<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 July 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 West Creek Drive, Tinley Park, Illinois 60477
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(708) 687-5000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
123 West 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: August 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 - July 31, 1996 and April 30, 1996 ..... 3
Consolidated Statements of Earnings - Three Months Ended
July 31, 1996 and 1995 ............................................ 5
Consolidated Statements of Stockholders' Equity - Three Months Ended
July 31, 1996 and 1995 ............................................ 6
Consolidated Statements of Cash Flows - Three Months Ended
July 31, 1996 and 1995 ............................................ 7
Notes to Consolidated Financial Statements - July 31, 1996 ......... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 14
SIGNATURES ................................................................... 17
PART II. OTHER INFORMATION
Item 6. Exhibit 27 - Financial Data Schedule ............................... 18
</TABLE>
<PAGE> 3
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
July 31, April 30,
ASSETS 1996 1996
----------- -----------
(Note)
<S> <C> <C>
Current assets
Cash and cash equivalents ......................................... $ 2,899,000 $ 5,118,000
Accounts receivable - net of allowance for doubtful receivables
and sales returns of $131,000 and $207,000 ....................... 3,236,000 1,421,000
Inventories ....................................................... 2,037,000 1,967,000
Deferred income taxes ............................................. 476,000 476,000
Prepaid income taxes .............................................. - 36,000
Other ............................................................. 198,000 119,000
----------- -----------
Total current assets ........................................... 8,846,000 9,137,000
Investment securities available for sale ........................... 91,000 91,000
Prepublication costs - net of accumulated amortization of $1,043,000
and $1,071,000 .................................................... 1,595,000 1,639,000
Property and equipment - net ....................................... 3,944,000 2,253,000
Cash surrender value of life insurance
net of loans of $363,000 and $363,000 ............................. 625,000 585,000
Other assets ....................................................... - -
----------- -----------
$15,101,000 $13,705,000
=========== ===========
</TABLE>
Note: The consolidated balance sheet at April 30, 1996 has been taken from the
audited financial statement at that date.
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>
July 31, April 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1996
----------- -----------
(Note)
<S> <C> <C>
Current liabilities
Accounts payable ............................................... $ 890,000 $ 852,000
Accrued real estate taxes ...................................... 107,000 89,000
Accrued compensation ........................................... 481,000 325,000
Accrued profit sharing contribution ............................ 82,000 -
Dividends payable .............................................. - 299,000
Royalties payable .............................................. 464,000 212,000
Income taxes payable ........................................... 403,000 -_
----------- -----------
Total current liabilities ................................... 2,427,000 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 3,117,000 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................................................ 9,122,000 8,416,000
----------- -----------
9,721,000 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)
----------- -----------
9,445,000 8,739,000
----------- -----------
$15,101,000 $13,705,000
=========== ===========
</TABLE>
Note: The consolidated balance sheet at April 30, 1996 has been taken from the
audited financial statement at that date.
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
THREE MONTHS ENDED JULY 31,
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
July 31 July 31
1996 1995
---------- ----------
<S> <C> <C>
Sales ...................................................................... $4,505,000 $4,373,000
Cost of goods .............................................................. 1,429,000 1,263,000
---------- ----------
Gross profit ........................................................ 3,076,000 3,110,000
Operating expenses
Selling, general and administrative ...................................... 1,451,000 1,408,000
Royalties ................................................................ 466,000 450,000
---------- ----------
1,917,000 1,858,000
---------- ----------
Operating profit .................................................... 1,159,000 1,252,000
Other income (expense)
Interest ................................................................. 25,000 51,000
Other .................................................................... 1,000 7,000
---------- ----------
26,000 58,000
---------- ----------
Earnings before income taxes ........................................ 1,185,000 1,310,000
Income tax expense (benefit)
Currently payable ........................................................ 439,000 514,000
---------- ----------
NET EARNINGS ........................................................ $ 746,000 $ 796,000
========== ==========
Earnings per share ......................................................... $ 1.00 $ 1.06
==== ====
</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 THREE MONTHS ENDED JULY 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Net unrealized gain (loss)
on investment
Common Retained securities Treasury
stock earnings available-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 for period .... - 746,000 - - 746,000
Change in estimated value of
redeemable common stock
in excess of insurance
proceeds based on increase
in cash surrender value
of life insurance ........ - (40,000) - - (40,000)
-------- ---------- ------ --------- ----------
Balance at July 31, 1996 ... $599,000 $9,122,000 $6,000 $(282,000) $9,445,000
======== ========== ====== ========= ==========
Balance at April 30, 1995 .. $599,000 $6,852,000 $ - $(282,000) $7,169,000
Net earnings for period .... - 796,000 - - 796,000
Change in estimated value of
redeemable common stock
in excess of insurance
proceeds based on increase
in cash surrender value
of life insurance ........ - (13,000) - - (13,000)
-------- ---------- ------ --------- ----------
Balance at July 31, 1995 ... $599,000 $7,635,000 $ - $(282,000) $7,952,000
======== ========== ====== ========= ==========
</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
THREE MONTHS ENDED JULY 31,
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
July 31 July 31
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings .................................................. $ 746,000 $ 796,000
Adjustments to reconcile net earnings to net cash used in
operating activities
Depreciation expense ...................................... 24,000 23,000
Amortization of prepublication costs ...................... 243,000 186,000
Deferred income taxes ..................................... - (4,000)
Other ..................................................... - -
Changes in assets and liabilities
Accounts receivable .................................... (1,815,000) (2,049,000)
Inventories ............................................ (70,000) (191,000)
Other assets ........................................... (79,000) (139,000)
Accounts payable ....................................... 38,000 (316,000)
Royalties payable ...................................... 252,000 273,000
Accrued expenses ....................................... 256,000 70,000
Income taxes payable ................................... 439,000 499,000
----------- -----------
Net cash provided by (used in) operating activities .. 34,000 (852,000)
Cash flows from investing activities:
Purchases of property and equipment ........................... (1,715,000) (742,000)
Purchases of prepublication costs ............................. (199,000) (257,000)
Increase in cash surrender value of officer's life insurance .. (40,000) (13,000)
Change in other assets ........................................ 0 1,000
----------- -----------
Net cash used in investing activities ................ (1,954,000) (1,011,000)
Cash flows from financing activities:
Dividends paid ................................................ (299,000) (299,000)
----------- -----------
Net cash used in financing activities ................ (299,000) (299,000)
----------- -----------
Decrease in cash and cash equivalents ................ (2,219,000) (2,162,000)
Cash and cash equivalents at beginning of period ................ 5,118,000 7,460,000
----------- -----------
Cash and cash equivalents at end of period ...................... $ 2,899,000 $ 5,298,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes - net ............ $ 7,500 $ 19,000
=========== ===========
</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
JULY 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 ended July 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, family and
consumer sciences 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 for estimated returns, consisting of sales
value less related inventory cost and royalty costs, is made at time of sale.
8
<PAGE> 9
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JULY 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>
July 31, April 30,
1996 1996
---------- ----------
<S> <C> <C>
Last-in, first out method .......................... $1,982,000 $1,898,000
First-in, first out method ......................... 55,000 69,000
---------- ----------
$2,037,000 $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
JULY 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 July 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.
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.
10
<PAGE> 11
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JULY 31, 1996
(UNAUDITED)
================================================================================
NOTE B - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, April 30,
1996 1996
---------- ----------
<S> <C> <C>
Raw materials ....................................... $ 86,000 $ 78,000
Work-in-process ..................................... 55,000 69,000
Finished goods ...................................... 1,896,000 1,820,000
---------- ----------
$2,037,000 $1,967,000
========== ==========
</TABLE>
Inventories would have been $2,729,000 and $2,645,000 higher at July 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.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
July 31, April 30,
1996 1996
---------- ----------
<S> <S> <S>
Land ................................................ $ 814,000 $ 814,000
Building and improvements ........................... 1,027,000 1,027,000
Equipment ........................................... 1,182,000 840,000
---------- ----------
3,023,000 2,681,000
Less accumulated depreciation ....................... 1,286,000 1,263,000
---------- ----------
1,737,000 1,418,000
Construction in progress ............................ 2,207,000 835,000
---------- ----------
$3,944,000 $2,253,000
========== ==========
</TABLE>
11
<PAGE> 12
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JULY 31, 1996
(UNAUDITED)
================================================================================
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.
The Company has recorded contributions amounting to $82,000 and $80,000 for the
quarter ended July 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 July 31, 1996 and
April 30, 1996.
12
<PAGE> 13
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JULY 31, 1996
(UNAUDITED)
================================================================================
NOTE F - COMMITMENTS AND CONTINGENCIES - CONTINUED
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 July 31, 1996 and April 30, 1996.
In May 1995, the Company acquired property in Tinley Park, Illinois, for
approximately $738,000 upon which it is constructing a warehouse and office
building. It is anticipated the building will be completed for occupancy in
early fiscal 1997 at a total cost exclusive of land of approximately
$2,798,000, prior to any change orders.
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
First Quarter Fiscal 1997 Compared With First Quarter Fiscal 1996
OPERATING RESULTS
The Company's net sales for the first quarter of fiscal 1997 increased
$132,000, or approximately 3% from the same quarter in the previous fiscal
year, due primarily to increased sales of recently revised products in open
territories coupled with selective price increases. In the first quarter of
the fiscal 1996, net sales decreased $58,000, or approximately 1% from the same
quarter in the previous fiscal year, due primarily to the decline in state
adoption sales while offsetting events included selective price increases and
sales increases from open territories. 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,
binding, the overhead contribution, and competitive pricing. Selective price
increases will not totally offset any significant decline in school
expenditures for textbooks and supplements. 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 first quarter of fiscal
1997 was 32% compared to 29% in the first quarter of fiscal 1996 and 28% in the
first quarter of fiscal 1995. The change in the ratio of the cost of goods
sold as a percentage of sales this past quarter was primarily attributable to
the increased 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 up of inventory, in preparation of the seasonal selling season before
the opening of school, 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 of 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 goods sold as a percentage of sales versus the
timing of when new or revised products come to market and contribute to sales.
14
<PAGE> 15
Operating expenses consisting of royalties, selling, general, and administrative
expenses increased $59,000, or about 3% over the first quarter in fiscal 1996,
compared to an increase of $137,000, or approximately 8%, in the first quarter
of fiscal 1996 over the same period in fiscal 1995. As a percentage of sales,
the selling, general, and administrative cost for the first quarter of fiscal
1997 was 32% compared to a similar 32% for the first quarter of fiscal 1996.
A major component of the operating expenses is the distribution of sample
textbooks and supplements as a marketing tool which is unique to the textbooks
publishing industry. In the first quarter of fiscal 1997 sampling expenses
increased to $98,000 from $69,000 in the first quarter of fiscal 1996.
The 3% increase in net sales during the first quarter and the 3% increase in
operating expenses along with a 3% increase in the cost of goods sold as a
percentage of sales reduced the Company's income from operations by $93,000 or
approximately 7%, to $1,159,000. For the first quarter of fiscal 1996, the
approximately 1% decrease in net sales and the 8% increase in operating
expenses along with an increased cost of goods sold as a percentage of sales
reduced the Company's income from operations by $231,000 or approximately 16%,
to $1,252,000 from the same period in the previous fiscal year. Other income
for the first quarter of fiscal 1997 was $26,000, compared to $58,000 in the
first quarter of fiscal 1996, with the decline primarily attributed to lower
interest income due to the investment in the new facility. 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 $2,899,000 at July 31, 1997, a decrease of
$2,219,000 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
operating activities for the first quarter of fiscal 1997 amounted to $34,000
as compared to $852,000 used in the first quarter of fiscal 1996, a change
which is attributable to the decrease in net earnings after adjustments to
accounts covering the amortization of prepublication costs, inventories,
accounts payable, accrued expenses, and income taxes payable. The changes in
assets and liabilities for the first quarter of fiscal 1997 include an increase
in accounts receivable, an increase in inventories attributable to the addition
of new printings, an increase in accounts payable, and an increase in accrued
expenses. There have been no changes in business practices including credit
terms or collection efforts from previous years. The cash used in the
operating activities of the Company for the first quarter of fiscal 1996
amounted to $852,000, as compared to $5,000 for the first quarter of fiscal
1995, an increase of $847,000, which is attributable to the decrease in net
earnings after adjustments to accounts covering the amortization of
prepublication costs, inventories, accounts payable, accrued expenses, and
income taxes payable.
Investment in new and revised products in the first quarter of the current
fiscal 1997 was $199,000, or a decrease of $58,000 compared to the first
quarter of fiscal 1996 when $257,000 was used to purchase prepublication items.
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 required to keep the industrial and technical books up to date has
increased. In the first quarter of fiscal 1997, there were no investing
activities related to marketable securities, as was also the case in the first
quarter of
15
<PAGE> 16
fiscal 1996. A major investment was made in property and equipment in the
first quarter of fiscal 1997 when $1,715,000 was directed towards a new
facility with added storage racking, conveyors, and material handling equipment
to improve productivity.
The primary financing use of cash in the first quarter of the current fiscal
1997 was the payment of dividends at the rate of $.40 per share compared to the
payment of dividends at the similar rate of $.40 per share in the first quarter
of fiscal 1996.
The first quarter historically has displayed increased shipments and increased
growth in the accounts receivable. In looking ahead into the second and third
quarters, there is an anticipated growth in inventories as new and revised
products are published for the next copyright year. Also, in the second and
third quarters, the accounts receivable decline as cash and cash equivalents
increase. The seasonal nature of selling products such as textbooks and
supplements into the school market with two separate semesters tends to affect
the periodic liquidity of the Company due to the required buildup of inventory
for the anticipated needs of schools opening in the fall and for second
semester. In the first quarter of fiscal 1996, the investment in property and
equipment was $742,000 including the acquisition of 5.9 acres in a business
park for approximately $738,000. The site was selected with the intention of
retaining all of the talented South Holland employees as a productive work
force.
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 will be met from cash flow from operating
activities. 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 our
line. The distribution facility in Tinley Park was operational July 1st while
the business, marketing and sales, and editorial and creative functions moved
into the office portion of the facility to start work on August 26th. It is
anticipated the structure will be completed at a total cost, exclusive of land,
of approximately $2,798,000 prior to any change orders.
THE EFFECTS OF INFLATION
Inflation affects the Company due to increases in cost of materials and
services. In both fiscal 1995 and fiscal 1996, the Company experienced
tightening of suppliers schedules and some price increases which appear 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
quarter of fiscal 1997, the outlook for paper pricing appeared to be more
stable than the immediate past few quarters. By advance planning and by
shifting grades of paper, the effect of some of the paper cost increases may be
delayed or 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 or all 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, and by staying alert to outside opportunities available to
meet key deadlines.
16
<PAGE> 17
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
17
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