject to the final year-end LIFO inventory valuation.
<PAGE> 12
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
OCTOBER 31, 1996
(UNAUDITED)
================================================================================
NOTE C - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
October 31, April 30,
1996 1996
----------- ----------
<S> <C> <C>
Land ........................................... $ 814,000 $ 814,000
Building and improvements ...................... 3,795,000 1,027,000
Equipment ...................................... 1,334,000 840,000
----------- ----------
5,943,000 2,681,000
Less accumulated depreciation .................. 1,357,000 1,263,000
----------- ----------
4,586,000 1,418,000
Construction in progress ....................... - 835,000
----------- ----------
$4,586,000 $2,253,000
=========== ==========
</TABLE>
================================================================================
NOTE D - INCOME TAXES
Income tax expense varies from the amount computed by applying the statutory
Federal income tax rate to earnings before income taxes primarily because of
state income taxes, tax-exempt interest income, and officer's life insurance.
================================================================================
NOTE E - EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan, covering all full-time employees, to
which both the Company and eligible employees may contribute. Company
contributions are voluntary and at the discretion of the Board of Directors.
Annual contributions by the Company cannot exceed 15% of eligible compensation.
Effective May 1, 1994, the Company adopted The Goodheart-Willcox Company, Inc.
Supplemental Executive Retirement Plan for the benefit of certain management
employees as determined by the Board of Directors. The purpose of the plan is
to provide additional benefits for those participants who have profit sharing
benefits limited by the Internal Revenue Code.
12
<PAGE> 13
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
OCTOBER 31, 1996
(UNAUDITED)
================================================================================
NOTE E - EMPLOYEE BENEFIT PLANS - CONTINUED
The Company has recorded contributions amounting to $169,000 and $160,000 for
the six months ended October 31, 1996 and 1995, respectively.
================================================================================
NOTE F - COMMITMENTS AND CONTINGENCIES
Under an agreement between the Company and a principal stockholder/officer, the
Company will purchase approximately 163,200 shares of the Company's stock owned
by him upon his death. The purchase price will be based on the fair market
value of the Company's shares at that time, as determined by a named third
party. The excess of the estimated fair market value of the mandatorily
redeemable shares over the amount of life insurance, net of cash surrender
value, carried to meet a portion of the Company's obligation under this
agreement has been segregated from stockholders' equity as of October 31, 1996
and April 30, 1996.
The Company has entered into employment agreements with two officers that
provide for annual compensation and certain other benefits including death
benefit payments equal to two years salary. The present value of the estimated
death benefit payable under these agreements of approximately $160,000 is
included in accrued compensation at October 31, 1996 and April 30, 1996.
In May 1995, the Company acquired property in Tinley Park, Illinois, for
approximately $738,000. The Company completed construction of its new office
and distribution facility on this property in August of 1996 for a total cost
of approximately $2,677,000. The Company's previous land and building are
being offered for sale and are carried at a net book value which is less than
the estimated fair market value less costs to sell. The assets held for sale
are included in property and equipment in the accompanying balance sheets.
13
<PAGE> 14
PART I - FINANCIAL INFORMATION
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Second Quarter Fiscal 1996 Compared With Second Quarter Fiscal 1995.
OPERATING RESULTS
The Company's net sales for the second quarter of fiscal 1997 increased
$1,396,000, or approximately 27% more than the same quarter in the previous
fiscal year, due to increased orders from one adoption state and increased
sales of recently revised products in open territories coupled with selective
price increases. For the six months ending October 31, 1996, net sales
increased $1,528,000, or approximately 16% compared to the first six months of
the previous fiscal year. The net sales increase for the first six months of
fiscal 1997 is due to the stronger orders for the Company's products from open
territories and increased orders from one adoption state, along with selective
price increases. In the second quarter of fiscal 1996, net sales decreased
$742,000, or approximately 13% less than the same quarter in the previous
fiscal year, due to decreased orders from state adoptions coupled with
increased orders from open territories, offsetting selective price increases.
For the six months ending October 31, 1995, net sales decreased $800,000, or
approximately 8% compared to the first six-month period of fiscal 1995 due to
the lack of significant state textbook adoptions and weaker orders from open
territories, coupled with selective price increases. State textbook adoptions,
which contribute substantially to the Company's sales, historically have been
held at regular intervals, During the past several years, the intervals for
several states have been significantly increased. Price increases are made
each year on a product by product basis after considering the cost of paper,
printing, and binding, the overhead contribution, and competitive pricing. The
selective price increases will not totally offset any significant decline in
school expenditures for textbooks and supplements as witnessed in the first two
quarters of fiscal 1996. The reserve for future returns will experience minor
revisions as the sales product mix continues to shift from middle and senior
high schools to community college bookstores, where the number of books and
supplements returned occur with greater frequency. The reserve for future
returns may experience minor fluctuations to reflect current business practices
and expectations of the return rate for various product categories and markets.
The cost of goods sold as a percentage of sales in the second quarter of fiscal
1997 was 31% compared to 35% in the second quarter of fiscal 1996 and 30% in
the second quarter of fiscal 1995. For the six months ending October 31, 1996,
the cost of goods sold as a percentage of sales was 31% compared to 32% for the
first six months of fiscal 1996 and 29% for the first six months of fiscal
1995. The change in the ratio of the cost of goods sold as a percentage of
sales for the first six months of fiscal 1997 reflects fluctuations in the cost
of paper, which is a major component of the cost of goods sold, with an added
influence being the substantial investment in the revision of a number of
backlist titles. While paper prices have started to level out, the build
14
<PAGE> 15
up of inventory, in preparation of the seasonal selling patterns before the
opening of schools, took place during a period of higher paper prices. As
stated in a recent annual report, "It is possible that the Company will not be
able to pass through all the paper price increase to our customers." Factors
affecting the ratio of the cost of goods sold as a percentage of sales are the
result of decisions regarding selected selling price increases, adjustments to
the print and reprint quantities, and the application of computer technology
by outside suppliers permitting shorter press runs, reduction in manufacturing
time, and consistent high quality allowing Goodheart-Willcox to better control
the unit cost of textbooks and supplements. Management decisions must be
balanced between the cost of the goods sold as a percentage of sales versus
the timing of when new or revised products come to market and contribute to
sales.
Operating expenses for the second quarter of fiscal 1997 consisting of
royalties, selling, general, and administrative expenses increased $258,000,
or approximately 13%, over the second quarter of fiscal 1996, compared to an
increase of $6,000 or less than one percent for the second quarter of fiscal
1995. For the six months ending October 31, 1996, the operating expenses
consisting of royalties as well as selling, general, and administrative
expenses increased $317,000, or approximately 8%, compared to an increase of
$143,000 or approximately 4% for the first six months of fiscal 1996. As a
percentage of sales, the selling, general, and administrative cost for the
second quarter of fiscal 1997 was 25% compared to 30% for the second quarter
of fiscal 1996 and 24% for the second quarter of fiscal 1995. For the
six-month period ending October 31, 1996, the selling, general, and
administrative cost as a percentage of sales was 28% compared to 31% for the
same period in the previous fiscal year and 26% for the first two quarters of
fiscal 1995. The ratios for the current period reflect added investment in
staffing an internal sales support group and the adjustments in warehousing
and shipping. A major component of the operating expenses is the distribution
of sample textbooks and supplements as a marketing tool which is unique to the
textbook industry. In the first six months of fiscal 1997, the sampling
expenses increased to $179,000 from $157,000 for the first six months of the
previous fiscal year.
The 27% increase in net sales during the second quarter of fiscal
1997, coupled with a lower cost of goods sold as a percentage of sales
and higher operating expenses, increased the Company's income from
operations by $903,000, or approximately 71%, to $2,177,000. For the
second quarter of fiscal 1996, the 13% decline in net sales coupled
with a higher cost of goods sold as a percentage of sales and slightly
higher operating expenses, decreased the Company's income from
operations by $793,000, or approximately 38%, to $1,274,000. The
second quarter of fiscal 1995 with income from operations of
$2,067,000 was comparable to the current second quarter. For the six
months ending October 31, 1996, the 16% increase in net sales and the
8% increase in operating expenses coupled with a lower cost of goods
sold at 31% increased the Company's income from operations by
$810,000, or approximately 32%, to $3,336,000. For the six months
ending October 31 of the previous fiscal year, the 8% decline in net
sales and the 4% increase in the operating expenses tied to a higher
cost of goods sold at 32% decreased the Company's income from
operations by $1,024,000, or approximately 29%, to $2,526,000. The
first six months of fiscal 1995 with income from operations of
$3,550,000 was comparable to the current six month period. Other
income for the second quarter of fiscal 1997 was $30,000 compared to
$58,000 in the second quarter of fiscal 1996. For the six month period
ending October 31, 1996, other income was $56,000 compared to $116,000
in the similar period of the previous fiscal year. The decline in
other income is primarily attributed to reduced interest income due to
the investment in new facility. As shown in the consolidated
statements, net earnings increased approximately $580,000 for the
second quarter and $530,000 for the first six months of the
15
<PAGE> 16
current fiscal year. The Company's fiscal year ending April 30 divides the
purchasing patterns of its school customers such that the major marketing and
inventory buildup efforts occur at the end of the fiscal year, while the
resulting sales primarily follow in the first two quarters of the next fiscal
year.
LIQUIDITY
Cash and cash equivalents totaled $5,581,000 at October 31, 1996, an increase
of $463,000 from the year ended April 30, 1996. The Company has no outstanding
long term debt. As shown in the cash flow statements, the cash provided by the
operating activities of the Company for the first six months of fiscal 1997
amounted to $3,740,000, as compared to $1,754,000 for the first six months of
fiscal 1996, a change which is attributable to an increase in net earnings
after adjustments to accounts primarily covering amortization of
prepublication costs, accounts receivable, inventories, accounts payable,
accrued expenses, royalties payable, and income taxes payable. The changes in
the assets and liabilities for the first six months of fiscal 1997 include an
increase in accounts receivable, a slight decrease in inventories due to
strong sales, an increase in the account for property and equipment reflecting
the new office/distribution facility, an increase in accounts payable from the
investment in new and revised products, and increases in royalties payable and
income taxes payable due to the strong seasonal sales experience. There have
been no changes in business practices including credit terms or collection
efforts from previous years. The cash provided by the operating activities of
the Company for the first six months of fiscal 1996 amounted to $1,754,000
compared to the amount from the previous fiscal year's six month period of
$3,391,000.
Investment in new and revised products for the first six months of fiscal 1997
was $471,000, or a decrease of $34,000 from the first six months of fiscal
1996 when $505,000 was used for the purchase of prepublication services. The
Company currently intends to continue an aggressive pace of prepublication
investment in future quarters to maintain a publishing program of adding new
titles while revising a backlist of products to match market needs. With the
advances in general technology, the magnitude of revision efforts to keep the
industrial and technical books up to date has increased. In the first six
months of fiscal 1997, there were no investing activities related to
marketable securities, as was also the case in the first six months of the
previous fiscal year. A major investment was made in property and equipment in
the first six months of fiscal 1997 when $2,427,000 was directed towards a new
facility with added storage, racking, conveyors, and material handling
equipment to improve productivity in the distribution of the Company's
products, as well as added office capability for sales, marketing, customer
service, editorial, and creative services.
The primary financing use of cash in the six month periods ending October 31,
1996 and 1995 was the payment of dividends at the rate of $.40 per share.
The first and second quarters historically have displayed increased
shipments and increased growth in accounts receivable while inventory
declined. In looking ahead to the third and fourth quarters, there is
an anticipated growth in inventories as new and revised products are
published for the next calendar/copyright year and for the next
marketing cycle. Also, in the third quarter, the accounts receivable
historically decline as cash and cash equivalents increase. The
seasonal and cyclical nature of selling products such as textbooks
and supplements into the educational market with two separate semesters tends
to affect the periodic liquidity of the Company.
16
<PAGE> 17
CAPITAL RESOURCES
It is anticipated that the future capital needs of the Company will be met
from internally generated funds. The investment in computer hardware and
software on a department by department basis, such as editorial or creative
services, will be met from cash flow from operating activities. The Company is
planning to invest in new software and hardware for the business/marketing
operations to improve customer service, warehouse management, and information
systems. In fiscal 1997, the investment in prepublication products and
services is expected to follow the pattern established in previous years with
plans to revise popular backlist titles and add new titles and products to the
Company's line. The distribution facility in Tinley Park was operational July
1, 1996, while the business, marketing and sales, editorial, and creative
functions were active in Tinley Park on August 26, 1996. The new facility
project was completed using internally generated funds with no financing cost
to the Company.
THE EFFECTS OF INFLATION
Inflation affects the Company due to increases in cost of materials and
services. In both fiscal 1995 and 1996, the Company experienced tightening of
suppliers' schedules and some price increases which appeared to be more
inflationary than patterns experienced in the previous fiscal year. The cost
of paper purchased in fiscal 1996, to replenish inventory and to print new
products to be sold in fiscal 1997, experienced dramatic increases. In the
first six months of fiscal 1997, the outlook for paper pricing appeared to be
more stable than the immediate past few quarters. By advanced planning and by
shifting grades of paper, the effect of some of the paper cost fluctuations
may be softened. The ability to reflect such cost increases in the selling
price of Goodheart-Willcox products depends upon the pricing of competing
product lines and general market conditions, which may require the Company to
absorb part of these paper price increases. The Company continues to manage
its cost of doing business in these very uncertain times by using various
suppliers with specialized graphic arts equipment and production capabilities,
by obtaining quotations from new suppliers, by reviewing the variety of paper
grades appropriate for various titles, by scheduling press runs in batches, by
balancing the quantities printed with considerations for unit cost versus turn
over of inventory, and by staying alert to outside opportunities available to
meet key deadlines.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GOODHEART-WILLCOX COMPANY, INC.
-----------------------------------
(Registrant)
Date _____________________________ ___________________________________
John F. Flanagan
President
Date ____________________________ ___________________________________
Donald A. Massucci
Vice President, Administration and
Treasurer
18
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