-----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, Q9wWEHIoLpiFMue46vpM/di4A3hsizWCGGMYPMcjZU6TBJ3ooaH/0F57ckftkeXK sGD3xO1/gwbNHDkaD/QEKQ== 0000040542-96-000006.txt : 19960629 0000040542-96-000006.hdr.sgml : 19960629 ACCESSION NUMBER: 0000040542-96-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960627 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14850 FILM NUMBER: 96587278 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-K405 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, 1996 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 7,383,317 outstanding as of June 7, 1996 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 [x]. As of June 7, 1996, the market value of the registrant's common stock held by nonaffiliates of the registrant was approximately $164,573,000. Portions of the following documents are incorporated by reference in the form 10-K as indicated: Part of 10-K Document into which incorporated 1996 Annual Report to Shareholders of Devon Group, Inc. Parts I, II, and IV Proxy Statement relative to the 1996 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 is one of the nation's leading suppliers of pre-press and other publishing services. These services include creative design, photography, copywriting, editing, color separations, page composition, image management, video production, interactive multimedia, and facility management. Black Dot Group provides high-quality services through off-the-shelf and internally developed applications software and the integration of traditionally separate pre-press services. The acquisition of Proof Positive/Farrowlyne Associates, Inc., a provider of editorial and creative services to the publishing industry, primarily in the educational sector, places Black Dot Group in the creative end of educational materials and textbook publishing. The acquisition of Nobart, Inc., a full-service design, art, photography, and production studio, adds increased capacity to serve a broader retail and catalog customer base. Sales attributable to Black Dot Group were $126,190,000, $108,630,000, and $87,707,000 in fiscal 1996, 1995, and 1994, respectively. The Company's Graftek Press, Inc. subsidiary provides high-quality color printing, binding, and distribution 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 $54,531,000, $53,037,000, and $47,622,000, in fiscal 1996, 1995, and 1994, 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 $68,252,000, $64,015,000, and $55,511,000 in fiscal 1996, 1995, and 1994, respectively. Sales to Sears and Kmart, the Company's two largest customers, together accounted for 33.4%, 29.3%, and 23.6% of total sales in fiscal 1996, 1995, and 1994, respectively. Pre-Press Services Pre-press services include 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. These services are performed for commercial customers (advertising and financial materials, newspaper inserts, and 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, Item 1 Business, Continued 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 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 data generated by customers into data which can then be readily used in Black Dot Group's type and graphics composition systems. Black Dot Group's internally developed applications software is fully transportable to any computer that possesses a "C" compiler. The Company believes that Black Dot Group is also a leader in PostScript expertise for both PC and Macintosh-based systems where its customized extension software is used to increase the efficiency of desktop production. Color separation services separate original artwork, photographs, or film transparencies into the four primary printing colors (yellow, magenta, cyan, and black) and output the image on either film or electronic media. These are 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. 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. (a new subsidiary of Black Dot Group acquired in March 1996) offer fully integrated advertising production services including creative design work, copywriting, and photography 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, catalogs, collateral material, and in-store signage. Proof Positive/Farrowlyne Associates, Inc. (a new subsidiary of Black Dot Group acquired in August 1995) 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. is a developer of interactive multimedia products and services along with internet 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, 1996 consisted of 160 persons, 43 in field sales and 117 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 recently negotiated with the Company's two major retail clients, Sears and Kmart. Item 1 Business, Continued 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 printing. Trade and special-interest magazine publishers generally contract for their printing for a three-to-five-year period. At March 31, 1996 Graftek's magazine list included 117 titles, 83% of which were under contract with 42 publishers. Graftek specializes in magazine printing runs ranging from 50,000 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 2 Perfect binding lines 5 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, 1996, consisted of 39 persons, 10 in field sales and 29 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 Item 1 Business, Continued 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. 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 an upscale poster line, limited edition prints, and original art 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 artist's 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 2,950 art prints and posters, 1,150 limited edition prints, uniques, and monoprints, 700 notecards, 100 calendars, and 900 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. Foreign printers do the printing for Portal's calendar line and selected card lines. 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. One-of-a-kind art, 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, 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 1996 approximately 56% of Devon Publishing Group's sales were made by company-employed sales personnel with independent, multiline representatives and house accounts providing 27% and 17%, respectively. At March 31, 1996 Devon Publishing Group had a salesforce of 97 employee representatives and 56 independent, multiline representatives as well as 26 company employees in sales support functions, including customer service. Item 1 Business, Continued Devon Publishing Group had export sales of $6,904,000, $5,760,000, and $4,470,000 in fiscal 1996, 1995, and 1994, respectively. Such sales accounted for approximately $601,000, $457,000, and $371,000 of pretax operating profits in fiscal 1996, 1995, and 1994, respectively. These sales were made to various countries including Argentina, Australia, Belgium, Canada, Denmark, France, Germany, Holland, Italy, Japan, New Zealand, Norway, Spain, Sweden, Switzerland, and the United Kingdom. In addition, Devon Publishing Group has licensing agreements with publishers and distributors in Australia, Holland, Japan, Switzerland, and the United Kingdom. Related royalties in fiscal 1996 were approximately $368,000, approximately 40% of which were from the United Kingdom. Backlog At March 31, 1996 and 1995, Devon Group, Inc. in its entirety had a backlog of unfinished work aggregating approximately $17,300,000 and $14,900,000, 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, 1996 the Company employed approximately 2,050 persons, 124 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 17 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 Ahrens 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 facility 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 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 New York, New York Black Dot Group Creative design, copywriting, and photography facilities Miami, Florida 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, Calif. Devon 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, 1996 and 1995 was as follows: 1996 1995 Common Stock, $.01 par value 127 132 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, 1996, 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 52 1975 John W. Dinzole President and Chief Operating Officer 68 1969 Marne Obernauer Chairman of the Executive Committee of the Board of Directors 77 1971 Bruce K. Koch Executive Vice President, Operations and Finance and Chief Financial Officer 49 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, 1996, 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. By s/Marne Obernauer Jr. Marne Obernauer, Jr. Chairman and Chief Executive Officer, Director Date: June 27, 1996 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, 1996 s/John W. Dinzole John W. Dinzole President and Chief Operating Officer, Director Date: June 27, 1996 s/Bruce K. Koch Bruce K. Koch Executive Vice President, Operations and Finance and Chief Financial Officer (Principal Financial Officer) Date: June 27, 1996 s/Robert H. Donovan Robert H. Donovan Senior Vice President, Finance and Treasurer (Principal Accounting Officer) Date: June 27, 1996 s/Robert S. Blank Robert S. Blank Director Date: June 27, 1996 s/William G. Gisel William G. Gisel Director Date: June 27, 1996 s/Thomas J. Harrington Thomas J. Harrington Director Date: June 27, 1996 s/Marne Obernauer Marne Obernauer Chairman of the Executive Committee, Director Date: June 27, 1996 s/Edward L. Palmer Edward L. Palmer Director Date: June 27, 1996 Selected Financial Data for Five Years Devon Group, Inc.
Years ended March 31, 1996 1995 1994 1993 1992 ($ in thousands except per share data) Operations Sales $248,973 $225,682 $190,840 $171,998 $143,035 Income from continuing operations $ 24,031 $ 19,301 $ 13,210 $ 10,262 $ 4,947 Income from discontinued operations - 2,206 - - - Net income $ 24,031 $ 21,507 $ 13,210 $ 10,262 $ 4,947 Per Share Data Income per common share: Continuing operations $ 3.27 $ 2.64 $ 1.83 $ 1.43 $ .69 Discontinued operations - .30 - - - Net income $ 3.27 $ 2.94 $ 1.83 $ 1.43 $ .69
Financial Position
Working capital $ 66,575 $ 43,190 $ 29,952 $ 8,128 $ 26,091 Total assets 156,426 133,436 122,556 107,528 103,958 Long-term debt 2,113 2,402 13,923 2,344 33,562 Stockholders' equity 112,958 88,153 65,587 51,802 40,744
Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Sales: Fiscal 1996 sales increased by $23,291,000, or 10.3%, compared to fiscal 1995, and fiscal 1995 sales increased by $34,842,000, or 18.3%, compared to fiscal 1994, with each of the Company's subsidiaries contributing to these increases. Pre-press Overall revenues for Black Dot Group increased $17,560,000, or 16.2%, in fiscal 1996 due primarily to increased creative, design, photographic, and composition services provided to retail customers. Increased sales resulting from acquisitions made by Black Dot Group late in fiscal 1995 and during fiscal 1996 were partially offset by a decrease in textbook-related revenues. Black Dot Group recently signed five-year contract extensions with its two major customers, Sears and Kmart. Such extensions include certain price concessions which will be phased in over the next two years. The Company hopes to at least partially mitigate the impact of these reductions on future earnings through improved operating efficiencies. In fiscal 1995, revenues increased $20,923,000, or 23.9%. Most of this increase was also related to higher levels of creative, design, photographic, and composition services provided to retail advertising customers which, in fiscal 1995, included a full year's results for Meridian Retail, Inc. as well as increased volume with existing customers. Results for fiscal 1995 at the pre-press business had also been favorably affected by increased typography and color separation revenues primarily relating to the magazine and catalog sectors. Publishing Devon Publishing Group's sales increased $4,237,000, or 6.6%, in fiscal 1996 versus the prior year, reflecting an increase at Portal Publications, a decline at The Winn Devon Art Group, and the absence of revenues from Regency House which was sold during the third quarter of fiscal 1995. At Portal, sales of cards were especially strong aided by the introduction of Easter and Mother's Day lines and the continued success of the boxed and blank lines which have benefited from the Anne Geddes imagery. Matted product sales also increased while sales of Portal's core poster product line approximated the prior year. In fiscal 1995, strong sales of Portal Publications' card, matted product, apparel, and calendar lines, as well as an increase in The Winn Devon Art Group's line of upscale posters and higher-end fine art, resulted in increased revenues of $8,504,000, or 15.3%. Printing Graftek's sales increased $1,494,000, or 2.8%, in fiscal 1996 primarily due to increased paper sales and despite continued pricing pressures and nominal growth in page count. During fiscal 1995, the addition of new magazine titles and nonrecurring work for both existing and new customers resulted in increased volume of $5,415,000, or 11.4%. Gross Profit: Gross profit increased by $10,136,000 for the fiscal year ended March 31, 1996 to $99,976,000, or 40.2%, as a percentage of sales compared to 39.8% for the prior year. 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. Gross profit increased $17,289,000 in fiscal 1995 to $89,840,000, 39.8% of sales compared to 38.0% in fiscal 1994. The gross profit margin improved at the pre-press subsidiary as significantly higher production levels resulted in more operating leverage and production efficiencies. The publishing subsidiary benefited from improved operating leverage and a reduction in inventory obsolescence charges. These savings were partially offset by a modest increase in paper-related material costs. At the printing subsidiary, the impact of lower repair and maintenance costs was partially offset by increased material costs. Selling, General, and Administrative Expenses: Selling, general, and administrative (SG&A) expenses as a percentage of sales were 24.9% for the fiscal year ended March 31, 1996 versus 25.4% for the prior year. This improvement is primarily due to an increase in noncommissionable sales at each of the Company's subsidiaries, partially offset by expenses related to DigiZINE, a retail magazine on CD-ROM released during the third quarter of fiscal 1996, and an increase in incentive compensation expense at the pre-press subsidiary. SG&A expenses decreased in fiscal 1995 to 25.4% of sales versus 26.2% for the prior year. The improvement reflects lower selling expenses as a percentage of sales at each subsidiary and is primarily due to the publishing and pre-press subsidiaries where much of the increased volume was noncommissionable. General and administrative expenses were also reduced as a percentage of sales primarily due to the absence of costs incurred related to the start up of Meridian Retail, Inc. in December 1993 and costs incurred in renegotiating the Company's revolving credit facility. Interest Income (Expense): Net interest income was $752,000 in fiscal 1996 compared to net interest expense of $513,000 and $851,000 in fiscal 1995 and 1994, respectively. During fiscal 1996 interest income increased to $964,000 from $163,000 reflecting higher levels of 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. Interest expense was $676,000 in fiscal 1995 compared to $869,000 in fiscal 1994, while interest income increased to $163,000 from $18,000. The decrease in interest expense is primarily due to reduced levels of debt, partially offset by an increase in the cost of borrowed funds. The increase in interest income reflects earnings from short-term investments. Other Income, net: 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. Excluding this charge, other income, net increased during the fiscal year ended March 31, 1996 due to the advantageous sale of scrap paper at the printing subsidiary during a period when paper prices were dramatically affected by shortages. Income Taxes: The effective income tax rate was 40.0% in fiscal 1996, 41.0% in fiscal 1995, and 40.9% in fiscal 1994. Net Income: 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 in fiscal 1996. During fiscal 1995, as a result of a significant increase in operating income and lower net interest expense, income from continuing operations increased $6,091,000 to $19,301,000. The fourth quarter of fiscal 1995 also includes net income of $2,206,000 from discontinued operations due to the favorable resolution of certain liabilities that were recorded in fiscal 1991 related to the discontinuance of financial printing operations. Liquidity and Capital Resources At March 31, 1996 the Company's debt to equity ratio was .02 to 1 compared to .03 to 1 at March 31, 1995 and .21 to 1 at March 31, 1994. The decrease in fiscal 1995 was primarily due to a reduction in long-term debt of $11,521,000 reflecting the repayment of all borrowings under the Company's bank line of credit during the fourth quarter of fiscal 1995. The Company generated cash from operations of $25,549,000, $34,438,000, and $19,328,000 in fiscal 1996, 1995, and 1994, respectively. Despite increased net income in fiscal 1996, cash generated declined versus the prior year reflecting an increase in working capital requirements. Such increased working capital requirements were primarily due to higher levels of accounts receivable in the pre-press and publishing subsidiaries attributable to both increased sales volume and the timing of payments. In fiscal 1996, cash provided by continuing operations was primarily used 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. In fiscal 1995, these funds were used primarily to reduce debt and fund capital expenditures, with the balance used for short-term, low-risk investments. Capital expenditures of approximately $13,000,000 are planned for fiscal 1997 generally for new equipment to expand/enhance operations and maintain the Company's technological leadership. 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, 50,000 shares were purchased during the first quarter of fiscal 1996. Management anticipates that existing cash and 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 $35,000,000 bank credit facility. Excess cash will be invested in short-term, low-risk investments. Consolidated Statements of Income Devon Group, Inc.
Years ended March 31, 1996 1995 1994 ($ in thousands except per share data) Sales $248,973 $225,682 $190,840 Operating costs and expenses: Cost of sales 148,997 135,842 118,289 Selling, general, and administrative 62,011 57,228 49,935 Income from operations 37,965 32,612 22,616 Interest income (expense), net 752 (513) (851) Other income, net 1,335 615 575 Income from continuing operations before income taxes 40,052 32,714 22,340 Provision for income taxes 16,021 13,413 9,130 Income from continuing operations 24,031 19,301 13,210 Income from discontinued operations - 2,206 - Net income $ 24,031 $ 21,507 $ 13,210 Income per common share: Continuing operations $ 3.27 $ 2.64 $ 1.83 Discontinued operations - .30 - Net income $ 3.27 $ 2.94 $ 1.83 See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets Devon Group, Inc.
March 31, 1996 1995 ($ in thousands) Assets Current assets: Cash and cash equivalents $ 27,749 $ 16,965 Receivables, less allowance for doubtful accounts of $2,477 in 1996 and $1,852 in 1995 39,629 32,272 Inventories, at lower of cost or market: Raw materials 2,726 2,390 Work-in-process 15,115 13,774 Finished goods 2,486 2,685 Total inventories 20,327 18,849 Deferred income tax benefits 3,430 3,385 Prepaid expenses and other current assets 6,079 4,781 Total current assets 97,214 76,252 Property, plant, and equipment, net 51,522 52,430 Deferred charges and other assets 1,111 1,179 Excess of cost over fair value of net assets acquired 6,579 3,575 $156,426 $133,436 Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ 110 $ 311 Accounts payable 9,439 8,920 Accrued expenses 9,963 11,406 Accrued compensation 9,493 8,907 Income taxes 1,634 3,518 Total current liabilities 30,639 33,062 Long-term debt, excluding current installments 2,003 2,091 Deferred and other compensation 6,413 5,205 Deferred income taxes 4,413 4,925 Stockholders' equity: Common stock, $0.01 par value. Authorized 30,000,000 shares; issued 8,304,317 shares in 1996 and 8,203,817 in 1995 83 82 Additional paid-in capital 34,538 32,471 Retained earnings 91,006 66,975 125,627 99,528 Less: 925,000 shares of common stock held in treasury, at cost, at March 31, 1996 and 875,000 at March 31, 1995 (12,669) (11,375) Total stockholders' equity 112,958 88,153 $156,426 $133,436 See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows Devon Group, Inc.
Years ended March 31, 1996 1995 1994 ($ in thousands) Operating activities: Income from continuing operations $ 24,031 $ 19,301 $ 13,210 Adjustments to reconcile income to net cash provided by operating activities: Depreciation and amortization 11,192 10,984 9,997 Provision for doubtful accounts 890 1,084 695 Loss on disposal of facility - 415 - Changes in assets and liabilities, net of the effects from purchases and disposition of subsidiaries: Receivables (7,854) 4,027 (9,883) Inventories (1,186) (3,136) (2,333) Deferred charges and other assets (1,215) (179) 1,808 Accounts payable 519 (1,650) 3,154 Accrued expenses (1,443) 2,748 1,521 Accrued compensation 586 572 1,433 Income taxes (622) 2,000 (519) Deferred income taxes (557) (1,872) (258) Deferred and other compensation 1,208 144 503 Net cash provided by operating activities 25,549 34,438 19,328 Investing activities: Capital expenditures (8,879) (7,418) (16,300) Payments for purchases of subsidiaries, net of cash acquired (5,109) (516) - Net cash used in investing activities (13,988) (7,934) (16,300) Financing activities: Purchase of treasury stock (1,294) - - Proceeds from long-term borrowings - 12,129 22,000 Payments of long-term debt (289) (23,850) (26,921) Proceeds from the exercise of stock options 806 576 330 and other Net cash used in financing activities (777) (11,145) (4,591) Net increase (decrease) in cash and cash 10,784 15,359 (1,563) equivalents Cash and cash equivalents, beginning of year 16,965 1,606 3,169 Cash and cash equivalents, end of year $ 27,749 $ 16,965 $ 1,606 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, 1996, Stock Capital Earnings Stock Total 1995, and 1994 ($ in thousands) Balances at March 31, 1993 $ 81 $ 30,838 $ 32,258 $ (11,375) $ 51,802 Exercise of stock options - 575 - - 575 Net income - - 13,210 - 13,210 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 See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements Years ended March 31, 1996, 1995, and 1994 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). All significant intercompany transactions are eliminated in consolidation. Prior years' financial statements have been reclassified, where applicable, to conform to the March 31, 1996 presentation. (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) Federal and State Income Taxes: The Company and its subsidiaries file a consolidated Federal income tax return. 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 the corporate income tax rate is recognized as an adjustment to income tax expense. (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, 1996 and 1995, the Company had $23,735,000 and $16,332,000, respectively, invested in U.S. government securities under agreements to resell on April 1, 1996 and April 3, 1995, 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. 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, 1996, 1995, and 1994, sales to the Company's two largest customers amounted to $83,035,000, $66,193,000, and $45,091,000, respectively. 3 Stockholders' Equity In fiscal 1996 and 1995, 100,500 and 89,000 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, 50,000 shares were acquired by the Company during fiscal 1996, and no shares were acquired during fiscal 1995. 4 Acquisitions and Dispositions In fiscal 1996, the Company acquired two businesses, Proof Positive/Farrowlyne Associates, Inc. (PP/FA), and Nobart, Inc. (Nobart). Effective July 31, 1995, the Company acquired PP/FA for $4,000,000 in cash and contingent consideration predicated on future earnings. Located in Evanston, Illinois, PP/FA is a provider of editorial and creative services to the publishing industry, primarily in the educational sector. The excess of the purchase price over the fair value of net assets acquired was $3,370,000. 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. (Ahrens), and a 50% interest in Portal Aird. Ahrens, 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, 1996, 1995, and 1994 was $366,000, $207,000, and $209,000, respectively. As of March 31, 1996 and 1995, the balance of accumulated amortization was $1,850,000 and $1,485,000, 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, due to the favorable resolution of certain liabilities that were recorded in fiscal 1991 related to the discontinuance of the financial printing business, net income of $2,206,000 was recorded. 5 Income Taxes The income tax provisions for the years ended March 31, 1996, 1995, and 1994 follow: ($ in thousands) Current Deferred Total 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 1994 Federal $ 7,649 $ (167) $ 7,482 State 1,739 (91) 1,648 Total $ 9,388 $ (258) $ 9,130 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 are as follows: ($ in thousands) 1996 1995 1994 Pretax Pretax Pretax Amount Income % Amount Income % Amount Income % Computed "expected" tax expense $14,018 35.0 $11,450 35.0 $ 7,819 35.0 Increase in taxes resulting from: State income taxes, net of Federal income tax benefit 1,823 4.6 1,321 4.0 1,071 4.8 Other 180 .4 642 2.0 240 1.1 $16,021 40.0 $13,413 41.0 $ 9,130 40.9 The actual amounts of income taxes paid during the years ended March 31, 1996, 1995, and 1994 were $17,167,000, $13,288,000, and $9,792,000, respectively. The tax effects of temporary differences that give rise to significant deferred tax assets and deferred tax liabilities at March 31, 1996 and 1995 are presented below: ($ in thousands) 1996 1995 Deferred tax assets: Deferred compensation $ 2,992 $ 2,873 Inventory 1,352 1,502 Accounts receivable 752 652 Other 894 1,064 Total deferred tax assets 5,990 6,091 Deferred tax liabilities: Accelerated depreciation (5,882) (6,895) Prepaid expenses (1,038) (727) Other (53) (9) Total deferred tax liabilities (6,973) (7,631) Net deferred tax liability $ (983) $(1,540) The Company believes that no valuation allowance is necessary for deferred tax assets. This determination is based on the Company's estimate that it is more likely than not that future taxable income will be sufficient to offset the expenses to which the deferred tax assets relate. 6 Income Per Share Income per common share is computed on the basis of weighted average shares outstanding during the year adjusted for common stock equivalents on the assumption that dilutive stock options were exercised at the beginning of the year with applicable proceeds used to purchase treasury stock at the average market price. The weighted average number of common shares included in this calculation for the years ended March 31, 1996, 1995, and 1994 was 7,339,951, 7,303,231, and 7,210,354, respectively. 7 Property, Plant, and Equipment A summary of property, plant, and equipment at March 31, 1996 and 1995, at cost, follows: ($ in thousands) 1996 1995 Land $ 1,939 $ 1,939 Buildings and improvements 24,507 23,253 Leasehold improvements 2,707 3,421 Furniture, fixtures, and equipment 99,544 93,403 128,697 122,016 Less accumulated depreciation and amortization 77,175 69,586 Net property, plant, and equipment $ 51,522 $ 52,430 8 Long-term Debt The following is a summary of long-term debt at March 31, 1996 and 1995: ($ in thousands) 1996 1995 Revolving credit facility (a) $ - $ - 6.5% IDA bond (b) 900 900 Miscellaneous notes payable (c) 1,213 1,502 2,113 2,402 Less current installments 110 311 $ 2,003 $ 2,091 Annual maturities of long-term debt for the next five fiscal years are as follows: 1997, $110,000; 1998, $92,000; 1999, $92,000; 2000, $92,000; and 2001, $92,000. Interest paid for the years ended March 31, 1996, 1995, and 1994 was $195,000, $649,000, and $968,000, 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, 1996, 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, 1996, minimum rental payments due under operating leases were as follows: 1997, $3,334,000; 1998, $2,210,000; 1999, $1,371,000; 2000, $494,000; 2001, $301,000; and later years, $195,000. Total rental expense for the years ended March 31, 1996, 1995, and 1994 was $3,631,000, $3,027,000, and $2,498,000, 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, 1996, 1995, and 1994 were $2,454,000, $2,483,000, and $1,972,000, 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, 1996, 1995, and 1994 were $4,866,000, $4,206,000, and $3,487,000, 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, 1996, 851,500 options were outstanding with exercise prices ranging from $5.00 to $34.25 per share with 130,500 exercisable. A total of 155,000 options are available for future grants. Pursuant to the terms of the option agreements, options are exercisable in increments over five- or ten-year periods. A total of 1,006,500 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, 1996, 1995, and 1994: Option Activity 1996 1995 1994 Options outstanding, beginning of year 532,000 621,000 395,500 Options granted 420,000 - 280,000 Options exercised (100,500) (89,000) (54,500) Options outstanding, end of year 851,500 532,000 621,000 Recap of Options Outstanding at March 31, 1996 1995 1994 $ 5.00 Exercise price 111,000 182,000 250,000 $10.63 Exercise price 12,000 12,000 16,000 $12.25 Exercise price 42,000 60,000 75,000 $16.75 Exercise price 266,500 278,000 280,000 $34.25 Exercise price 420,000 - - 851,500 532,000 621,000 In October 1995, Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," was issued. The Company currently does not plan to change its method of accounting for stock-based compensation; however, SFAS No. 123 will require additional footnote disclosure relating to the effect of using a fair value-based method of accounting for stock-based compensation costs for its fiscal year ending March 31, 1997. 12 Contingent Liabilities The Company, in the ordinary course of business, is contingently liable on pending lawsuits and claims. Based upon advice from legal counsel, management believes such pending items will not have a material effect on the Company's consolidated financial position or results of operations. 13 Quarterly Financial Information (unaudited) The quarterly results for the years ended March 31, 1996 and 1995 are summarized below: First Second Third Fourth Fiscal ($ in thousands except Quarter Quarter Quarter Quarter Year per share data) 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 1995 Sales $49,222 $58,584 $61,505 $56,371 $225,682 Gross profit 19,376 24,930 24,599 20,935 89,840 Income from: Continuing operations $ 3,722 $ 5,920 $ 5,741 $ 3,918 $ 19,301 Discontinued operations - - - 2,206 2,206 Net income $ 3,722 $ 5,920 $ 5,741 $ 6,124 $ 21,507 Income per common share: (1) Continuing operations $ .51 $ .81 $ .78 $ .54 $ 2.64 Discontinued operations - - - .30 .30 Net income $ .51 $ .81 $ .78 $ .84 $ 2.94 (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, 1996 1995 Fiscal Quarter First Quarter 29 3/4 - 25 3/4 20 1/2 - 18 Second Quarter 44 - 29 24 1/2 - 18 3/4 Third Quarter 45 3/4 - 26 3/4 29 3/4 - 23 1/2 Fourth Quarter 34 3/4 - 27 30 1/2 - 22 The approximate number of record holders of common stock at March 31, 1996 was 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. 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, 1996 and 1995, 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, 1996. These consolidated financial statements are the responsibility 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three- year period ended March 31, 1996 in conformity with generally accepted accounting principles. s/KPMG Peat Marwick LLP Stamford, Connecticut May 8, 1996 Independent Auditors' Report The Board of Directors and Shareholders Devon Group, Inc. Under date of May 8, 1996, we reported on the consolidated balance sheets of Devon Group, Inc. and subsidiaries as of March 31, 1996 and 1995, 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, 1996, as contained in the 1996 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 1996. 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, 1996 F-1 DEVON GROUP, INC. AND SUBSIDIARIES Schedule II VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED MARCH 31, 1996 ($ 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, 1994 Allowance for doubtful accounts $1,197 $ 695 $ - $ 550 (1) $1,342 Inventory reserves $1,097 $1,570 $ - $1,301 $1,366 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 (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 Publishers Services Incorporated Delaware 100.0 Ahrens Interactive, Inc. Delaware 100.0 Proof Positive/Farrowlyne Illinois 100.0 Associates, Inc. Nobart, Inc. Illinois 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, 1996, relating to the consolidated balance sheets of Devon Group, Inc. and subsidiaries as of March 31, 1996 and 1995 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, 1996, which reports are included or incorporated by reference in the March 31, 1996 annual report on Form 10-K of Devon Group, Inc. s/KPMG Peat Maewick LLP Stamford, Connecticut June 27, 1996 F-4 EX-27 2
5 0000040542 B DONOVAN 1,000 US DOLLARS YEAR MAR-31-1996 MAR-31-1996 1 27749 0 42106 2477 20327 97214 128697 77175 156426 30639 0 83 0 0 112875 156426 248973 248973 148997 148997 0 890 212 40052 16021 24031 0 0 0 24031 3.27 0
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