<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, 1999
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.
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(Exact name of registrant as specified in charter)
Delaware 36-2135994
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18604 W. Creek Drive, Tinley Park, Illinois 60477
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(Address of principal executive offices) (Zip Code)
(708) 687-5000
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(Registrant's telephone number, including area code)
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(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, 1999 - 584,700 shares.
---------------------------------
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INDEX
THE GOODHEART-WILLCOX COMPANY, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets - January 31, 1999 and April 30, 1998............... 3
Consolidated Statements of Earnings - Three Months Ended January 31,
1999 and 1998; Nine Months Ended January 31, 1999 and 1998................... 5
Consolidated Statements of Stockholders' Equity - Nine Months Ended
January 31, 1999 and 1998..................................................... 6
Consolidated Statements of Cash Flows - Nine Months Ended
January 31, 1999 and 1998..................................................... 7
Notes to Consolidated Financial Statements - January 31, 1999................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 14
SIGNATURES ................................................................................... 20
PART II. OTHER INFORMATION
Item 6. Exhibit 27 - Financial Data Schedule............................................ 21
</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>
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January 31, April 30,
ASSETS 1999 1998
-------------- --------------
(Note)
<S> <C> <C>
Current assets
Cash and cash equivalents.................................................... $ 5,728,000 $ 2,119,000
Accounts receivable - net of allowance for doubtful receivables
and sales returns of $376,000 and $113,000................................ 2,078,000 1,661,000
Inventories.................................................................. 2,045,000 2,415,000
Deferred income taxes........................................................ 742,000 742,000
Other ....................................................................... 133,000 106,000
------------ ------------
Total current assets................................................... 10,726,000 7,043,000
Prepublication costs - net of accumulated amortization of $1,136,000
and $1,528,000............................................................... 1,039,000 1,149,000
Property and equipment - net.................................................... 4,154,000 4,930,000
Cash surrender value of life insurance.......................................... 66,000 55,000
------------- ------------
$ 15,985,000 $ 13,177,000
============= ============
</TABLE>
Note: The consolidated balance sheet at April 30, 1998 has been taken from the
audited financial statements at that date.
The accompanying notes are an integral part of these statements.
3
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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 1999 1998
------------ ------------
(Note)
<S> <C> <C>
Current liabilities
Accounts payable............................................................. $ 522,000 $ 805,000
Accrued compensation......................................................... 904,000 399,000
Accrued other................................................................ 468,000 379,000
Dividends payable............................................................ - 293,000
Royalties payable............................................................ 352,000 260,000
------------ ------------
Total current liabilities.............................................. 2,246,000 2,136,000
Deferred income taxes........................................................... 86,000 86,000
Commitments and contingencies................................................... - -
Stockholders' equity
Common stock................................................................. 762,000 762,000
Retained earnings............................................................ 18,600,000 15,902,000
------------ ------------
19,362,000 16,664,000
Less cost of 177,300 shares of common stock held in treasury................. (5,709,000) (5,709,000)
------------ ------------
13,653,000 10,955,000
------------ ------------
$ 15,985,000 $ 13,177,000
============ ============
</TABLE>
Note: The consolidated balance sheet at April 30, 1998 has been taken from the
audited financial statements at that date.
The accompanying notes are an integral part of these statements.
4
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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,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sales ...................................... $3,473,000 $4,125,000 $15,569,000 $16,470,000
Cost of goods............................... 1,038,000 1,372,000 4,367,000 4,680,000
---------- ---------- ----------- -----------
Gross profit....................... 2,435,000 2,753,000 11,202,000 11,790,000
Operating expenses
Selling, general and
administrative........................ 1,733,000 1,692,000 5,218,000 5,058,000
Royalties................................ 358,000 425,000 1,610,000 1,708,000
---------- ---------- ----------- -----------
2,091,000 2,117,000 6,828,000 6,766,000
---------- ---------- ----------- -----------
Operating profit................... 344,000 636,000 4,374,000 5,024,000
Other income (expense)
Gain on sale of investments.............. - 16,000 - 16,000
Gain on sale of property
and equipment......................... 264,000 - 264,000 -
Interest income.......................... 52,000 46,000 89,000 101,000
Interest expense......................... - (27,000) - (158,000)
Other ................................... 4,000 5,000 12,000 8,000
---------- ---------- ----------- -----------
320,000 40,000 365,000 (33,000)
---------- ---------- ----------- -----------
Earnings before income
taxes.......................... 664,000 676,000 4,739,000 4,991,000
Income tax expense ......................... 240,000 250,000 1,748,000 1,846,000
---------- ---------- ----------- -----------
NET EARNINGS....................... $424,000 $426,000 $2,991,000 $3,145,000
======== ======== ========== ==========
Earnings per share.......................... $.73 $.73 $5.12 $5.38
==== ==== ===== =====
</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, 1999 AND 1998
(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, 1998........... $762,000 $15,902,000 $ - $(5,709,000) $10,955,000
Net earnings for period............. - 2,991,000 - - 2,991,000
Cash dividends declared
($.50 per share).................. - (293,000) - - (293,000)
-------- ----------- -------- ----------- -----------
Balance at January 31, 1999......... $762,000 $18,600,000 $ - $(5,709,000) $13,653,000
======== =========== ======== =========== ===========
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 earnings........ - - (7,000) - (7,000)
-------- ----------- -------- ----------- -----------
Balance at January 31, 1998......... $762,000 $16,365,000 $ - $(5,709,000) $11,418,000
======== =========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
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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>
- -------------------------------------------------------------------------------------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................................ $2,991,000 $3,145,000
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation expense................................................... 288,000 245,000
Amortization of prepublication costs................................... 714,000 813,000
Profit on sales of available-for-sale securities....................... - (16,000)
Profit on sale of property and equipment............................... (264,000) -
Changes in operating assets and liabilities
Accounts receivable................................................ (417,000) (781,000)
Inventories........................................................ 370,000 589,000
Other assets....................................................... (27,000) (15,000)
Accounts payable................................................... (283,000) (378,000)
Accrued expenses................................................... 594,000 1,033,000
Royalties payable.................................................. 92,000 200,000
---------- ----------
Net cash provided by operating activities....................... 4,058,000 4,835,000
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities......................... - 101,000
Proceeds from sales of property and equipment................................ 845,000 -
Purchases of property and equipment.......................................... (93,000) (394,000)
Purchases of prepublication costs............................................ (604,000) (606,000)
Increase in cash surrender value of officer's life insurance................. (11,000) (13,000)
---------- ----------
Net cash provided by (used in) investing activities............. 137,000 (912,000)
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) (586,000)
---------- ----------
Net cash used in financing activities........................... (586,000) (2,540,000)
---------- ----------
Increase in cash and cash equivalents........................... 3,609,000 1,383,000
Cash and cash equivalents at beginning of period................................ 2,119,000 2,613,000
---------- ----------
Cash and cash equivalents at end of period...................................... $5,728,000 $3,996,000
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for Income taxes - net........................... $1,626,000 $1,566,000
========== ==========
</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, 1999
(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, 1999 are not necessarily
indicative of the results that may be expected for the year ending April 30,
1999. 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, 1998.
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
JANUARY 31, 1999
(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):
January 31, April 30,
1999 1998
---------- ----------
Last-in, first-out method...................... $1,991,000 $2,330,000
First-in, first-out method..................... 54,000 85,000
---------- ----------
$2,045,000 $2,415,000
========== ==========
Cost includes the purchase of paper, printing and binding from outside sources.
No allocation of selling and administrative expenses is included in inventories.
Even though some books will not be sold in the current period, large quantities
of books are printed initially for stock, due to economies of scale. Management
feels that substantially all books will be sold in the current period and,
therefore, classifies all inventories as a current asset.
INVESTMENT SECURITIES
Available-for-sale securities are those that management designated as available
to be sold in response to changes in market interest rates or liquidity needs.
Investment securities available-for-sale are stated at fair value, with the
unrealized gains or losses shown as a component of stockholders' equity. Gains
or losses on disposition of these securities are determined using the specific
identification method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is provided on the straight-line and accelerated methods over the
estimated useful lives of the assets. Annual depreciation rates range from 20%
to 40% for equipment and from 3% to 20% for buildings and improvements.
9
<PAGE> 10
PART I - FINANCIAL STATEMENTS
FORM 10-Q
THE GOODHEART-WILLCOX COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JANUARY 31, 1999
(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. The Company has adopted the
provisions of SFAS No. 128 in these financial statements. Earnings per share is
computed on the weighted average number of shares of 584,700 for the periods
ending January 31, 1999 and 1998, respectively.
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, 1999 and April 30, 1998 the Company had 584,700
shares outstanding.
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, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 1998 amounts have been reclassified to conform with the 1999
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997 the Financial Accounting Standards Board (FASB) issued Statements of
Financial Accounting Standards (SFAS) No. 130. "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," both effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 requires disclosures for the components of and total comprehensive
income in the period in which they are recognized in the financial statements.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise arising from transactions and other events and circumstances
from non-owner sources. It includes all changes in shareholders' equity during
the reporting period except those resulting from investments by owners and
distributions to owners. The adoption of this new standard has not had a
material impact on the disclosure of comprehensive income.
SFAS No. 131 requires disclosures of certain segment information based on the
way that management evaluates segments for making decisions and assessing
performance. It also requires disclosure of certain information about products
and services, the geographic areas in which the Company operates, and major
customers. The adoption of this new standard has not had a material impact on
the disclosure of segment information.
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, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE B - INVENTORIES
Inventories consist of the following:
January 31, April 30,
1999 1998
---------- ----------
Raw materials.............................. $ 45,000 $ 87,000
Work-in-process............................ 54,000 85,000
Finished goods............................. 1,446,000 2,243,000
---------- ----------
$2,045,000 $2,415,000
========== ==========
Inventories would have been $2,747,000 and $2,640,000 higher at January 31, 1999
and April 30, 1998, 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:
January 31, April 30,
1999 1998
---------- ----------
Land....................................... $ 739,000 $ 814,000
Buildings and improvements................. 2,991,000 4,056,000
Equipment.................................. 1,950,000 1,857,000
---------- ----------
5,680,000 6,727,000
Less accumulated depreciation.............. 1,526,000 1,797,000
---------- ----------
$4,154,000 $4,930,000
========== ==========
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, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE D - INCOME TAXES
Income tax expense varies from the amount computed by applying the statutory
Federal income tax rate to earnings before income taxes primarily because of
state income taxes, tax-exempt interest income, and officer's life insurance.
- --------------------------------------------------------------------------------
NOTE E - EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan, covering all full-time employees. Company
contributions are voluntary and at the discretion of the Board of Directors.
Annual contributions by the Company cannot exceed 15% of eligible compensation.
The Company has recorded contributions amounting to $268,000 and $276,000 for
the nine months ended January 31, 1999 and 1998, respectively.
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.
- --------------------------------------------------------------------------------
NOTE F - COMMITMENTS AND CONTINGENCIES
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, 1999 and April 30, 1998.
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
Third Quarter Fiscal 1999 Compared With Third Quarter Fiscal 1998
OPERATING RESULTS
The Company's net sales for the third quarter of fiscal 1999 decreased $652,000
or approximately 16% less than the same quarter in the previous fiscal year.
This decrease resulted from the absence in the third quarter of any reported
state adoptions in the curriculum areas served by the Company's product lines.
In the third quarter of fiscal 1998, net sales 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 Alabama textbook
adoption, coupled with strong sales in open territories, along with selective
price increases. For the nine months ending January 31, 1999, net sales
decreased $901,000 or approximately 5% less compared to the same nine-month
period in the prior fiscal year. The decrease in net sales for the first nine
months of fiscal 1999 is attributed to the absence of states adoptions calling
for the products published in the curriculum areas served by Goodheart-Willcox.
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 was 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. 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 between adoption periods
have been significantly increased. However, fiscal 1999 is an exception to the
typical cyclical pattern of state textbook adoptions in that there is an absence
of opportunity to submit products for sales in any of the categories in which
the Company publishes textbooks or supplements. 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 educational expenditures for textbooks and supplements. The reserve
for future returns may experience minor fluctuations to reflect current business
practices and expectations for 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
1999 was 30% compared to 33% in the third quarter of fiscal 1998 and 34% in the
third quarter of fiscal 1997. For the nine months ending January 31, 1999, the
cost of goods sold as a percentage of sales was 28% compared to 28% for the
first nine months of fiscal 1998 and 32% for the first nine months of fiscal
1997. The relatively stable ratio of the cost of goods sold as a percentage of
sales for the
14
<PAGE> 15
first nine months of fiscal 1999 was the result of adjusting print quantities to
match the projected absence of state adoptions coupled with careful decisions
regarding the quantities of products manufactured for initial press runs for new
titles as well as the quantities selected for reprints of backlist titles,
factoring in decisions which matched product characteristics with the available
manufacturing technology provided by suppliers. The change in the ratio of the
cost of goods sold as a percentage of sales for the first nine months of fiscal
1998 reflected 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 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. 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." While
recent paper prices have been relatively stable, factors affecting the ratio of
the cost of goods sold as a percentage of sales are the result of decisions
regarding selected selling price increases, adjustments to the print and reprint
quantities, and the application of computer technology by outside suppliers
permitting shorter press runs, reduction in manufacturing turn-around, the
elimination of traditional film processes coupled with 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 created and sold 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 1999 consisting of royalties,
selling, general, and administrative expenses decreased $26,000 or approximately
1% less than the third quarter of fiscal 1998. The 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. For the nine months ending January 31, 1999, the
operating expenses consisting of royalties as well as selling, general, and
administrative expenses increased $62,000 or approximately 1% over the same
period in the previous year. The operating expenses for the first nine months of
fiscal 1998 increased $622,000 or approximately 10% as compared to the first
nine months of fiscal 1997. As a percentage of sales, the selling, general, and
administrative expenses for the third quarter of fiscal 1999 was 50% compared to
41% for the third quarter of fiscal 1998 and 47% for the third quarter of fiscal
1997. For the nine month period ending January 31, 1999, the selling, general,
and administrative expenses as percentage of sales was 34% compared to 31% for
the same period in fiscal 1998 and 32% for the same period in fiscal 1997. A
major component of the operating expenses is the distribution of sample
textbooks and supplements as a marketing tool that is unique to the textbook
industry. In the first nine months of fiscal 1999, the sampling expenses
relating to the promotion of new and revised products decreased to $354,000 from
$373,000 from the same period in the previous fiscal. In fiscal 1999, it must be
recognized that sampling expenses in the first nine months for future adoption
consideration was diminished due to the absence of state adoption calls in the
curriculum areas served by the Company's products compared to previous years.
The 16% decrease in net sales during the third quarter of fiscal 1999, coupled
with a 30% cost of goods sold as a percentage of sales and a 1% lower operating
expense, decreased the Company's income from operations by $292,000 down to
$344,000. For the third quarter of fiscal 1998, the
15
<PAGE> 16
24% increase in net sales coupled with a 33% cost of goods sold as a percentage
of sales and 11% higher operating expenses, increased the 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 nine months ending January 31,
1999, the 5% decrease in net sales and the 1% increase in operating expenses
coupled with a 28% cost of goods sold as a percentage of sales decreased the
Company's income from operations by $650,000 or approximately 13%, to
$4,374,000. 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 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. Other income for the third quarter of fiscal 1999 was $320,000
compared to $40,000 in the third quarter of fiscal 1998 and $41,000 in the third
quarter of fiscal 1997. Other income for the third quarter of fiscal 1999
benefited from the sale of the former business and distribution facility in
South Holland, Illinois. For the nine-month period ending January 31, 1999,
other income was $365,000 compared to an expense of $33,000 in the first nine
months of fiscal 1998 and income of $97,000 in the first nine months of fiscal
1997. The change in other income in the first nine months of fiscal 1999 is
primarily attributed to the sale of the former facility. 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 the Company's
stock. Another factor influencing other income or expense may be attributed to
reduced interest income due to investment in the new facility, and new hardware
and software. As shown in the consolidated statements of earnings, net earnings
were similar for the third quarters of fiscal 1999 and fiscal 1998, while net
earnings for the nine-month period decreased $154,000 for the current fiscal
year. The Company's fiscal year ending April 30th divides the purchasing
patterns of its educational customers such that the major marketing and
inventory buildup efforts and investment occur at the end of the fiscal year,
while the resulting sales primarily follow in the first two quarters of the
following fiscal year.
LIQUIDITY
Cash and cash equivalents totaled $5,728,000 at January 31, 1999, an increase of
$3,609,000 from the fiscal year ended April 30, 1998. Accounts receivable, net
of allowances for doubtful receivables and sales returns totaled $2,078,000 at
January 31, 1999, and increase of $417,000 from the fiscal year ended April 30,
1998. For the quarter ending January 31, 1999, the company had no long-term
debt, compared to the quarter ending January 31, 1998 when the Company had
long-term debt of $1,302,000 resulting from the repurchase of the Company's
stock. As shown in the statements of cash flows, the cash provided by the
operating activities of the Company for the first nine months of fiscal 1999
amounted to $4,058,000 as compared to $4,835,000 for the first nine months of
fiscal 1998, a change which is attributable to a decrease in net earnings after
adjustments to accounts primarily covering amortization of prepublication costs,
profit on the
16
<PAGE> 17
sale of property, 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 1998 amounted to $4,835,000, as compared to
$3,816,000 for the first nine months of fiscal 1997, a change which is
attributed 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
significant changes in the assets and liabilities for the first nine months of
fiscal 1999 include increases in cash and cash equivalents, accounts receivable,
accrued expenses, and royalties payable, a decrease in property and equipment
due to the sale of the South Holland facility, and a decreases in inventories.
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. 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 1999
was $604,000 or a decrease of $2,000 from the first nine months of fiscal 1998
when $606,000 was used for the purchase of prepublication services. 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. The rate of
investment in new and revised products as a percentage of sales for the first
nine months of fiscal 1999 was approximately 4% compared with the previous
year's first nine months of rate of investment 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 attention directed at year 2000
copyrights. 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. In the first nine months of fiscal 1999, $93,000 was invested in
property and equipment compared to $394,000 invested in the first nine months of
fiscal 1998, a decrease of $301,000, which may be attributed primarily to the
acquisition of new hardware and software to strengthen the business and
marketing functions of the Company. In the third quarter ending January 31,
1999, investment activity of the Company reflects the proceeds of $845,000 from
the sale of its previous facility. In the third quarter ending January 31, 1998,
investment activity resulted in the sale of securities with a small gain.
The primary financing use of cash in the nine months ending January 31, 1999 was
the payment of dividends at the rate of $1.00 per share which was the same rate
as paid in the first nine months of fiscal 1998. In the first nine months of
fiscal 1999 no interest or principal payments were made. In the first nine
months of fiscal 1998, $1,954,000 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.
17
<PAGE> 18
The first and second quarters of the Company have historically displayed
increased shipments and increased growth in accounts receivable while inventory
declined. The third quarter in fiscal 1999 did not include significant state
adoption sales when compared to previous third quarters. 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 educational market with two separate
semesters tends to affect the periodic liquidity of the Company.
CAPITAL RESOURCES
It is anticipated that the Company's future capital needs will be met from
internally generated funds. The investment in computer software and hardware on
a department-by-department basis, such as the editorial, creative, or sales
areas, will be met from operating cash flows. In the first nine months of fiscal
1999, the Company converted to new software and hardware for the business,
marketing, and distribution operations to improve customer service, inventory
and warehouse management, and information technology. The business, marketing,
and distribution software and hardware were acquired in fiscal 1998 using
internally generated funds. Also in fiscal 1998, the creative area acquired a
new network server and workstations enabling the conversion to more productive
software for the design and assembly of products. For fiscal 1999, the projected
investment in prepublication products and services is expected to follow the
typical pattern established in previous years with plans to revise popular
backlist titles and to publish new products for the Company's line of textbooks
and supplements. Attention will be paid to copyright year 2000 issues so
backlist titles in the product line are included in a revision schedule. The
Company's previous land and building in South Holland, Illinois were sold in the
third quarter ending January 31, 1999 and is recorded as a decrease in net
property and equipment, and increase in cash and cash equivalents, and as an
increase in other income as a gain in sale of property and equipment. In fiscal
1998, prepayment of the installment note issued in the purchase of the Company's
stock was completed using internally generated funds. The prepayment in fiscal
1998 of the principal on the outstanding debt saved $637,000 in interest expense
for the Company.
THE EFFECTS OF INFLATION
Inflation affects the Company due to increases in the costs of materials and
services which may not be passed through to customers. Fiscal 1998 showed a
slight tightening of available press time in the short term, thus necessitating
clearer projections for initial printings or reprints. The first nine months of
fiscal 1999 displayed less tightening of press time, however the lessons of
previous years leads the Company to continue careful planning with suppliers and
manufacturers to assure predictable delivery of products into inventory for
ultimate sales to customers. Paper prices in fiscal 1998 and in the first nine
months of fiscal 1999 did not experience dramatic changes, thus allowing
moderate reaction in setting price adjustments for the Company's products.
Advance planning and shifting grades of paper for marketing reasons may soften
the effect of some of the paper price fluctuations. The ability of the Company
to reflect cost increases from suppliers and from internal pressures in the
selling price of Goodheart-Willcox
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<PAGE> 19
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,
whether the result of increases in paper, other materials, or services. The
Company manages its cost of conducting business in these fast-paced times by
using various suppliers, reviewing the variety of paper grades appropriate for
various titles and products, scheduling press runs in batches, using
direct-to-plate technology, balancing the quantities printed with consideration
for the unit cost versus the inventory turnover, nurturing close relationships
with key suppliers, all the while staying alert to outside opportunities
available to meet key deadlines.
IMPACT OF YEAR 2000
The business, customer service, marketing, warehousing and distribution
operations acquired new vendor-supported software in fiscal 1998 and are now
Year 2000 compliant. The Company believes that with the conversion in fiscal
1998 and 1999 to new software and hardware along with any future upgrading of
the vendor-supported software, the year 2000 issue should not pose significant
internal operational difficulties. Future vendor-supported software upgrades
will not be material to the Company's results of operation or financial
condition. In addition to address internal considerations, the Company believes
that there can be no guarantee that the systems of external suppliers,
manufacturers, or customers will be converted in a timely manner, thus
potentially having an adverse effect.
19
<PAGE> 20
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
20
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