<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, 1998
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: January 31, 1998 - 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 - January 31, 1998 and April 30, 1997 .. 3
Consolidated Statements of Earnings - Three Months Ended January 31,
1998 and 1997; Nine Months Ended January 31, 1998 and 1997 ........ 5
Consolidated Statements of Stockholders' Equity - Nine Months Ended
January 31, 1998 and 1997 ......................................... 6
Consolidated Statements of Cash Flows - Nine Months Ended
January 31, 1998 and 1997 ......................................... 7
Notes to Consolidated Financial Statements - January 31, 1998 ...... 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 1998 1997
----------- ---------
(Note)
<S> <C> <C>
Current assets
Cash and cash equivalents ..................................... $ 3,996,000 $ 2,613,000
Accounts receivable - net of allowance for doubtful receivables
and sales returns of $306,000 and $113,000 .................. 2,346,000 1,565,000
Inventories ................................................... 2,141,000 2,730,000
Deferred income taxes ......................................... 646,000 646,000
Other ......................................................... 140,000 125,000
---------- ----------
Total current assets ..................................... 9,269,000 7,679,000
Investment in securities available for sale ..................... - 92,000
Prepublication costs - net of accumulated amortization of $1,567,000
and $1,528,000 ................................................ 1,280,000 1,487,000
Property and equipment - net .................................... 4,918,000 4,769,000
Cash surrender value of life insurance .......................... 51,000 38,000
---------- ----------
$15,518,000 $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>
=============================================================================================
January 31, April 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- ---------
(Note)
<S> <C> <C>
Current liabilities
Notes payable, current portion ................................ $ - $ 651,000
Accounts payable .............................................. 642,000 1,020,000
Accrued compensation .......................................... 1,002,000 360,000
Accrued other ................................................. 561,000 170,000
Dividends payable ............................................. - 293,000
Royalties payable ............................................. 424,000 224,000
---------- ----------
Total current liabilities ................................. 2,629,000 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 ............................................. 16,365,000 13,513,000
---------- ----------
17,127,000 14,275,000
Net unrealized gain on investment securities
available-for-sale .......................................... - 7,000
Less cost of 177,300 shares of common stock held in treasury .. (5,709,000) (5,709,000)
---------- ----------
11,418,000 8,573,000
---------- ----------
$15,518,000 $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 Nine months ended
January 31, January 31,
---------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales .......................................... $4,125,000 $3,335,000 $16,470,000 $14,347,000
Cost of goods .................................. 1,372,000 1,130,000 4,680,000 4,577,000
--------- --------- ---------- ----------
Gross profit .......................... 2,753,000 2,205,000 11,790,000 9,770,000
Operating expenses
Selling, general and
administrative ............................ 1,692,000 1,564,000 5,058,000 4,656,000
Royalties ................................... 425,000 351,000 1,708,000 1,488,000
--------- --------- ---------- ----------
2,117,000 1,915,000 6,766,000 6,144,000
--------- --------- ---------- ----------
Operating profit ...................... 636,000 290,000 5,024,000 3,626,000
Other income (expense)
Gain on sale of investments ................. 16,000 - 16,000 -
Interest income ............................. 46,000 40,000 101,000 86,000
Interest expense ............................ (27,000) - (158,000) -
Other ....................................... 5,000 1,000 8,000 11,000
--------- --------- ---------- ----------
40,000 41,000 (33,000) 97,000
--------- --------- ---------- ----------
Earnings before income
taxes .............................. 676,000 331,000 4,991,000 3,723,000
Income tax expense ............................. 250,000 122,000 1,846,000 1,378,000
--------- --------- ---------- ----------
NET EARNINGS .......................... $ 426,000 $ 209,000 $ 3,145,000 $ 2,345,000
========= ========= ========== ==========
Earnings per share ............................. $.73 $.28 $5.38 $3.14
==== ==== ===== =====
</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, 1998 AND 1997
(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, 1997 .............. $762,000 $13,513,000 $7,000 $(5,709,000) $ 8,573,000
Net earnings ........................... - 3,145,000 - - 3,145,000
Cash dividends declared ($.50 per share) - (293,000) - - (293,000)
Net change in unrealized gain (loss) on
marketable equity securities - - (7,000) - (7,000)
-------- ----------- ------ ----------- -----------
Balance at January 31, 1998 ............ $762,000 $16,365,000 $ - $(5,709,000) $11,418,000
======== =========== ====== =========== ===========
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
======== =========== ====== =========== ===========
</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>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings .................................................. $3,145,000 $2,345,000
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation expense ...................................... 245,000 143,000
Amortization of prepublication costs ...................... 813,000 742,000
Profit on sales of available-for-sale securities .......... (16,000) -
Changes in operating assets and liabilities
Accounts receivable .................................... (781,000) (670,000)
Inventories ............................................ 589,000 241,000
Other assets ........................................... (15,000) (39,000)
Accounts payable ....................................... (378,000) (287,000)
Accrued expenses ....................................... 1,033,000 1,204,000
Royalties payable ...................................... 200,000 137,000
----------- -----------
Net cash provided by operating activities ........... 4,835,000 3,816,000
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities .......... 101,000 -
Purchases of property and equipment ........................... (394,000) (2,500,000)
Purchases of prepublication costs ............................. (606,000) (668,000)
Increase in cash surrender value of officer's life insurance .. (13,000) (120,000)
----------- -----------
Net cash used in investing activities ............... (912,000) (3,288,000)
Cash flows from financing activities:
Principal payments on long-term debt .......................... (1,303,000) -
Principal payments on short-term debt ......................... (651,000) -
Dividends paid ................................................ (586,000) (598,000)
----------- -----------
Net cash used in financing activities ............... (2,540,000) (598,000)
----------- -----------
Increase (decrease) in cash and cash equivalents .... 1,383,000 (70,000)
Cash and cash equivalents at beginning of period ................ 2,613,000 5,118,000
----------- -----------
Cash and cash equivalents at end of period ...................... $3,996,000 $5,048,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes - net ............ $1,566,000 $730,000
=========== ===========
</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, 1998
(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, 1998 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
JANUARY 31, 1998
(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>
January 31, April 30,
1998 1997
----------- ----------
<S> <C> <C>
Last-in, first-out method ..... $2,095,000 $2,639,000
First-in, first-out method .... 46,000 91,000
----------- ----------
$2,141,000 $2,730,000
=========== ==========
</TABLE>
Cost includes the purchase of paper, and 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, 1998
(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 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 number of shares outstanding of 584,700 and 747,900 for the periods
ending January 31, 1998 and 1997, respectively.
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, 1998
(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 January 31, 1998 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>
January 31, April 30,
1998 1997
----------- ----------
<S> <C> <C>
Raw materials ...................... $30,000 $100,000
Work-in-process .................... 46,000 91,000
Finished goods ..................... 2,065,000 2,539,000
----------- ----------
$2,141,000 $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
JANUARY 31, 1998
(UNAUDITED)
================================================================================
NOTE B - INVENTORIES - CONTINUED
Inventories would have been $2,657,000 and $2,491,000 higher at January 31,
1998 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>
<S> <C> <C>
Property and equipment consist of the following:
January 31, April 30,
1998 1997
----------- ----------
Land ........................................... $814,000 $814,000
Buildings and improvements ..................... 4,050,000 4,013,000
Equipment ...................................... 1,761,000 1,404,000
----------- ----------
6,625,000 6,231,000
Less accumulated depreciation .................. 1,707,000 1,462,000
----------- ----------
$4,918,000 $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
JANUARY 31, 1998
(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 $276,000 and $253,000 for
the nine months ended January 31, 1998 and 1997, 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
January 31, 1998 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
THE GOODHEART-WILLCOX COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Third Quarter Fiscal 1998 Compared With Third Quarter Fiscal 1997.
OPERATING RESULTS
The Company's net sales for the third quarter of fiscal 1998 increased $790,000
or approximately 24% more than the same quarter in the previous fiscal year, an
increase which benefited from the reported results in the recent Alabama
textbook adoption, coupled with strong sales in open territories along with
selective price increases. For the nine months ending January 31, 1998, net
sales increased $2,123,000 for an approximate 15% improvement compared to the
same period for the prior fiscal year. The net sales increase for the first
nine months of fiscal 1998 is due to stronger orders for the Company's products
from open territories and increased orders from the adoption states of North
Carolina, Kentucky, and Alabama, along with selective price increases. In the
third quarter of fiscal 1997, net sales increased $402,000, or approximately
14% from the same quarter in the previous fiscal year due to increased orders
from open territories along 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 due to stronger sales for the Company's products from open territories and
increased orders from one state adoption, 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 to the Company occurs 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
1998 was 33% compared to 34% in the third quarter of fiscal 1997 and 39% in the
third quarter of fiscal 1996. For the nine months ending January 31, 1998, the
cost of goods sold as a percentage of sales was 28% compared to 32% for the
first nine months of fiscal 1997 and 34% for the first nine months of fiscal
1996. The change in the ratio of the cost of goods sold as a percentage of
sales for the first nine 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 nine
months of fiscal 1997 reflected 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. 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
14
<PAGE> 15
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 third quarter of fiscal 1998 consisting of
royalties, selling, general, and administrative expenses increased $202,000 or
approximately 11% over the third quarter of fiscal 1997, compared to fiscal
1997's third quarter increase of $149,000 or approximately 8% over the third
quarter of fiscal 1996. For the nine months ending January 31, 1998, the
operating expenses consisting of royalties as well as selling, general, and
administrative expenses increased $622,000 or approximately 10%, compared to an
increase of $466,000 or approximately 8% for the first nine months of fiscal
1997. As a percentage of sales, the selling, general, and administrative
expenses for the third quarter of fiscal 1998 was 41% compared to 47% for the
third quarter of fiscal 1997 and 50% for fiscal 1996. For the nine month
period ending January 31, 1998, the selling, general, and administrative
expenses as a percentage of sales was 31% compared to 32% for the same period
in fiscal 1997 and 35% in the first nine months of fiscal 1996. A major
component of the operating expenses is the distribution of sample textbooks and
supplements as a marketing tool which is unique to the textbook industry. In
the first nine months of fiscal 1998, the sampling expenses increased to
$373,000 from $331,000 for the first nine months of the previous fiscal year as
new and revised products were promoted or as increased sampling took place for
future adoption consideration.
The 24% increase in net sales during the third quarter of fiscal 1998, coupled
with a 33% cost of goods sold as a percentage of sales and 11% higher
operating expenses, increased the Company's income from operations by $346,000
up to $636,000. For the third quarter of fiscal 1997, the 14% increase in net
sales coupled with a 34% cost of goods sold as a percentage of sales and an 8%
higher operating expense, increased the Company's income from operations by
$279,000 up 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 39%
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. For the nine months ending January 31, 1998,
the 15% 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 28%
increased the Company's income from operations by $1,398,000, or approximately
39%, to $5,024,000. For the nine months ending January 31, 1997, as compared
to the first nine months of fiscal 1996, the 15% increase in net sales and with
the 8% increase in operating expenses coupled with the 32% cost of goods sold
as a percentage of sales increased the Company's income from operations by
$1,089,000, or approximately 43%, to $3,626,000. For the nine months ending
January 31, 1996, as compared to the same period of the previous year, the 5%
decline in net sales and the 5% increase in operating expenses coupled with a
34% cost of goods sold as a percentage of sales, decreased the Company's income
from operations by $1,087,000, or approximately 30%, to $2,537,000. Other
income for the third quarter of fiscal 1998 was $40,000 compared to $41,000 in
the third quarter of fiscal 1997 and $57,000 in the third quarter of fiscal
1996. For the nine month period ending January 31, 1998, other income or
expense was an expense of $33,000 compared to income of $97,000 in the first
nine months of fiscal 1997 and income of $173,000 in the similar period of the
previous fiscal year. The change in other income or expense in the first nine
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 nine months fiscal 1998, 1997, and 1996 may also be
traced to reduced interest income due to the investment in the new facility.
As shown in the
15
<PAGE> 16
consolidated statements of earnings, net earnings increased $217,000 for the
third quarter of fiscal 1998 and $800,000 for the first nine months of the
current fiscal year. The Company's fiscal year ending April 30th divides the
purchasing pattern 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 $3,996,000 at January 31, 1998, an increase
of $1,383,000 from the year ended April 30, 1997. Accounts receivable, net of
allowances for doubtful receivables and sales returns, totaled $2,346,000 at
January 31, 1998, an increase of $781,000 from the year ended April 30, 1997.
At the end of the fiscal year ending April 30, 1997, the Company had a current
portion of a note payable of $651,000 and long term debt of $2,605,000, while
at the end of the first nine months ending January 31, 1998, the Company had no
current portion of a note payable and $1,302,000 long term debt resulting from
the repurchase of shares of the Company's stock. The Company had no long term
debt at the end of the first nine months of the previous fiscal year. As shown
in the cash flows statement, the cash provided by the operating activities of
the Company for the first nine months of fiscal 1998 amounted to $4,835,000, as
compared to $3,816,000 for the first nine months of fiscal 1997, a change which
is attributable to an increase in net earnings after adjustments to accounts
primarily covering amortization of prepublication expenses, accounts
receivable, inventories, accounts payable, accrued expenses, and royalties
payable. 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
attributed to an increase in net earnings after adjustments to accounts
covering amortization of prepublication costs, accounts receivable,
inventories, accounts payable, accrued expense, and income taxes. The
significant changes in assets and liabilities for the first nine months of
fiscal 1998 include a decrease in both the current portion and long term
portion of the note payable from the repurchase of the Company's stock, an
increase in accounts receivable, a decrease in inventories due to strong sales,
a decrease in securities available for sale, and a decrease in accounts
payable. The changes in the assets and liabilities for the first nine months
of fiscal 1997 included 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. 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 1998
was $606,000, or a decrease of $62,000 from the first nine months of fiscal
1997 when $668,000 was used for the purchase of prepublication services.
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. The
rate of investment in new and revised products as a percentage of sales for the
first nine months of fiscal 1998 was approximately 4%, compared to an
investment rate of 5% for the similar period of the previous fiscal year. 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
16
<PAGE> 17
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 the Company into
the future. In the first nine months of fiscal 1997, a major investment was
made in property and equipment 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 ending January
31, 1998, investment activity resulted in the sale of securities with a small
gain while there were no investment activities in the first nine months of the
previous fiscal year.
The primary financing use of cash in the nine month period ending January 31,
1998 was the payment of dividends at the rate of $1.00 per share compared to
the payment of dividends at the rate of $.80 per share in the first nine months
of fiscal 1997. In fiscal 1997, the repurchase of the Company's 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 first nine
months of fiscal 1998, $1,953,000 of internally generated funds were 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 of the Company have historically displayed
increased shipments and increased growth in accounts receivable while inventory
declined. For the third quarter ending January 31, 1998, the strength of the
Company's product line 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 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 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 the 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
17
<PAGE> 18
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 goods sold going into the inventory which was sold in the current
fiscal 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 advance 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 cost increases or postpone 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 inventory turnover, 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
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