-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HGx7Mz5HXUAsGw3e2RWo0hiHPawOYot3VLOsHK7z+QUIpp70IxYGetiDXP5SBRN0 WPATdgOi0fENL9MjcB3eNQ== 0000040542-97-000007.txt : 19970630 0000040542-97-000007.hdr.sgml : 19970630 ACCESSION NUMBER: 0000040542-97-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEVON GROUP INC CENTRAL INDEX KEY: 0000040542 STANDARD INDUSTRIAL CLASSIFICATION: SERVICE INDUSTRIES FOR THE PRINTING TRADE [2790] IRS NUMBER: 030212800 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14850 FILM NUMBER: 97631485 BUSINESS ADDRESS: STREET 1: 281 TRESSER BLVD STREET 2: STE 501 CITY: STAMFORD STATE: CT ZIP: 06901-3227 BUSINESS PHONE: 2039641444 MAIL ADDRESS: STREET 1: 281 TRESSER BLVD STREET 2: STE 501 CITY: STAMFORD STATE: CT ZIP: 06901-3227 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL EDUCATIONAL SERVICES CORP DATE OF NAME CHANGE: 19760810 10-K 1 United States SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 2-14850 DEVON GROUP, INC. (Exact name of Registrant as specified in its charter) Delaware 03-0212800 (State of Incorporation) (I.R.S. Employer Identification Number) 281 Tresser Boulevard, Suite 501, Stamford, Connecticut 06901-3227 (address of principal executive offices) Registrant's telephone number, including area code (203) 964-1444 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Class on which registered Common Stock, $.01 par value, NASDAQ 7,283,817 outstanding as of June 6, 1997 Securities registered pursuant to Section 12(g) of the Act: None 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. As of June 6, 1997, the market value of the registrant's common stock held by nonaffiliates of the registrant was approximately $167,280,000. Portions of the following documents are incorporated by reference in the form 10-K as indicated: Part of 10-K Document into which incorporated 1997 Annual Report to Shareholders of Devon Group, Inc. Parts I, II, and IV Proxy Statement relative to the 1997 Annual Meeting of Parts I, II, and III Shareholders of Devon Group, Inc. PART I Item 1 Business General Devon Group, Inc. is a diversified graphic arts company that provides the following services and products: advertising and editorial production, conventional and digital photography, interactive multimedia, computerized typesetting, composition, color separation, printing, binding, and related services to corporate, retail, advertising, and publishing customers, and publishing/distribution of posters, art reproductions, original art, greeting cards, notecards, calendars, and related products. The Company was incorporated in Delaware in 1962 and between 1968 and 1982 traded on the American Stock Exchange. The Company was acquired in 1982 by a group of investors, including management. In August 1986 the Company affected an initial public offering of its common stock, issuing 2,500,000 shares at $18 per share and now trades over the counter on the National Association of Securities Dealers Automated Quotation System (NASDAQ). The Company's Black Dot Group subsidiary, a total visual communication company, both to print and interactive media, is one of the nation's leading suppliers of pre-press and other publishing services. These services include strategic planning, creative design, photography (conventional and digital), copywriting, editing, color separation, page composition, image management, video production, interactive multimedia, and facility management. Black Dot Group provides high-quality services through a skilled team of professionals using off-the-shelf and internally developed software applications along with traditional pre-press services. Sales attributable to Black Dot Group were $132,674,000, $126,190,000, and $108,630,000 in fiscal 1997, 1996, and 1995, respectively. The Company's Graftek Press, Inc. subsidiary provides high-quality color printing, binding, and distribution services to publishers of trade and special-interest magazines as well as commercial printing services to a variety of customers, primarily advertisers. Sales attributable to Graftek were $54,866,000, $54,531,000, and $53,037,000 in fiscal 1997, 1996, and 1995, respectively. Devon Publishing Group is one of the nation's largest publishers of posters, prints, original artwork, greeting cards, notecards, calendars, and related products. Sales attributable to Devon Publishing Group were $76,848,000, $68,252,000, and $64,015,000 in fiscal 1997, 1996, and 1995, respectively. Sales to Sears and Kmart, the Company's two largest customers, together accounted for 28.4%, 33.4%, and 29.3% of total sales in fiscal 1997, 1996, and 1995, respectively. Pre-Press Services Pre-press services include strategic planning, creative and editorial design services, electronic preparation and management of type and color images, and final composition on film or electronic media. Such media is then used by the Company's customers to make offset printing plates and gravure cylinders or to store digital information for future reference or create interactive multimedia whether on CD-ROM or the World Wide Web. These services are performed for commercial customers (advertising and financial materials, newspaper inserts, retail, industrial, and commercial catalogs, directories, buyers' guides, annual reports, and brochures) and publishers (textbooks, tradebooks, magazines, directories, and encyclopedias). Various types of computers are used to compose type and graphics which are output via lasers onto film or electronic media. The Company believes that Black Dot Group, through the enhancement of off-the-shelf software or its own internally developed applications software, has a distinct competitive advantage in its ability to compose type and create fonts and graphics to meet customer demands. Black Dot Group also Item 1 Business, Continued has the expertise to adapt the configuration of its computer hardware and software to meet the requirements of its customers. The Company believes that Black Dot Group is a leader in the industry in the ability to transform and manipulate data generated by customers into a variety of formats flexible enough to be utilized in any media, be it print, CD-ROM, or the World Wide Web. In color separation, original artwork, photographs, or film transparencies are electronically scanned and separated into the four primary printing colors (yellow, magenta, cyan, and black) and the image is output on either film or electronic media. This output is used to prepare the printing plates for offset printing, the cylinders employed in the gravure printing process, or to store digital information for future reference or create interactive multimedia whether on CD-ROM or the World Wide Web. Black Dot Group uses various electronic laser color scanners, including Hell, to digitize the primary colors into the correct format for page-assembly on PC- or Mac- based systems. These systems utilize a high-resolution color monitor to enable an operator to perform all page-assembly functions and necessary color corrections and alterations. As subsidiaries of Black Dot Group, Ambrosi & Associates, Inc., ABD Group, Inc., Meridian Retail, Inc., and Nobart, Inc. offer fully integrated advertising production services including strategic planning, creative design, copywriting, photography (conventional and digital), color separation, image management, and final page composition to key accounts in Chicago, Troy, and other major U.S. cities. Using a variety of computer-based systems, operating efficiencies are achieved by completing the linkage from creation to printed products. These services are performed for retail customers and include newspaper inserts, pre-print circulars, mailers, catalogs, collateral material, and in-store signage. Proof Positive/Farrowlyne Associates, Inc. specializes in the design and editorial development of pupils' textbooks, teachers' manuals, workbooks, videos, and other ancillary educational materials primarily for the school market. Ahrens Interactive, Inc. (now Taproot Interactive, Inc.) is a developer of interactive multimedia products and services along with Internet Web-site development for the corporate, retail, advertising, and publishing markets. Black Dot Group markets its services primarily to commercial customers and publishers through its direct salesforce which at March 31, 1997 consisted of 152 persons, 37 in field sales and 115 in support functions, including customer service. Services to retail advertising customers of Black Dot Group, including Sears and Kmart, represent a significant component of Black Dot Group's total revenues. The loss of any of Black Dot Group's significant retail advertising customers or a significant change in their advertising strategies could have a material adverse effect on the Company. The Company believes that Black Dot Group's relations with all of its retail advertising customers are excellent as evidenced by the willingness of those customers to store significant amounts of their retail advertising art with Black Dot Group and by their choice of Black Dot Group as the provider of substantially all of their newspaper advertising (ROPs and inserts) production needs. In addition, five-year contract extensions were negotiated last year with the Company's two major retail clients, Sears and Kmart. Printing Services The Company's Graftek subsidiary provides magazine manufacturing services primarily in connection with the printing, binding, and fulfillment of trade and special-interest magazines and related work. Graftek also engages in commercial Item 1 Business, Continued printing. Trade and special-interest magazine publishers generally contract for their printing for a three-to-five-year period. At March 31, 1997 Graftek's magazine list included 113 titles, 82% of which were under contract with 38 publishers. Graftek specializes in magazine printing runs ranging from 5,000 to 250,000 copies. The Company's current capacity is approximately 130,000,000 magazine copies per year. Graftek's equipment includes: Press Equipment Quantity Description 3 Harris M-300 nine-unit press, press speed up to 1,200 feet per minute 1 Harris M-1000A nine-unit press, press speed up to 1,200 feet per minute 1 Harris M-300 five-unit web offset press, press speed up to 1,200 feet per minute 2 Harris M-200 six-unit web offset press, press speed up to 1,000 feet per minute 1 Planeta six-color sheet-fed press with coating tower 1 Miller six-color perfecting sheet-fed press 2 Heidelberg two-color sheet-fed press 4 Single color sheet-fed, offset press Bindery and Mailing Equipment Quantity Description 1 Perfect binding line 6 Selective saddle binding lines with in-line mailing and inside/outside ink-jet system 1 Selective perfect binding line with in-line mailing and inside/outside ink-jet system 1 Polybag mailing line 1 In-line/offline polybag mailing line 4 Free-standing mailing lines Graftek also maintains equipment which is used for pre-press and platemaking work associated with printing. The Company believes that Graftek's equipment is state of the art. Graftek's services are primarily sold to publishers of trade and special-interest magazines by a direct salesforce which, at March 31, 1997, consisted of 39 persons, 9 in field sales and 30 in support functions, including customer service. Publishing Devon Publishing Group is one of the nation's largest publishers of posters, prints, original artwork, greeting cards, notecards, calendars, and related products. Formed during fiscal 1989, Devon Publishing Group is composed of four divisions: Portal Publications, Ltd., acquired in April 1970; The Winn Devon Art Group, Ltd., which combines The Winn Art Group, acquired in April 1988, and Devon Editions which was formed in April 1989; Portal Publications, Ltd. (U.K.), which commenced operations in September 1993; and Portal Aird Publications Pty. Ltd., a 50%-owned distributor located in South Australia acquired in April 1994. Item 1 Business, Continued Portal's product lines include posters, art reproductions, notecards, greeting cards, calendars, and related products. The product selection is extensive, with appeal to a broad spectrum of customers. The company believes that its marketing strategy of offering a broad line of products at moderate prices enables it to sell to a large and stable customer base. Since Portal's product lines are intended to be carried by its customers for many years, it believes that its in-store service program is critical to its selling success. The Winn Devon Art Group carries a higher quality product line which consists of fine art reproductions, limited edition prints, imprints, and monoprints. Winn Devon's upscale poster line is directed at the market segment between that of Portal and Winn Devon's higher quality products while its other offerings are sold primarily to galleries, designers, and institutional customers requiring higher quality art. Portal Publications, Ltd. (U.K.) is primarily a fulfillment and distribution center for Portal's product lines in the U.K., while Portal Aird Publications Pty. Ltd. is a key distributor in Australia. Portal purchases the rights to publish photographs and artwork which are either in the artists' stock or are commissioned specifically for Portal's products. Images are also obtained from the public domain primarily through photo libraries. Commissioned works are assigned to a Portal art director for creation of a product that can be marketed through Portal's distribution network. Winn Devon's images are provided primarily by artists, many of whom are under contract, or licensed from museums. Devon Publishing Group also distributes posters and prints of other publishers. Devon Publishing Group's current titles approximate 3,100 art prints and posters, 560 limited edition prints, uniques, and monoprints, 800 notecards, 160 calendars, and 1,400 greeting cards. Portal's products are printed by a number of companies which are selected based upon their quality, ability to deliver, and price. Both domestic and foreign printers are utilized. After Portal's products are printed, they are delivered to its warehouse facility in Hayward, California for distribution. Posters and prints are shipped shrink-wrapped, rolled, or flat depending upon customer orders, which are consolidated at the warehouse facility and shipped directly to them. Winn Devon utilizes several domestic and foreign printers to meet its printing requirements. Fine art reproductions, imprints, monoprints, and a portion of the limited edition art are provided by outside artists. Winn Devon's products are shipped from the Seattle warehouse. Portal's products are sold to customers such as gift shops, bookstores, import stores, department stores, multistore chains, mass- market merchants, card shops, framers, and other specialty-type stores by both independent, multiline representatives and Portal-employed sales personnel. Winn Devon's products are sold principally to fine art galleries, interior designers, and directly to certain institutional customers (e.g. hotel chains) by both company and independent multiline representatives. In fiscal 1997 approximately 66% of Devon Publishing Group's sales were made by company-employed sales personnel with independent, multiline representatives and house accounts providing 22% and 12%, respectively. At March 31, 1997 Devon Publishing Group had a salesforce of 118 employee representatives and 39 independent, multiline representatives as well as 38 company employees in sales support functions, including customer service. Devon Publishing Group had export sales of $8,592,000, $6,904,000, and $5,760,000 in fiscal 1997, 1996, and 1995, respectively. Such sales accounted for approximately $926,000, $601,000, and $457,000 of pretax operating profits in fiscal 1997, 1996, and 1995, respectively. These sales were made to various countries including Argentina, Australia, Belgium, Brazil, Canada, Denmark, France, Germany, Holland, Hong Kong, Italy, Japan, New Zealand, Norway, Phillippines, Saudi Arabia, Item 1 Business, Continued Singapore, Spain, Taiwan, and the United Kingdom. In addition, Devon Publishing Group has licensing agreements with publishers and distributors in Australia, France, Germany, Holland, Japan, Switzerland, and the United Kingdom. Related royalties in fiscal 1997 were approximately $395,000, approximately 27% of which were from the United Kingdom. Backlog At March 31, 1997 and 1996, Devon Group, Inc. in its entirety had a backlog of unfinished work aggregating approximately $18,300,000 and $17,300,000, respectively, almost all of which was attributable to Black Dot Group's operations. Generally, the Company's backlog work is completed within a six-month period. Sources and Availability of Materials The Company purchases a number of different materials such as paper, ink, film, and plates. In the case of Devon Publishing Group, it contracts out most of its printing requirements. The Company believes many alternative sources of materials and printing services are available. The Company has not experienced any difficulty in obtaining adequate supplies of materials or printing services and does not anticipate any difficulty in obtaining materials or printing services in the future. Competition The graphic arts industry is one of the most geographically dispersed industries in the United States. Competition in the graphic arts industry is intense. The principal methods of competition are performance, quality, reliability, service, and price, and the Company believes it competes effectively on all these bases. The Company competes directly with a number of graphic arts companies, some of which have greater financial resources than the Company. Employees At March 31, 1997 the Company employed approximately 2,230 persons, 166 of whom were covered by a collective bargaining contract relating to Portal's Hayward warehouse. The bargaining unit is not affiliated with any union. The Company has not experienced any work stoppage in over 18 years and believes its employee relations are satisfactory. Acquisitions In fiscal 1996 the Company acquired Proof Positive/Farrowlyne Associates, Inc., and Nobart, Inc. In fiscal 1995 the Company acquired Taproot Interactive, Inc. and a 50% interest in Portal Aird Publications Pty. Ltd. Information regarding these acquisitions appears in Note 4 of "Notes to Consolidated Financial Statements" in the accompanying Annual Report to Shareholders, which information is incorporated by reference in this report. Item 2 Properties The following tables set forth certain information relating to the Company's principal facilities: Owned Facilities Location Operating Unit Principal Use Crystal Lake, Illinois Black Dot Group Computer typesetting, composition, color separation, office, and storage facilities Chicago, Illinois Black Dot Group Photography facilities Freeport, Illinois Black Dot Group Color separation and office facilities Omaha, Nebraska Black Dot Group Color separation and office facilities Chicago, Illinois Black Dot Group Computer typesetting, composition, and office facilities Orlando, Florida Black Dot Group Computer typesetting, composition, and office facilities Lincoln, Nebraska Black Dot Group Color separation and office facilities Woodstock, Illinois Graftek Press Warehousing, fulfillment, and office facilities Crystal Lake, Illinois Graftek Press Magazine printing and office facilities Elkhorn, Wisconsin Graftek Press Magazine printing, fulfillment, and office facilities Carpentersville, Illinois Graftek Press Printing, fulfillment, and office facilities Novato, California Devon Publishing Group Administrative and art publication facilities Leased Facilities Location Operating Unit Principal Use Stamford, Connecticut Corporate Administrative offices and corporate headquarters New York, New York Corporate Administrative offices Chicago, Illinois Black Dot Group Creative design, copywriting, and photography facilities Chicago, Illinois Black Dot Group Interactive multimedia development and office facilities Troy, Michigan Black Dot Group Creative design, copywriting, and photography facilities Miami, Florida Black Dot Group Creative design, copywriting, and photography facilities Los Angeles, California Black Dot Group Creative design, copywriting, and photography facilities Evanston, Illinois Black Dot Group Editorial and creative facilities Hayward, California Devon Publishing Group Warehousing, office, and distribution facilities Seattle, Washington Devon Publishing Group Warehousing, office, and distribution facilities Corte Madera, CaliforniaDevon Publishing Group Administrative and art publication facilities Heath, Ohio Devon Publishing Group Sales office Miami, Florida Devon Publishing Group Sales office Cheltenham, England Devon Publishing Group Warehousing, office, and distribution facilities Tucker, Georgia Devon Publishing Group Framing facility The Company believes that its facilities are adequate for its present needs and that its properties are in good condition, well- maintained, and suitable for their intended uses. Item 3 Legal Proceedings The Company, in the ordinary course of business, is contingently liable on pending lawsuits and claims. Based upon advice from legal counsel, management believes that these pending items will not have a material effect on the Company's consolidated financial position or results of operations. Item 4 Submission of Matters to a Vote of Security Holders None PART II Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters The approximate number of equity security holders of record at March 31, 1997 and 1996 was as follows: 1997 1996 Common Stock, $.01 par value 128 127 Based on previous communications with banks and securities dealers who hold the Company's stock in "street" name for individuals, the Company estimates that the number of holders of its common stock exceeds 500. Additional information regarding markets and market prices is included in the accompanying Annual Report to Shareholders, which information is incorporated by reference in this Report. Item 6 Selected Financial Data The "Selected Financial Data" appearing on page 30 of the accompanying Annual Report to Shareholders is incorporated by reference in this Report. Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition "Management's Discussion and Analysis of Results of Operations and Financial Condition" appearing on pages 31 through 33 of the accompanying Annual Report to Shareholders is incorporated by reference in this Report. Item 8 Financial Statements and Supplementary Data The consolidated financial statements and the related notes thereto, together with the report thereon of KPMG Peat Marwick LLP dated May 8, 1997, appearing on pages 34 through 44 of the accompanying Annual Report to Shareholders are incorporated by reference in this Report. Item 9 Changes in and disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10 Directors and Executive Officers of the Registrant The biographical information relating to the Company's Directors is included under "Election of Directors" in the Proxy Statement relating to the Company's Annual Meeting of Shareholders, which information is incorporated by reference in this Report. Executive Officers of the Registrant Served As Name Title Age Officer Since Marne Obernauer, Jr. Chairman and Chief Executive Officer 53 1975 John W. Dinzole President and Chief Operating Officer 69 1969 Marne Obernauer Chairman of the Executive Committee of the Board of Directors 78 1971 Bruce K. Koch Executive Vice President, Operations and Finance and Chief Financial Officer 50 1980 Mr. Marne Obernauer, Jr., Chairman and Chief Executive Officer of the Company, is the son of Marne Obernauer, Chairman of the Executive Committee of the Board of Directors. Each of the executive officers of the Company is elected by the Board of Directors for a one-year term. All executive officers have been actively engaged in the business of the Company for more than five years. Item 11 Executive Compensation Information relative to Executive Compensation is included under "Remuneration of Directors and Officers" in the Proxy Statement relating to the Company's Annual Meeting of Shareholders, which information is incorporated by reference in this Report. Item 12 Security Ownership of Certain Beneficial Owners and Management Information relative to Security Ownership of Certain Beneficial Owners and Management is included under "Stockholders Entitled to Vote and Shares Outstanding" in the Proxy Statement relating to the Company's Annual Meeting of Shareholders, which information is incorporated by reference in this Report. Item 13 Certain Relationships and Related Transactions Not applicable. PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K (A) 1. Financial Statements Consolidated financial statements of the Company and its subsidiaries and the related notes thereto, together with the report thereon of KPMG Peat Marwick LLP, dated May 8, 1997, appearing on pages 34 through 44 of the accompanying Annual Report to Shareholders are incorporated by reference in this Report. Form 10-K Page No. 2. Financial Statement Schedules Independent Auditors' Report F-1 Schedule II - Valuation and qualifying accounts F-2 All other schedules are omitted, as the required information is inapplicable or is set forth in the consolidated financial statements or notes thereto. 3. Exhibits Exhibit 21 - Subsidiaries of the Registrant F-3 Exhibit 23 - Consent of Independent Auditors F-4 All other exhibits are omitted, as the required information is inapplicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. DEVON GROUP, INC. Bys/Marne Obernauer, Jr. Marne Obernauer, Jr. Chairman and Chief Executive Officer, Director Date: June 27, 1997 Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. s/Marne Obernauer, Jr. Marne Obernauer, Jr. Chairman and Chief Executive Officer, Director Date: June 27, 1997 s/John W. Dinzole John W. Dinzole President and Chief Operating Officer, Director Date: June 27, 1997 s/Bruce K. Koch Bruce K. Koch Executive Vice President, Operations and Finance and Chief Financial Officer (Principal Financial Officer) Date: June 27, 1997 s/Robert H. Donovan Robert H. Donovan Senior Vice President, Finance and Treasurer (Principal Accounting Officer) Date: June 27, 1997 s/Robert S. Blank Robert S. Blank Director Date: June 27, 1997 s/William G. Gisel William G. Gisel Director Date: June 27, 1997 s/Thomas J. Harrington Thomas J. Harrington Director Date: June 27, 1997 s/Marne Obernauer Marne Obernauer Chairman of the Executive Committee, Director Date: June 27, 1997 s/Edward L. Palmer Edward L. Palmer Director Date: June 27, 1997 Selected Financial Data for Five Years Devon Group, Inc.
Years ended March 31, 1997 1996 1995 1994 1993 ($ in thousands except per share data) Operations Sales $264,388 $248,973 $225,682 $190,840 $171,998 Income from continuing operations $ 21,328 $ 24,031 $ 19,301 $ 13,210 $ 10,262 Income from discontinued operations - - 2,206 - - Net income $ 21,328 $ 24,031 $ 21,507 $ 13,210 $ 10,262 Per Share Data Income per common share: Continuing operations $ 2.90 $ 3.27 $ 2.64 $ 1.83 $ 1.43 Discontinued operations - - .30 - - Net income $ 2.90 $ 3.27 $ 2.94 $ 1.83 $ 1.43 Financial Position Working capital $ 79,625 $ 66,575 $ 43,190 $ 29,952 $ 8,128 Total assets 172,860 156,426 133,436 122,556 107,528 Long-term debt 2,008 2,113 2,402 13,923 2,344 Stockholders' equity 131,081 112,958 88,153 65,587 51,802
Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Sales: Fiscal 1997 sales increased by $15,415,000, or 6.2%, compared to fiscal 1996, and fiscal 1996 sales increased by $23,291,000, or 10.3%, versus fiscal 1995, with each of the Company's subsidiaries contributing to these increases. Pre-press Overall revenues for Black Dot Group increased $6,484,000, or 5.1%, in fiscal 1997 due primarily to increased creative, design, photographic, and composition services provided to new retail advertising and catalog customers and incremental revenues from Nobart and PP/FA, businesses acquired during fiscal 1996. Partially offsetting these gains were lower billings to our major retail customers resulting from price concessions made in connection with five-year contract extensions which were signed at the end of fiscal 1996. In fiscal 1996, revenues increased $17,560,000, or 16.2%, mostly due to increased levels of creative, design, photographic, and composition services provided to retail advertising customers. Increased sales resulting from acquisitions made in fiscal 1996 and 1995 were partially offset by a decline in textbook-related revenues. Publishing Devon Publishing Group's sales increased $8,596,000, or 12.6%, in fiscal 1997 versus the prior year, reflecting increases at both Portal Publications and The Winn Devon Art Group. At Portal, sales of cards were especially strong reflecting the success of the Anne Geddes imagery, incremental revenues from the fiscal 1997 introduction of the Boynton line, and the addition of die- cut postcards. The introduction of photo albums during the third quarter also added incremental revenues. While sales of matted product approximated prior year, sales of Portal posters/prints were lower. At The Winn Devon Art Group, an increase in revenues from the upscale Devon Editions poster line was partially offset by reduced framing revenues. In fiscal 1996 revenues increased $4,237,000, or 6.6%, as increased sales of Portal Publications' cards and matted product were partially offset by a decline at The Winn Devon Art Group and the absence of Regency House which was sold during the third quarter of fiscal 1995. Printing Graftek's sales increased $335,000, or 0.6%, in fiscal 1997 primarily due to higher commercial printing revenues and work for catalog publishers as page counts were not a factor. During fiscal 1996, despite continued pricing pressures and a nominal growth in page count, revenues increased $1,494,000, or 2.8%, primarily due to increased paper sales. Gross Profit: Gross profit decreased by $827,000 for the fiscal year ended March 31, 1997 to $99,149,000, or 37.5%, as a percentage of sales compared to 40.2% for the prior year. The decrease is primarily due to a reduction at the pre-press subsidiary partially offset by an improvement in the magazine printing business. The gross profit margin in the publishing subsidiary remained in line with the prior year, despite an increase in the level of, and reserve for, returns and allowances attributable to its increased focus on mass-market merchants. The decline at the pre-press subsidiary resulted primarily from increased costs associated with the transition of Nobart into the Black Dot Group, higher outside service costs related to new retail advertising customers, expenditures related to development of the interactive multimedia business, and the effects of price concessions. The improvement at the magazine printing business is primarily due to lower material costs. Gross profit increased $10,136,000 in fiscal 1996 to $99,976,000, 40.2% of sales compared to 39.8% in fiscal 1995. Gross profit margins at both the pre-press and printing subsidiaries were virtually unchanged, while margins at the Company's publishing subsidiary improved, reflecting a reduction in inventory obsolescence charges, material costs, and improved operating leverage as a result of increased volume. Selling, General, and Administrative Expenses: Selling, general, and administrative (SG&A) expenses as a percentage of sales were 25.1% for the fiscal year ended March 31, 1997 versus 24.9% the prior year. The increase is primarily the result of higher royalties in the publishing subsidiary, reflecting the popularity of licensed imagery and higher costs in the pre-press subsidiary attributable to the fiscal 1996 acquisitions of Nobart and PP/FA, partially offset by a reduction in incentive compensation expense. SG&A expenses decreased in fiscal 1996 to 24.9% of sales versus 25.4% for the prior year. This improvement reflects an increase in noncommissionable sales at each of the Company's subsidiaries, partially offset by increased incentive compensation expense and expenses related to a retail magazine on CD-ROM test-marketed beginning in the third quarter of fiscal 1996. Interest Income (Expense), net: Net interest income was $1,197,000 in fiscal 1997 and $752,000 in fiscal 1996 compared to net interest expense of $513,000 in fiscal 1995. During fiscal 1997, interest income increased to $1,375,000 from $964,000 reflecting higher levels of short-term investments, while interest expense decreased $34,000 to $178,000. During fiscal year 1996, interest income increased to $964,000 from $163,000 reflecting an increase in short-term investments. Interest expense was $212,000 in fiscal 1996 compared to $676,000 in fiscal 1995, reflecting the repayment of all borrowings under the Company's bank line of credit during the fourth quarter of fiscal 1995. Other Income, net: Other income, net for fiscal 1997 was comparable to fiscal 1996 as increased sublicense and other income at the publishing group offset lower scrap paper revenues at the printing subsidiary. Other income, net for fiscal 1995 included a charge of $415,000 related to the sale of the publishing subsidiary's contract art and framing operations. Income Taxes: The effective income tax rate was 39.4% in fiscal 1997, 40.0% in fiscal 1996, and 41.0% in fiscal 1995. Net Income: As a result of an increase in cost of sales and SG&A expenses, partially offset by higher interest income, income from continuing operations decreased $2,703,000, or 11.2%, to $21,328,000, or $2.90 per share, in fiscal 1997. During fiscal 1996, as a result of increased operating, interest, and other income and reduced interest expense versus the prior year, income from continuing operations increased $4,730,000, or 24.5%, to $24,031,000, or $3.27 per share. In fiscal 1998, the Company will adopt SFAS No. 128 "Earnings Per Share." Had SFAS No. 128 been in effect for fiscal 1997, "basic" and "diluted" earnings per share would have been $2.90 and $2.85, respectively. Liquidity and Capital Resources The Company generated cash from operations of $20,293,000, $25,549,000, and $34,438,000 in fiscal 1997, 1996, and 1995, respectively. The decrease in fiscal 1997 is primarily due to lower net income and increased working capital requirements. Such increased working capital requirements resulted primarily from a higher inventory backlog in the pre-press subsidiary and higher levels of both inventory and accounts receivable in the publishing subsidiary as it expands business with mass-market merchants. In fiscal 1997, cash provided by continuing operations was primarily used to fund capital expenditures and purchase 174,500 shares of treasury stock, with the balance invested in short-term, low-risk investments. In fiscal 1996, these funds were used primarily to fund capital expenditures, acquire Proof Positive/Farrowlyne Associates, Inc. and Nobart, Inc., and purchase 50,000 shares of treasury stock, with the balance invested in short-term, low-risk investments. Capital expenditures of approximately $27,000,000 are planned for fiscal 1998 generally for new equipment to expand/enhance operations and maintain the Company's technological leadership. Approximately $15,000,000 of this amount is for a new press which is expected to improve the operating efficiency and competitive position of the printing subsidiary and $4,000,000 will be used to acquire a headquarters building for Portal Publications and Devon Publishing Group. In March 1995, the Company's Board of Directors authorized the purchase of up to 700,000 shares of its outstanding common stock in the open market. Under this authorization, 174,500 and 50,000 shares were purchased in fiscal 1997 and 1996, respectively. Management anticipates that existing cash, cash equivalents, and cash generated by operations will provide sufficient funding for its purposes. Operating cash flows can be supplemented, if required, through utilization of the Company's $35,000,000 bank credit facility. Excess cash will be invested in short-term, low-risk investments. Consolidated Statements of Income Devon Group, Inc.
Years ended March 31, 1997 1996 1995 ($ in thousands except per share data) Sales $264,388 $248,973 $225,682 Operating costs and expenses: Cost of sales 165,239 148,997 135,842 Selling, general, and administrative 66,465 62,011 57,228 Income from operations 32,684 37,965 32,612 Interest income (expense), net 1,197 752 (513) Other income, net 1,298 1,335 615 Income from continuing operations before income taxes 35,179 40,052 32,714 Provision for income taxes 13,851 16,021 13,413 Income from continuing operations 21,328 24,031 19,301 Income from discontinued operations - - 2,206 Net income $ 21,328 $ 24,031 $ 21,507 Income per common share: Continuing operations $ 2.90 $ 3.27 $ 2.64 Discontinued operations - - .30 Net income $ 2.90 $ 3.27 $ 2.94 See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets Devon Group, Inc.
March 31, 1997 1996 ($ in thousands) Assets Current assets: Cash and cash equivalents $ 29,443 $ 27,749 Receivables, less allowance for doubtful accounts of $2,206 in 1997 and $2,477 in 1996 44,837 39,629 Inventories, at lower of cost or market: Raw materials 1,877 2,726 Work-in-process 19,453 15,115 Finished goods 3,453 2,486 Total inventories 24,783 20,327 Deferred income tax benefits 3,743 3,430 Prepaid expenses and other current assets 7,305 6,079 Total current assets 110,111 97,214 Property, plant, and equipment, net 54,348 51,522 Deferred charges and other assets 1,882 1,111 Excess of cost over fair value of net assets acquired 6,519 6,579 $172,860 $156,426 Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ 92 $ 110 Accounts payable 9,054 9,439 Accrued expenses 9,992 9,963 Accrued compensation 9,815 9,493 Income taxes 1,533 1,634 Total current liabilities 30,486 30,639 Long-term debt, excluding current installments 1,916 2,003 Deferred and other compensation 5,005 6,413 Deferred income taxes 4,372 4,413 Stockholders' equity: Common stock, $0.01 par value. Authorized 30,000,000 shares; issued 8,383,317 shares in 1997 and 8,304,317 in 1996 84 83 Additional paid-in capital 35,658 34,538 Retained earnings 112,334 91,006 148,076 125,627 Less: 1,099,500 shares of common stock held in treasury, at cost, at March 31, 1997 and 925,000 at March 31, 1996 (16,995) (12,669) Total stockholders' equity 131,081 112,958 $172,860 $156,426 See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows Devon Group, Inc.
Years ended March 31, 1997 1996 1995 ($ in thousands) Operating activities: Income from continuing operations $ 21,328 $ 24,031 $ 19,301 Adjustments to reconcile income to net cash provided by operating activities: Depreciation and amortization 11,969 11,192 10,984 Provision for doubtful accounts 647 890 1,084 Loss on disposal of facility - - 415 Changes in assets and liabilities, net of the effects of purchases and disposition of subsidiaries: Receivables (5,855) (7,854) 4,027 Inventories (4,456) (1,186) (3,136) Deferred charges and other assets (1,997) (1,215) (179) Accounts payable (385) 519 (1,650) Accrued expenses 29 (1,443) 2,748 Accrued compensation 322 586 572 Income taxes 453 (622) 2,000 Deferred income taxes (354) (557) (1,872) Deferred and other compensation (1,408) 1,208 144 Net cash provided by operating activities 20,293 25,549 34,438 Investing activities: Capital expenditures (14,335) (8,879) (7,418) Payments for purchases of subsidiaries, net of cash acquired (400) (5,109) (516) Net cash used in investing activities (14,735) (13,988) (7,934) Financing activities: Purchase of treasury stock (4,326) (1,294) - Proceeds from long-term borrowings - - 12,129 Payments of long-term debt (105) (289) (23,850) Proceeds from the exercise of stock options 567 806 576 and other Net cash used in financing activities (3,864) (777) (11,145) Net increase in cash and cash equivalents 1,694 10,784 15,359 Cash and cash equivalents, beginning of year 27,749 16,965 1,606 Cash and cash equivalents, end of year $ 29,443 $ 27,749 $ 16,965 See accompanying notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity Devon Group, Inc.
Additional Common Paid-in Retained Treasury Years ended March 31, 1997, Stock Capital Earnings Stock Total 1996, 1995 ($ in thousands) Balances at March 31, 1994 $ 81 $ 31,413 $ 45,468 $ (11,375) $ 65,587 Exercise of stock options and other 1 1,058 - - 1,059 Net income - - 21,507 - 21,507 Balances at March 31, 1995 82 32,471 66,975 (11,375) 88,153 Purchase of treasury stock - - - (1,294) (1,294) Exercise of stock options and other 1 2,067 - - 2,068 Net income - - 24,031 - 24,031 Balances at March 31, 1996 83 34,538 91,006 (12,669) 112,958 Purchase of treasury stock - - - (4,326) (4,326) Exercise of stock options and other 1 1,120 - - 1,121 Net income - - 21,328 - 21,328 Balances at March 31, 1997 $ 84 $ 35,658 $ 112,334 $ (16,995) $ 131,081 See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements Years ended March 31, 1997, 1996, and 1995 1 Summary of Significant Accounting Policies (a) Basis of Presentation: The consolidated financial statements reflect the operations of the Company and its subsidiaries, all of which are wholly-owned except for Portal Aird Publications Pty. Ltd. (Portal Aird) which is 50% owned. All significant intercompany transactions are eliminated in consolidation. (b) Use of Estimates: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (c) Property, Plant, and Equipment: The Company provides for depreciation and amortization of property, plant, and equipment principally by use of the straight-line method over estimated useful lives or lease terms, as applicable. Significant improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation is computed based on the following useful lives: buildings (20 to 45 years), building improvements (5 to 15 years), leasehold improvements (1 to 9 years), and furniture, fixtures, and equipment (3 to 11 years). (d) Excess of Cost Over Fair Value of Net Assets Acquired: The excess of cost over fair value of net assets of companies acquired is amortized on a straight-line basis over periods of 15 or 25 years. The Company periodically evaluates the recoverability of goodwill by assessing whether the unamortized amount can be recovered over its remaining life through undiscounted cash flows. (e) Income Taxes: The provision for income taxes, as determined using the liability method, includes deferred taxes resulting from temporary differences in income for financial and tax purposes. Such temporary differences primarily result from differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The cumulative effect on deferred taxes of changes in corporate income tax rates is recognized as an adjustment to income tax expense. The Company and its U.S. subsidiaries file a consolidated Federal income tax return. (f) Inventories: Inventories are stated at the lower of cost or market, using the first-in, first-out (FIFO) method. (g) Cash and Cash Equivalents: For purposes of the consolidated statements of cash flows, the Company considers all cash funds and short-term investments with original maturities of three months or less to be cash equivalents. At March 31, 1997 and 1996, the Company had $18,498,000 and $23,735,000, respectively, invested in U.S. government securities under agreements to resell on April 1, 1997 and 1996, respectively. The market value of the underlying securities approximated their carrying value. Due to the short-term nature of the agreements, the Company did not take possession of the securities which were instead held by financial institutions. Additionally, at March 31, 1997, the Company had $9,961,000 in U.S. Treasury bills with a maturity date of April 3, 1997. (h) Stock-based Compensation: In fiscal 1997 the Company adopted the provisions of SFAS No. 123, "Accounting for Stock-based Compensation," regarding disclosure of pro forma information for stock compensation which is included in Note 11. As is allowed by Statement No. 123, the Company will continue to measure compensation expense using the methods described in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." 2 Business Devon Group, Inc. is a diversified graphic arts company that provides the following services and products: advertising and editorial production, conventional and digital photography, interactive multimedia, computerized typesetting, composition, color separation, printing, binding, and related services to corporate, retail, advertising, and publishing customers, and publishing/distribution of posters, art reproductions, original art, greeting cards, notecards, calendars, and related products. During the years ended March 31, 1997, 1996, and 1995, sales to the Company's two largest customers amounted to $75,100,000, $83,035,000, and $66,193,000, respectively. 3 Stockholders' Equity In fiscal 1997 and 1996, 79,000 and 100,500 stock options, respectively, were exercised at prices between $5.00 and $16.75 per share (see Note 11). In March 1995, the Company's Board of Directors authorized the purchase of up to 700,000 shares of its outstanding common stock in the open market from time to time. Under this authorization, 174,500 shares were acquired by the Company during fiscal 1997, and 50,000 shares were acquired during fiscal 1996. 4 Acquisitions and Dispositions In fiscal 1996, the Company acquired two businesses, Proof Positive/Farrowlyne Associates, Inc. (PP/FA), and Nobart, Inc. (Nobart). PP/FA was acquired effective July 31, 1995 for $4,000,000 in cash and earnings-related, contingent consideration, $400,000 of which has been earned and paid to date. Located in Evanston, Illinois, PP/FA is a provider of editorial and creative services to the publishing industry, primarily in the educational sector. The purchase price exceeded the fair value of net assets acquired by $3,770,000, including the additional contingent consideration. Nobart, acquired effective March 1, 1996, is a full-service design, art, photography, and production studio located in Chicago, Illinois. The purchase price of $1,217,000 was equal to the net book value of assets acquired. In fiscal 1995, the Company acquired Ahrens Interactive, Inc. (now Taproot Interactive, Inc.) and a 50% interest in Portal Aird. Taproot, which is located in Chicago, Illinois, is a developer of interactive multimedia products and services for the corporate, retail, advertising, and publishing markets. Located in Adelaide, South Australia, Portal Aird is a distributor of cards, stationery, and related products. This investment is accounted for using the equity method. During the third quarter of fiscal 1995 the Company sold the publishing subsidiary's contract art and framing operation located in Decatur, Georgia. The sale resulted in a charge of $415,000 which is included in "Other income, net" on the accompanying consolidated statements of income. All of the aforementioned acquisitions were accounted for as purchases. The cumulative excess of cost over the fair value of net assets acquired (goodwill) was recorded on the consolidated balance sheets. Goodwill amortization charged to operations for the years ended March 31, 1997, 1996, and 1995 was $460,000, $366,000, and $207,000, respectively. As of March 31, 1997 and 1996, the balance of accumulated amortization was $2,310,000 and $1,850,000, respectively. Effective December 18, 1990, the Company announced its intention to withdraw from the financial printing business and a reserve was established to provide for the related costs of the discontinuance. During the fourth quarter of fiscal 1995, the Company recorded net income of $2,206,000 related to the favorable resolution of certain liabilities that were recorded in fiscal 1991 for the discontinuance of the financial printing business. 5 Income Taxes The income tax provisions for the years ended March 31, 1997, 1996, and 1995 follow: ($ in thousands) Current Deferred Total 1997 Federal $11,710 $ (377) $11,333 State 2,495 23 2,518 Total $14,205 $ (354) $13,851 1996 Federal $13,651 $ (435) $13,216 State 2,927 (122) 2,805 Total $16,578 $ (557) $16,021 1995 Federal $12,816 $(1,435) $11,381 State 2,469 (437) 2,032 Total $15,285 $(1,872) $13,413 Income tax provisions vary from the amounts which would have been computed by applying the applicable U.S. statutory Federal income tax rate to income before taxes. The primary reasons for the differences between the expected and effective rates stated as a percent of pretax income are as follows: 1997 1996 1995 Computed "expected" tax expense 35.0% 35.0% 35.0% Increase (decrease)in taxes resulting from: State income taxes, net of Federal income tax benefit 4.7 4.6 4.0 Other (.3) .4 2.0 39.4% 40.0% 41.0% The actual amounts of income taxes paid during the years ended March 31, 1997, 1996, and 1995 were $14,331,000, $17,167,000, and $13,288,000, respectively. The tax effects of temporary differences that give rise to significant deferred tax assets and deferred tax liabilities at March 31, 1997 and 1996 are presented below: ($ in thousands) 1997 1996 Deferred tax assets: Deferred compensation $ 2,647 $ 2,992 Inventory 1,562 1,352 Accounts receivable 623 752 Other 750 894 Total deferred tax assets 5,582 5,990 Deferred tax liabilities: Accelerated depreciation (5,318) (5,882) Prepaid expenses (849) (1,038) Other (44) (53) Total deferred tax liabilities (6,211) (6,973) Net deferred tax liability $ (629) $ (983) The Company believes that no valuation allowance is necessary for deferred tax assets based on its estimate that it is more likely than not that future taxable income will be sufficient to offset the expenses to which the deferred tax assets relate. 6 Income Per Share Income per common share is computed on the basis of weighted average shares outstanding during the year adjusted for common stock equivalents on the assumption that dilutive stock options were exercised at the beginning of the year with applicable proceeds used to purchase treasury stock at the average market price. The weighted average number of common shares included in this calculation for the years ended March 31, 1997, 1996, and 1995 was 7,360,235, 7,339,951, and 7,303,231, respectively. Options outstanding were not included in the computations of net income per share as their effect was not material. In fiscal 1998, the Company will adopt SFAS No. 128 "Earnings Per Share." Had SFAS No. 128 been in effect for fiscal 1997, "basic" and "diluted" earnings per share would have been $2.90 and $2.85, respectively. 7 Property, Plant, and Equipment A summary of property, plant, and equipment at March 31, 1997 and 1996, at cost, follows: ($ in thousands) 1997 1996 Land $ 2,009 $ 1,939 Buildings and improvements 26,789 24,507 Leasehold improvements 2,744 2,707 Furniture, fixtures, and equipment 107,208 99,544 138,750 128,697 Less accumulated depreciation and amortization 84,402 77,175 Net property, plant, and equipment $ 54,348 $ 51,522 8 Long-term Debt The following is a summary of long-term debt at March 31, 1997 and 1996: ($ in thousands) 1997 1996 Revolving credit facility (a) $ - $ - 6.5% IDA bond (b) 900 900 Miscellaneous notes payable (c) 1,108 1,213 2,008 2,113 Less current installments 92 110 $ 1,916 $ 2,003 Annual maturities of long-term debt for the next five fiscal years are $92,000 per year. Interest paid for the years ended March 31, 1997, 1996, and 1995 was $163,000, $195,000, and $649,000, respectively. (a) The Company's $35,000,000 revolving credit facility extends through April 1, 2000, is unsecured, and provides interest rate options no less favorable than prime and generally based upon a competitively bid "auction" rate. Under the facility agreement, the Company pays fees which range from .100 to .250 on various portions of the revolving credit facility. At March 31, 1997, the Company had no outstanding balance under this agreement. (b) The 6.5% IDA bond is payable in full on August 1, 2004 and is secured by real estate. (c) The Company has various acquisition-related notes payable at interest rates ranging from 7.5% to 10.0%. 9 Lease Commitments At March 31, 1997, minimum rental payments due under operating leases in subsequent fiscal years were as follows: 1998, $3,467,000; 1999, $2,403,000; 2000, $1,531,000; 2001, $785,000; 2002, $445,000; and later years, $126,000. Total rental expense for the years ended March 31, 1997, 1996, and 1995 was $4,389,000, $3,631,000, and $3,027,000, respectively. Most of the Company's leases are for facilities and provide that the Company pay taxes, maintenance, insurance, and certain other operating expenses applicable to the leased properties. Management expects that, in the normal course of business, leases which expire will be renewed or replaced by other leases. 10 Profit Sharing, Pension, and Bonus Plans The Company has various profit sharing and pension plans covering substantially all employees who meet eligibility requirements. Amounts contributed to profit sharing plans are at the discretion of the appropriate subsidiary's Board of Directors. Benefits for pension plans accrue and are vested based on compensation levels and years of service. The amounts charged to operations for all plans combined for the years ended March 31, 1997, 1996, and 1995 were $2,755,000, $2,454,000, and $2,483,000, respectively. The Company has various bonus plans covering key corporate and subsidiary personnel. The amounts charged to operations under all bonus plans for the years ended March 31, 1997, 1996, and 1995 were $2,490,000, $4,866,000, and $4,206,000, respectively. 11 Stock Option Plans The Company has three stock option plans which provide for the grant of nonqualified stock options to employees and certain directors. As of March 31, 1997, 927,500 options were outstanding with exercise prices ranging from $5.00 to $34.25 per share with 241,000 exercisable at a weighted average exercise price of $17.34. As of March 31, 1997, there were no options available for future grants under the Company's existing stock option plans. Pursuant to the terms of the option agreements, options are exercisable in increments over five- or ten- year periods. A total of 927,500 shares are reserved for issuance under the option plans. The tables below summarize stock option activity and options outstanding for the years ended March 31, 1997, 1996, and 1995: Option Activity 1997 1996 1995 Options outstanding, beginning of year 851,500 532,000 621,000 Options granted 155,000 420,000 - Options exercised (79,000) (100,500) (89,000) Options outstanding, end of year 927,500 851,500 532,000 Weighted average fair value of options granted $ 7.74 $ 9.79 - Options Expiration Options Recap of Options Outstanding Outstanding Date Exercisable at March 31, 1997 $ 5.00 Exercise price 58,000 8/97 58,000 $10.63 Exercise price 8,000 4/00 - $12.25 Exercise price 33,000 5/98 12,000 $16.75 Exercise price 253,500 12/99 113,500 $26.00 Exercise price 155,000 7/02 15,500 $34.25 Exercise price 420,000 7/01 42,000 927,500 241,000 The estimated fair value of stock options at the grant date using the Black-Scholes option-pricing model is used to compute pro forma net income and earnings per share in accordance with SFAS No. 123. The weighted average assumptions used for grants in fiscal 1997 include risk-free interest rates ranging from 6.25% to 6.62% and a volatility factor of 27.64%, while fiscal 1996 is based on risk-free interest rates of 5.94% to 6.19% and a volatility factor of 26.68%. The calculations for both fiscal 1997 and 1996 are based on expected lives of five years and a dividend yield of 0%. If compensation cost for the Company's stock-based compensation plans had been recognized in the income statements based on the fair value method, net income and earnings per share would have been reduced to pro forma amounts of $20,631,000, or $2.80, and $23,357,000, or $3.18, for fiscal years 1997 and 1996, respectively. 12 Contingent Liabilities The Company, in the ordinary course of business, is contingently liable on pending lawsuits and claims. Based upon advice from legal counsel, management believes such pending items will not have a material effect on the Company's consolidated financial position or results of operations. 13 Quarterly Financial Information (unaudited) The quarterly results for the years ended March 31, 1997 and 1996 are summarized below: ($ in thousands except First Second Third Fourth Fiscal per share data) Quarter Quarter Quarter Quarter Year 1997 Sales $62,554 $68,389 $70,047 $63,398 $264,388 Gross profit 23,331 27,124 26,183 22,511 99,149 Net income 4,759 6,311 6,095 4,163 21,328 Income per common share (1) .64 .85 .83 .57 2.90 1996 Sales $59,781 $63,449 $66,112 $59,631 $248,973 Gross profit 23,909 28,135 25,630 22,302 99,976 Net income 5,761 7,402 6,348 4,520 24,031 Income per common share (1) .79 1.01 .86 .61 3.27 (1) Per share amounts for each quarter are computed independently; and, due to the computation formula, the sum of the four quarters may not equal the year. Market Price of Common Stock The Company's stock is traded on the National Association of Securities Dealers Automated Quotation System (NASDAQ) under the symbol "DEVN." The following table sets forth the high and low sales prices of the Company's common stock for the periods indicated: Years ended March 31, 1997 1996 Fiscal Quarter First Quarter 33 1/4 - 28 1/4 29 3/4 - 25 3/4 Second Quarter 32 3/4 - 20 1/4 44 - 29 Third Quarter 30 - 23 1/4 45 3/4 - 26 3/4 Fourth Quarter 30 - 26 31 3/4 - 27 The approximate number of record holders of common stock at March 31, 1997 was 128. Based on previous communications with banks and securities dealers who hold the Company's stock in "street" name for individuals, the Company estimates that the number of holders of its common stock exceeds 500. Management's Report The preparation, integrity, and objectivity of Devon Group, Inc.'s consolidated financial statements and the maintenance of a sound system of internal controls are the responsibilities of the management of the Company. The consolidated financial statements, which necessarily include amounts based on the judgment of management, were prepared in conformity with generally accepted accounting principles appropriate in the circumstances. The Company's management believes that the system of internal controls is effective and appropriately designed to reasonably assure that the books and records properly reflect the transactions of the Company in accordance with management's authorizations, and that assets are protected against improper use. The system is augmented by written policies, programs of external and internal audits, and qualified management under an organizational structure that provides for delegation of authority and segregation of responsibility. Recommendations resulting from both internal and external audits are given due consideration in constantly monitoring and improving internal controls. The Board of Directors, through the Audit Committee, consisting entirely of outside directors, meets periodically with management and the independent auditors to determine that each is properly discharging its responsibilities. To ensure independence, the auditors and management charged with internal audit responsibility have free access to the Audit Committee. s/Marne Obernauer, Jr. s/Bruce K. Koch Marne Obernauer, Jr. Bruce K. Koch Chairman and Chief Executive Officer Executive Vice President, Operations and Finance and Chief Financial Officer Independent Auditors' Report The Board of Directors and Shareholders Devon Group, Inc.: We have audited the accompanying consolidated balance sheets of Devon Group, Inc. and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1997. These consolidated financial statements are the respon-sibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Devon Group, Inc. and subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three- year period ended March 31, 1997 in conformity with generally accepted accounting principles. s/KPMG Peat Marwick LLP Stamford, Connecticut May 8, 1997 Independent Auditors' Report The Board of Directors and Shareholders Devon Group, Inc. Under date of May 8, 1997, we reported on the consolidated balance sheets of Devon Group, Inc. and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1997, as contained in the 1997 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10- K for the year 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in the accompanying index under Item 14(A)2 on page 11 of this document. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. s/KPMG Peat Marwick LLP Stamford, Connecticut May 8, 1997 F-1 DEVON GROUP, INC. AND SUBSIDIARIES Schedule II VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED MARCH 31, 1997 ($ in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions Balance at DESCRIPTION Beginning of Charged to Costs Charged to Other Deductions Balance at End Period and Expenses Accounts of Period Year ended March 31, 1995 Allowance for doubtful accounts $1,342 $1,084 $ - $ 574 (1) $1,852 Inventory reserves $1,366 $1,323 $ - $ 815 $1,874 Year ended March 31, 1996 Allowance for doubtful accounts $1,852 $ 890 $ - $ 265 (1) $2,477 Inventory reserves $1,874 $1,136 $ - $1,278 $1,732 Year ended March 31, 1997 Allowance for doubtful accounts $2,477 $ 647 $ - $ 918 (1) $2,206 Inventory reserves $1,732 $1,046 $ - $1,334 $1,444 (1) Uncollectible accounts written off, net of recoveries.
F-2 Exhibit 21 Subsidiaries of the Registrant The following subsidiaries of the Company and subsidiaries of such subsidiaries of the Company are included in the consolidated financial statements of the Company, excluding those of the discontinued operations. Percentage Voting Securities Owned Organized Under by its Immediate the Laws of Parent Black Dot Graphics, Inc. Illinois 100.0 Orent GraphicArts, Inc. Nebraska 100.0 Typo-Graphics, Inc. Florida 100.0 Ambrosi & Associates, Inc. Delaware 100.0 ABD Group, Inc. Illinois 100.0 Meridian Retail, Inc. Nebraska 100.0 Taproot Interactive, Inc. Delaware 100.0 Proof Positive/Farrowlyne Associates, Inc. Illinois 100.0 Nobart, Inc. Illinois 100.0 West Coast Creative, Inc. California 100.0 Graftek Press, Inc. Delaware 100.0 Elkhorn Webpress, Inc. Wisconsin 100.0 Carlith Printing, Inc. Delaware 100.0 Portal Publications, Ltd. Delaware 100.0 The Winn Art Group, Ltd. Washington 100.0 Portal Publications, Ltd. (U.K.) United Kingdom 100.0 Aird Imports Pty. Ltd. Australia 50.0 F-3 Exhibit 23 Consent of Independent Auditors The Board of Directors and Shareholders Devon Group, Inc. We consent to incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-47939, 33-50060, 33-75060, and 33- 64181) of Devon Group, Inc. of our reports dated May 8, 1997, relating to the consolidated balance sheets of Devon Group, Inc. and subsidiaries as of March 31, 1997 and 1996 and the related consolidated statements of income, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended March 31, 1997, which reports are included or incorporated by reference in the March 31, 1997 annual report on Form 10-K of Devon Group, Inc. s/KPMG Peat Marwick LLP Stamford, Connecticut June 27, 1997 F-4 EX-27 2
5 0000040542 B DONOVAN 1,000 US DOLLARS YEAR MAR-31-1997 MAR-31-1997 1 29443 0 47043 2206 24783 110111 138750 84402 172860 30486 0 84 0 0 130997 172860 264388 264388 165239 165239 0 647 178 35179 13851 21328 0 0 0 21328 2.90 0
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