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 June 30, 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 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 August 4, 1997
Common Stock 7,283,817
<PAGE>
PART I
Item 1 - Financial Statements
<TABLE>
DEVON GROUP, INC.
Condensed Consolidated Statements of Income
For the three months ended June 30, 1997 and 1996
(Unaudited)
(in thousands, except per share data)
<CAPTION>
1997 1996
<S> <C> <C>
Sales $69,530 $62,554
Operating costs and expenses:
Cost of sales 42,327 39,223
Selling, general, and administrative 18,629 15,873
Income from operations 8,574 7,458
Interest income, net 315 248
Other income, net 283 226
Income before income taxes 9,172 7,932
Provision for income taxes 3,669 3,173
Net income $ 5,503 $ 4,759
Net income per common share $ 0.76 $ 0.64
Average common shares outstanding 7,284 7,383
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
DEVON GROUP, INC.
Condensed Consolidated Balance Sheets
As of June 30, 1997 and March 31, 1997
(in thousands, except share and per share data)
<CAPTION>
June 30, March 31,
Assets 1997 1997
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 26,978 $ 29,443
Receivables, less allowance for doubtful
accounts of $2,310 at June 30, 1997
and $2,206 at March 31, 1997 47,953 44,837
Inventories, at lower of cost or market:
Raw materials 1,931 1,877
Work-in-process 22,117 19,453
Finished goods 3,070 3,453
Total inventories 27,118 24,783
Deferred income tax benefits 4,002 3,743
Prepaid expenses and other current assets 5,371 7,305
Total current assets 111,422 110,111
Property, plant, and equipment, net 54,852 51,312
Deferred charges and other assets 5,071 4,918
Excess of cost over fair value of net
assets acquired 7,096 6,519
$178,441 $172,860
Liabilities and Stockholders' Equity
Current Liabilities:
Current installments of long-term debt $ 92 $ 92
Accounts payable 7,685 9,054
Accrued expenses 9,326 9,992
Accrued compensation 8,095 9,815
Income taxes 4,963 1,533
Total current liabilities 30,161 30,486
Long-term debt, excluding current installments 1,897 1,916
Deferred and other compensation 4,984 5,005
Deferred income taxes 4,836 4,372
Stockholders' equity:
Common Stock, $0.01 par value. Authorized
30,000,000 shares; issued 8,383,317 shares
at June 30, 1997 and March 31, 1997 84 84
Additional paid-in capital 35,637 35,658
Retained earnings 117,837 112,334
153,558 148,076
Less: 1,099,500 shares of common stock held in
treasury, at cost, at June 30, 1997 and
March 31, 1997 (16,995) (16,995)
Total stockholders' equity 136,563 131,081
$178,441 $172,860
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
DEVON GROUP, INC.
Condensed Consolidated Statements of Cash Flows
For the three months ended June 30, 1997 and 1996
(Unaudited)
(in thousands)
<CAPTION>
1997 1996
<S> <C> <C>
Net cash provided by operating activities $ 4,544 $ 3,978
Cash flows from investing activities:
Capital expenditures (6,269) (2,226)
Payments for purchases of subsidiaries, net of
cash acquired (700) (400)
Net cash used in investing activities (6,969) (2,626)
Cash flows from financing activities:
Payments of long-term debt (19) (14)
Proceeds from the exercise of stock options and other (21) 60
Purchase of treasury stock - (211)
Net cash used in financing activities (40) (165)
Net increase (decrease) in cash and cash equivalents (2,465) 1,187
Cash and cash equivalents, beginning of period 29,443 27,749
Cash and cash equivalents, end of period $26,978 $28,936
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DEVON GROUP, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 1997
(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. The prior year financial
statements have been reclassified, where applicable, to
conform to the June 30, 1997 presentation.
Reference should be made to the "Annual Report of Corporation Form
10-K" for the fiscal year ended March 31, 1997 (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-month periods ended June 30, 1997 and 1996.
Options outstanding were not included in the 1997 or 1996
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 $83,590,000 and $80,864,000 at June 30, 1997
and March 31, 1997, respectively.
(5) Effective July 31, 1995, the Company acquired Proof
Positive/Farrowlyne Associates, Inc. (PP/FA) for $4,000,000
in cash and earnings-related contingent consideration,
$1,100,000 of which has been earned and paid to date.
Located in Evanston, Illinois, PP/FA is a provider of edito
rial 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 $4,470,000, including the additional contingent consideration.
(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. Under
this authorization, 174,500 and 50,000 shares were acquired
during fiscal 1997 and 1996, respectively.
<PAGE>
(7) On July 22, 1997, Devon Group, Inc. announced that it had
reached agreement for the sale of the capital stock of its
printing subsidiary, Graftek Press, Inc., to BGJ
Enterprises, Inc., an affiliate of Brown Printing Company,
for approximately $40,000,000 in cash (the "transaction").
The transaction should be completed after the applicable
Hart-Scott-Rodino waiting period has expired and other
customary conditions have been satisfied. It is currently
estimated that the transaction will result in a gain (net of
applicable income taxes) for financial statement purposes of
approximately $6,700,000 and generate approximately
$34,700,000 in after-tax cash.
<PAGE>
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Sales:
Consolidated sales for the quarter ended June 30, 1997 increased
$6,976,000, or 11.2%, compared to the prior year's first quarter
reflecting increases in the pre-press and publishing subsidiaries
and a decline at the magazine printing business.
Pre-press
Revenues for Black Dot Group increased $1,907,000, or 6.1%,
versus the comparable prior year period. The increase was
primarily due to creative, design, photographic, and composition
services provided to new retail advertising and catalog
customers. Partially offsetting this gain were lower billings to
Sears resulting from the second phase of price concessions made
in connection with the five-year contract extension signed at the
end of fiscal 1996.
Publishing
Devon Publishing Group's sales increased $5,638,000, or 34.2%,
versus the comparable prior year period reflecting increased
revenues at each of its subsidiaries. At Portal the three-month
period ended June 30, 1997 benefited from strong sales of its
wall decor, card, and apparel product lines reflecting increased
volume with two sizable mass-market merchants. The improvement
at The Winn Devon Art Group reflects an increase in revenues from
the upscale Devon Editions poster line and an increase in fine
art volume.
Printing
Graftek's sales decreased $569,000, or 3.9%, versus the
comparable prior year period primarily due to a decline in paper
sales. While value-added magazine printing revenues were down
for the three-month period, this decrease was partially offset by
added catalog and special project work.
Gross Profit:
Gross profit increased by $3,872,000 for the quarter ended June
30, 1997 to $27,203,000, or 39.1% as a percentage of sales,
compared to 37.3% for the comparable prior year period. Most of
the margin improvement results from a shift in revenue mix which
favored the publishing subsidiary. As a distribution operation,
the publishing subsidiary has relatively higher gross margins
than either the pre-press or printing subsidiaries. Gross profit
margins at both the pre-press and publishing subsidiaries
remained in line with the prior year, while margins at the
Company's printing business improved primarily due to lower
material costs.
<PAGE>
Selling, General, and Administrative Expenses:
Selling, general, and administrative expenses as a percentage of
sales were 26.8% for the three months ended June 30, 1997 versus
25.4% for the comparable prior year period. As with the gross
profit margin, most of the increase relates to the relative
increase in publishing subsidiary revenues where
selling/distribution expenses exceed those of the pre-press and
printing subsidiaries. In addition, higher royalty expenses at
the publishing subsidiary due to the increased sale of licensed
imagery also contributed to the overall increase in SG&A
expenses.
Interest Income, net:
Net interest income increased $67,000 to $315,000 for the three-
month period ended June 30, 1997 versus the comparable prior year
period reflecting an increase in the level of average short-term
investments over the prior year period.
Income Taxes:
The effective income tax rate was 40.0% for the three-month
periods ended June 30, 1997 and 1996.
Net Income:
As a result of the foregoing and, to a lesser extent, a decrease
in the average common shares outstanding for the period, net
income per share increased $.12, or 18.8%, for the three months
ended June 30, 1997 versus the comparable prior year period.
Liquidity and Capital Resources
During the three-month period ended June 30, 1997, the Company
generated cash from operating activities of $4,544,000 versus
$3,978,000 for the comparable prior year period. This increase
was primarily due to the $744,000 increase in net income
partially offset by higher working capital requirements for the
three-month period ended June 30, 1997. For the three-month
period ended June 30, 1997, cash provided by operating activities
and existing short-term investments were used to fund capital
expenditures and the contingent payment related to the purchase
of PP/FA. For the three-month period ended June 30, 1996, cash
provided by operating activities was used primarily to fund
capital expenditures and the contingent payment related to the
purchase of PP/FA and purchase treasury shares.
Recently Issued Financial Accounting Standards
The Company will adopt Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", beginning with
the quarterly reporting period ending December 31, 1997. The
adoption of this statement should not have a material impact on
the calculation of earnings per share.
In June 1997, SFAS No. 130 "Reporting Comprehensive Income" was
issued establishing standards for reporting and display of
"comprehensive income" and its components. The Company will be
required to adopt SFAS No. 130 for its fiscal year ending March
31, 1999; however, it is not expected that such adoption will
have a material impact on the Company's financial position or
results of operations.
<PAGE>
In June 1997, SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information" was issued establishing
standards for reporting information about operating segments,
products and services, geographic areas, and major customers in
annual and interim financial statement footnote disclosure. As
required, the Company will adopt the applicable sections of SFAS
No. 131 during its fiscal year ending March 31, 1999 and its
adoption will have no impact on the Company's financial position
or results of operations as it relates to disclosure matters only.
<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 24, 1997.
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, 1998 was adopted by the
following vote:
For Against Abstain
6,506,886 200 3,450
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. 6,496,001 14,535
Robert S. Blank 6,418,136 92,400
John W. Dinzole 6,504,336 6,200
William G. Gisel 6,409,601 100,935
Thomas J. Harrington 6,504,436 6,100
Marne Obernauer 6,495,901 14,635
Edward L. Palmer 6,409,401 101,135
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.
On August 6, 1997, the Company filed a report on Form 8-K,
including pro forma financials statements, pertaining
to the sale of the capital stock of its printing
subsidiary, Graftek Press, Inc., to BGJ Enterprises,
Inc., an affiliate of Brown Printing Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DEVON GROUP, INC.
Date: August 8, 1997 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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<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
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0
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