<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, 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:
October 31, 1997 - 584,700 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, 1997 and April 30, 1997 ... 3
Consolidated Statements of Earnings - Three Months Ended October 31,
1997 and 1996; Six Months Ended October 31, 1997 and 1996 ......... 5
Consolidated Statements of Stockholders' Equity - Six Months Ended
October 31, 1997 and 1996 .......................................... 6
Consolidated Statements of Cash Flows - Six Months Ended
October 31, 1997 and 1996 .......................................... 7
Notes to Consolidated Financial Statements - October 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>
October 31, April 30,
ASSETS 1997 1997
----------- -----------
(Note)
<S> <C> <C>
Current assets
Cash and cash equivalents ..................................... $ 3,938,000 $ 2,613,000
Accounts receivable - net of allowance for doubtful receivables
and sales returns of $307,000 and $113,000 .................. 2,914,000 1,565,000
Inventories ................................................... 1,931,000 2,730,000
Deferred income taxes ......................................... 646,000 646,000
Other ......................................................... 89,000 125,000
----------- -----------
Total current assets ....................................... 9,518,000 7,679,000
Investment securities available for sale ........................ 92,000 92,000
Prepublication costs - net of accumulated amortization of
$1,649,000 and $1,528,000 ..................................... 1,332,000 1,487,000
Property and equipment - net .................................... 4,685,000 4,769,000
Cash surrender value of life insurance .......................... 47,000 38,000
----------- -----------
$15,674,000 $14,065,000
=========== ===========
</TABLE>
Note: The consolidated balance sheet at April 30, 1997 has been taken from the
audited financial statements 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>
October 31, April 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
----------- -----------
(Note)
<S> <C> <C>
Current liabilities
Note payable, current portion ................................. $ - $ 651,000
Accounts payable .............................................. 523,000 1,020,000
Accrued compensation .......................................... 831,000 360,000
Accrued other ................................................. 874,000 170,000
Dividends payable ............................................. - 293,000
Royalties payable ............................................. 683,000 224,000
----------- -----------
Total current liabilities ................................ 2,911,000 2,718,000
Deferred income taxes ........................................... 169,000 169,000
Commitments and contingencies ................................... - -
Notes payable, net of current portion ........................... 1,302,000 2,605,000
Stockholders' equity
Common stock .................................................. 762,000 762,000
Retained earnings ............................................. 16,232,000 13,513,000
----------- -----------
16,994,000 14,275,000
Net unrealized gain on investment securities available-for-sale 7,000 7,000
Less cost of 177,300 shares of common stock held in treasury .. (5,709,000) (5,709,000)
----------- -----------
11,292,000 8,573,000
----------- -----------
$15,674,000 $14,065,000
=========== ===========
</TABLE>
Note: The consolidated balance sheet at April 30, 1997 has been taken
from the audited financial statements 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 Six months ended
October 31, October 31,
---------------------- ------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales .................... $6,420,000 $6,507,000 $12,345,000 $11,012,000
Cost of goods ............ 1,575,000 2,018,000 3,308,000 3,447,000
---------- ---------- ----------- -----------
Gross profit ......... 4,845,000 4,489,000 9,037,000 7,565,000
Operating expenses
Selling, general and
administrative ......... 1,739,000 1,641,000 3,366,000 3,092,000
Royalties ............... 675,000 671,000 1,283,000 1,137,000
---------- ---------- ----------- -----------
2,414,000 2,312,000 4,649,000 4,229,000
---------- ---------- ----------- -----------
Operating profit ..... 2,431,000 2,177,000 4,388,000 3,336,000
Other income (expense)
Interest income ......... 33,000 21,000 55,000 46,000
Interest expense ........ (61,000) - (131,000) -
Other ................... 1,000 9,000 3,000 10,000
---------- ---------- ----------- -----------
(27,000) 30,000 (73,000) 56,000
---------- ---------- ----------- -----------
Earnings before income
taxes .............. 2,404,000 2,207,000 4,315,000 3,392,000
Income tax expense ....... 888,000 817,000 1,596,000 1,256,000
---------- ---------- ----------- -----------
NET EARNINGS ......... $1,516,000 $1,390,000 $ 2,719,000 $ 2,136,000
========== ========== =========== ===========
Earnings per share ....... $ 2.59 $ 1.86 $ 4.65 $ 2.86
========== ========== =========== ===========
</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, 1997 AND 1996
(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, 1997 .... $762,000 $13,513,000 $7,000 $(5,709,000) $8,573,000
Net earnings for period ...... - 2,719,000 - - 2,719,000
-------- ----------- ------------- ------------ -----------
Balance at October 31, 1997 .. $762,000 $16,232,000 $7,000 $(5,709,000) $11,292,000
======== =========== ============= ============ ===========
Balance at April 30, 1996 .... $599,000 $8,416,000 $6,000 $(282,000) $8,739,000
Net earnings for period ...... - 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
======== =========== ============= ============ ===========
</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>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings .................................................. $2,719,000 $2,136,000
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation expense ...................................... 140,000 94,000
Amortization of prepublication costs ...................... 546,000 485,000
Changes in operating assets and liabilities
Accounts receivable .................................... (1,349,000) (1,334,000)
Inventories ............................................ 799,000 129,000
Other assets ........................................... 36,000 -
Accounts payable ....................................... (497,000) 504,000
Accrued expenses ....................................... 1,175,000 1,256,000
Royalties payable ...................................... 459,000 470,000
----------- -----------
Net cash provided by operating activities ........... 4,028,000 3,740,000
Cash flows from investing activities:
Purchases of property and equipment ........................... (56,000) (2,427,000)
Purchases of prepublication costs ............................. (391,000) (471,000)
Increase in cash surrender value of officer's life insurance .. (9,000) (80,000)
----------- -----------
Net cash used in investing activities ............... (456,000) (2,978,000)
Cash flows from financing activities:
Principal payments on long-term debt .......................... (1,303,000) -
Principal payments on short-term debt ......................... (651,000) -
Dividends paid ................................................ (293,000) (299,000)
----------- -----------
Net cash used in financing activities ............... (2,247,000) (299,000)
----------- -----------
Increase in cash and cash equivalents ............... 1,325,000 463,000
Cash and cash equivalents at beginning of period ................ 2,613,000 5,118,000
----------- -----------
Cash and cash equivalents at end of period ...................... $3,938,000 $5,581,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for Income taxes - net ............ $ 289,000 $ 390,000
=========== ===========
</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, 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 six month periods ended October 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
April 30, 1998. 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, 1997.
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 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, 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>
<CAPTION>
October 31, April 30,
1997 1997
----------- ----------
<S> <C> <C>
Last-in, first-out method ......... $ 1,869,000 $ 2,639,000
First-in, first-out method ........ 62,000 91,000
----------- -----------
$ 1,931,000 $ 2,730,000
=========== ===========
</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, 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 for the period. The FASB has issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share, which is effective for
financial statements issued after December 15, 1997. Early adoption of the new
standard is not permitted. The new standard eliminates primary and fully
diluted earnings per share and requires presentation of basic and diluted
earnings per share together with disclosure of how the per share amounts were
computed. The adoption of this new standard is not expected to have a material
impact on the disclosure of earnings per share in the financial statements.
Earnings per share is computed on the weighted average number of shares of
584,700 and 747,900 for the periods ending October 31, 1997 and 1996,
respectively.
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, 1997
(UNAUDITED)
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
COMMON STOCK
The Company has 1,000,000 shares of $1 par value common stock authorized and
762,000 shares issued, of which 177,300 shares have been repurchased by the
Company. As of October 31, 1997 the Company has 584,700 shares outstanding. As
of April 30, 1997 the Company had 584,700 shares outstanding with a weighted
average of 739,405 shares used to compute the end-of-year financial results.
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.
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
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,
1997 1997
---------- ----------
<S> <C> <C>
Raw materials ................................... $ 118,000 $ 100,000
Work-in-process ................................. 62,000 91,000
Finished goods .................................. 1,751,000 2,539,000
---------- ----------
$1,931,000 $2,730,000
========== ==========
</TABLE>
11
<PAGE> 12
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
OCTOBER 31, 1997
(UNAUDITED)
================================================================================
NOTE B - INVENTORIES - CONTINUED
Inventories would have been $2,602,000 and $2,491,000 higher at October 31,
1997 and April 30, 1997, 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
<TABLE>
<CAPTION>
Property and equipment consist of the following:
October 31, April 30,
1997 1997
----------- ----------
<S> <C> <C>
Land ........................................... $ 814,000 $ 814,000
Buildings and improvements ..................... 4,013,000 4,013,000
Equipment ...................................... 1,460,000 1,404,000
----------- ----------
6,287,000 6,231,000
Less accumulated depreciation .................. 1,602,000 1,462,000
----------- ----------
$4,685,000 $4,769,000
=========== ==========
</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.
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, 1997
(UNAUDITED)
================================================================================
NOTE E - EMPLOYEE BENEFIT PLANS - CONTINUED
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 $182,000 and $169,000 for
the six months ended October 31, 1997 and 1996, respectively.
NOTE F - COMMITMENTS AND CONTINGENCIES
In April 1997, under an agreement between the Company and a principal
stockholder/officer, the Company purchased 163,200 shares of the Company's
stock owned by him upon his death for $5,427,000. The purchase price was based
on the fair market value of the Company's shares at that time, as determined by
a named third party and consisted of $2,171,000 in cash and a note payable of
$3,256,000. The note payable, which matures on April 11, 2002, provides for
five annual principal payments of $651,000 with interest at the prime rate. On
October 10, 1997 the company prepaid the first three installments of the term
note. The Company carried a life insurance policy to help meet a portion of the
obligation created by this agreement. Net proceeds from the policy were
$1,207,000, which had the effect of reducing the cash surrender value by
$538,000 and resulting in other income of $548,000. In addition, the excess of
estimated fair market value over the amount of life insurance, net of cash
surrender value, previously segregated from stockholders equity has been
recorded as retained earnings. As a result of the acquisition of the stock by
the Company, the total outstanding shares of stock have been reduced from
747,900 to 584,700.
The Company has entered into employment agreements with the former Chairman of
the Board of Directors and President that provides 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, 1997 and April 30, 1997.
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 $2,973,000. 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 CONDITIONS AND RESULTS OF OPERATIONS
Second Quarter Fiscal 1998 Compared With Second Quarter Fiscal 1997
OPERATING RESULTS
The Company's net sales for the second quarter of fiscal 1998 decreased $87,000
or approximately 1% less than the same quarter in the previous fiscal year, a
decrease which is primarily attributable to more timely shipping of products in
the first quarter of this year. Goodheart-Willcox's distribution to customers
was current as of July 31, 1997, the end of the first quarter of the fiscal
year and prior to the United Parcel Service disruption. Our previously
expressed concerns at the end of the last quarter during the UPS strike as to
the possibility of the strike's adverse effects on the Company, such as
canceled purchase orders, returned product, duplicate orders and shipments, and
added shipping expenses, did not materialize and thus the strike did not impact
the financial results of the second quarter. For the six months ending
October 31, 1997, net sales increased $1,333,000 for an approximate 12%
improvement compared to the same period for the prior fiscal year. The net
sales increase for the first six months of fiscal 1998 is due to the stronger
orders for the Company's products from open territories and increased orders
from the adoption states of North Carolina and Kentucky, along with selective
price increases. In the second quarter of fiscal 1997, net sales 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 due primarily to the stronger orders for the Company's
products from open territories and increased orders from one adoption state,
along 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 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
1998 was 24.5% compared to 31.0% in the second quarter of fiscal 1997 and 34.9%
in the second quarter of fiscal 1996. For the six months ending October 31,
1997, the cost of goods sold as a percentage of sales was 26.8% compared to
31.3% for the first six months of fiscal 1997 and 32.1% for the first six
months of fiscal 1996. The change in the ratio of the cost of goods sold as
a percentage
14
<PAGE> 15
of sales for the first six months of fiscal 1998 reflects more favorable paper
prices in a period of increased sales and larger or more favorable sized press
runs ordered in anticipation of strong sales for the period. 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 the build up of inventory, in preparation for
the seasonal selling patterns before the opening of schools, which 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 increases to our customers." Factors affecting the ratio of 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
relative cost of the goods sold as a percentage of sales versus the investment
affecting the timing of when new or revised products come to market and
contribute to sales.
Operating expenses for the second quarter of fiscal 1998 consisting of
royalties, selling, general, and administrative expenses increased $102,000 or
approximately 4.5% over the second quarter of fiscal 1997, compared to fiscal
1997's second quarter increase of $258,000 or approximately 13% over the second
quarter of fiscal 1996. For the six months ending October 31, 1997, the
operating expenses consisting of royalties as well as selling, general, and
administrative expenses increased $420,000 or approximately 10%, compared to an
increase of $317,000 or approximately 8% for the first six months of fiscal
1997. As a percentage of sales, the selling, general, and administrative
expenses for the second quarter of fiscal 1998 was 27% compared to 25% for the
second quarter of fiscal 1997 and 30% for fiscal 1996. For the six month
period ending October 31, 1997, the selling, general, and administrative
expenses as a percentage of sales was 27% compared to 28% for the same period
in the previous fiscal year and 31% for the same period in 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 textbook
industry. In the first six months of fiscal 1998, the sampling expenses
increased to $288,000 from $179,000 for the first six months of the previous
fiscal year as more new and revised products were promoted or as increased
sampling took place for future adoption consideration.
The 1% decrease in net sales during the second quarter of fiscal 1998, 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 $254,000, or
approximately 12%, to $2,431,000. For the second quarter of fiscal 1997, the
27% increase in net sales 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. For the six months ending October 31,
1997, the 12% increase in net sales and the 10% increase in operating expenses
coupled with a lower cost of goods sold as a percentage of sales at 27%
increased the Company's income from operations by $1,052,000, or approximately
31%, to $4,388,000. 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, 1995, the 8% decline in net sales and the 4% increase in the
operating expenses tied
15
<PAGE> 16
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. Other income or
expense for the second quarter of fiscal 1998 amounted to an expense $27,000
compared to other income of $30,000 in the second quarter of fiscal 1997 and
other income of $58,000 in the second quarter of fiscal 1996. For the six
month period ending October 31, 1997, other income or expense was an expense of
$73,000 compared to other income of $56,000 in the first six month period of
fiscal 1997 and other income of $116,000 in the first six month period of
fiscal 1996. The change in other income or expense in the first six months of
fiscal 1998 is primarily attributed to the interest expense related to the
repurchase of shares of the Company's stock. The change in other income or
expense in the first six month periods in both fiscal 1998 and fiscal 1997 may
also be traced to reduced interest income due to the investment in the new
facility. As shown in the consolidated statements of earnings, net earnings
increased approximately $126,000 for the second quarter and $583,000 for the
first six months of the current fiscal year. The Company's fiscal year ending
April 30th 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 $3,938,000 at October 31, 1997, an increase
of $1,325,000 from the year ended April 30, 1997. Accounts receivable, net of
allowances for doubtful receivables and sales returns, totaled $2,914,000 at
October 31, 1997, an increase of $1,349,000 from the year ended April 30, 1997.
At the end of the first quarter ending July 31, 1997, the Company had long
term debt of $2,605,000 and for the six months ending October 31, 1997, the
Company had long term debt of $1,302,000 resulting from the repurchase of
shares of the Company's stock. The Company had no long term debt at the end of
the second quarter of fiscal 1997. As shown in the cash flows statement, the
cash provided by the operating activities of the Company for the first six
months of fiscal 1998 amounted to $4,028,000 as compared to $3,740,000 for the
first six months of fiscal 1997, a change which is attributable to an increase
in net earnings after adjustments to accounts covering depreciation expenses,
amortization of prepublication costs, inventories, accounts payable, and
accrued expenses. 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, account receivable,
inventories, accounts payable, accrued expenses, royalties payable, and income
taxes payable. The significant changes in assets and liabilities for the first
six months of fiscal 1998 include a decrease in both the current portion and
long term portion of the note payable from the purchase of treasury stock, a
decrease in inventories which were built up in anticipation of strong seasonal
sales, a decrease in accounts payable, and an increase in accrued expenses.
The significant changes in the assets and liabilities for the first six months
of fiscal 1997 include an increase in accounts payable, 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.
16
<PAGE> 17
Investment in new and revised products for the first six months of fiscal 1998
was $391,000, or a decrease of $80,000 from the first six months of fiscal 1997
when $471,000 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 six months of fiscal 1998 was approximately 3% compared with the previous
fiscal year's first six months of 4%. The Company currently intends to
maintain its traditional pace of prepublication investment in products and
services in future quarters to maintain a publishing program of adding new
titles and products to the line while revising a backlist of products to match
marketing and customer needs. With advances in general technology, the
magnitude of revision efforts required to keep the industrial and technical
product line up-to-date has typically increased investment allocations over
patterns earlier in the decade. Plans are being implemented to acquire new
software/hardware systems for the business/marketing operations and the
creative services area of the Company, replacing existing systems which are not
robust enough to grow with the Company into the future. In the first six
months of fiscal 1998, $56,000 was invested in property and equipment compared
to $2,427,000 in the first six months of fiscal 1997 when the new Tinley Park
facility was being completed 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 period ending October 31,
1997 was the payment of dividends at the rate of $.50 per share compared to the
payment of dividends at the rate of $.40 per share in the first six months of
fiscal 1997. In fiscal 1997, the purchase of treasury stock required
$2,171,000 along with the acceptance of a note payable in the amount of
$3,256,000. The source of the cash portion of the purchase price was provided
in part by the $1,207,000 proceeds of an insurance policy owned by the Company
and the balance provided by internally generated funds. In the second quarter
of fiscal 1998, $1,953,000 of internally generated funds was applied against
the principal of the note payable, $651,000 paid against the current
installment due and $1,302,000 prepaid against installments not yet due. It is
anticipated the source of the future annual installment payments as required by
the note will be met by internally generated funds.
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 due to the
required buildup of inventory for the anticipated needs of schools opening in
the Fall and for the second semester.
CAPITAL RESOURCES
It is anticipated that the future capital needs of the Company will be met from
internally generated funds. The investment in computer software and hardware
on a department wide basis, such as the creative services area, will be met
from operating cash flow. Goodheart-Willcox is proceeding to invest in new
software and hardware for the business/marketing operations to improve
customer service, inventory and warehouse management, and information
17
<PAGE> 18
technology. In fiscal 1998, 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
lines. The Company's warehouse and distribution operations were relocated to a
new facility in Tinley Park, Illinois, on July 1, 1996 while business,
marketing and sales, editorial, and creative services were relocated August 26,
1996. The new facility project was completed using internally generated funds
with no financing expenses to the Company. The Company's previous land and
building in South Holland, Illinois, are being offered for sale and are carried
at net book value which is less than the estimated fair market value less net
of anticipated costs of sale. The principal balance of $1,302,000 on the note
payable issued in the repurchase of the Company's shares of stock is payable in
two annual installments of $651,000 each, due April 2001 and April 2002. It is
anticipated the source of the installment payments will be met by internally
generated funds.
THE EFFECTS OF INFLATION
Inflation affects the Company due to increases in the costs of materials and
services. In fiscal 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 fiscal 1997, paper prices
appeared more stable than in the prior period thus allowing better control over
the cost of the goods sold going into the inventory which was sold in the
current year's seasonal orders received for the opening of schools in the Fall.
However, new price increases appear to cloud future trends in paper pricing
for the balance of fiscal 1998. By advanced planning and shifting grades of
paper, the effect of some of the paper cost fluctuations may be softened.
Fiscal 1998 shows a slight tightening of available press time in the short run,
thus necessitating clearer projections for initial printings or reprints. The
ability of the Company to reflect cost increases from suppliers and from
internal pressures 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 the price increases, be they the
result of increases in paper, other materials, or services. The Company
continues to manage its cost of doing business in these uncertain and changing
times by using various suppliers, reviewing the variety of paper grades
appropriate for various titles, scheduling press runs in batches, balancing the
quantities printed with considerations for unit cost versus turnover of
inventory, and nurturing close relationships with key suppliers.
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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 3,938
<SECURITIES> 92
<RECEIVABLES> 2,914
<ALLOWANCES> 307
<INVENTORY> 1,931
<CURRENT-ASSETS> 9,518
<PP&E> 6,287
<DEPRECIATION> 1,602
<TOTAL-ASSETS> 15,674
<CURRENT-LIABILITIES> 2,911
<BONDS> 1,302
0
0
<COMMON> 762
<OTHER-SE> 16,232
<TOTAL-LIABILITY-AND-EQUITY> 15,674
<SALES> 12,345
<TOTAL-REVENUES> 12,345
<CGS> 3,308
<TOTAL-COSTS> 7,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> 4,315
<INCOME-TAX> 1,596
<INCOME-CONTINUING> 2,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,719
<EPS-PRIMARY> $4.65
<EPS-DILUTED> 0
</TABLE>
