<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 January 31, 1997
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)
- -------------------------------------------------------------------------------
(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:
January 31, 1997 - 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 - January 31, 1997 and April 30, 1996 .. 3
Consolidated Statements of Earnings - Three Months Ended January 31,
1997 and 1996; Nine Months Ended January 31, 1997 and 1996 ....... 5
Consolidated Statements of Stockholders' Equity - Nine Months Ended
January 31, 1997 and 1996 ......................................... 6
Consolidated Statements of Cash Flows - Nine Months Ended
January 31, 1997 and 1996 ......................................... 7
Notes to Consolidated Financial Statements - January 31, 1997 ...... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 14
SIGNATURES ................................................................... 19
PART II OTHER INFORMATION
- ------- -----------------
Item 6. Exhibit 27 - Financial Data Schedule ............................... 20
</TABLE>
<PAGE> 3
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
January 31, April 30,
ASSETS 1997 1996
----------- ----------
(Note)
<S> <C> <C>
Current assets
Cash and cash equivalents ..................................... $ 5,048,000 $ 5,118,000
Accounts receivable - net of allowance for doubtful receivables
and sales returns of $218,000 and $207,000 .................. 2,091,000 1,421,000
Inventories ................................................... 1,726,000 1,967,000
Deferred income taxes ......................................... 476,000 476,000
Prepaid income taxes .......................................... - 36,000
Other ......................................................... 194,000 119,000
----------- -----------
Total current assets ..................................... 9,535,000 9,137,000
Investment in securities available for sale ..................... 91,000 91,000
Prepublication costs - net of accumulated amortization of $1,373,000
and $1,071,000 ................................................ 1,565,000 1,639,000
Property and equipment - net .................................... 4,610,000 2,253,000
Cash surrender value of life insurance
net of loans of $357,000 and $363,000 ......................... 705,000 585,000
----------- -----------
$16,506,000 $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>
January 31, April 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
----------- ----------
(Note)
<S> <C> <C>
Current liabilities
Accounts payable .................................................. $565,000 $852,000
Accrued real estate taxes ......................................... 119,000 89,000
Accrued compensation .............................................. 633,000 325,000
Accrued profit sharing contribution ............................... 253,000 -
Dividends payable ................................................. - 299,000
Royalties payable ................................................. 349,000 212,000
Income taxes payable .............................................. 613,000 -
----------- ----------
Total current liabilities ...................................... 2,532,000 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.. 3,173,000 3,077,000
(Note F)
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................................................. 10,366,000 8,416,000
----------- ----------
10,965,000 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)
----------- ----------
10,689,000 8,739,000
----------- ----------
$16,506,000 $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
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
January 31, January 31,
---------------------- ------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ......................... $3,335,000 $2,933,000 $14,347,000 $12,417,000
Cost of goods ................. 1,130,000 1,156,000 4,577,000 4,202,000
---------- ---------- ----------- -----------
Gross profit ............. 2,205,000 1,777,000 9,770,000 8,215,000
Operating expenses
Selling, general and
administrative ............. 1,564,000 1,460,000 4,656,000 4,395,000
Royalties .................... 351,000 306,000 1,488,000 1,283,000
---------- ---------- ----------- -----------
1,915,000 1,766,000 6,144,000 5,678,000
---------- ---------- ----------- -----------
Operating profit ......... 290,000 11,000 3,626,000 2,537,000
Other income (expense)
Interest ..................... 40,000 54,000 86,000 154,000
Other ........................ 1,000 3,000 11,000 19,000
---------- ---------- ----------- -----------
41,000 57,000 97,000 173,000
---------- ---------- ----------- -----------
Earnings before income
taxes .................. 331,000 68,000 3,723,000 2,710,000
Income tax expense (benefit) .. 122,000 27,000 1,378,000 1,063,000
---------- ---------- ----------- -----------
NET EARNINGS ............. $209,000 $41,000 $2,345,000 $1,647,000
========== ========== =========== ===========
Earnings per share ............ $.28 $.05 $3.14 $2.20
========== ========== =========== ===========
</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 NINE MONTHS ENDED JANUARY 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Net
unrealized
gain (loss)
on investment
Common Retained securities Treasury
stock earnings available stock Total
-------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1996 .............. $599,000 $8,416,000 $6,000 $ (282,000) $8,739,000
Net earnings ........................... - 2,345,000 - - 2,345,000
Change in estimated value of
redeemable common stock
in excess of insurance
proceeds based on increase
in cash surrender value
of life insurance ................... - (96,000) - - (96,000)
Cash dividends declared ($.40 per share) - (299,000) - - (299,000)
Net change in unrealized gain (loss) on
marketable equity securities - - - - -
-------- ----------- ------------- ---------- -----------
Balance at January 31, 1997 ............ $599,000 $10,366,000 $6,000 $ (282,000) $10,689,000
======== =========== ============= ========== ===========
Balance at April 30, 1995 .............. $599,000 $6,852,000 $- $ (282,000) $7,169,000
Net earnings ........................... - 1,647,000 - - 1,647,000
Change in estimated value of
redeemable common stock
in excess of insurance
proceeds based on increase
in cash surrender value
of life insurance ................... - (39,000) - - (39,000)
Cash dividends declared ($.40 per share) - (299,000) - - (299,000)
Net change in unrealized gain (loss) on
marketable equity securities - - - - -
-------- ----------- ------------- ---------- -----------
Balance at January 31, 1996 ............ $599,000 $8,161,000 $- $ (282,000) $8,478,000
======== =========== ============= ========== ===========
</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
NINE MONTHS ENDED JANUARY 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings .................................................. $2,345,000 $1,647,000
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation expense ...................................... 143,000 67,000
Amortization of prepublication costs ...................... 742,000 605,000
Deferred income taxes ..................................... - (8,000)
Changes in operating assets and liabilities
Accounts receivable .................................... (670,000) (380,000)
Inventories ............................................ 241,000 (153,000)
Other assets ........................................... (39,000) (133,000)
Accounts payable ....................................... (287,000) (318,000)
Accrued expenses ....................................... 591,000 443,000
Royalties payable ...................................... 137,000 125,000
Income taxes ........................................... 613,000 92,000
----------- -----------
Net cash provided by operating activities ........... 3,816,000 1,987,000
Cash flows from investing activities:
Purchases of property and equipment ........................... (2,500,000) (1,030,000)
Purchases of prepublication costs ............................. (668,000) (948,000)
Increase in cash surrender value of officer's life insurance .. (120,000) (39,000)
----------- -----------
Net cash used in investing activities ............... (3,288,000) (2,017,000)
Cash flows from financing activities:
Dividends paid ................................................ (598,000) (598,000)
----------- -----------
Net cash used in financing activities ............... (598,000) (598,000)
----------- -----------
Decrease in cash and cash equivalents ............... (70,000) (628,000)
Cash and cash equivalents at beginning of period ................ 5,118,000 7,460,000
----------- -----------
Cash and cash equivalents at end of period ...................... $5,048,000 $6,832,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes - net .............. $730,000 $978,000
=========== ===========
</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
JANUARY 31, 1997
(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 month and nine month periods ended January 31, 1997 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
JANUARY 31, 1997
(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>
<S> <C> <C>
January 31, April 30,
1997 1996
----------- ----------
Last-in, first-out method ... $1,685,000 $1,898,000
First-in, first-out method .. 41,000 69,000
----------- ----------
$1,726,000 $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
JANUARY 31, 1997
(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 January 31, 1997 and 1996.
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
JANUARY 31, 1997
(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>
<S> <C> <C>
January 31, April 30,
1997 1996
----------- ----------
Raw materials .... $28,000 $78,000
Work-in-process .. 41,000 69,000
Finished goods ... 1,657,000 1,820,000
----------- ----------
$1,726,000 $1,967,000
=========== ==========
</TABLE>
Inventories would have been $2,700,000 and $2,681,000 higher at January 31,
1997 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.
11
<PAGE> 12
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JANUARY 31, 1997
(UNAUDITED)
NOTE C - PROPERTY AND EQUIPMENT
<TABLE>
<S> <C> <C>
Property and equipment consist of the following:
January 31, April 30,
1997 1996
----------- ----------
Land ........................................... $814,000 $814,000
Building and improvements ...................... 3,815,000 1,027,000
Equipment ...................................... 1,387,000 840,000
----------- ----------
6,016,000 2,681,000
Less accumulated depreciation .................. 1,406,000 1,263,000
----------- ----------
4,610,000 1,418,000
Construction in progress ....................... - 835,000
----------- ----------
$4,610,000 $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
JANUARY 31, 1997
(UNAUDITED)
NOTE E - EMPLOYEE BENEFIT PLANS - CONTINUED
The Company has recorded contributions amounting to $253,000 and $240,000 for
the nine months ended January 31, 1997 and 1996, respectively.
NOTE F - COMMITMENTS AND CONTINGENCIES
Under an agreement between the Company and a principal stockholder/officer,
George A. Fischer, who died February 1, 1997, the Company will purchase 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 as of February
1, 1997, as determined by a named third party. The excess of the estimated
fair market value as determined at April 30, 1996 of the mandatorily redeemable
shares over the amount of life insurance, net of cash surrender value, has been
segregated from stockholders' equity as of January 31, 1997 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 January 31, 1997 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 $2,973,000. 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
Third Quarter Fiscal 1997 Compared With Third Quarter Fiscal 1996.
OPERATING RESULTS
The Company's net sales for the third quarter of fiscal 1997 increased
$402,000, or approximately 14% from the same quarter in the previous fiscal
year due to increased orders from open territories coupled with selective price
increases. For the nine months ending January 31, 1997, net sales increased
$1,930,000, or approximately 15% compared to the previous nine month period
ending January 31,1996. The net sales increase for the first nine months of
fiscal 1997 is due to stronger orders for the Company's products from open
territories and increased orders from one adoption state, along with selective
price increases. In the third quarter of fiscal 1996, net sales increased
$196,000, or approximately 7% from the same quarter in the previous fiscal year
due to increased orders from open territories coupled with selective price
increases. For the nine months ending January 31, 1996, net sales decreased
$604,000, or approximately 5% compared to the previous nine month period ending
January 31, 1995 due to the lack of significant state textbook adoptions and
weaker orders from open territories during the first two quarters of the fiscal
year when a majority of the seasonal sales are recorded. 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 third quarter of fiscal
1997 was 34% compared to 39% in the third quarter of fiscal 1996 and 37% in the
third quarter of fiscal 1995. For the nine months ending January 31, 1997, the
cost of goods sold as a percentage of sales was 32% compared to 34% for the
first nine months of fiscal 1996 and 31% for the first nine months of fiscal
1995. The change in the ratio of the cost of goods sold as a percentage of
sales for the first nine months of fiscal 1997 reflects fluctuations in the
cost of paper, which is a major component of the cost of goods sold, with added
influence being the substantial investment in the revision of a number of
backlist titles. While paper prices have stabilized recently, the build up
14
<PAGE> 15
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 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, 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 third quarter of fiscal 1997 consisting of
royalties, selling, general, and administrative expenses increased $149,000, or
approximately 8%, over the third quarter of fiscal 1996, compared to an
increase of $124,000 or 8% over the third quarter of fiscal 1995. For the nine
months ending January 31, 1997, the operating expenses consisting of royalties
as well as selling, general, and administrative expenses increased $466,000 or
approximately 8%, compared to an increase of $267,000 or approximately 5% for
the first nine months of fiscal 1996. As a percentage of sales, the selling,
general, and administrative cost for the third quarter of fiscal 1997 was 47%
compared to 50% for the third quarter of fiscal 1996 and 49% in the third
quarter of fiscal 1995. For the nine month period ending January 31, 1997, the
selling, general, and administrative cost as a percentage of sales was 32%
compared to 35% in the first nine months of fiscal 1996 and 31% in the first
nine months of fiscal 1995. The ratio for the current period reflects added
investment in staffing for an inside sales support group and 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 nine months of fiscal 1997, the
sampling expenses increased to $331,000 from $261,000 for the first nine months
of the previous fiscal year. The sampling increase of $70,000 or approximately
27% can be attributed to added marketing efforts aimed at future state
adoptions as well as the introduction of a significant number of new and
revised titles.
The 14% increase in net sales during the third quarter of fiscal 1997 over the
third quarter of fiscal 1996, coupled with a lower cost of goods sold as a
percentage of sales and 8% higher operating expenses, increased the Company's
income from operations by $279,000 to $290,000. For the third quarter of
fiscal 1996 compared to the third quarter of fiscal 1995, the 7% increase in
net sales coupled with a 2% increase in the cost of goods sold as a percentage
of sales and an 8% greater operating expense, decreased the Company's income
from operations by $63,000, or approximately 85%, to $11,000. The third
quarter of fiscal 1995 as compared to the same period of the previous fiscal
year saw a 16% increase in net sales coupled with a 10% increase in the cost of
goods sold as a percentage of sales (due in large part to the revised
accounting estimates for the expected end-of-year inventory levels under the
LIFO method the previous year) and an approximate 10% increase in the operating
expenses resulted in income from operations of $74,000, or a decline of
approximately 66% from the previous third quarter's income from operations of
$215,000. For the nine months ending January 31, 1997, as compared to the
first nine months of fiscal 1996, the 15% increase in net sales coupled with a
2% decline in the cost of goods sold as a percentage of sales and the 8%
increase in operating expenses increased the Company's income from operations
by $1,089,000 to $3,626,000. For the nine months ending January 31, 1996, as
compared to the same period of the previous fiscal year, the 5% decline in
15
<PAGE> 16
net sales coupled with the 3% increase in the cost of goods sold as a
percentage of sales and a 5% greater operating expense, decreased the Company's
income from operations by $1,087,000, or approximately 30%, to $2,537,000. For
the nine months ending January 31, 1995, compared to the first nine months
ending January 31, 1994, the 22% sales increase and the 15% increase in
operating expenses tied to lower cost of goods sold at 31% improved the
Company's income from operations by $1,005,000, or approximately 38%, to
$3,624,000. The first nine months of fiscal 1995 with income of $3,624,000 was
comparable to the current nine month period. Other income for the third
quarter of fiscal 1997 was $41,000 compared to $57,000 in the third quarter of
fiscal 1996. For the nine month period ending January 31, 1997, other income
was $97,000 compared to $173,000 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 the new facility. As shown in the consolidated
statements, net earnings increased approximately $168,000 for the third quarter
and $698,000 for the first nine months of the current fiscal year. The
Company's fiscal year ending April 30 divides the purchasing patterns of its
school customers such that the major marketing, sampling, 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 $5,048,000 at January 31, 1997, a decrease of
$70,000 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 nine months of fiscal 1997
amounted to $3,816,000, as compared to $1,987,000 for the first nine 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,
and income taxes. The cash provided by the operating activities of the Company
for the first nine months of fiscal 1996 amounted to $1,987,000, as compared to
$4,269,000 for the first nine months of fiscal 1995, a change which is
attributed to the decrease in net earnings after adjustments to accounts
covering amortization of prepublication costs, accounts receivable,
inventories, accrued expenses, and income taxes payable. The changes in the
assets and liabilities for the first nine months of fiscal 1997 include an
increase in accounts receivable, a decrease in inventories due to strong sales,
an increase in the account for property and equipment reflecting the new
office/distribution facility, a decrease in accounts payable, and increases in
royalties payable and income taxes payable due to the strong sales experience.
The changes in the assets and liabilities for the first nine months of fiscal
1996 included a decrease of cash and cash equivalents, an increase in accounts
receivable, an increase in inventories attributable to the addition of new and
revised products, an increase of prepublication services for new and revised
products under development, an increase in property and equipment from the
construction of the new facility, a reduction in accounts payable, and an
increase in income taxes payable. There have been no changes in business
practices including credit terms or collection efforts from previous years.
Investment in new and revised products for the first nine months of fiscal 1997
was $668,000, or a decrease of $280,000 from the first nine months of fiscal
1996 when $948,000 was used for the purchase of prepublication services.
Investment in new and revised products for the first nine months of fiscal 1996
showed an increase of $418,000 over the first nine months of fiscal 1995
16
<PAGE> 17
when $530,000 was used for the purchase of prepublication services. The rate
of investment in new and revised products as a percentage of sales for the
first nine months of fiscal 1997 was approximately 5%, compared to an
investment rate of 8% for the similar period of the previous fiscal year. 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 the investment
allocations. A major investment was made in property and equipment in the
first nine months of fiscal 1997 when $2,500,000 was directed toward 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 capacity for sales, marketing, customer
service, editorial, and creative services. In the third quarter of fiscal
1997, there were no investing activities related to marketable securities, as
was also the case in the first and second quarters of fiscal 1997. No
investing activities related to marketable securities took place in any of the
first three quarters of fiscal 1996.
The primary financing use of cash in the nine months ending January 31, 1997
was the payment of dividends at $.80 per share. For the previous nine month
period ending January 31, 1996, the primary financing use of cash was the
payment of dividends at the rate of $.80 per share.
The first and second quarters historically have displayed increased shipments
and increased growth in accounts receivable while inventory declined. This
past third quarter, the strength of the Company's product line also contributed
to increased sales. The fourth quarter has historically displayed an
anticipated growth in inventory as new and revised products are published for
the next calendar/copyright year and for the next marketing cycle. The
seasonal and cyclical 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.
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 operating cash flow. The Company is planning to invest in new
software and hardware for the business/marketing operations to improve customer
service, inventory and warehouse management, and information technology. 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 products to the Company's line. The
Company's warehouse and distribution operations were relocated to a new
facility in Tinley Park, Illinois, on July 1, 1996 and the business, marketing
and sales, editorial, and creative operations relocated August 26,1996. The
new facility project was completed using internally generated funds with no
financing expenses for the Company. The Company's previous land and building
in South Holland, Illinois are being offered for sale and are carried at a net
book value which is less than the estimated fair market value less cost to
sell.
Under an agreement between the Company and a principal stockholder/officer, who
died February 1, 1997, the Company will purchase 163,200 shares of the
Company's stock. The
17
<PAGE> 18
purchase price will be based on the fair market value of the Company's shares
as determined by a named third party. The excess of the estimated fair market
value of the redeemable shares over the amount of life insurance carried, net
of cash surrender value, will be met out of the Company's cash and cash
equivalents as well as from internally generated funds.
THE EFFECTS OF INFLATION
Inflation affects the Company due to increases in costs 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 nine months of fiscal 1997, the outlook for paper pricing appeared to be
more stable than in the immediate past few quarters. However, new price
increases appear to cloud the future trends in paper pricing for the balance of
fiscal 1997. By advanced planning and by shifting grades of paper, the effect
of some of the paper cost fluctuations may be softened. The ability of the
Company to reflect such cost increases in the selling price of
Goodheart-Willcox products depends upon the pricing of the 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
turnover of inventory, and by staying alert to outside opportunities available
to meet key deadlines.
18
<PAGE> 19
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
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> JAN-31-1997
<CASH> 5,048
<SECURITIES> 91
<RECEIVABLES> 2,091
<ALLOWANCES> 218
<INVENTORY> 1,726
<CURRENT-ASSETS> 9,535
<PP&E> 6,016
<DEPRECIATION> 1,406
<TOTAL-ASSETS> 16,506
<CURRENT-LIABILITIES> 2,532
<BONDS> 0
0
0
<COMMON> 599
<OTHER-SE> 10,366
<TOTAL-LIABILITY-AND-EQUITY> 16,506
<SALES> 14,347
<TOTAL-REVENUES> 14,347
<CGS> 4,577
<TOTAL-COSTS> 10,721
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,723
<INCOME-TAX> 1,378
<INCOME-CONTINUING> 2,345
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,345
<EPS-PRIMARY> $3.14
<EPS-DILUTED> $3.14
</TABLE>
