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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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,
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
Selected Financial Data for Five Years Devon Group, Inc.
<CAPTION>
Years ended March 31, 1997 1996 1995 1994 1993
($ in thousands except
per share data)
Operations
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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.
<PAGE>
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 $35,000,000 bank credit facility. Excess cash will
be invested in short-term, low-risk investments.
<PAGE>
<TABLE>
Consolidated Statements of Income Devon Group, Inc.
<CAPTION>
Years ended March 31, 1997 1996 1995
($ in thousands except per share data)
<S> <C> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets Devon Group, Inc.
<CAPTION>
March 31, 1997 1996
($ in thousands)
<S> <C> <C>
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 $156,426
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows Devon Group, Inc.
<CAPTION>
Years ended March 31, 1997 1996 1995
($ in thousands)
<S> <C> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity Devon Group, Inc.
<CAPTION>
Additional
Common Paid-in Retained Treasury
Years ended March 31, 1997, Stock Capital Earnings Stock Total
1996, 1995
($ in thousands)
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE>
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.
<PAGE>
(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
<PAGE>
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%
<PAGE>
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
<PAGE>
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.
<PAGE>
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 $3.18, for fiscal years
1997 and 1996, respectively.
<PAGE>
12 Contingent Liabilities
The Company, in the ordinary course of business, is contingently
liable on pending lawsuits and claims. Based upon advice from legal
counsel, management believes such pending items will not have a
material effect on the Company's consolidated financial position or
results of operations.
13 Quarterly Financial Information (unaudited)
The quarterly results for the years ended March 31, 1997 and 1996 are
summarized below:
($ 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.
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
DEVON GROUP, INC. AND SUBSIDIARIES
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED MARCH 31, 1997
($ in thousands)
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
F-2
<PAGE>
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
<PAGE>
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
<PAGE>
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