UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 No.)
281 Tresser Boulevard, Suite 501, Stamford, Connecticut 06901-3227
(Address of principal executive offices)
Registrant's telephone number, including area code (203) 964-1444
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of November 12, 1996
Common Stock 7,379,817
<PAGE>
<TABLE>
PART I
Item 1 - Financial Statements
DEVON GROUP, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
<CAPTION>
For the Three Months For the Six Months
Ended September 30, Ended September30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales $ 68,389 $ 63,449 $130,943 $123,230
Operating costs and expenses:
Cost of sales 41,265 35,314 80,488 71,186
Selling, general, and
administrative 17,209 16,267 33,082 31,012
Income from operations 9,915 11,868 17,373 21,032
Interest income (expense), net 219 155 467 305
Other income, net 384 418 610 786
Income before income taxes 10,518 12,441 18,450 22,123
Provision for income taxes 4,207 5,039 7,380 8,960
Net income $ 6,311 $ 7,402 $ 11,070 $ 13,163
Net income per common share $ .85 $ 1.01 $ 1.50 $ 1.80
Average common shares outstanding 7,396 7,317 7,390 7,303
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
DEVON GROUP, INC.
Condensed Consolidated Balance Sheets
As of September 30, 1996 and March 31, 1996
(in thousands, except share and per share data)
September 30, March 31,
Assets 1996 1996
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,059 $ 27,749
Receivables, less allowance for doubtful
accounts of $2,300 at September 30, 1996
and $2,477 at March 31, 1996 52,394 39,629
Inventories, at lower of cost or market:
Raw materials 1,959 2,726
Work-in-process 18,396 15,115
Finished goods 2,402 2,486
Total inventories 22,757 20,327
Deferred income tax benefit 3,430 3,430
Prepaid expenses and other current assets 7,016 6,079
Total current assets 105,656 97,214
Property, plant, and equipment, net 52,241 51,522
Deferred charges and other assets 1,129 1,111
Excess of cost over fair value of net
assets acquired 6,752 6,579
$165,778 $156,426
Liabilities and Stockholders' Equity
Current Liabilities:
Current installments of long-term debt $ 110 $ 110
Accounts payable 7,985 9,439
Accrued expenses 11,058 9,963
Accrued compensation 8,555 9,493
Income taxes 1,093 1,634
Total current liabilities 28,801 30,639
Long-term debt, excluding current installments 1,968 2,003
Deferred and other compensation 6,418 6,413
Deferred income taxes 4,413 4,413
Stockholders' equity:
Common Stock, $0.01 par value. Authorized
30,000,000 shares; issued 8,357,317 shares at
September 30, 1996 and 8,304,317 shares at
March 31, 1996 84 83
Additional paid-in capital 34,898 34,538
Retained earnings 102,076 91,006
137,058 125,627
Less: Shares of common stock held in treasury,
at cost; 932,000 at September 30, 1996
and 925,000 at March 31, 1996 (12,880) (12,669)
Total stockholders' equity 124,178 112,958
$165,778 $156,426
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
DEVON GROUP, INC.
Condensed Consolidated Statements of Cash Flows
For the six months ended September 30, 1996 and 1995
(Unaudited)
(in thousands)
1996 1995
<S> <C> <C>
Net cash provided by (used in) operating activities $(1,009) $ 3,848
Cash flows from investing activities:
Capital expenditures (6,396) (3,691)
Payments for purchases of subsidiaries, net of
cash acquired (400) (3,892)
Net cash used in investing activities (6,796) (7,583)
Cash flows from financing activities:
Payments of long-term debt (35) (41)
Proceeds from the exercise of stock options and other 361 675
Purchase of treasury stock (211) (1,294)
Net cash provided by (used in) financing activities 115 (660)
Net decrease in cash and cash equivalents (7,690) (4,395)
Cash and cash equivalents, beginning of period 27,749 16,965
Cash and cash equivalents, end of period $20,059 $12,570
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DEVON GROUP, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1996
(Unaudited)
(1) The condensed 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 have been eliminated in consolidation. In the
opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary for a fair
presentation of the results for the unaudited periods, have
been included. Results of operations for the periods
included in the report are not necessarily indicative of
the results for the full year.
Reference should be made to the "Annual Report of
Corporation Form 10-K" for the fiscal year ended March 31, 1996
(including its notes to consolidated financial statements) filed with
the Securities and Exchange Commission.
(2) Net income per common share is computed on the basis of the
weighted average number of common shares outstanding during
the three- and six-month periods ended September 30, 1996
and 1995. Options outstanding were not included in the
1996 or 1995 computations of net income per share as their
effect was not material.
(3) For purposes of the Statements of Cash Flows, the Company
considers all short-term investments to be cash equivalents
since the investments are highly liquid with maturities of
three months or less.
(4) Property, plant, and equipment is net of accumulated
depreciation of $82,621,000 and $77,175,000 at September
30, 1996 and March 31, 1996, respectively.
(5) Effective July 31, 1995, the Company acquired Proof Positive/
Farrowlyne Associates, Inc. (PP/FA) for $4,000,000 in cash
and contingent consideration predicated on future earnings
of which $400,000 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 excess of the
purchase price over the fair value of net assets acquired
was $3,770,000 including the additional contingent consideration.
Nobart, Inc., 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.
(6) 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. During
the six-month periods ended September 30, 1996 and 1995,
under this authorization, 7,000 and 50,000 shares,
respectively, were repurchased.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Sales:
Consolidated sales increased $4,940,000, or 7.8%, and $7,713,000,
or 6.3%, for the three- and six-month periods ended September 30,
1996 versus the comparable prior year periods with each of the
Company's subsidiaries contributing to this growth.
Pre-press
Revenues for Black Dot Group increased $3,067,000, or 11.0%, and
$4,429,000, or 7.6%, respectively, for the three- and six-month
periods ended September 30, 1996. The increases versus the prior
year periods were primarily due to new retail advertising
accounts, additional textbook volume, incremental revenues from
Nobart and PP/FA, businesses acquired during fiscal 1996, and
sales from the Company's developing multimedia business.
Partially offsetting these factors were reductions in billings to
Sears and Kmart reflecting reduced prices included in the five-
year contract extensions.
Publishing
Devon Publishing Group's sales increased $1,676,000, or 7.5%, and
$2,169,000, or 5.7%, for the three- and six-month periods ended
September 30, 1996, reflecting increased revenues at Portal and
Portal UK, while sales at The Winn Devon Art Group approximated
the prior year periods. At Portal, sales of cards were
especially strong reflecting the success of the Geddes imagery
and the May 1996 introduction of the Boynton line. A decrease in
poster/print and matted product revenues partially offset this
gain. At The Winn Devon Art Group, an increase in revenues from
the upscale Devon Editions poster line was offset by reduced
framing revenues.
Printing
Sales at Graftek Press, Inc. increased $197,000, or 1.5%, and
$1,115,000, or 4.1%, respectively, for the three- and six-month
periods ended September 30, 1996. The increases were primarily
due to increased work for catalog publishers, which was
particularly strong during the first quarter of fiscal 1997, and
the addition of new magazines added in fiscal 1997.
Gross Profit:
Gross profit as a percentage of sales was 39.7%, and 38.5%,
respectively, for the three- and six-month periods ended
September 30, 1996 versus 44.3%, and 42.2%, for the comparable
prior year periods. For the three-month period ended September
30, 1996, the decrease was primarily due to a reduction at the
pre-press subsidiary while margins at the publishing and magazine
printing businesses were in line with the prior year period. In
the pre-press subsidiary, the decrease was primarily due to
higher outside service costs related to new retail advertising
customers, increased labor costs associated with the transition
of Nobart into the Black Dot Group, expenditures related to
further development of the interactive multimedia business, and
the effects of the Sears and Kmart price concessions. For the
six-month period, margins at both the pre-press and publishing
subsidiaries decreased versus the prior year period and were
partially offset by a slight improvement at the magazine printing
business. In the pre-press subsidiary, the decline was primarily
due to the aforementioned increase in labor costs and
expenditures related to the multimedia business. Margins in the
publishing subsidiary reflect higher charges related to calendar,
seasonal card, and poster returns. The increased charge for
calendar and seasonal card returns reflects the slightly higher
than anticipated fiscal first quarter returns from previous sales
and more aggressive current sales programs, while the charge for
poster returns results from the issuance of credit vouchers for
slower-moving product in an effort to reenergize this line.
Material costs also increased slightly at the publishing
subsidiary as a result of the shift in sales to cards, in
particular, the boxed line. At the printing business, lower
material costs contributed to its slight margin improvement.
<PAGE>
Selling, General, and Administrative Expenses:
Selling, general, and administrative expenses as a percentage of
sales were 25.2%, and 25.3%, respectively, for the three- and six-
month periods ended September 30, 1996 versus 25.6% and 25.2% for
the comparable prior year period. For the quarter, the modest
improvement in SG&A expenses as a percentage of sales was
primarily attributable to the pre-press subsidiary and reflects a
reduction in incentive-based compensation expenses, partially
offset by higher costs due to the fiscal 1996 acquisitions of
Nobart and PP/FA. For the six-month period ended September 30,
1996, SG&A expenses at each of the Company's subsidiaries were in
line with the prior year period.
Interest Income (Expense):
Net interest income increased $64,000 and $162,000, respectively,
for the three- and six-month periods ended September 30, 1996
reflecting an increase in the level of average short-term
investments over the prior year periods.
Income Taxes:
The effective income tax rate was 40.0% for the three- and six-
month periods ended September 30, 1996 versus 40.5% for the prior
year periods.
Net Income:
As a result of the foregoing, net income per share decreased
$.16, or 15.8%, and $.30, or 16.7%, respectively, versus the
prior year three- and six-month periods.
Liquidity and Capital Resources
During the six-month period ended September 30, 1996, cash used
by operating activities was $1,009,000, while cash provided by
operating activities for the prior year period was $3,848,000.
The change reflects a $3,179,000 increase in working capital
requirements versus the prior year period as well as a $2,093,000
reduction in net income. The increased working capital
requirements were primarily due to the higher inventory levels in
the pre-press business as its customer base expands and higher
levels of accounts receivable in the publishing business
attributable to increased sales volume and the timing of
payments. For the six-month period ended September 30, 1996,
short-term investments were used to provide cash for operating
activities and fund capital expenditures. For the six-month
period ended September 30, 1995, cash provided by operating
activities and existing short-term investments were used to fund
capital expenditures and the acquisition of PP/FA in August 1995.
<PAGE>
Recently Issued Financial Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" requires that long-lived
assets and certain intangible assets to be held and used by the
Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. SFAS No. 121 further requires that assets in this
category to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The Company will be
required to adopt SFAS No. 121 for its fiscal year ending March
31, 1997, however, it is not expected that such adoption will
have a material impact on the Company's financial position or
results of operations.
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.
<PAGE>
DEVON GROUP, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company, in the ordinary course of business, is
contingently liable on pending lawsuits and claims. Based
upon advice from legal counsel, these pending items are not
expected to have a material effect on the Company's
consolidated financial position or results of operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
a. The Company's Annual Meeting of Stockholders was held on
July 30, 1996.
b. Not required.
c. A proposal to ratify the selection of the firm of KPMG
Peat Marwick LLP as auditors for the Company for the
fiscal year ending March 31, 1997 was adopted by the
following vote:
For Against Abstain
6,709,374 150 5,513
The following Directors were elected for the ensuing year
and until their respective successors have been duly
elected and qualified by the following vote:
For Withhold Vote on
Marne Obernauer, Jr. 6,713,110 1,927
Robert S. Blank 6,713,110 1,927
John W. Dinzole 6,713,139 1,898
William G. Gisel 6,711,297 3,740
Thomas J. Harrington 6,711,610 3,427
Marne Obernauer 6,712,997 2,040
Edward L. Palmer 6,712,997 2,040
d. Not applicable.
<PAGE>
DEVON GROUP, INC.
PART II - OTHER INFORMATION
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
None.
b. Reports on Form 8-K.
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DEVON GROUP, INC.
Date: November 14, 1996 s/Bruce K. Koch
Bruce K. Koch
Executive Vice President
Operations and Finance
and Chief Financial Officer
(Principal Financial Officer)
s/Robert H. Donovan
Robert H. Donovan
Senior Vice President, Finance
and Treasurer
(Principal Accounting Officer)
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<PERIOD-START> APR-01-1996
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