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 December 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 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 February 11, 1998
Common Stock 7,358,817
<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 Nine Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales $ 69,038 $ 56,514 $190,020 $159,411
Operating costs and expenses:
Cost of sales 40,655 33,182 108,423 90,886
Selling, general, and
administrative 18,330 14,865 53,571 44,272
Income from operations 10,053 8,467 28,026 24,253
Interest income, net 602 181 1,216 648
Other income, net 150 384 374 739
Income from continuing operations
before income taxes 10,805 9,032 29,616 25,640
Provision for income taxes 4,322 3,615 11,846 10,261
Income from continuing operations 6,483 5,417 17,770 15,379
Discontinued operations:
Gain on sale - - 6,818 -
Income from operations - 678 1,046 1,786
Income from discontinued
operations - 678 7,864 1,786
Net income $ 6,483 $ 6,095 $ 25,634 $ 17,165
Income per share from
continuing operations:
Basic $ 0.88 $ 0.74 $ 2.43 $ 2.08
Diluted 0.86 0.73 2.38 2.05
Net income per share:
Basic $ 0.88 $ 0.83 $ 3.50 $ 2.32
Diluted 0.86 0.82 3.43 2.29
Average common shares outstanding:
Basic 7,351 7,378 7,317 7,386
Diluted 7,525 7,472 7,467 7,506
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
DEVON GROUP, INC.
Condensed Consolidated Balance Sheets
As of December 31, 1997 and March 31, 1997
(in thousands, except share and per share data)
<CAPTION>
December 31, March 31,
Assets 1997 1997
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 49,464 $ 28,901
Short-term investments 4,699 -
Receivables, less allowance for doubtful
accounts of $2,291 at December 31, 1997
and $1,821 at March 31, 1997 58,939 37,615
Inventories, at lower of cost or market:
Raw materials 635 572
Work-in-process 23,537 19,178
Finished goods 4,010 3,453
Total inventories 28,182 23,203
Deferred income tax benefits 3,212 3,070
Prepaid expenses and other current assets 5,371 6,624
Net assets of discontinued operation - 27,762
Total current assets 149,867 127,175
Property, plant, and equipment, net 29,003 24,194
Deferred charges and other assets 5,246 4,918
Deferred income tax benefits 1,008 1,095
Excess of cost over fair value of net assets acquired 9,226 6,369
$194,350 $163,751
Liabilities and Stockholders' Equity
Current Liabilities:
Current installments of long-term debt $ 92 $ 92
Accounts payable 5,307 6,803
Accrued expenses 10,977 9,709
Accrued compensation 8,665 7,818
Income taxes 4,194 1,327
Total current liabilities 29,235 25,749
Long-term debt, excluding current installments 2,901 1,916
Deferred and other compensation 5,083 5,005
Stockholders' equity:
Common Stock, $0.01 par value. Authorized 30,000,000
shares; issued 8,458,317 shares at December 31,
1997 and 8,383,317 shares at March 31, 1997 85 84
Additional paid-in capital 36,073 35,658
Retained earnings 137,968 112,334
174,126 148,076
Less: 1,099,500 shares of common stock held in
treasury, at cost, at December 31, 1997
and March 31, 1997 (16,995) (16,995)
Total stockholders' equity 157,131 131,081
$194,350 $163,751
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
DEVON GROUP, INC.
Condensed Consolidated Statements of Cash Flows
For the nine months ended December 31, 1997 and 1996
(Unaudited)
(in thousands)
<CAPTION>
<S> <C> <C>
1997 1996
Net cash provided by (used in) continuing operations $(3,281) $ 308
Net cash provided by (used in) discontinued operations (2,037) 1,801
Net cash provided by (used in) operating activities (5,318) 2,109
Cash flows from investing activities:
Capital expenditures (9,392) (4,938)
Purchase of short-term investments (4,699) -
Payments for purchases of subsidiaries, net of
cash acquired (3,227) (400)
Proceeds from sale of discontinued operations 42,883 -
Net cash provided by (used in) investing activities 25,565 (5,338)
Cash flows from financing activities:
Payments of long-term debt (100) (52)
Proceeds from the exercise of stock options and other 416 454
Purchase of treasury stock - (4,326)
Net cash provided by (used in) financing activities 316 (3,924)
Net increase (decrease) in cash and cash equivalents 20,563 (7,153)
Cash and cash equivalents, beginning of period 28,901 27,857
Cash and cash equivalents, end of period $49,464 $20,704
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DEVON GROUP, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 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 December 31, 1997 presentation.
On September 8, 1997 the Company consummated a transaction
for the sale of its printing subsidiary, Graftek Press,
Inc. (see note 7). Accordingly, the operations of Graftek
Press, Inc. have been presented as a discontinued operation
in the accompanying condensed consolidated financial statements.
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) Earnings per share is presented on a Basic and Diluted
basis. The computation of Basic earnings per share is
based on income available to common stockholders and the
weighted average number of common shares outstanding
during the three- and nine-month periods. Diluted
earnings per share reflects the potential dilution that
could occur if dilutive stock options were exercised
resulting in the issuance of common stock that then shared
in the earnings of the Company. The following table
details the computation of Basic and Diluted earnings per
share for the three- and nine-month periods.
For the Three Months For the Nine Months
Ended December 31, Ended December31,
Income 1997 1996 1997 1996
Income from continuing
operations $ 6,483 $ 5,417 $17,770 $15,379
Discontinued operations - 678 7,864 1,786
Net Income $ 6,483 $ 6,095 $25,634 $17,165
Shares
Basic Shares 7,351 7,378 7,317 7,386
Effect of Dilutive
Stock Options 174 94 150 120
Diluted Shares 7,525 7,472 7,467 7,506
<PAGE>
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
Basic EPS 1997 1996 1997 1996
Income from continuing
operations $ .88 $ .74 $2.43 $2.08
Discontinued operations - .09 1.07 .24
Net Income $ .88 $ .83 $3.50 $2.32
Diluted EPS
Income from continuing
operations $ .86 $ .73 $2.38 $2.05
Discontinued operations - .09 1.05 .24
Net Income $ .86 $ .82 $3.43 $2.29
(3) For purposes of the Statements of Cash Flows, the Company
considers all short-term investments with maturities of
three months or less to be cash equivalents since the
investments are highly liquid.
(4) Property, plant, and equipment is net of accumulated
depreciation of $37,659,000 and $34,747,000 at December 31,
1997 and March 31, 1997, respectively.
(5) Effective September 1, 1997 the Company acquired Canadian
Art Prints Inc.(CAP) for $2,527,000 in cash and a note
payable of $1,086,000. Located in Richmond, B.C., Canada,
CAP publishes and distributes art posters, art cards,
limited edition prints, and matted as well as framed art.
The excess of the purchase price over the fair value of net
assets acquired was $2,684,000.
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 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 $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.
(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 was
consummated on September 8, 1997 and resulted in a gain
(net of applicable income taxes) for financial statement
purposes of $6,818,000 and generated approximately
$35,455,000 in after-tax cash. Revenues for Graftek Press,
Inc. were $24,688,000 for the nine-month period ended
December 31, 1997 versus $12,882,000 and $41,579,000 for
the prior year three- and nine-month periods, respectively.
Income from discontinued operations is net of related
income tax expense of $5,235,000 for the nine-month period
ended December 31, 1997, versus $448,000 and $1,182,000 for
the prior year three- and nine-month periods, respectively.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Sales:
Sales from continuing operations increased $12,524,000, or 22.2%,
and $30,609,000, or 19.2%, for the three- and nine-month periods
ended December 31, 1997 versus the comparable prior year periods
reflecting growth in both the pre-press and publishing subsidiaries.
Pre-press
Revenues for Black Dot Group increased $7,659,000, or 20.2%, and
$14,184,000, or 14.2%, respectively, for the three- and nine-
month periods ended December 31, 1997. The increases versus the
prior year periods reflect continued growth in creative, design,
photographic, and composition services provided to new retail
advertising and catalog accounts as well as incremental volume
with our major retail advertising customers. These gains offset
lower textbook-related revenues.
Publishing
Devon Publishing Group's sales increased $4,865,000, or 26.0%,
and $16,425,000, or 27.8%, respectively, versus the comparable
prior year periods reflecting increased revenues at each of its
existing subsidiaries and incremental revenues from Canadian Art
Prints Inc., a subsidiary acquired effective September 1, 1997.
At Portal, the improvements reflect increased sales of the card,
matted product, and T-shirt lines, primarily due to the combined
effects of the popularity of the Anne Geddes imagery and
increased sales to mass market merchants. Revenues at The Winn
Fine Art Group improved versus the prior year periods reflecting
the success of the upscale Devon Editions poster line as well as
a slight increase in fine art sales.
Gross Profit:
Gross Profit as a percentage of sales was 41.1% and 42.9%,
respectively, for the three- and nine-month periods ended
December 31, 1997 versus 41.3% and 43.0% for the comparable prior
year periods. While gross margins at the pre-press subsidiary
were essentially flat, they declined at the publishing subsidiary
where a shift in product mix resulted in an increase in the cost
of materials as a percentage of sales. Increased return
provisions in the publishing subsidiary also contributed to the
lower gross margin.
Selling, General, and Administrative Expenses:
Selling, general, and administrative expenses as a percentage of
sales were 26.6% and 28.2%, respectively, for the three- and nine-
month periods ended December 31, 1997 versus 26.3% and 27.8% for
the comparable prior year periods. These increases were
primarily due to higher royalty expenses and art amortization
charges at the publishing subsidiary reflecting an increase in
licensed imagery and an expansion of published titles.
Interest Income, Net:
Net interest income increased $421,000 and $568,000,
respectively, for the three- and nine-month periods ended
December 31, 1997 reflecting an increase in the average level of
short-term investments over the prior year periods.
<PAGE>
Income Taxes:
The effective income tax rate was 40.0% for the three- and nine-
month periods ended December 31, 1997 and 1996
Net Income:
As a result of the foregoing, income from continuing operations
increased $1,066,000, or $.14 per share, and $2,391,000, or $.35
per share, for the three- and nine-month periods ended December
31, 1997, while diluted earnings per share increased $.13 and
$.33, respectively, versus the prior year periods.
Liquidity and Capital Resources
During the nine-month period ended December 31, 1997, cash used
by continuing operations was $3,281,000 while cash provided by
continuing operations for the prior year period was $308,000.
The difference primarily reflects increased working capital
versus the prior year period partially offset by a $2,391,000
increase in income from continuing operations. The increased
working capital requirements were primarily due to higher levels
of accounts receivable in the pre-press business attributable to
increased sales volume and the timing of payments for the nine-
month period ended December 31, 1997. Existing short-term
investments were used to fund the cash requirements of the discon-
tinued operation, capital expenditures, the purchase of Canadian
Art Prints, and the contingent payment related to the purchase of
PP/FA. All balances, including those generated by the sale of
Graftek Press, Inc., were invested in short-term low-risk
investments. For the nine months ended December 31, 1996,
existing short-term investments along with cash generated by
continuing and discontinued operations were used to fund capital
expenditures and the contingent payment related to the purchase
of PP/FA.
Impact of the Year 2000 Issue
The Company has assessed the impact of the Year 2000 issue on its
computer systems. Remedial action has been taken or is planned
for completion in a timely manner, and the Company estimates that
the related costs will not have a material impact on its results
of operations.
Recently Issued Financial Accounting Standards
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, such adoption will not have a material impact
on the Company's financial position or results of operations as
it relates to disclosure matters only.
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 not have a material 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.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 10 - Material Contracts - Stock Purchase Agreement
between BGJ Enterprises, Inc. and the Company.
(Incorporated by reference to Exhibit No. 10
forming part of the Registrant's Report on
Form 10-Q filed with Securities and Exchange Commossion
under the Securities Exchange Act of 1934, as
amended, for the quarterly period ended
September 30, 1997)
Exhibit 27 - Financial Data Schedule
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: February 12, 1998 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
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