<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, 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 West 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: August 31, 1997 - 584,700 shares.
--------------------------------
<PAGE> 2
INDEX
THE GOODHEART-WILLCOX COMPANY, INC.
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets - July 31, 1997 and April 30, 1997 ..... 3
Consolidated Statements of Earnings - Three Months Ended
July 31, 1997 and 1996 ............................................ 5
Consolidated Statements of Stockholders' Equity - Three Months Ended
July 31, 1997 and 1996 ............................................ 6
Consolidated Statements of Cash Flows - Three Months Ended
July 31, 1997 and 1996 ............................................ 7
Notes to Consolidated Financial Statements - July 31, 1997 ......... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 14
SIGNATURES ................................................................... 18
PART II. OTHER INFORMATION
Item 6. Exhibit 27 - Financial Data Schedule ............................... 19
</TABLE>
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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 1997 1997
----------- -----------
(Note)
<S> <C> <C>
Current assets
Cash and cash equivalents ....................................... $ 2,094,000 $ 2,613,000
Accounts receivable - net of allowance for doubtful receivables
and sales returns of $210,000 and $113,000 ..................... 4,591,000 1,565,000
Inventories ..................................................... 2,389,000 2,730,000
Deferred income taxes ........................................... 646,000 646,000
Other ........................................................... 156,000 125,000
----------- -----------
Total current assets ......................................... 9,876,000 7,679,000
Investment securities available for sale ......................... 92,000 92,000
Prepublication costs - net of accumulated amortization of $1,703,000
and $1,528,000 .................................................. 1,438,000 1,487,000
Property and equipment - net ..................................... 4,724,000 4,769,000
Cash surrender value of life insurance ........................... 43,000 38,000
----------- -----------
$16,173,000 $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>
July 31, April 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
----------- -----------
(Note)
<S> <C> <C>
Current liabilities
Note payable, current portion ................................. $ 651,000 $ 651,000
Accounts payable .............................................. 945,000 1,020,000
Accrued compensation .......................................... 655,000 360,000
Accrued other ................................................. 749,000 170,000
Dividends payable ............................................. - 293,000
Royalties payable ............................................. 623,000 224,000
----------- -----------
Total current liabilities ................................ 3,623,000 2,718,000
Deferred income taxes ........................................... 169,000 169,000
Commitments and contingencies ................................... - -
Notes payable, net of current portion ........................... 2,605,000 2,605,000
Stockholders' equity
Common stock .................................................. 762,000 762,000
Retained earnings ............................................. 14,716,000 13,513,000
----------- -----------
15,478,000 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)
----------- -----------
9,776,000 8,573,000
----------- -----------
$16,173,000 $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
THREE MONTHS ENDED JULY 31,
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
July 31 July 31
1997 1996
---------- ----------
<S> <C> <C>
Sales ................................................. $5,925,000 $4,505,000
Cost of goods ......................................... 1,733,000 1,429,000
---------- ----------
Gross profit .................................... 4,192,000 3,076,000
Operating expenses
Selling, general and administrative.................. 1,627,000 1,451,000
Royalties ........................................... 608,000 466,000
---------- ----------
2,235,000 1,917,000
---------- ----------
Operating profit ................................ 1,957,000 1,159,000
Other income (expense)
Interest income ..................................... 22,000 25,000
Interest expense .................................... (70,000) -
Other ............................................... 2,000 1,000
---------- ----------
(46,000) 26,000
---------- ----------
Earnings before income taxes..................... 1,911,000 1,185,000
Income tax expense
Currently payable ................................... 708,000 439,000
---------- ----------
NET EARNINGS..................................... $1,203,000 $ 746,000
========== ==========
Earnings per share .................................... $2.06 $1.00
===== =====
</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, 1997 AND 1996
(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, 1997 .. $ 762,000 $ 13,513,000 $ 7,000 $(5,709,000) $8,573,000
Net earnings for period .... - 1,203,000 - - 1,203,000
------------ ------------- ------- ----------- ----------
Balance at July 31, 1997 ... $ 762,000 $ 14,716,000 $ 7,000 $(5,709,000) $9,776,000
============ ============= ======= =========== ==========
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
============ ============= ======= =========== ==========
</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
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................... $ 1,203,000 $ 746,000
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities
Depreciation expense ....................................... 68,000 24,000
Amortization of prepublication costs ....................... 270,000 243,000
Changes in assets and liabilities
Accounts receivable ..................................... (3,026,000) (1,815,000)
Inventories ............................................. 341,000 (70,000)
Other assets ............................................ (31,000) (79,000)
Accounts payable ........................................ (75,000) 38,000
Royalties payable ....................................... 399,000 252,000
Accrued expenses ........................................ 874,000 695,000
----------- -----------
Net cash provided by (used in) operating activities .. 23,000 34,000
Cash flows from investing activities:
Purchases of property and equipment ............................ (23,000) (1,715,000)
Purchases of prepublication costs .............................. (221,000) (199,000)
Increase in cash surrender value of officer's life insurance ... (5,000) (40,000)
----------- -----------
Net cash used in investing activities ................ (249,000) (1,954,000)
Cash flows from financing activities:
Dividends paid ................................................. (293,000) (299,000)
----------- -----------
Net cash used in financing activities ................ (293,000) (299,000)
----------- -----------
Decrease in cash and cash equivalents ................ (519,000) (2,219,000)
Cash and cash equivalents at beginning of period ................. 2,613,000 5,118,000
----------- -----------
Cash and cash equivalents at end of period ....................... $ 2,094,000 $ 2,899,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes - net ............. $ 157,000 $ 7,500
=========== ===========
</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, 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 months ended July 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended 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 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, 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>
July 31, April 30,
1997 1997
--------- ----------
<S> <C> <C>
Last-in, first out method ............... $2,329,000 $2,639,000
First-in, first out method .............. 60,000 91,000
---------- ----------
$2,389,000 $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
JULY 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 July 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
JULY 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 July 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>
July 31, April 30,
1997 1997
---------- ----------
<S> <C> <C>
Raw materials ...................... $ 79,000 $ 100,000
Work-in-process .................... 60,000 91,000
Finished goods ..................... 2,250,000 2,539,000
---------- ----------
$2,389,000 $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
JULY 31, 1997
(UNAUDITED)
================================================================================
NOTE B - INVENTORIES - CONTINUED
Inventories would have been $2,542,000 and $2,491,000 higher at July 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
Property and equipment consist of the following:
<TABLE>
<CAPTION>
July 31, April 30,
1997 1997
---------- ----------
<S> <C> <C>
Land ........................................... $ 814,000 $ 814,000
Buildings and improvements ..................... 4,013,000 4,013,000
Equipment ...................................... 1,427,000 1,404,000
---------- ----------
6,254,000 6,231,000
Less accumulated depreciation .................. 1,530,000 1,462,000
---------- ----------
$4,724,000 $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
JULY 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 $93,000 and $82,000 for the
quarters ended July 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. 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 form
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
July 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
CONDITION AND RESULTS OF OPERATIONS
First Quarter Fiscal 1998 Compared With First Quarter Fiscal 1997
OPERATING RESULTS
The Company's net sales for the first quarter of fiscal 1998 increased
$1,420,000, or approximately 31% from the same quarter in the previous fiscal
year, due primarily to increased sales of recently revised products in open
territories along with state adoption sales in North Carolina and Kentucky,
coupled with selective price increases. In the first quarter of fiscal 1997,
net sales 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. 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.
Selective 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. 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 results of the first quarter of fiscal 1998 may be tempered for the full
fiscal year by the yet unknown impact the United Parcel Service disruption has
caused such as canceled purchase orders, returned products, duplicate orders
and shipments, and added expenses. Goodheart-Willcox's distribution to
customers was current as of July 31, 1997 prior to the United Parcel Service
disruption.
The cost of goods sold as a percentage of sales in the first quarter of fiscal
1998 was 29% compared to 32% in the first quarter of fiscal 1997 and 29% in the
first quarter of fiscal 1996. The improvement in the ratio of the cost of
goods sold as a percentage of sales for the first quarter of fiscal 1998 was
primarily attributed to more favorable paper prices coupled with the
significant increase in sales. The change in the ratio of the cost of goods
sold as a percentage of sales for the first quarter of fiscal 1997 was
primarily attributed 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
started to level out one year ago, the build up of inventory in preparation of
the seasonal selling period in
14
<PAGE> 15
the first quarter of fiscal 1997 before the open 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 the paper price
increases 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 more rapid
creative preparation, shorter press runs, reduction in manufacturing time, and
consistent high quality, all allowing Goodheart-Willcox to better control the
unit cost of textbooks and supplements. Management decisions must be balanced
between the cost of goods sold in terms of the investment in product versus the
timing of when new or revised products are developed, come to market, and
contribute to sales.
Operating expenses consisting of royalties, selling, general, and
administrative expenses increased $318,000, or approximately 17% over the first
quarter in fiscal 1997, compared to an increase of $59,000, or approximately
3%, in the first quarter of fiscal 1997 over the same period in fiscal 1996.
Royalties paid to authors increased $142,000 as the net sales increased. As a
percentage of sales, the selling, general, and administrative cost for the
first quarter of fiscal 1998 was 27% compared to 32% for the first quarter of
fiscal 1997. 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 publishing industry. In the first quarter of fiscal 1998 sampling
expense increased to $115,000 from $98,000 in the first quarter of fiscal 1997.
The sampling increase of $17,000 or approximately 17% can be attributed to
added marketing efforts aimed at future state and local adoptions as well as
the introduction of a number of new and revised titles.
The 31% increase in net sales during the first quarter and the 17% increase in
operating expense along with a 3% decrease in the cost of goods sold as a
percentage of sales increased the Company's income from operations by $798,000
or approximately 69%, to $1,957,000. For the first quarter of fiscal 1997, the
3% increase in net sales 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
from the same period in the previous fiscal year. Other income or expense for
the first quarter of fiscal 1998 was an expense of $46,000, attributed to the
interest paid, compared to other income of $26,000 in the first quarter of
fiscal 1997. 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 $2,094,000 at July 31, 1997, a decrease of
$519,000 from the year ended April 30, 1997. Accounts receivable, net of
allowances for doubtful receivable and sales returns, totals $4,591,000 at July
31, 1997, and increase of $3,026,000 from the year ended April 30, 1997. For
the quarter ending July 31, 1997, the Company had long-term debt of $2,605,000
resulting from the stock repurchase. The Company had no long-term debt at the
end of the first quarter of fiscal 1997. As shown in the cash flow statements,
the cash provided by operating activities for the first quarter of fiscal 1998
amounted to $23,000 as compared to $34,000 provided in the first quarter of
fiscal 1997, a change which is attributable to the increase in net earnings
after adjustments to accounts covering depreciation expenses, amortization of
15
<PAGE> 16
prepublication expenses, accounts receivable, inventories, accounts payable,
royalties payable, and accrued expenses. The cash provided by the operating
activities of the Company 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 was attributed 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 significant
changes in assets and liabilities for the first quarter of fiscal 1998 include
increases in the accounts receivable, accrued expenses, and royalties payable,
with decreases in inventories and accounts payable. The changes in assets and
liabilities for the first quarter of fiscal 1997 include increases in accounts
receivable, inventories, accounts payable, and accrued expenses. There have
been no changes in business practices including credit terms or collection
efforts from previous years.
Investment in new and revised products in the first quarter of the current
fiscal 1998 was $221,000, or an increase of $22,000 compared to the first
quarter of fiscal 1997 when $199,000 was used to purchase prepublication
materials and services. The rate of investment in new and revised products as
a percentage of sales for the first quarter of fiscal 1998 remained constant
with the previous years's first quarter of approximately 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 books up-to-date has typically increased investment allocations
over patterns earlier in the decade. Plans are being finalized to acquire a
new software/hardware system for the business/marketing functions, replacing an
existing system which is not robust enough to grow with the Company into the
future. In the first quarter of fiscal 1998, $23,000 was invested in property
and equipment compared to $1,715,000 invested in the first quarter of fiscal
1997 when the new Tinley Park facility was being completed 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
1998 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 quarter 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. It is anticipated the source of the
annual installment payments as required by the note will be met by internally
generated funds.
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 marketing cycle. Also, in the second and
third quarters, the accounts receivable will 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 the second semester.
16
<PAGE> 17
CAPITAL RESOURCES
It is anticipated that the future capital needs of the Company will be met from
internally generated funds. The investment in computer hardware and software
on a department by department basis, such as editorial or creative services,
will be met from operating cash flow. Goodheart-Willcox 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 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
line. The Company's warehouse and distribution operations were relocated to a
new facility in Tinley Park, Illinois, on July 1, 1996 while the business,
marketing and sales, editorial, and creative operations were 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 net book value which is less than the estimated fair market value
less cost to sell. The promissory note for $3,256,000 used to acquire Treasury
Stock provides for five consecutive annual payments of $651,000 and it is
anticipated the source of the annual installation payments will be met by
internally generated funds.
THE EFFECTS OF INFLATION
Inflation affects the Company due to increases in costs of materials and
services. In fiscal 1996, the Company experienced tightening of supplier's
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 print new products to be sold in
fiscal 1997 experienced dramatic increases. In fiscal 1997, paper pricing
appeared more stable than in the prior recent quarters. However, new price
increases appear to cloud future trends in paper pricing for 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 tightening of available
press time in the short term, thus necessitating clearer projections for
initial printings or reprints. The ability of the Company to reflect cost
increases from suppliers 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
for paper or other materials and 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.
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<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GOODHEART-WILLCOX COMPANY, INC.
(Registrant)
Date _______________________ ____________________________________________
John F. Flanagan
President
Date _______________________ ____________________________________________
Donald A. Massucci
Vice President, Administration and Treasurer
18
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