UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
Commission file number 0-7152
DEVCON INTERNATIONAL CORP.
Florida Corporation EIN # 59-0671992
1350 East Newport Center Drive, Suite 201, Deerfield Beach, FL 33442
Telephone number: (954) 429-1500
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock Registered at the
$.10 par value NASDAQ National market
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 (of 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes _____ No ___X__
As of February 20, 2003, Devcon International Corp. had 3,453,969 shares
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of Devcon International Corp. as of June 30, 2002 was
approximately $7.6 million, based on the closing price on that date of $5.75. In
this calculation all executive officers, directors and 5 percent beneficial
owners of Devcon International Corp. are considered to be affiliates. This is
not an admission that such executive officers, directors or 5 percent beneficial
owners are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference from Devcon's definitive proxy statement (to be filed pursuant to
Regulation 14A)
PART I
Item 1. Business
General
In the Caribbean, Devcon International Corp. (the "Company") produces and
distributes ready-mix concrete, crushed stone, concrete block, and asphalt and
distributes bagged cement. We also perform site preparation work as a land
development contractor. We have established a significant market share in most
locations where we have facilities.
We are a large producer and distributor of ready-mix concrete and quarry
products in these Caribbean islands:
Puerto Rico Commonwealth of Puerto Rico
St. Thomas United States Virgin Islands
St. Croix United States Virgin Islands
St. Maarten Netherlands Antilles
St. Martin French West Indies
Antigua West Indies
Our Construction division performs earthmoving, excavating, and filling
operations, builds golf courses, roads, and utility infrastructures, dredges
waterways and constructs deep-water piers and marinas in the Caribbean. We have
historically provided these land development services to both private
enterprises and governments in the Caribbean. We believe that our relationships
with customers in the Caribbean give us a competitive advantage. Our project
managers have substantial experience in land development construction, and our
equipment is well suited for the Caribbean markets. We have equipment and
personnel in the Caribbean that, we believe, often allow us to start work more
quickly and less expensively than other contractors. While we can bid
competitively and cost-effectively for these land development contracts, our
ability to mobilize quickly can sometimes cause us to incur higher expense
during low activity periods.
The following table sets forth financial highlights of our materials and
construction business. During the first quarter 2000, we sold our operations in
Tortola and Dominica, our concrete operations in St. Thomas and all our bulk
cement terminals. Total assets by segment and other information is further
described in Note 11 of Notes to Consolidated Financial Statements.
2002 2001 2000
---- ---- ----
(In thousands)
Revenue (net of intersegment sales):
......Materials $37,733 $39,703 $50,956
......Construction 15,623 15,185 14,292
-------- -------- --------
...... $53,356 $54,888 $65,248
======= ======= =======
Operating (loss) income (by segment)
......Materials $ (671) $ 23 $(1,608)
......Construction (1,260) 1,173 1,266
......Unallocated corporate overhead (1,115) (1,188) (818)
--------- -------- ---------
...... $ (3,046) $ 8 $(1,160)
======== ========== =======
2
Revenue by geographic area includes sales to unaffiliated customers based on
customer location, not the selling entity's location. The Company moves its
equipment from country to country; therefore, to make this disclosure meaningful
the geographic area separation for assets is based upon the location of the
legal entity owning the assets.
December 31,
-----------------------------------------
2002 2001 2000
---- ---- ----
Revenue by geographic areas: (In thousands)
U.S. and its territories $19,859 $21,563 $25,235
------- ------- -------
Netherlands Antilles 6,689 9,459 12,689
Antigua and Barbuda 10,963 10,535 12,594
French West Indies 4,999 6,385 9,159
Other foreign areas 10,846 6,946 5,571
-------- --------- ---------
Total foreign countries 33,497 33,325 40,013
-------- -------- --------
Total (including U.S.) 53,356 $54,888 $65,248
====== ======= =======
Long-lived assets, net, by geographic areas:
U.S. and its territories $18,325 $20,292 $21,186
------- ------- -------
Netherlands Antilles 270 285 344
Antigua and Barbuda 7,030 6,720 7,281
French West Indies 4,400 3,874 4,206
Other foreign areas 3 54 133
------- ------- -------
Total foreign countries 11,703 10,933 11,964
------- ------- -------
Total (including U.S.) $30,028 $31,225 $33,150
======= ======= =======
Business Address
Our executive offices are located at 1350 East Newport Center Drive, Suite 201,
Deerfield Beach, Florida 33442, our telephone number is (954) 429-1500 and our
web address is www.devc.com. In this document, the terms "Company" and "Devcon"
refer to Devcon International Corp. and its subsidiaries.
Business Development
Our business has shown different trends during the year. The construction
business has been slowing down, except for certain projects on the island of
Exuma in the Bahamas. Including these projects, the Construction division has
still shown a downward trend during the year. The Materials division business
has shown improved revenue the last three quarters of 2002 as compared to fourth
quarter 2001 and first quarter 2002.
In February 2003, the Company's subsidiary in St Maarten entered into an
agreement with the Island Territory of St Maarten, N. A. to sell up to 197
medium-priced homes, approximately $100,000 per home, in a developed subdivision
owned by the Island Government. The Company will initially build two model
homes, and will subsequently finance the construction of homes for buyers upon
receipt of firm sales contracts with mortgage financing approved by one of two
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local banks. The mortgage financing is dependent on the establishment of a
mortgage guarantee fund by the Island Government. There is no assurance that
this fund will be established or that this project will go forward. As the
Company is traditionally engaged in land development contracting, if this
project goes forward, we will hire subcontractors to perform all the residential
construction. We also intend, to the extent possible, to sell construction
materials from the Materials division to the subcontractors, if the project
moves forward successfully.
From time to time, we investigate opportunities to expand our operations to
areas of the Caribbean where we presently have no business, and also
opportunities to expand our existing operations in related areas of operations.
The Company decided in 2001 to stop its operations in Aguadilla, Puerto Rico and
has leased all its equipment on the site to a company affiliated with one of the
joint venture owners of the subsidiary in Puerto Rico.
Risks of Foreign Operations
Portions of our operation in 2002 were conducted in foreign countries located in
the Caribbean, primarily Antigua and Barbuda, St. Maarten, St. Martin and the
Bahamas. In 2002, 62.8 percent of our revenue was derived from foreign
geographic areas. For a summary of our revenue and earnings from foreign
operations, see Notes 9 and 11 of Notes to Consolidated Financial Statements.
The risks of doing business in foreign areas include potential adverse changes
in U.S. diplomatic relations with foreign countries, changes in the relative
purchasing power of the U.S. dollar, hostility from local populations, adverse
effects of exchange controls, restrictions on the withdrawal of foreign
investment and earnings, government policies against businesses owned by
non-nationals, expropriations of property, the instability of foreign
governments, and any insurrection that could result in uninsured losses. We are
not subject to these risks in Puerto Rico or the U.S. Virgin Islands since these
are United States territories. The Company is also subject to U.S. federal
income tax upon the distribution of certain offshore earnings. See Note 8 of
Notes to Consolidated Financial Statements. Although we have not encountered
significant difficulties in our foreign operations, there can be no assurance
that we will never encounter difficulties.
Materials Division
General In 2002, we manufactured and distributed ready-mix concrete, block and
crushed aggregate. We also distributed bagged cement. Our sales can be
segregated into certain product groups:
2002 2001 2000
---- ---- ----
Revenue (net of intersegment sales): (In thousands)
......Ready-Mix concrete $13,270 $14,068 $16,256
......Aggregates 17,444 17,984 17,413
......Concrete block 4,108 4,445 5,558
......Cement 1,724 2,851 10,738
......Other 1,187 355 991
------- ------- -------
...... $37,733 $39,703 $50,956
======= ======= =======
4
The different activities on the islands are shown below:
Quarry Concrete Aggregates
Ready-mix aggregates block & Block Cement
concrete production production sales sales
-------- ---------- ---------- ----- -----
Puerto Rico X X
St. Thomas, U.S.V.I. X X X X
St. Croix, U.S.V.I. X X X
St. Maarten X X X X
St. Martin X X X X
Antigua X X X X X
Our Materials division employed assets in 2002 such as:
o Quarry Related Equipment o Concrete Batch Plants
o Aggregates Processing Plants o Fleet of Concrete Mixer Trucks
o Concrete Block Plants o Asphalt Plants
See additional information under Item 1 - Business-General.
Ready-Mix Concrete and Concrete Block Our concrete batch plants mix cement,
sand, crushed stone, water and chemical additives to produce ready-mix concrete
for use in local construction. Our fleet of concrete mixer trucks delivers the
concrete to the customer's job site. At our concrete block plants, a
low-moisture concrete mixture is machine-formed, then dried and stored for later
sale. Usually, our ready-mix concrete operations and concrete block plants are
the area's largest or only facility. We also sell a product we refer to as
soil-cement, which utilizes similar ingredients as our concrete, as well as some
by-products from our aggregates production. The production of soil-cement also
reduces the material that we have to dispose of.
Quarry Operations and Crushed Stone We own or lease quarry sites at which we
blast rock from exposed mineral formations. This rock is crushed to sizes
ranging from 3 1/2-inch stones down to manufactured sand. The resulting
aggregate is then sorted, cleaned and stored. The aggregate is sold to customers
and used in our operations to make concrete products. Our quarries are the
largest on four Caribbean islands. It is often less expensive to manufacture
crushed rock at our quarries than to import aggregate from off-island sources.
Bagged Cement In prior years, we owned and operated several bulk cement
terminals. In the beginning of 2000, all of the Company's cement terminals were
sold. As a result of this transaction we now enter the supply chain for cement
at a later stage, and purchase cement directly from the terminals we sold. The
Company purchases cement from these terminals for use in its concrete batch
plants, block plants and on some islands for resale in the form of bagged
cement.
Supplies We presently obtain all of the crushed rock and a majority of the sand
necessary for our production of ready-mix concrete from our own quarries. We
believe our ability to produce our own sand and stone gives us a competitive
advantage because of the substantial investment required to produce aggregates,
the difficulty in obtaining the necessary environmental permits to establish
5
quarries and the moratorium on mining beach sand imposed by most Caribbean
countries. We purchase cement from cement terminals located on the islands where
our operations are established and bulk cement is readily available from a
number of manufacturers located throughout the Caribbean basin.
Customers Our primary customers are building contractors, governments, asphalt
pavers and individual homeowners. Customers generally pick up quarry products,
concrete block and bagged cement at our facilities, and we generally deliver
ready-mix concrete to the customers' job sites.
Competition We have competitors in the materials business in the locations where
we conduct business. The competition includes local ready-mix concrete plants,
importers of aggregates and concrete blocks. We also encounter competition from
the producers of asphalt, which is an alternative material to concrete for road
construction. We believe our materials market share, resources, facilities,
local presence and cost structure give us a competitive advantage in the eastern
Caribbean markets where we operate.
Construction Division
General We have completed land development construction projects, including
interstate highways, airport sites and runways, deep-water piers and marinas,
hydraulic dredging, golf courses, and industrial, residential and commercial
site development.
The revenue related to the work performed by our Construction division is
generated on a contract-by-contract basis. The majority of our contracts are
completed in less than one year, although we obtain multi-year contracts from
time to time. These contracts are bid or negotiated at a fixed price, except for
changes in the scope of the work requested by the owner during the term of the
contract. The majority of our work is performed by our own labor and equipment
and is not subcontracted. We also enter into unit-price contracts where our fee
is based upon the quantity of work performed. This is often measured in yards,
meters or tons, rather than time.
Operations We obtain leads for new projects from customers and engineering firms
with whom we have established relationships. First, we decide whether to submit
a bid or negotiate to undertake a particular project. We prepare and submit
timely proposals detailing what we believe will best meet the customer's
objectives. We have also provided long-term or short-term financing to obtain
more profitable construction contracts, and any financing by us in the future is
contingent upon our financial position and operating results. Our Vice President
of Construction Operations and/or our President review project proposals and
bids. After a customer accepts our proposal, a formal contract is negotiated. We
are normally the prime contractor. We assign one of our field superintendents to
maintain close contact with the customer and its engineers, to supervise
personnel and the relocation, purchase, lease and maintenance of equipment, and
to schedule and monitor our operations.
Backlog Our backlog of unfulfilled portions of construction contracts at
December 31, 2002 was approximately $5.6 million involving 6 projects. One
Bahamian project's backlog amounted to approximately $3.3 million at the end of
2002. A subsidiary, our President and one of our directors are minority
6
partners, and our President is also a member of the managing committee of the
entity developing this project. The backlog of $5.6 million involving 6 projects
at the end of 2002 compares to $10.5 million involving 7 projects at December
31, 2001. Since December 31, 2002, through February 20, 2003, we have entered
into new construction contracts in the Caribbean amounting to $2.1 million, and
we are finalizing contracts for another $3.1 million that we estimate will be
signed shortly, however, no assurance can be given that these contracts will be
signed as expected. We are actively bidding and negotiating additional projects.
We expect most of the current backlog to be completed during 2003.
Bonding We must obtain a performance bond to bid on government construction
contracts and some private contracts. We have, in the past, been able to provide
performance and/or payment bonds, when required.
Customers Our primary customers are government entities, large contractors and
large landowners located through out the Caribbean basin. During 2002 there was
one customer in the Bahamas, for whom we recorded revenue of $8.4 million in the
year. Should this customer become insolvent or decide not to utilize our
services, the Construction division's revenue would be diminished substantially.
Our President and one of our directors are minority shareholders of this entity.
Competition Land development construction is extremely competitive. We compete
with smaller local contractors as well as larger US and European based
contractors in all our markets. Primary competitive factors include price, prior
experience and relationships, the equipment available to complete the job,
innovation, the available engineering staff to assist an owner in minimizing
costs, how quickly a company can complete a contract, and the ability to obtain
bonding which guarantees contract completion.
Tax Exemptions and Benefits
Some of our offshore earnings are taxed at rates lower than U.S. statutory
federal income tax rates due to tax exemptions and tax incentives. The U.S.
Virgin Islands Industrial Development Commission granted us tax exemptions on
most of our U.S. Virgin Islands earnings through March 2003. No decision has
been made as to whether or not we will seek an extension of this tax exemption,
and there is no guarantee that, if sought, it will be granted. If we do not have
the exemption, our taxes would be increased, however, some fees and scholarships
that we are currently granting would not continue. The impact of not having the
exemption is currently being reviewed.
U.S. tax laws provide that our offshore earnings are not taxable for U.S.
federal income tax purposes, and most post-April 1988 Materials division
earnings in the U.S. Virgin Islands can be distributed to us free of U.S. income
tax. Any distribution to Devcon International Corp, the parent company, of: (1)
earnings from our U.S. Virgin Islands operations accumulated prior to April 1,
1988; or (2) earnings from our Antigua, St. Martin and St. Maarten operations,
would subject us to U.S. federal income tax on the amounts distributed, less
applicable taxes paid in those jurisdictions according to specific rules. At
December 31, 2002, $35.8 million of accumulated earnings had not been
distributed to the parent company. We have not provided for U. S. federal income
7
tax on the undistributed earnings of foreign subsidiaries because we intend to
permanently reinvest those earnings offshore, unless the earnings can be
repatriated in a tax-free manner.
Our tax exemption and our ability to receive most of the current earnings from
our U.S. Virgin Islands operations without being subject to U.S. federal income
taxes reduce our income tax expense. For further information on our tax
exemptions and income taxes, see Note 8 of Notes to Consolidated Financial
Statements.
Equipment
Both of our businesses require us to lease or purchase and maintain equipment.
As of December 31, 2002, our equipment included cranes, bulldozers, road
graders, rollers, backhoes, earthmovers, a hydraulic dredge, barges, rock
crushers, concrete batch and block plants, concrete mixer trucks, asphalt
processing and paving equipment and other items. Some of this equipment is
encumbered by chattel mortgages. At certain times, a part of this equipment will
be idle in between construction jobs, and at times, certain equipment will be
idle for longer periods until suitable construction contracts are found. See
Notes 7 and 10 of Notes to Consolidated Financial Statements.
Miscellaneous Investments and Joint Ventures
We have invested or participated in several joint ventures in connection with
our Construction and Materials divisions.
During the period 1998 through 2001, we invested a total of $186,000 for a 1.2
percent interest in a real estate joint venture in the Bahamas. The upscale
resort project is expected to finish its hotel construction by the middle of
2003 and open the resort shortly thereafter. Both our President and one of our
other directors have an interest in the joint venture. See Note 12 of Notes to
Consolidated Financial Statements.
During the period 1998 through 2001 we invested a total of $181,000 for a 33.3
percent interest in a real estate joint venture in Puerto Rico that owns the
land where the Aguadilla aggregate processing plant was operating. During 2002
we recognized earnings of $9,000 from this joint venture under the equity method
of accounting.
Executive Officers
The executive officers of the Company are as follows:
Donald L. Smith, Jr., 81, a co-founder of the Company, has served as its
Chairman of the Board, President and Chief Executive Officer since its formation
in 1951.
Richard L. Hornsby, 67, was appointed the Company's Executive Vice President in
March 1989. Mr. Hornsby served as Vice President of the Company from August 1986
to February 1989. From 1981 to 1986 he was Financial Manager for unrelated
private investment companies. He has been a director of the Company since 1975
and served as Vice President-Finance from 1972 to 1977.
8
Henry C. Obenauf, 73, was appointed Vice President-Engineering of the Company in
March 1989, after having served as Vice President of the Company since 1977. The
Company has employed Mr. Obenauf for over 33 years.
Jan A. Norelid, 49, was appointed Vice President-Finance and Chief Financial
Officer in October 1997. From January 1996 to September 1997, he owned and
operated a printing company. From 1991 to 1995 he served as Chief Financial
Officer for Althin Medical, Inc., a medical device manufacturer.
Donald L. Smith, III, 50, was appointed Vice President-Construction Operations
for the Company in December 1992. Mr. Smith joined the Company in 1976 and has
served in supervisory and managerial positions within the Company since that
time.
Kevin M. Smith, 45, was appointed Vice President-Materials Division in June
2002. Mr. Smith joined the Company in 1989 and has served in management
positions within the Company since that time.
Intellectual Property
We possess trade names used in the islands, of which none are registered. We
believe that trade names, which are normally the corporate names of our local
subsidiaries, have name recognition and are valuable to the Company. No asset
has been recorded for this purpose in our consolidated balance sheet.
Employees
At December 31, 2002, we employed 119 persons in the Construction division, of
whom 6 are members of a union. As of the same date, we employed 231 persons in
our Materials division, of whom 77 are members of a union. Most employees are
employed on a full-time basis. Employee relations are considered satisfactory.
Environmental Matters
We are involved, on a continuing basis, in monitoring our compliance with
environmental laws and in making capital and operating improvements necessary to
comply with existing and anticipated environmental requirements. While it is
impossible to predict with certainty, management currently does not foresee such
expenses in the near future as having a material effect on our business, results
of operations, or financial condition. See Item 3 and Note 16 of Notes to
Consolidated Financial Statements.
9
Item 2. Property
General
The Materials division utilizes nearly all of the real property that we own or
lease. We also own undeveloped parcels of land in the U.S. Virgin Islands and
Antigua. The following table shows information on the properties and facilities
that we owned or leased for our operations at December 31, 2002:
Lease Expiration
Description Location with all Options Area
----------- -------- ---------------- -----
Shared facilities
- -----------------
Principal executive offices Deerfield Beach 5/07 8,410 sq. ft. (1)
Maintenance shop for heavy equipment Deerfield Beach 6/12 3.44 acres (1)(2)
Materials division
- ------------------
Concrete block plant and equipment St. Thomas 6/04 11.00 acres (1)
maintenance facility
Quarry St. Thomas owned 8.50 acres
Quarry St. Thomas 2/18 44.00 acres (1)
Barge terminal St. Thomas 5/22 1.50 acres (1)
Quarry St. Thomas 8/06 7.49 acres (1)
Concrete batch plant and office St. Croix owned 3.20 acres
Quarry, rock crushing plant St. Croix owned 61.34 acres
Maintenance shop St. Croix 7/10 6.00 acres (1)
Quarry St. Croix 5/03 10.78 acres (1)
Concrete batch plant, concrete block Antigua 9/16 22.61 acres (1)
plant, rock crushing plant, asphalt
plant, quarry and office
Concrete block plant St. Maarten Month-to-Month 3.00 acres (1)
Barge unloading facility St. Maarten 5/05 0.30 acres (1)
Office building, batch plant, shop St. Maarten Month-to-Month 1.39 acres
Quarry, rock-crushing plant, concrete
batch plant and office building St. Martin 7/10 123.50 acres (1)
Quarry, rock crushing plant and
office building Guaynabo, P.R. 3/06 40.00 acres (1)(3)
(1) Underlying land is leased but equipment and machinery on the land are
owned by the Company.
(2) Leased from Donald L. Smith, Jr., the Company's Chief Executive. See
Note 12 of Notes to Consolidated Financial Statements.
(3) Acreage is estimated.
We consider the properties and facilities used in our operations suitable for
our industry, and they are currently adequate for our use. The reserves are
sufficient for many years' aggregates production in all operations, except for
the operations in Guaynabo, Puerto Rico. We are currently searching for a new
site to use for our quarry business in Puerto Rico.
10
Item 3. Legal Proceedings
We are involved in routine litigation arising in the ordinary course of our
business, primarily construction.
In the fall of 2000, Virgin Islands Cement and Building Products, Inc.
("VICBP"), a subsidiary of the Company, was under contract with the Virgin
Islands Port Authority ("VIPA") for the construction of the expansion of the St.
Croix Airport. During the project, homeowners and residents of the Yellow Cedar
Housing Community, located next to the end of the expansion project, claimed to
have experienced several days of excessive dust in their area as a result of the
ongoing construction work. The homeowners of Yellow Cedar have filed two
separate lawsuits against VIPA and VICBP as co-defendants. One suit, filed in
the U.S. District Court by Mariepaul Antoine, Benjamin Ashe, et. al, vs. VIPA
et. al, case #2001,63 R/F, seeks equitable relief from nuisance, specific
performance and damages. The second suit, Louisa Williams et. al vs. VIPA et. al
filed in the Territorial Court of the U.S.V.I. case #548/2000 seeks equitable
relief from nuisance, specific performance and damages. In both cases, VICBP, as
defendant, has agreed to indemnify VIPA for any civil action as a result of the
construction work. Reliance Insurance Company ("Reliance"), the general
liability carrier for VICBP during that period, has taken the legal position
that "dust" is a pollutant and, therefore, the pollution exclusion clause
applies and as a result denies liability insurance coverage to VICBP. Corporate
counsel in Florida, as well as in the U.S. Virgin Islands, have advised the
Company that laws now in place should enable the Company to enforce the duty to
defend contained in the liability policy, thus affording the Company a defense
of both legal actions. The Pennsylvania Insurance Commissioner placed Reliance
in rehabilitation in October 2001, and subsequently into liquidation. We have
also presented claims under the policy to the Florida Insurance Guaranty
Association, the V.I. Insurance Guaranty Association, and to the Pennsylvania
Insurance Commissioner. It is too early to predict the final outcome of this
matter or to estimate the potential risk of loss, if any, to the Company.
In the late 1980s, Bouwbedrijf Boven Winden, N.V., ("BBW") currently a Devcon
subsidiary in the Netherlands Antilles, supplied concrete to a large apartment
complex on the French side of St. Maarten. In the early 1990s the buildings
began to develop exterior cracking and "pop outs." In November 1993, BBW was
named one of several defendants including the building's insurer, in a suit
filed by Syndicat des Coproprietaires la Residence Le Flamboyant (condominium
owners association of Le Flamboyant), in the French court "Tribunal de Grande
Instance de Paris", case No. 510082/93. A French court assigned an expert to
examine the cause of the cracking and pop outs and to determine if the
cracking/pop outs are caused by a phenomenon known as alkali reaction (ARS). The
expert found, in his report dated December 3, 1998, that BBW was responsible for
the ARS. The plaintiff is seeking unspecified damages, including demolition and
replacement of the 272 apartments. Based on the advice of legal counsel, a
judgment assessed in a French court would not be enforceable against a
Netherlands Antilles company. Thus, in order to obtain an enforceable judgment,
the plaintiff would have to file a successful claim in an Antillean court. It is
too early to predict the final outcome of this matter or to estimate the
potential risk of loss, if any, to the Company. Due to the lack of
enforceability, the Company decided not to continue the defense in the French
court. Therefore, the Company may not be aware of recent developments in the
proceedings. Management believes our defenses to be meritorious and does not
believe that the outcome will have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
11
We are subject to federal, state and local environmental laws and regulations.
We believe that the Company is in compliance with all such laws and regulations.
Compliance with environmental protection laws has not had a material adverse
impact on our consolidated financial condition, results of operations or cash
flows in the past and is not expected to have a material adverse impact in the
foreseeable future.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the fourth
quarter of 2002.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
Our common stock is traded on the Nasdaq National Market System under the symbol
DEVC. The following table shows high and low prices for our common stock for
each quarter for the last two fiscal years as quoted by Nasdaq.
2002 High Low
---- ---- ----
Fourth Quarter $6.97 $6.25
Third Quarter 6.65 5.50
Second Quarter 6.85 5.50
First Quarter 6.85 5.51
2001 High Low
---- ---- ----
Fourth Quarter $6.80 $5.70
Third Quarter 7.28 6.55
Second Quarter 7.50 6.43
First Quarter 7.25 6.19
As of February 20, 2003 there were 137 holders of record of the outstanding
shares of Common Stock and more than 440 beneficial owners holding our common
stock in their brokers' name. The closing sales price for the common stock on
February 19, 2003, was $6.70. We paid no dividends in 2002 or 2001. The payment
of cash dividends will depend upon the earnings, consolidated financial position
and cash requirements of the Company, its compliance with loan agreements, and
other relevant factors. We do not presently intend to pay cash dividends. No
unregistered securities were sold or issued in 2002, 2001 or 2000.
12
Equity Compensation Plans
The table below provides information relating to our equity compensation plans
as of December 31, 2002.
Number of shares
Number of shares to be Weighted average remaining available for
issued upon exercise exercise price of future issuance under
of outstanding options outstanding options compensation plans (1)
---------------------- ------------------- ----------------------
Equity compensation
plans:
Approved by 793,195 $3.77 17,000
shareholders
Not approved by - - -
shareholders
Total 793,195 $3.77 17,000
(1) excluding shares reflected in first column
There are no other shares of capital stock issued other than common stock. No
employments or other agreements provide for the issuance of any shares of
capital stock. There are no other options, warrants, or other rights to purchase
securities of the Company, other than options to purchase common stock issued
under the 1986 Non-Qualified Stock Option Plan, the 1992 Directors Stock Option
Plan, the 1992 Stock Option Plan, as amended and the 1999 Stock Option Plan.
Item 6. Selected Financial Data
The following is our selected financial data which should be read in conjunction
with our Consolidated Financial Statements and accompanying Notes and with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." This data is derived from our Consolidated Financial Statements
audited by KPMG LLP, independent certified public accountants. Our Consolidated
Financial Statements as of December 31, 2002 and 2001 and for each of the years
in the three-year period ended December 31, 2002 and the independent auditors'
report appear elsewhere in this document.
13
Financial Data Year Ended December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Income Statement Data:
Materials revenue $37,733 $39,703 $50,956 $55,313 $50,448
Construction revenue 15,623 15,185 14,292 12,721 15,359
Other revenue - - - - 371
------------ ------------ ------------- ------------- ----------
Total revenue 53,356 54,888 65,248 68,034 66,178
Cost of materials 30,754 32,182 42,608 46,364 41,281
Cost of construction 14,790 12,447 11,461 11,000 12,900
Cost of other - - - - 246
------------ ------------ ----------- ----------- ----------
Gross profit 7,812 10,259 11,179 10,670 11,751
Operating expenses 10,858 10,251 12,339 12,888 10,806
-------- -------- ------- ------- -------
Operating (loss) income (3,046) 8 (1,160) (2,218) 945
Other income (expense) 4,643 3,252 20,362 (821) (122)
-------- -------- ------- -------- ----------
Income (loss) from operations (1)
before income taxes 1,597 3,260 19,202 (3,039) 823
Income taxes 396 830 715 273 339
------- -------- -------- -------- --------
Net income (loss) $ 1,201 $ 2,430 $18,487 $(3,312) $ 484
======= ======= ======= ======= =======
Income (loss) per share:
Basic $ 0.34 $ 0.67 $ 4.80 $ (0.74) $ 0.11
Diluted $ 0.31 $ 0.61 $ 4.40 $ (0.74) $ 0.11
Weighted average number of shares outstanding:
Basic 3,572 3,632 3,851 4,481 4,499
Diluted 3,874 3,963 4,202 4,481 4,520
Balance Sheet Data:
Working capital $19,659 $16,203 $14,035 $ 6,549 $ 6,910
Total assets 68,437 67,952 72,136 81,914 82,430
Long-term debt, excluding
current portion 2,335 2,455 2,465 14,350 18,153
Stockholders' equity 55,025 53,845 52,434 39,436 43,641
(1) There are no discontinued operations.
14
The Company has not made any material accounting changes in the past five years.
We disposed of several businesses in year 2000, as more precisely described in
Note 18 of Notes to Consolidated Financial Statements and our Reports on form
8-K dated January 7, 2000 and February 22, 2000, respectively, which materially
affect the comparability of the selected financial data shown above. As we
continued to distribute cement on most islands after the sale of our cement
terminals, and as after the sale of our concrete business on St Thomas, the
buyer became our largest customer on the island of aggregates, it is not
practical to demonstrate the net sales, gross profit or net income of the
operations without the sold businesses.
The following is our selected quarterly financial data which should be read in
conjunction with our Consolidated Financial Statements and accompanying Notes
and with our "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(Loss) income
Total Gross Net (loss) Per Share
Revenue Profit Income Basic Diluted
------- ------ ------ ----- -------
(in thousands)
2002
Fourth Quarter $13,204 $ 1,454 $ (151) $ (0.04) $(0.04)
Third Quarter 13,268 2,004 3 0.00 0.00
Second Quarter 13,498 2,331 412 0.11 0.11
First Quarter 13,386 2,023 937 0.26 0.24
2001
Fourth Quarter $12,413 $ 2,095 $ 475 $ 0.13 $ 0.12
Third Quarter 14,673 3,332 1,036 0.29 0.26
Second Quarter 14,586 2,926 870 0.24 0.22
First Quarter 13,216 1,906 49 0.01 0.01
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Dollar amounts of $1.0 million or more are rounded to the nearest one tenth of a
million; all other dollar amounts are rounded to the nearest one thousand and
all percentages are stated to the nearest one tenth of one percent.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a
safe harbor for forward-looking statements made by or on behalf of the
Corporation. The Corporation and its representatives may, from time to time,
make written or verbal forward-looking statements, including statements
contained in the Corporation's filings with the Securities and Exchange
Commission and in its reports to stockholders. Generally, the inclusion of the
15
words "believe," "expect," "intend," "estimate," "anticipate," "will," and
similar expressions identify statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended to come
within the safe harbor protection provided by those sections. All statements
addressing operating performance, events, or developments that we expect or
anticipate will occur in the future, including statements relating to sales
growth, earnings or earnings per share growth, and market share, as well as
statements expressing optimism or pessimism about future operating results, are
forward-looking statements within the meaning of the Reform Act.
The forward-looking statements are and will be based upon our management's
then-current views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such statements. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise.
By their nature, all forward-looking statements involve risks and uncertainties.
Actual results, including our revenues from both are Construction and Materials
divisions, expenses, gross margins, cash flows, financial condition, and net
income, as well as factors such as our competitive position, inventory levels,
backlog, the demand for our products and services, customer base and the
liquidity and needs of our customers, may differ materially from those
contemplated by the forward-looking statements or those currently being
experienced by the Company for a number of reasons, including but not limited
to:
o The strength of the construction economies on various islands in the
Caribbean, primarily in the United States Virgin Islands, St Maarten, St.
Martin, Antigua and Puerto Rico. Our business is subject to economic
conditions in our markets, including recession, inflation, deflation,
general weakness in construction and housing markets, and changes in
infrastructure requirements.
o Our ability to maintain mutually beneficial relationships with key
customers. We have a number of significant customers. The loss of
significant customers, the financial condition of our customers or an
adverse change to the financial condition of our significant customers
could have a material adverse effect on our business or the
collectibility of our receivables.
o Unforeseen inventory adjustments or significant changes in purchasing
patterns by our customers and the resultant impact on manufacturing
volumes and inventory levels.
o Adverse changes in currency exchange rates or raw material commodity
prices, both in absolute terms and relative to competitors' risk
profiles. We have businesses in various foreign countries in the
Caribbean. As a result, we are exposed to movements in the exchange rates
of various currencies against the United States dollar. We believe our
most significant foreign currency exposure is the Euro.
o Increased competition. The Materials division operates in markets, which
are highly competitive on the basis of price and quality. We compete with
local suppliers of ready-mix, and foreign suppliers of aggregates and
concrete block. Competition from certain of these manufacturers has
intensified in recent years and is expected to continue. The Construction
division has local and foreign competitors in its markets. Customer and
competitive pressures sometimes have an adverse effect on our pricing.
16
o Our foreign operations may be affected by factors such as tariffs,
nationalization, exchange controls, interest rate fluctuations, civil
unrest, governmental changes, limitations on foreign investment in local
business and other political, economic and regulatory conditions, risks
or difficulties.
o The effects of litigation, environmental remediation matters, and product
liability exposures, as well as other risks and uncertainties detailed
from time to time in our filings with the Securities and Exchange
Commission.
o Our ability to generate sufficient cash flows to support capital
expansion, business acquisition plans, our share repurchase program and
general operating activities, and our ability to obtain necessary
financing at favorable interest rates.
o Changes in laws and regulations, including changes in accounting
standards, taxation requirements, including tax rate changes, new tax
laws and revised tax law interpretations, and environmental laws, in both
domestic and foreign jurisdictions, and restrictions on repatriation of
foreign investments.
o The impact of unforeseen events, including war or terrorist activities,
on economic conditions and consumer confidence.
o Interest rate fluctuations and other capital market conditions.
o Construction contracts with a fixed price sometimes suffer penalties that
cannot be recovered by additional billing, which penalties may be due to
circumstances in completing construction work, errors in bidding
contracts, or changed conditions.
o Adverse weather conditions, specifically heavy rains or hurricanes, which
could reduce demand for our products.
The foregoing list is not exhaustive. There can be no assurance that we have
correctly identified and appropriately assessed all factors affecting our
business or that the publicly available and other information with respect to
these matters is complete and correct. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial also may
adversely impact us. Should any risks and uncertainties develop into actual
events, these developments could have material adverse effects on our business,
financial condition, and results of operations. For these reasons, you are
cautioned not to place undue reliance on our forward-looking statements.
17
Critical Accounting Policies and Estimates
Our discussion of our financial condition and results of operations is an
analysis of the Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"), consistently applied. Although our significant accounting
policies are described in Note 1 of the Notes to Consolidated Financial
Statement, the following discussion is intended to describe those accounting
policies and estimates most critical to the preparation of our consolidated
financial statements. The preparation of these Consolidated Financial Statements
requires our management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to allowance for credit losses,
valuation of the Antigua and Barbuda notes, inventories and loss reserve for
inventories, cost to complete of construction contracts, assets held for sale,
intangible assets, income taxes, specifically the Antigua tax assessments, tax
on un-repatriated earnings, warranty obligations, restructuring, business
divestitures, pensions, deferral compensation and other employee benefit plans
or arrangements, environmental matters, and contingencies and litigation. We
base our estimates on historical experience and on various other factors that we
believe to be reasonable, the results of which, form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our Consolidated
Financial Statements:
o Revenue and earnings on construction contracts, including construction
joint ventures are recognized on the percentage-of-completion-method based
upon the ratio of costs incurred to estimated final costs, for which
collectibility is reasonably assured. Provisions are recognized in the
statement of income for the full amount of estimated losses on uncompleted
contracts whenever evidence indicates that the estimated total cost of a
contract exceeds its estimated total revenue. Contract cost is recorded as
incurred and revisions in contract revenue and cost estimates are reflected
in the accounting period when known. Revenue in an amount equal to cost
incurred is recognized prior to contracts reaching 25% completion.
Change-orders for additional contract revenue are recognized if it is
probable that they will result in additional revenue and the amount can be
reliably estimated. The related earnings are not recognized until the
period in which such percentage completion is attained. It is our judgment
that until a project reaches 25% completion, there is insufficient
information to determine with a reasonable level of assurance what the
estimated profit on the project will be. We estimate costs to complete our
construction contracts based on experience from similar work in the past.
If the conditions of the work to be performed changes or if the estimated
costs are not accurately projected, the gross profit from construction
contracts may vary significantly in the future. The foregoing, as well as
weather, stage of completion and mix of contracts at different margins may
cause fluctuations in gross profit between periods and these fluctuations
may be significant.
18
o We maintain allowances for doubtful accounts for estimated losses resulting
from management's review and assessment of our customers' ability to make
required payments. We consider the age of specific accounts, a customer's
payment history and specific collateral given by the customer to secure the
receivable. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances might be required. If the customers pay a previous
impaired receivable, income is then recognized.
o We maintain reserves for estimated obsolescence or unmarketable inventory
for the difference between the cost of inventory and the estimated market
value based upon assessments about current and future demand and market
conditions. If actual market conditions were to be less favorable than
those projected by management, additional inventory reserves could be
required. If the actual market demand surpasses the projected levels,
certain inventory reserves would be removed and the result of operations
would be higher than expected.
o We maintain an accrual for deferred compensation agreements with the
Company's President and certain other employees. This accrual is based on
the life expectancy of these persons and the assumed Company-specific
long-term interest rate for debt, 8 percent. Should the actual longevity
vary significantly from the United States insurance norms, or should the
interest rate used to establish the present value of the deferred
compensation obligation vary, the accrual may have to be significantly
increased or diminished at that time.
o Based on written legal opinion from Antiguan counsel, we have not recorded
a liability of $6.1 million, not including any interest or penalties, for
taxes assessed by the Government of Antigua and Barbuda for the years 1995
through 1999. The Government may also assess further taxes for the years
prior and subsequent to the assessed tax years. We are appealing said
assessments. However, if our appeal is not successful, a significant tax
liability may have to be recorded. We do not believe losing the appeal
would have an immediate effect on our cash flow, as the Government of
Antigua and Barbuda owes us in excess of $30.0 million, and we have the
right of to offset against any amounts owed the government. See Notes 3 and
8 of Notes to Consolidated Financial Statements.
o We have $35.8 million of un-repatriated earnings in our foreign
subsidiaries. We have no intention of bringing these earnings back to the
United States, unless we can do so in a tax-free manner. However, should we
be forced to repatriate the earnings, we would have to recognize and pay a
substantial U.S. federal income tax. The tax would be approximately 34
percent of the repatriated amount, or potentially $12.2 million.
o We were accounting for the notes receivable from the Government of Antigua
and Barbuda under the cost-recovery method until April 2000. Subsequent to
a restructuring of the notes, we started to account for the notes using the
accrual method. We record payments received, first to the projected
principal reductions for the period, then to accrued interest, and lastly
to additional reduction of principal. Interest income is recognized on the
notes only to the extent payments are recorded for accrued interest. Should
19
the payments from the government diminish substantially or become
uncertain, we may have to revert to the cost-recovery method or impair the
notes. This could decrease our earnings significantly. See Note 3 of Notes
to Consolidated Financial Statements. The Government was delayed in certain
of its payments due in the fourth quarter of 2002 and, consequently, the
Company recorded $497,000 less in interest income compared to the average
of the first three quarters of 2002. Subsequent to year-end the Company
received payment for all past due amounts from 2002.
o We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in
the event that we were to determine that we would be able to realize our
deferred tax assets in the future in excess of the net recorded amount, an
adjustment to the deferred tax asset would increase income in the period
such determination was made. Likewise, should we determine that we would
not be able to realize all or part of our net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income
in the period such determination was made.
We are not presently considering changes to any of our critical accounting
policies and we do not presently believe that any of our critical accounting
policies are reasonably likely to change in the near future. There have not been
any material changes to the methodology used in calculating our estimates during
the last three years, except for the Company starting to recognize interest
income for payments received from the Government of Antigua and Barbuda in April
2000, see Note 3 of Notes to Consolidated Financial Statements. The CEO, CFO and
the Audit Committee have reviewed all of the foregoing critical accounting
policies and estimates.
Comparison of Year Ended December 31, 2002 with Year Ended December 31, 2001
Total Revenue
Our revenue was $53.4 million in 2002 and $54.9 million in 2001. This 2.8
percent decrease reflects a decrease in materials revenue, partially offset by
an increase in construction revenue.
Our materials revenue decreased 5.0 percent to $37.7 million in 2002 from $39.7
million in 2001. This decrease was primarily due to reduction in sale of
concrete, block and aggregates, and reduced sale of cement due to the
termination of our cement distribution agreement with Union Maritima
International, S.A. on March 1, 2001. Concrete and block revenue diminished 5.7%
and 7.6%, respectively, mainly due to the completion in early 2002 of a large
construction project on St. Croix and reduced volumes on St. Martin, offset to a
lesser extent by improved volumes on Antigua. Aggregates revenue was reduced by
3.0%, mainly due to reduced activity on Puerto Rico, offset to a lesser extent
by improved volumes on Antigua. We believe the poor result on St. Maarten/St.
Martin is a result of a slowdown in the island's economy due to reduced tourism
on that island in the aftermath of the events of September 11, 2001. However, we
have seen continued strengthening demand in the U.S. Virgin Islands and Antigua
over the last year. At this time we cannot predict materials revenue levels in
2003.
20
Revenue from our Construction division increased 2.9 percent to $15.6 million in
2002 from $15.2 million in 2001. This increase resulted primarily from increased
activity in the Bahamas and the U.S. Virgin Islands. Our backlog of unfilled
portions of land development contracts at December 31, 2002 was approximately
$5.6 million involving 6 projects, as compared to approximately $10.5 million
involving 7 projects at December 31, 2001. The backlogs of the contracts on
Exuma in the Bahamas at December 31, 2002 were approximately $3.3 million. Since
December 31, 2002, through February 20, 2003, we have entered into new
construction contracts in the Caribbean amounting to approximately $2.1 million,
and we are finalizing contracts for another $3.1 million that we estimate will
be signed shortly, however, no assurance can be given that these contracts will
be signed as expected. We are actively bidding and negotiating additional
projects. We expect most of the current backlog to be completed during 2003.
Cost of Materials
Cost of materials increased slightly to 81.5 percent of materials revenue from
81.1 percent in 2001. This increase was primarily the result of a decrease in
revenue, which resulted in fixed costs of sales weighing heavier on the margins
for the division, and reduced margins in St. Martin.
Cost of Construction
Cost of construction increased to 94.7 percent of construction revenue in 2002
from 82.0 percent in 2001. This increase is primarily attributable to the marine
equipment having profitable work in 2001 and being idle in 2002, the cost of
which includes depreciation and continuous maintenance of the equipment, and
also to the varying profitability levels of individual contracts and the stage
of completion of such contracts.
Operating Expenses
Selling, general and administrative expenses ("SG&A expense") increased by 5.9
percent to $10.9 million in 2002 from $10.3 million in 2001. The increase in
SG&A expense was primarily due to retirement and severance expense and losses on
foreign exchange. As a percentage of revenue, SG&A expense increased to 20.4
percent during 2002 as compared to 18.7 percent during the previous year.
Due to lower profitability and lower volumes affecting certain assets,
management upon its review in 2002 and 2001 of long-lived assets, determined
that impairment had occurred to some of our assets. An impairment expense of
$16,000 was recognized in 2002 compared to $31,000 in 2001.
Operating (Loss) Income
We had an operating loss of $3.0 million in 2002 compared to income of $8,000 in
2001. Our Materials division had an operating loss of $672,000 in 2002, compared
to $23,000 in 2001. This increased operating loss is mainly due to the
operations on St. Maarten/St. Martin, offset to a lesser extent by improved
21
results on other islands, in particular Antigua and St. Thomas. The operations
in St. Maarten/St. Martin were affected by lower volumes, increased costs in
terms of severance expenses and loss on foreign exchange. Although there is no
assurance, we believe that the operations in St. Maarten/St. Martin will improve
during 2003, due to earlier lay-offs of personnel and projected improved
volumes. However, the operations may not reach a break-even level in the near
future. We see some continuing strength in St Thomas and Antigua, but do not
presently anticipate significant changes in Puerto Rico and St. Croix. Our
Construction division had an operating loss of $1.3 million in 2002 compared to
income of $1.2 million in 2001. This decrease was primarily attributable to the
marine division's having profitable work in 2001 and being idle in 2002, also we
had lower margins on some contracts during 2002. The current backlog is
comparatively low; therefore, unless we can achieve success in our current
negotiations and bids for new contracts, we may see continuing poor results for
the division in 2003.
Other Income
At the time of the sale of the operations in Dominica in 2000, the Company
entered into a profit and loss participation agreement that expired on March 31,
2002. During this time the gain on the sale of the operations was deferred. At
March 31, 2002, the Company recognized a gain on sale of business of $1.0
million. Gain on sale of equipment was $180,000 in 2002, compared to $71,000 for
the previous year. Our interest expense decreased to $167,000 in 2002 from
$435,000 in 2001 due to a reduction of outstanding debt and reduced interest
rates. Our interest income of $3.6 million remained approximately the same in
2002 compared to the previous year, interest recognized on notes receivable due
from the Government of Antigua and Barbuda increased in 2002, while interest
received on outstanding accounts receivable diminished. The minority interest
allocation of losses decreased to $0 in 2002 from $52,000 in 2001, mainly
because the losses in Puerto Rico cannot be allocated to the joint venture
partners, as their equity has been exhausted.
Income Taxes
Income taxes decreased to $395,000 in 2002 from $829,000 in 2001. Our tax rate
varies depending on the level of our earnings in the various tax jurisdictions
where we operate, the tax loss carry-forwards and tax exemptions available to
us. The effective tax rate was 24.8 percent in 2002 as compared to 25.4 percent
in 2001. The Company is currently appealing tax assessments in Antigua for $6.1
million, as has been previously discussed. See also Item 3 and Notes 8 and 16 of
Notes to Consolidated Financial Statements.
Net Income
Our net income was $1.2 million in 2002 compared to $2.4 million in 2001. This
reduction in profitability was primarily attributable to our operating loss of
$3.0 million, partially offset by a gain on sale of business of $1.0 million,
improvement of the net interest income/expense from $3.1 million in 2001 to $3.4
million in 2002 and a decrease of income taxes.
22
Comparison of Year Ended December 31, 2001 with Year Ended December 31, 2000
Total Revenue
Our revenue was $54.9 million in 2001 and $65.2 million in 2000. This 15.9
percent decrease reflects a decrease in materials revenue, partially offset by
an increase in construction revenue.
Our materials revenue decreased 22.1 percent to $39.7 million in 2001 from $51.0
million in 2000. This decrease was primarily due to the sale of our cement
terminals in the Caribbean and the sale of our operations in Dominica in 2000
and to the termination of a cement distribution agreement in March 2001.
Excluding these operations, materials revenue decreased by 7.2 percent,
primarily due to decreased demand for block and concrete in St. Martin and
Antigua. We have, during the fourth quarter of 2001, seen significantly
diminished demand in our St. Martin and Antigua operations. We believe this is a
result of a slowdown in the islands' economy due to reduced tourism in those
islands in the aftermath of the events of September 11, 2001. However, we have
seen continued strengthening demand in the U.S. Virgin Islands over the last
year.
Revenue from our Construction division increased 6.2 percent to $15.2 million in
2001 from $14.3 million in 2000. This increase resulted primarily from increased
activity with our dredge in St. Martin, partially offset by lower activity in
the U.S. Virgin Islands and Antigua. Our backlog of unfilled portions of land
development contracts at December 31, 2001 was approximately $10.5 million
involving 7 projects, as compared to approximately $13.0 million involving 7
projects at December 31, 2000. The backlogs of the contracts in the Bahamas at
December 31, 2001 was approximately $7.2 million.
Cost of Materials
Cost of materials decreased slightly to 81.1 percent of materials revenue from
83.6 percent in 2000. The cost decrease was due to the reduction of sales of
cement that had a lower margin than the rest of our business. The cost of
materials for the Materials division, excluding cement, decreased to 80.5
percent in 2001 as compared to 81.5 percent in 2000.
Cost of Construction
Cost of construction increased to 82.0 percent of construction revenue in 2001
from 80.2 percent in 2000. Increased costs as a percent of revenue were due to
lower profitability on some 2001 contracts. Our gross margins are also affected
by the profitability of each contract and the stage of completion.
Operating Expenses
Selling, general and administrative expenses ("SG&A expense") decreased by 16.9
percent to $10.3 million in 2001 from $12.3 million in 2000. This decrease is
primarily due a reduction in impairment expense, bad debt expense, labor cost,
fees and other taxes.
23
Due to lower profitability, lower volumes and hurricane damages affecting
certain assets, management, upon its review in 2001 and 2000 of long-lived
assets, determined that impairment had occurred to some of our assets. An
impairment expense of $31,000 was recognized in 2001 compared to $702,000 in
2000. In 2000, the remaining goodwill recorded in connection with the purchase
of our subsidiary in St. Martin was impaired by $378,000 due to projected low
profitability. In addition, in 2000 the remaining assets in Saba were determined
to be impaired due to the closure of its operations, and certain obsolete
equipment was also determined to be impaired.
Operating (Loss) Income
Operating income was $8,000 in 2001 compared to a loss of $1.2 million in 2000.
Our Materials division had operating income of $23,000 in 2001, compared to a
loss of $1.6 million in 2000. This improvement is primarily due to improved
profitability in most islands relating primarily to reduced cost of production
as well as reduced SG&A expenses. Over the last two years we have seen an
improvement in the operating income of the Materials division. However, there
are risks that this trend cannot be sustained and that the division's results
may decrease in the near future. Our Construction division had operating income
of $1.2 million in 2001 compared to $1.3 million in 2000. This is primarily
attributable to lower margins on some contracts. Due to possible lower activity
in 2002, we may see reduced earnings, however, the remaining backlog is
estimated to have reasonable gross profit margins.
Other Income
In 2000, we recognized a gain on the sale of our cement terminals and the
concrete business in St. Thomas and the Tortola operation, in the aggregate
amount of $18.3 million. We had gains on sale of other property and equipment of
$71,000 in 2001 compared to $154,000 in 2000. Our interest expense decreased to
$435,000 in 2001 from $913,000 in 2000 due to a substantial reduction of
outstanding debt, utilizing the proceeds of our sales of operations as mentioned
above. Our interest income increased to $3.5 million in 2001 compared to $2.5
million in 2000. Our interest income increased due to interest recognized on
notes receivable due from the Government of Antigua and Barbuda, and to interest
received on outstanding accounts and notes receivable. The minority interest
allocation of losses decreased to $52,000 in 2001 from $314,000 in 2000, mainly
because the losses in Puerto Rico cannot be allocated to the joint venture
partners as their equity has been exhausted.
Income Taxes
Income taxes increased to $829,000 in 2001 from $716,000 in 2000. Our tax rate
varies depending on the level of our earnings in the various tax jurisdictions
where we operate, the tax loss carry-forwards and tax exemptions available to
us. The effective tax rate was 25.4 percent in 2001 as compared to 3.7 percent
in 2000. See Notes 8 and 16 of Notes to Consolidated Financial Statements.
24
Net Income
Our net income was $2.4 million in 2001 compared to a net income of $18.5
million in 2000. This reduction in profitability was primarily attributable to
the $18.3 million profit recognized on the sales of assets in the beginning of
year 2000, partially offset by a net interest income increase from $1.6 million
in 2000 to $3.1 million in 2001, and a reduction of our operating loss by $1.2
million.
Liquidity and Capital Resources
We generally fund our working capital needs from operations and bank borrowings.
In the construction business, we expend considerable funds for equipment, labor
and supplies. Our capital needs are greatest at the start of a new contract,
since we generally must complete 45 to 60 days of work before receiving the
first progress payment. As a project continues, a portion of the progress
billing is usually withheld as retainage until the work is complete. We
sometimes provide long term financing to customers who have previously utilized
our construction services. During 2002, we financed $1.1 million, and the
outstanding balance of the financed construction contracts as of December 31,
2002 was $3.0 million, all of which is due to be paid at different times within
the next three years. Accounts receivable for the Materials division are
typically outstanding for 60 days or longer. Our business requires a continuing
investment in plant and equipment, along with the related maintenance and upkeep
costs.
Management believes our cash flow from operations, existing working capital, and
funds available from lines of credit are adequate to meet our needs during the
next 12 months. Historically, we have used a number of lenders to finance a
portion of our machinery and equipment purchases. At December 31, 2002, there
were no amounts outstanding to these lenders. Management believes it has
significant collateral and financial stability to be able to obtain significant
financing, should it be required, though no assurances can be made.
As of December 31, 2002, our liquidity and capital resources included cash and
cash equivalents of $9.0 million, working capital of $19.7 million and available
lines of credit of $1.4 million. Total outstanding liabilities were $13.4
million as of December 31, 2002 compared to $14.1 million a year earlier.
Cash flow provided by operating activities for the year ended December 31, 2002
was $4.1 million compared with $3.3 million for the year ended December 31,
2001. The primary use of cash for operating activities during the year ended
December 31, 2002 was an increase in costs and estimated earnings in excess of
billings of $1.8 million, an increase in inventories of $534,000 and a decrease
in billings in excess of costs and estimated earnings. The primary source of
cash from operating activities was an increase in accounts payable and accrued
expenses of $944,000, a decrease in receivables of $553,000 and an increase in
deferred gain and other non-current liabilities of $517,000.
Net cash used in investing activities was $1.4 million in 2002, including
purchases of property, plant, and equipment of $3.4 million, offset by payments
received on notes of $2.2 million. Net cash used in financing activities was
$1.8 million, including purchases of treasury stock of $988,000 and principal
payments on indebtness of $884,000.
25
Our accounts receivable averaged 53 days of sales outstanding as of December 31,
2002. This is an improvement from 78 days at the end of December 2001. The
Company's Materials division improved to 50 days as compared to 60 days at the
end of the previous year. The improvements were particularly noticeable in
Antigua, of which a part is due to large payments from one customer, in
particular. We have seen smaller improvements in St Thomas, Puerto Rico and St
Maarten, but have also seen deterioration in St. Martin. The Construction
division has improved substantially to 61 days as compared to 113 days at the
end of last year. The improvement was due to large cash receipts from the
venture in the Bahamas in the beginning of the year. We do not consider notes
receivable in this calculation. See Notes 3 and 12 of Notes to Consolidated
Financial Statements.
We have a $1.0 million unsecured overdraft facility from a commercial bank in
the United States. The facility is due on demand and bears interest at a rate
variable with LIBOR. The bank can demand repayment of the loan and cancellation
of the overdraft facility, if certain financial or other covenants are in
default. At December 31, 2002, we had $11,000 outstanding under this line. This
facility was put in place to help cash management strategies. We have similar
overdraft facilities with Caribbean banks totaling $385,000. At December 31,
2002, we had no outstanding amounts on these facilities.
At December 31, 2002 we had borrowed $2.1 million from the Company's President.
The note to the President is unsecured and bears interest at the prime rate.
Presently, $300,000 is due on demand and $1.8 million is due on July 1, 2004.
The President has the option to make the note due on demand should a "Change of
Control" occur. A Change of Control is deemed to have occurred if a person or
group acquires 15 percent or more of the common stock or announces a tender
offer that, if successful, would result in ownership by a person or group of 15
percent or more of the common stock.
We purchase equipment as needed for our ongoing business operations. We are
currently replacing or upgrading some equipment used by the Materials division,
principally concrete trucks and quarry equipment. This resulted in a net cash
expenditure of $3.4 million in 2002. At present, management believes that our
inventory of construction equipment is adequate for our current contractual
commitments and operating activities. New construction contracts may, depending
on the nature of the contract and job location and duration, require us to make
significant investments in heavy construction equipment. The Company has
identified certain idle equipment in the material division and is currently
trying to sell this equipment. During 2002 we sold equipment with an original
cost basis of $2.1 million and a net book value of $350,000. The net proceeds
consisting of cash and notes receivable were $530,000. We realized a gain of
approximately $180,000 on these transactions. We believe we have available funds
or can obtain sufficient financing for our contemplated equipment replacements
and additions.
In September 2001, the Company decided to stop its operations on Aguadilla,
Puerto Rico. There was no material impact on the Consolidated Financial
Statements. The Company has leased, with option to buy, its equipment on this
site to a company controlled by one of the joint venture owners of the Company's
subsidiary in Puerto Rico. The lease rate should generate a small income after
depreciation and interest on the equipment.
26
Our notes receivable at December 31, 2002 include $6.8 million in promissory
notes from the Government of Antigua, with approximately $525,000 classified as
a current receivable. See Notes 3, 8 and 16 of Notes to Consolidated Financial
Statements.
Our only issued guarantee is more fully described below under "Contingent
Liabilities" and our short-term borrowings, long-term debt, other long-term
obligations and lease commitments are more fully described in Notes 7, 8, and
10, respectively, of Notes to Consolidated Financial Statements. The following
table provides a summary of our contractual obligations by due date:
Payment due by period
2004 to 2006 to 2008
Total 2003 2005 2007 and beyond
-------- ------ ------ ------ ----------
Short-term borrowings $ 11,000 $ 11,000 $ - $ - $ -
Long term debt 2,602,000 300,000 1,770,000 - 532,000
Capital leases 111,000 78,000 33,000 - -
Operating leases 4,728,000 1,638,000 2,096,000 664,000 330,000
Purchase obligations - - - - -
Other non-current liabilities 2,423,000 - 1,135,000 652,000 636,000
---------- ---------- ---------- ---------- -----------
Total $9,875,000 $2,027,000 $5,034,000 $1,316,000 $1,498,000
As part of the 1995, subsequently renegotiated in 1999, acquisition of Societe
des Carrieres de Grand Case ("SCGC"), a French company operating a ready-mix
concrete plant and quarry in St. Martin, the Company agreed to pay the quarry
owners, who were also the owners of SCGC, a royalty payment of $500,000 per year
through July 2004 and rent of $50,000 per year through July 2005. The agreements
may be renewed, at the Company's option, for a successive five-year period and
would require annual payments of $500,000 and $50,000 per year, respectively. At
the end of the 15-year royalty period, the Company has the option to purchase
this 50-hectare property for $4.4 million.
We have not guaranteed any other person's or company's debt, except as set forth
below in "Contingent Liabilities." We have not entered into any currency or
interest options, swaps or future contracts, nor do we have any off-balance
sheet debts or transactions, except as disclosed below under "Contingent
Liabilities."
We are sometime involved in litigation; the outcome of such litigation may in
the future have an impact on our liquidity. See item 3 above.
Contingent Liabilities
During the second quarter 2002, the Company issued a construction contract
performance guarantee together with one of the Company's customers, Northshore
Partners, Inc., ("Northshore"), in favor of Estate Plessen Associates L.P. and
JPMorgan Chase Bank, for $5.1 million. Northshore Partners is an important
27
customer on St. Croix and the construction contract that Northshore Partners has
with Estate Plessen Associate L.P. has requirements for our construction
materials. Although there is no assurance, we do not presently believe that this
guarantee will have any material impact on our liquidity or capital resources or
any material negative impact on our financial position or results of operations.
In the case that Northshore is unable to fulfill its commitments of the
construction contract, the Company will be obligated to take Northshore's place
and finish the contract. The Company is closely monitoring the progress of
construction. The Company issued a letter of credit for $500,000 as collateral
for the transaction and has not yet had any expenses in connection with this
transaction. The construction project is estimated to be finished within two
years and the guarantee expires two years after completion. The Company received
an up front fee of $154,000, and has recognized a receivable for additional
$52,000. At the same time, a long-term liability of the total amount has been
recorded, which may be recognized to income, once it is determined that no
liability exists for the project, less any amounts paid by us in connection with
the performance guarantee.
We have no other off-balance sheet transactions where we are the obligors.
Details regarding the Company's other contingent liabilities are described fully
in Note 16 of Notes to the Consolidated Statements.
Related Party Transactions
We have engaged in transactions with some of our Directors or employees. See
Note 12 of Notes to the Consolidated Financial Statements and item 13 of Part
III
We lease from the Company President, Mr. Donald L. Smith, Jr. a 3.4-acre parcel
of real property in Deerfield Beach, Florida of which a smaller portion is
actually utilized by the Company. This property is being used for our equipment
logistics and maintenance activities. The annual rent for the period 1996
through 2001 was $49,000, which was below market rent for the utilized portion
of the property. In January 2002, a new 5-year agreement was signed; the rent
was increased to $95,000. This rent was based on comparable rental contracts for
similar properties in Deerfield Beach.
We have borrowed $2.1 million from Mr. Smith, our President, to provide
long-term financing to the Company and security for a payment-guarantee issued
by Mr. Smith on behalf of an entity in the Bahamas. The loan is documented with
an unsecured note; of which $300,000 is payable on demand and $1.8 million is
due on July 1, 2004. The interest charged by Mr. Smith is at the prime rate. We
believe that these terms are similar to what the Company would be able to
achieve if we were to borrow this money from a bank. Our board approved this
transaction in advance. See Liquidity and Capital Resources above.
We have a $28.2 million construction contract with an entity in the Bahamas. Mr.
Smith and Mr. Steele, a director of our Company, are minority shareholders in
the entity, 11.3 percent and 1.0 percent, respectively. Mr. Smith is also a
member of the entity's managing committee. We believe the contract has been
entered into at arm's length and at terms and conditions that we would offer our
other customers. Prices established for the work are dependent on market
conditions and unique conditions to the environment of the Bahamas. In
connection with this contract, the Company recorded revenue of $8.4 million
28
during 2002. The backlog on the contract as of December 31, 2002 was $3.0
million. As of December 31, 2002 we had trade receivables from the venture of
approximately $1.3 million and the cost and estimated earnings in excess of
billings was $1.5 million. Mr. Smith has guaranteed the payment of the
receivables from the entity, up to a maximum of $2.5 million.
Our joint venture subsidiary in Puerto Rico has transactions with the joint
venture partners. A company controlled by one of the partners provides drilling
and blasting services for our quarry in Guaynabo. The price for the services is
negotiated periodically, primarily by comparison to the cost of performing that
work by us. The subsidiary recently entered into a 36-month lease agreement for
equipment located in the Aguadilla facility with another company controlled by
this partner. The agreement also contains an option to buy the equipment. The
price of the lease and the sales price of the equipment were negotiated between
the parties at arm's length. There are no clear comparable prices in the market
place, and no third party evaluation of the fairness of the transaction was
completed. The subsidiary will recuperate its recorded book value of the assets,
should the purchase option be exercised.
The same subsidiary sells a significant portion of its products to a company
controlled by another joint venture partner. In 2002 our subsidiary's revenue
from these sales was $3,452,000. This partner is controlled by one of our
directors; Jose A. Bechara, Jr. Esq. The price of the products is governed by
firm supply agreements, renegotiated every other year. Comparable prices from
other quarries are studied and used in the price negotiation.
Other assets include amounts due from officers and employees as a result of
payments made by the Company pursuant to a split-dollar life insurance plan. Our
advances to pay premiums are secured by a pledge of the cash value of the issued
policies. Amounts due to the Company under the split-dollar life insurance plan
were $974,418 in 2002 and $943,638 in 2001, respectively. No payments were made
since July 2002 on these policies and no commitments exist to make any further
payments on the policies.
The board has adopted a policy that all future related party transactions be
approved by a majority of disinterested directors in advance. We believe that
all of the foregoing related party transactions were entered into on an
arms-length basis.
New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development, and/or
normal use of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS 143
on January 1, 2003. The adoption of SFAS 143 is not expected to have a material
effect on the Company's financial position and results of operations.
29
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). SFAS 145 amends existing guidance on reporting gains and losses on
the extinguishments of debt to prohibit the classification of the gain or loss
as extraordinary, as the use of such extinguishments have become part of the
risk management strategy of many companies. SFAS 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 are applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No. 13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS 145 is not expected to have a material effect
on the Company's financial position and results of operations.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 will be effective for the Company for disposal activities
initiated after December 31, 2002. The Company does not expect adoption of SFAS
146 to have a material impact on its financial position and results of
operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's financial position and
results of operations. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002
During November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 00-21, Multiple-Deliverable Revenue Arrangements, which
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services, and/or rights to use assets. The
final consensus will be applicable to agreements entered into in fiscal periods
beginning after June 15, 2003, with early adoption permitted. The Company does
not expect that the adoption will have an impact on the Company's financial
position and results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS 148"). SFAS 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
30
compensation and the effect of the method used on reported results. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for interim periods
beginning after December 15, 2002. The Company currently plans to continue to
apply the intrinsic-value based method to account for stock options and has
adopted the disclosure requirements of SFAS 148 in the notes to these
consolidated financial statements.
Environmental Matters
We are involved, on a continuing basis, in monitoring our compliance with
environmental laws and in making capital and operating improvements necessary to
comply with existing and anticipated environmental requirements. While it is
impossible to predict with certainty, management currently does not foresee such
expenses in the future as having a material effect on our business, results of
operations, or financial condition.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to financial market risks due primarily to changes in
interest rates, which it manages primarily by managing the maturities of its
financial instruments. The Company does not use derivatives to alter the
interest characteristics of its financial instruments. Management does not
believe a change in interest rate will materially affect the Company's financial
position or results of operations.
The Company has significant operations overseas. Generally, all significant
activities of the overseas affiliates are recorded in their functional currency,
which is generally the currency of the country of domicile of the affiliate. The
foreign functional currencies that the Company deals with are Netherlands
Antilles Guilders, Eastern Caribbean Units and Euros. The first two are pegged
to the U.S. dollar and have remained fixed for many years. Management does not
believe a change in the Euro exchange rate will materially affect the Company's
financial position or result of operations. The French operations are
approximately 10 percent of the Company's total operations.
31
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32
Item 8. Financial Statements and Supplementary Data
The financial information and the supplementary data required in response to
this Item are as follows:
Page
Number(s)
Independent Auditors' Report 34
Financial Statements:
Consolidated Balance Sheets 35-36
December 31, 2002 and 2001
Consolidated Statements of Income 37
For Each of the Years in the Three-Year Period
Ended December 31, 2002
Consolidated Statements of Stockholders' Equity 38
and Comprehensive (Loss) Income for Each of the Years
in the Three-Year Period Ended December 31, 2002
Consolidated Statements of Cash Flows 39-40
For Each of the Years in the Three-Year Period
Ended December 31, 2002
Notes to Consolidated Financial Statements 41-65
Schedule II - Valuation and Qualifying Accounts 75
33
Independent Auditors' Report
The Board of Directors and Stockholders
Devcon International Corp.:
We have audited the consolidated financial statements of Devcon International
Corp. and subsidiaries (the "Company") as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and this financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and this
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 Devcon International
Corp. and subsidiaries as of December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related 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 LLP
Fort Lauderdale, Florida
February 21, 2003
34
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
Assets 2002 2001
- ------ ------------- ------------
Current assets:
Cash and cash equivalents $ 8,977,293 $ 7,994,327
Receivables, net 12,261,687 12,162,049
Costs and estimated earnings in excess of billings 1,990,353 229,056
Inventories 4,416,278 3,736,759
Prepaid expenses and other assets 667,174 645,665
------------- -------------
Total current assets 28,312,785 24,767,856
Property, plant and equipment, net
Land 1,462,068 1,462,068
Buildings 1,111,954 1,135,954
Leasehold improvements 3,494,392 3,159,536
Equipment 53,109,586 49,567,905
Furniture and fixtures 712,124 684,849
Construction in process 744,448 2,793,580
----------- -----------
60,634,572 58,803,892
Less accumulated depreciation (30,606,467) (27,578,652)
------------ ------------
30,028,105 31,225,240
Investments in unconsolidated joint
ventures and affiliates, net 373,251 315,858
Receivables, net 8,460,887 10,596,702
Other assets 1,262,333 1,046,091
---------- ----------
Total assets $68,437,361 $67,951,747
=========== ===========
See accompanying notes to consolidated financial statements.
35
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
December 31, 2002 and 2001
Liabilities and Stockholders' Equity 2002 2001
- ------------------------------------ --------------- --------------
Current liabilities:
Accounts payable, trade and other $ 4,131,087 $ 4,093,229
Accrued expenses and other liabilities 3,197,545 2,214,575
Lines of Credit 11,000 -
Current installments of long-term debt 378,500 1,143,097
Billings in excess of costs and estimated earnings 1,958 414,837
Income taxes 933,734 699,118
----------- -----------
Total current liabilities 8,653,824 8,564,856
Long-term debt, excluding current installments 2,334,974 2,454,809
Deferred income taxes 65,356 205,344
Deferred gain on sale of businesses - 1,142,537
Other liabilities 2,357,952 1,738,930
---------- ----------
Total liabilities 13,412,106 14,106,476
Stockholders' equity:
Common stock, $0.10 par value. Authorized
15,000,000 shares, issued 3,591,269 in 2002
and 3,741,285 in 2001, outstanding 3,469,169
in 2002 and 3,586,585 shares in 2001 359,126 374,128
Additional paid-in capital 9,704,937 10,133,527
Accumulated other comprehensive loss -
cumulative translation adjustment (1,611,983) (2,516,382)
Retained earnings 47,417,954 46,941,249
Treasury stock, at cost, 122,100 and 154,700
shares in 2002 and 2001, respectively (844,779) (1,087,251)
---------- -----------
Total stockholders' equity 55,025,255 53,845,271
---------- ----------
Commitments and contingencies
Total liabilities and stockholders' equity $68,437,361 $67,951,747
=========== ===========
See accompanying notes to consolidated financial statements.
36
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Income
For Each of the Years in the Three-Year Period Ended December 31, 2002
2002 2001 2000
----------- ------------- -----------
Materials revenue $37,732,839 $39,702,788 $50,956,382
Construction revenue 15,623,007 15,184,727 14,291,801
------------ ----------- -----------
Total revenue 53,355,846 54,887,515 65,248,183
Cost of materials (30,753,566) (32,181,968) (42,607,478)
Cost of construction (14,790,454) (12,446,142) (11,461,423)
------------ ------------ ------------
Gross profit 7,811,826 10,259,405 11,179,282
Operating expenses:
Selling, general and administrative (10,858,187) (10,250,934) (12,339,586)
----------- ----------- -----------
Operating (loss) income (3,046,361) 8,471 (1,160,304)
------------ ------------ -----------
Other income (expense):
Joint venture equity earnings (loss) 8,540 28,733 (23,166)
Gain on sale of property and equipment 180,091 70,678 153,561
Gain on sale of businesses 1,040,973 - 18,293,045
Interest expense (167,174) (434,802) (913,456)
Interest income, receivables 3,401,711 3,273,893 1,995,952
Interest income, banks 178,819 250,891 469,019
Minority interest - 51,798 313,748
Other income - 10,041 73,965
------------ ----------- -----------
4,642,960 3,251,232 20,362,668
------------ ----------- -----------
Income before income taxes 1,596,599 3,259,703 19,202,364
Income taxes (395,264) (829,334) (715,756)
------------- ----------- ------------
Net income $1,201,335 $ 2,430,369 $18,486,608
========== =========== ===========
Income per common share - basic $ 0.34 $ 0.67 $ 4.80
=========== ========== ===========
Income per common share - diluted $ 0.31 $ 0.61 $ 4.40
=========== ========== ===========
Weighted average number of shares outstanding
Basic 3,572,488 3,631,703 3,850,566
========== ========== ===========
Diluted 3,873,752 3,963,278 4,201,537
========== ========== ===========
See accompanying notes to consolidated financial statements.
37
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income
For Each of the Years in the Three-Year Period Ended December 31, 2002
Accumulated
Additional Other
Common Paid-in Comprehensive Retained Treasury
Stock Capital (Loss) Income Earnings Stock Total
----- ------ ------------- -------- ----- -----
Balance at Dec. 31, 1999 $449,894 $12,064,133 $(1,594,577) $28,674,264 $(157,504) $39,436,210
Comprehensive income:
Net income 18,486,608 18,486,608
Currency translation adjustment (442,925) (442,925)
-------------
Comprehensive income 18,043,683
Repurchase of 805,350 shares (5,074,229) (5,074,229)
Retirement of 675,850 shares (67,586) (1,812,329) (2,142,004) 4,021,919 -
Exercise of 13,200 stock options 1,320 27,480 28,800
--------- ------------ ------------ ----------- ----------- -----------
Balance at Dec. 31, 2000 383,628 10,279,284 (2,037,502) 45,018,868 (1,209,814) 52,434,464
Comprehensive income:
Net income 2,430,369 2,430,369
Currency translation adjustment (478,880) (478,880)
-----------
Comprehensive income 1,951,489
Repurchase of 97,000 shares (700,925) (700,925)
Retirement of 113,600 shares (11,360) (304,140) (507,988) 823,488 -
Non-cash stock compensation 127,843 127,843
Exercise of 18,600 stock options 1,860 30,540 32,400
--------- ---------- ----------- ------------ ---------- ----------
Balance at Dec. 31, 2001 374,128 10,133,527 (2,516,382) 46,941,249 (1,087,251) 53,845,271
Comprehensive income:
Net income 1,201,335 1,201,335
Currency translation adjustment 904,399 904,399
----------
Comprehensive income 2,105,734
Repurchase of 150,016 shares (987,790) (987,790)
Retirement of 182,616 shares (18,262) (487,370) (724,630) 1,230,262 -
Exercise of 32,600 stock options 3,260 58,780 62,040
--------- ---------- ---------------- -------------- ---------------- ------------
Balance at Dec. 31, 2002 $359,126 $9,704,937 $(1,611,983) $47,417,954 $(844,779) $55,025,255
See accompanying notes to consolidated financial statements.
38
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Each of the Years in the Three-Year Period Ended December 31, 2002
2002 2001 2000
---------- --------- --------
Cash flows from operating activities:
Net income $1,201,335 $2,430,369 $18,486,608
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash stock compensation - 127,843 -
Depreciation and amortization 4,908,597 4,895,406 5,174,699
Deferred income tax benefit (463,704) (152,775) (253,898)
Provision for doubtful accounts and notes 69,250 162,695 334,811
Impairment on long-lived assets 15,543 30,570 702,345
Gain on sale of property and equipment (180,091) (70,678) (153,561)
Gain on sale of business (1,040,973) - (18,293,045)
Joint venture equity (earnings) loss (8,540) (28,733) 23,166
Minority interest in loss of
consolidated subsidiaries - (51,798) (313,748)
Changes in operating assets and liabilities:
Decrease (increase) in receivables 552,929 (1,781,028) (4,455,005)
(Increase) decrease in costs and
estimated earnings in excess of billings (1,761,297) 1,176,842 (1,147,118)
(Increase) decrease in inventories (533,776) (806,664) 2,788
Decrease (increase) in prepaid expenses
and other current assets 58,656 (59,950) 135,356
(Increase) decrease in other assets (21,544) (90,151) 951
Increase (decrease) increase in accounts
payable and accrued expenses 944,197 (3,152,347) 2,278,660
Decrease in billings in excess
of costs and estimated earnings (412,879) (120,710) (490,769)
Increase in income taxes payable 234,616 467,391 228,684
Increase in deferred gain and other
non-current liabilities 517,458 355,989 45,177
------------ ------------ -------------
Net cash provided by operating activities $4,079,777 $3,332,271 $ 2,306,101
---------- ---------- -----------
See accompanying notes to consolidated financial statements.
39
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For Each of the Years in the Three-Year Period Ended December 31, 2002
2002 2001 2000
------------ ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment $(3,376,098) $(4,515,495) $(4,981,110)
Proceeds from disposition of property,
plant and equipment 240,351 219,617 845,325
Proceeds and deposits from disposition
of business - - 23,196,405
Issuance of notes (472,419) (564,000) (414,000)
Payments received on notes 2,226,966 2,682,546 1,888,224
Investments in unconsolidated joint ventures - (5,306) (27,904)
----------- ----------- -----------
Net cash (used in) provided by
investing activities (1,381,200) (2,182,638) 20,506,940
----------- ---------- -----------
Cash flows from financing activities:
Issuance of stock 62,040 32,400 28,800
Purchase of treasury stock (987,790) (700,925) (2,684,700)
Proceeds from debt - 1,896,761 810,389
Principal payments on debt (884,432) (2,240,056) (18,609,240)
Net borrowing (repayment), lines of credit 11,000 (300,000) (325,000)
---------- ---------- -----------
Net cash used in financing activities (1,799,182) (1,311,820) (20,779,751)
---------- ---------- -----------
Effect of exchange rate changes on cash 83,571 (10,440) (10,588)
Net increase (decrease) in cash
and cash equivalents 982,966 (172,627) 2,022,702
Cash and cash equivalents at beginning of year 7,994,327 8,166,954 6,144,252
------------ ------------ ------------
Cash and cash equivalents at end of year $ 8,977,293 $ 7,994,327 $ 8,166,954
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 172,320 $ 416,472 $ 986,386
============ ============ ============
Cash paid for income taxes $ 366,933 $ 288,223 $ 732,702
============ ============ ============
Supplemental non-cash items:
Issuance of notes in settlement
of receivables $ 1,709,905 $ 3,972,607 $ 269,220
Reduction of note receivable =========== =========== ===========
and deferred income $ 1,142,537 $ 1,000,000 -
=========== =========== ===========
Retirement of treasury stock $ 1,230,262 $ 823,488 $4,021,919
=========== ============ ===========
Translation income (loss) adjustment $ 904,399 $ (478,880) $ (442,925)
============ ============ ===========
See accompanying notes to consolidated financial statements.
40
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
(1) Description of Business and Summary of Significant Accounting Policies
(a) Devcon International Corp. and its subsidiaries (the
"Company") produce and distribute ready-mix concrete, crushed
stone, concrete block, and asphalt and distribute bagged
cement in the Caribbean. The Company also performs
earthmoving, excavating and filling operations, builds golf
courses, roads, and utility infrastructures, dredges waterways
and constructs deep-water piers and marinas in the Caribbean.
(b) Principles of Consolidation
These consolidated financial statements include the accounts
of Devcon International Corp. and its majority-owned
subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
The Company's investments in unconsolidated joint ventures and
affiliates are accounted for under the equity and cost
methods. Under the equity method, original investments are
recorded at cost and then adjusted by the Company's share of
undistributed earnings or losses of these ventures. Other
investments in unconsolidated joint ventures in which the
Company owns less than 20 percent are accounted for by using
the cost method.
(c) Revenue Recognition
Materials Division
Revenue is recognized when the products are delivered,
invoiced at a fixed price and the collectibility is reasonably
assured.
Construction Division
The Company uses the percentage-of-completion method of
accounting for both financial statements and tax reports.
Revenue is recorded based on the Company's estimates of the
completion percentage of each project, based on the
cost-to-cost method. Anticipated contract losses, when
probable and estimable, are charged to income. Changes in
estimated contract profits are recorded in the period of
change. Selling, general and administrative expenses are not
allocated to contract costs. Monthly billings are based on the
percentage of work completed in accordance with each specific
contract. While some contracts extend longer, most are
completed within one year. Revenue is recognized under the
percentage-of-completion method when there is a contract for
the work, with a fixed price for the work performed or a fixed
price for a quantity of work delivered, and collectibility is
reasonably assured. Change-orders for additional contract
revenue are recognized if it is probable that they will result
in additional revenue and the amount can be reliably
estimated.
41
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits and
highly liquid debt instruments with an original maturity of
three months or less.
(e) Allowance for Doubtful Accounts
The Company performs periodic credit evaluations of its
customers and maintains an allowance for potential credit
losses based on historical experience and other information
available to management.
(f) Notes Receivable
Notes receivable are recorded at cost, less the related
allowance for impaired notes receivable. Management,
considering current information and events regarding the
borrowers' ability to repay their obligations, considers a
note to be impaired when it is probable that the Company will
be unable to collect all amounts due according to the
contractual terms of the note agreement. When a loan is
considered to be impaired, the amount of the impairment is
measured based on the present value of expected future cash
flows discounted at the note's effective interest rate.
Impairment losses are included in the allowance for doubtful
accounts through a charge to bad debt expense.
(g) Inventories
Inventories are stated at the lower of average cost or market.
(h) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
is calculated on the straight-line method over the estimated
useful life of each asset. Leasehold improvements are
amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset.
Useful lives or lease terms for each asset type are summarized
below:
Buildings 15 - 40 years
Leasehold improvements 3 - 35 years
Equipment 3 - 20 years
Furniture and fixtures 3 - 10 years
During 2002, 2001 and 2000 the Company sold equipment and
property and recorded a resulting gain of $180,091, $70,678
and $153,561, respectively.
42
(i) Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of
In August 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 144 provides a single accounting model for long-lived
assets to be disposed of. SFAS 144 also changes the criteria
for classifying an asset as held for sale; and broadens the
scope of businesses to be disposed of that qualify for
reporting as discontinued operations and changes the timing of
recognizing losses on such operations. The Company adopted
SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not
affect the Company's financial position and results of
operation.
In accordance with SFAS 144, long-lived assets, such as
property, plant, and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value
of the asset. Assets to be disposed of would be separately
presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are
no longer depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of
the balance sheet.
An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value. Prior to the
adoption of SFAS 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."
In accordance with its policy, the Company recorded charges
for impairment losses in the Materials division in 2002, 2001
and 2000 of approximately $16,000, $14,000 and $659,000,
respectively. The Construction division recorded charges for
impairment losses of $0, $17,000 and $43,000, in 2002, 2001
and 2000 respectively. These charges are included within
Selling, general and administrative expense in the
Consolidated Statement of Income.
Other assets, dredge equipment, asphalt plant, batch plant,
generators, and other assets, not in use in Puerto Rico, St.
Croix, St. Kitts and other islands were written down to net
realizable value with an impairment charge of $16,000 in 2002,
$31,000 in 2001 and $174,000 in 2000. In 2000, impairment of
goodwill in St. Martin of $378,000 was determined based on
future projected undiscounted cash flows compared to
remaining asset value as of the end of the period. There is
no remaining goodwill relating to the operations in St Martin.
In 1999, due to the planned closing of the Saba operations,
the asset values in Saba were reduced to estimated net
realizable value, by an impairment charge of $267,000. During
the actual closing of the plant, additional impairment of
$150,000 was recognized in 2000 due to an additional
write-down of inventories,
43
unforeseen additional dismantling costs and lower than
expected proceeds received upon the sale of the fixed assets.
There were no remaining assets in Saba as of December 31,
2000.
(j) Foreign Currency Translation
All balances denominated in foreign currencies are remeasured
at year-end rates to the respective functional currency of
each consolidating company.
For those subsidiaries, with a functional currency other than
the US dollar, assets and liabilities have been translated
into U.S. dollars at year-end exchange rates. Income statement
accounts are translated into U.S. dollars at average exchange
rates during the period. The translation adjustment increased
(decreased) equity by $904,399, $(478,880) and $(442,925) in
2002, 2001 and 2000, respectively. Gains or losses on foreign
currency transactions are reflected in the net income of the
period. The (expense) income recorded was ($122,215), $65,143,
and $55,368 in 2002, 2001, and 2000, respectively.
The French subsidiary does not record a foreign exchange loss
or gain on long-term inter-company debt. This gain or loss is
deferred and combined with the translation adjustment of said
subsidiary. If and when the debt is paid, in part or whole,
the deferred loss or gain will be realized and will affect the
net respective result of the period.
(k) Income (Loss) Per Share
The Company computes income per share in accordance with the
provisions of SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting basic and
diluted income per share. Basic income per share is computed
by dividing net income (loss) by the weighted average number
of shares outstanding during the period. Diluted income per
share is computed assuming the exercise of stock options and
the related income tax effects if not antidilutive. For loss
periods, common share equivalents are excluded from the
calculation, as their effect would be antidilutive. See Note 2
of Notes to Consolidated Financial Statements for the
computation of basic and diluted number of shares.
(l) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
44
that includes the enactment date. The Company and certain of
its domestic subsidiaries file consolidated federal and state
income tax returns. Subsidiaries located in U.S. possessions
and foreign countries file individual income tax returns. U.S.
income taxes are not provided on undistributed earnings, which
are expected to be permanently reinvested by foreign
subsidiaries, unless the earnings can be repatriated in a
tax-free manner.
(m) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements
in conformity with generally accepted accounting principles.
Actual results could differ from these estimates.
(n) Stock Option Plans
The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations, in accounting for its fixed plan
stock options. As such, compensation expense would be recorded
on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"),
established accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS 123, the Company has
elected to continue to apply the intrinsic value-based method
of accounting described above, and has adopted the disclosure
requirements of SFAS 148.
The per-share weighted-average fair value of stock options
granted during 2002, 2001 and 2000 was $2.70, $3.88, and
$3.08, respectively, on the grant date, using the Black
Scholes option-pricing model with the following assumptions:
2002 2001 2000
---- ---- ----
Expected dividend yield - - -
Expected price volatility 20.6% 34.0% 39.8%
Risk-free interest rate 5.0% 5.3% 6.5%
Expected life of options 10 years 10 years 10 years
The Company applies APB Opinion No. 25 in accounting for its
plan and, accordingly, stock compensation cost of $127,843 was
recognized in 2001 in the consolidated financial statements
for the extension of certain stock options. Had the Company
determined compensation costs based on fair value at the grant
date for our stock options under SFAS 123, the Company's
consolidated net income or loss would have been the pro forma
amounts below:
45
2002 2001 2000
------------- ------------- ----------------
Net income, as reported $1,201,335 $2,430,369 $18,486,608
Add stock-based employee
compensation expense included
in reported net income, net of tax - 84,376 -
Deduct total stock-based employee
compensation expense determined
under fair-value based method for
all rewards, net of tax (91,762) (192,548) (197,806)
------------ ------------ -------------
Pro forma net income $1,109,573 $2,322,197 $18,288,802
Basic earnings per share, as reported $ 0.34 $ 0.67 $ 4.80
======= ======= =======
Basic income per share, pro forma $ 0.31 $ 0.64 $ 4.75
======= ======= =======
Diluted income per share, as reported $ 0.31 $ 0.61 $ 4.40
======= ======= =======
Diluted income per share, pro forma $ 0.29 $ 0.59 $ 4.35
======= ======= =======
(o) Reclassification
Certain prior year amounts have been reclassified to conform
to the current year presentation.
(2) Number of shares outstanding
The following table sets forth the computation of basic and diluted
share data:
2002 2001 2000
------------ ----------- -----------
Weighted average number of
shares outstanding - basic 3,572,488 3,631,703 3,850,566
Effect of dilutive securities:
Options 301,264 331,575 350,971
---------- ---------- ----------
Weighted average number of
shares outstanding - diluted 3,873,752 3,963,278 4,201,537
========= ========= =========
Shares outstanding:
Beginning of the year outstanding shares 3,586,585 3,664,985 4,457,135
Repurchase of shares (150,016) (97,000) (805,350)
Issuance of shares 32,600 18,600 13,200
------------- ----------- -----------
Ending outstanding shares 3,469,169 3,586,585 3,664,985
========= ========= =========
46
(3) Receivables
December 31,
-------------------------------------
2002 2001
---- -----
Materials division trade accounts $ 7,312,785 $ 7,984,474
Construction division trade accounts
receivable, including retainage 3,364,260 4,942,402
Accrued interest and other receivables 192,726 25,938
Notes and bonds due from the
Government of Antigua and Barbuda, net 6,855,946 7,318,035
Trade notes receivable - other 5,521,931 5,951,291
Due from employees 250,837 64,604
------------ -----------
23,498,485 26,286,744
Allowance for doubtful accounts and notes (2,775,911) (3,527,993)
------------ -----------
$20,722,574 $22,758,751
=========== ===========
Receivables are classified in the consolidated balance sheets as
follows:
December 31,
-------------------------------------
2002 2001
---- ----
Current assets $12,261,687 $12,162,049
Non-current assets 8,460,887 10,596,702
------------- -----------
$20,722,574 $22,758,751
=========== ===========
Included in notes and other receivables are unsecured notes due from
the Government of Antigua and Barbuda (the "Government") totaling a net
amount of $6,787,286 and $7,249,375 in 2002 and 2001, respectively,
approximately $525,000 of which is classified as a current receivable
in 2002. These notes were originally executed in connection with a
construction contract in 1987. During the following nine years, eight
amendments to the agreement were executed, primarily due to additional
work contracted. In 1987, the notes were placed on the cost recovery
method, and all payments received from the Government from agreed upon
sources were recorded as reduction of the principal balance of the
notes. Payments from agreed upon sources were derived from lease
proceeds from a rental of a United States military base, fuel tax
revenues and proceeds from a real estate venture. The contractual
outstanding balance of the notes, including the balance of prepayment
of taxes and duties, was $30.0 million and $31.7 million as of December
31, 2002 and 2001, respectively.
In April 2000, the Company executed the ninth amendment to the
agreement with the Government and the notes were removed from the cost
recovery method. The original notes receivable were consolidated into
two new 15-year notes and the stated interest rate was reduced from 10
percent to 6 percent annually. Payments from agreed upon sources were
expanded to include an additional monthly payment of $61,400, starting
47
in August 2000, and up to $2.5 million in offsets against future duties
and taxes to be incurred by the Company. In total, the agreement calls
for $155,000 to be received monthly and $312,000 to be received
quarterly, until maturity in 2015. Since April 28, 2000 the Company has
been recognizing interest income on the notes under the accrual basis.
The Company expects to receive principal payments against the book
balance of $525,000, $666,000, $1,089,000, $1,761,000, and $2,846,000
during each of the next 5 years, respectively.
From time to time in the future the Company expects to incur taxes and
duties in excess of the $2.5 million stipulated in the agreement. As a
result, the contractual outstanding balance of the notes may be further
reduced to pay these additional taxes and duties; and the notes may be
paid off prior to the scheduled maturity. At the time of recording the
actual duty or taxes incurred the Company will record the offsetting
payment from the Government.
Receipts on the notes were $3.4 million and $2.9 million, in 2002 and
2001, respectively. Interest income recognized in 2002, 2001 and 2000
was $2,932,749, $2,385,842, and $1,538,540, respectively. The Company
records payments received, first to the projected principal reductions
for the period, then to accrued interest, and lastly to additional
reduction of principal. Interest income is recognized on the notes only
to the extent payments are recorded for accrued interest. The
Government was delayed in certain of its payments during the fourth
quarter of 2002 and, consequently, the Company recorded $497,000 less
in interest income compared to the average of the first three quarters
of 2002. Subsequent to year-end the Company received payment for all
past due amounts from 2002.
Antigua-Barbuda Government Development Bonds 1994-1997 series amounting
to $68,660 in 2002 and 2001, respectively, are included in the total
due from the Government.
The Company also has net trade receivables from various Government
agencies of $281,396 and $31,331 in 2002 and 2001, respectively.
Trade notes receivable - other consist of the following:
December 31,
----------------------------------------
2002 2001
---- ----
Unsecured promissory notes receivable
with varying terms and maturity dates $1,091,509 $ 249,869
Notes receivable with varying terms and
maturity dates, secured by real estate
or equipment 2,373,700 2,362,128
10.0 percent note receivable, due on demand,
secured by first mortgage on real property 120,370 817,788
48
December 31,
----------------------------------------
2002 2001
---- ----
Unsecured notes receivable bearing interest
at 1.0 percent over the prime rate,
due in monthly installments through 2005 1,436,352 1,946,506
8.0 percent note receivable, due in
installments through July 2005, secured
by land and building 500,000 575,000
------------- ------------
Trade notes receivable $5,521,931 $5,951,291
============= ============
(4) Inventories
Inventories consist of the following: December 31,
-------------------------------------
2002 2001
---- ----
Sand, stone, cement and concrete block $3,974,619 $3,240,910
Maintenance parts 141,244 175,589
Other 300,415 320,260
------------ ------------
$4,416,278 $3,736,759
========== ==========
(5) Investments in Unconsolidated Joint Ventures and Affiliates
At December 31, 2002 and 2001, the Company had investments in
unconsolidated joint ventures and affiliates consisting of a 1.2
percent equity interest in a real estate project in the Bahamas, see
Note 12, a 33.3 percent interest in a real estate company in Puerto
Rico and a 50 percent interest in a real estate project in South
Florida. Equity earnings (loss) of $8,540, $28,733, and ($23,166) were
recognized in 2002, 2001, and 2000, respectively, on ventures accounted
for under the equity method.
(6) Fair Value of Financial Instruments
The carrying amount of financial instruments including cash, cash
equivalents, most of the receivables - net, other current assets,
accounts payable trade and other, accrued expenses and other
liabilities, and notes payable to banks approximated fair value at
December 31, 2002 because of the short maturity of these instruments.
The carrying value of debt and most notes receivable approximated fair
value at December 31, 2002 based upon the present value of estimated
future cash flows. Given the nature of the notes and lack of comparable
instruments, estimation of fair value of the notes due from the
Government of Antigua and Barbuda is not practicable. The carrying
amount of these notes as of December 31, 2002 was $6.8 million. The
effective interest rate of the notes was 42 percent in 2002. The notes
call for monthly and quarterly payments until maturity in 2015.
49
(7) Debt
Debt consists of the following:
December 31,
-----------------------------------------
2002 2001
---- ----
Installment notes payable in monthly installments
through 2005, bearing interest at a weighted average
rate of 8.0 percent and secured by equipment with
a carrying value of approximately $209,000 $ 111,442 $ 200,006
Unsecured note payable to the Company's President,
$300,000 due on demand with the balance due
July 1, 2004, bearing interest at the prime interest rate 2,070,000 2,780,000
Unsecured notes payable due through 2011, bearing
interest at a weighted average rate of 7.0 percent 532,032 617,900
Unsecured note payable to a bank under a $1,000,000
line of credit, due on demand, bearing interest at
2.5 percent over the Libor market rate 11,000 -
---------- ----------
Total debt outstanding $2,724,474 $3,597,906
========== ==========
In 2001, the Company entered into a revolving line of credit facility
with a bank in the United States that provides for borrowings up to a
maximum amount of $1,000,000, with interest charged at LIBOR plus 2.50
percent. The facility is due on demand. The bank can demand repayment
of the loan and cancellation of the line of credit facility, if certain
financial or other covenants are in default. The Company also maintains
lines of credit with local banks in St. Maarten and Antigua, $200,000
and $185,000, respectively, for cash flow management purposes. The
interest rates on these lines of credit are 11 percent and 12 percent,
respectively. There were no amounts outstanding under these lines as of
December 31, 2002 and 2001.
The effective interest on all debt outstanding, excluding lines of
credit, was 5.4 percent at December 31, 2002 and 8.5 percent at
December 31, 2001. Outstanding debt is shown in the consolidated
balance sheets under the following captions:
December 31,
-------------------------------------
2002 2001
---- ----
Current installments of long-term debt $ 378,500 $1,143,097
Lines of credit 11,000 -
Long-term debt 2,334,974 2,454,809
----------- ----------
$2,724,474 $3,597,906
========== ==========
50
The total maturities of all outstanding debt subsequent to
December 31, 2002 are as follows:
2003 $ 389,500
2004 1,802,942
2005 -
2006 -
2007 -
Thereafter 532,032
------------
$2,724,474
(8) Income Taxes
Income tax expense (benefit) consists of:
Current Deferred Total
------- -------- -------
2002:
Federal $415,327 $(457,650) $ (42,323)
Foreign 443,640 (6,053) 437,587
--------- ------------ ----------
$858,967 $(463,703) $395,264
======== ========== ========
2001:
Federal $358,435 $(190,162) $168,273
Foreign 623,674 37,387 661,061
--------- ----------- ---------
$982,109 $(152,775) $829,334
======== ========= ========
2000:
Federal $502,826 $ (32,539) $470,287
Foreign 466,828 (221,359) 245,469
--------- ---------- ---------
$969,654 $(253,898) $715,756
======== ========= ========
The actual expense differs from the "expected" tax expense
(benefit)computed by applying the U.S. federal corporate income tax
rate of 34 percent to income (loss) before income taxes is as follows:
2002 2001 2000
---- ---- ----
Computed "expected" tax expense $ 542,844 $1,108,299 $6,528,804
Increase (reduction) in income
taxes resulting from:
Distribution of deemed dividends 527,000 141,100 2,035,275
Intercompany interest income
untaxed by foreign jurisdiction - (137,194) -
Tax incentives granted to
foreign subsidiaries (1,679,527) (1,308,863) (2,864,131)
Nontaxable capital gains - - (1,156,048)
Net operating loss not utilized 149,877 27,985 47,594
Change in deferred tax
valuation allowance 3,279,889 (845,729) (2,902,361)
Differences in effective rate in
foreign jurisdiction and other (2,424,819) 1,843,736 (973,377)
------------ ---------- ----------
$ 395,264 $ 829,334 $ 715,756
============ ========== ==========
51
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and (b) net operating loss carry-forwards.
Significant portions of the deferred tax assets and liabilities results
from the tax effects of temporary difference:
December 31,
--------------------------------------------
2002 2001
---- ----
Deferred tax assets:
Allowance for bad debts $ 120,318 $ 165,889
Net operating loss carry-forwards 7,744,673 4,076,320
Reserves and other 850,053 493,805
Deferred income - 388,464
----------- ------------
Total gross deferred tax assets 8,715,044 5,124,478
Less valuation allowance (7,744,673) (4,464,784)
----------- ------------
Net deferred tax assets 970,371 659,694
----------- ------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capitalized interest (479,647) (632,673)
----------- ------------
Total gross deferred tax liabilities (479,647) (632,673)
----------- ------------
Net deferred tax asset $ 490,724 $ 27,021
=========== ============
Net deferred tax assets (liabilities):
Net current deferred tax assets (liabilities) $ 312,529 $ 232,365
Net non-current deferred tax assets (liabilities) 178,195 (205,344)
----------- ------------
$ 490,724 $ 27,021
=========== ============
The valuation allowance for deferred tax assets as of December 31, 2002
was $7.7 million or about 88.9 percent of the potential deferred tax
benefit.
In April 1988, the U.S. Virgin Islands Industrial Development
Commission (IDC) granted one of the Company's subsidiaries a 10-year
tax exemption expiring in April 1998. With some conditions and
exceptions, the Company's operations related to (1) production and sale
of ready-mix concrete; (2) production and sale of concrete block on St.
Thomas and St. Johns and outside of the U.S. Virgin Islands; (3)
production and sale of sand and aggregate; and (4) bagging of cement
from imported bulk cement, are 100 percent exempt from U.S. Virgin
Islands real property, gross receipts (currently 4 percent) and excise
taxes, 90 percent exempt from U.S. Virgin Islands income taxes, and
about 83 percent exempt from U.S. Virgin Islands customs duties. In
1998, the Company was granted a five-year extension, through April
2003, of the exemptions. No decision has been made as to whether or not
we will seek an extension of this tax exemption, and there is no
52
guarantee that, if sought, it will be granted. If the Company does not
have the exemption, the taxes would be increased, however, some fees
and scholarships that the Company is currently granting would not
continue. The impact of not having the exemption is currently being
reviewed.
At December 31, 2002, approximately $35.8 million of foreign
subsidiaries' earnings have not been distributed and no U.S. income
taxes have been provided for with respect to them. These earnings are
considered permanently reinvested in the subsidiaries' operations,
unless the earnings can be repatriated in a tax-free manner, and when
earned, did not require income tax recognition under U.S. laws. Should
the foreign subsidiaries distribute these earnings to the parent
company or provide access to these earnings, taxes of approximately
$12.2 million at the U.S. federal tax rate of 34 percent, net of
foreign tax credits, may be incurred. At December 31, 2002, the Company
had accumulated net operating loss carry-forwards available to offset
future taxable income in its Caribbean operations of about $21.2
million, which expire at various times through the year 2009.
During the fourth quarter 2001, the Company's three subsidiaries in
Antigua were assessed $6.1 million in income taxes and withholding
taxes for the years 1995 through 1999. The Company is appealing the
assessments in the appropriate venues. The Company is owed a total of
$30.0 million from the Government of Antigua and Barbuda; see further
Note 3, of which $6.8 million is reflected as a receivable in the
Company's financial statements. The difference between the gross
balance and the reflected balance is the result of the notes receivable
being on the cost recovery method from the notes inception through
April 2000. In the event that the appeal is denied, the Company
believes it has the right to offset any amounts owed to the Government
against what is owed to the Company. Therefore, the Company believes
that if any tax is accrued in the future, it will not have an immediate
cash flow effect on the Company, but will result in an offset between
tax owed and receivables outstanding. It is too early to predict the
final outcome of the appeals process or to estimate the ultimate amount
of loss, if any, to the Company. Based on the advice from local
Antiguan tax consultants and local Antiguan counsel, management
believes the Company's defenses to be meritorious and does not believe
that the ultimate outcome will have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
(9) Foreign Subsidiaries
Combined financial information for the Company's foreign Caribbean
subsidiaries, except for those located in the U.S. Virgin Islands and
Puerto Rico, are summarized here:
December 31,
--------------------------------------------
2002 2001
---- ----
Current assets $17,539,443 $11,822,302
Advances to the Company 6,082,030 7,734,792
Property, plant and equipment, net 11,703,177 10,933,035
53
December 31,
--------------------------------------------
2002 2001
---- ----
Investments in joint ventures and
affiliates, net 186,490 186,490
Notes receivable, net 7,490,948 9,752,049
Other assets 6,998 11,147
----------- -----------
Total assets $43,009,086 $40,439,815
=========== ===========
Current liabilities $ 2,983,530 $ 2,512,409
Long-term debt 889,416 946,725
Equity 39,136,140 36,980,681
----------- -----------
Total liabilities and equity $43,009,086 $40,439,815
=========== ===========
2002 2001 2000
---- ---- ----
Revenue $20,476,404 $25,607,906 $32,419,421
Gain on sale of business - - 9,751,585
Income before income taxes 820,251 3,440,105 10,343,782
Net income 439,251 2,853,800 10,309,560
(10) Lease Commitments
The Company leases real property, buildings and equipment under
operating leases that expire over periods of one to thirty-one years.
Future minimum lease payments under non-cancelable operating leases
with terms in excess of one year as of December 31, 2002 are as
follows:
Years ending December 31, Operating
Leases
----------
2003 $1,637,843
2004 1,261,811
2005 833,742
2006 467,269
2007 196,709
Thereafter 330,204
----------
Total minimum lease payments $4,727,578
==========
Total operating lease expense for real property and buildings was
$1,869,548, $1,977,537 and $3,473,000 in 2002, 2001 and 2000,
respectively. Total operating lease and rental expense for equipment
was $1,092,640, $903,455, and $904,709 in 2002, 2001 and 2000,
respectively. The equipment leases are normally on a month-to-month
basis. Some operating leases provide for contingent rentals or
royalties based on related sales and production; contingent expense
amounted to $17,464, $10,755 and $112,770 in 2002, 2001 and 2000,
54
respectively. Included in the above minimum lease commitments are
royalty payments due to the owners of the Societe des Carrieres de
Grand Case (SCGC) quarry. See Note 16.
(11) Segment Reporting
The Company is organized based on the products and services it
provides. Under this organizational structure the Company has two
reportable segments: Materials division and Construction division. The
Materials division segment includes manufacturing and distribution of
ready-mix concrete, block, crushed aggregate and cement. The
Construction division segment consists of land development construction
projects. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
December 31,
--------------------------------------------
Revenue (incl. inter-segment): 2002 2001 2000
---- ---- ----
Materials $37,740,458 $40,985,155 $51,466,445
Construction 15,796,199 15,282,867 14,421,338
Elimination of inter-segment revenue (180,811) (1,380,507) (639,600)
----------- ----------- -----------
Total $53,355,846 $54,887,515 $65,248,183
=========== =========== ===========
Operating (loss) income:
Materials $ (670,988) $ 23,330 $(1,607,653)
Construction (1,260,373) 1,173,141 1,266,349
Unallocated corporate overhead (1,115,000) (1,188,000) (819,000)
----------- ----------- -----------
Total (3,046,361) 8,471 (1,160,304)
Other income, net 4,642,960 3,251,232 20,362,668
----------- ----------- -----------
Income before taxes $ 1,596,599 $ 3,259,703 $19,202,364
=========== =========== ===========
Total assets:
Materials $44,017,013 $43,787,877 $46,852,093
Construction 13,635,796 13,441,816 10,983,399
Other 10,784,552 10,722,054 14,300,579
----------- ----------- -----------
Total $68,437,361 $67,951,747 $72,136,071
=========== =========== ===========
Depreciation and amortization:
Materials $ 3,384,336 $ 3,309,717 $ 3,596,902
Construction 1,524,261 1,585,689 1,577,797
----------- ------------ -----------
Total $ 4,908,597 $ 4,895,406 $ 5,174,699
=========== =========== ===========
Capital expenditures:
Materials $ 2,080,756 $ 3,709,789 $ 2,854,719
Construction 1,295,342 805,706 2,126,391
------------ ----------- -----------
Total $ 3,376,098 $ 4,515,495 $ 4,981,110
============ =========== ===========
55
Operating (loss) income is revenue less operating expenses. In
computing operating (loss) income, the following items have not been
added or deducted: interest expense, income tax expense, equity in
earnings from unconsolidated joint ventures and affiliates, interest
and other income, minority interest and gain or loss on sales of
equipment. The note receivable from the Government of Antigua and
Barbuda is included in total assets, other.
Revenue by geographic area includes sales to unaffiliated customers
based on customer location, not the selling entity's location. The
Company moves its equipment from country to country; therefore, to make
this disclosure meaningful the geographic area separation for assets is
based on the location of the legal entity owning the assets. One
customer, the owner of the project in the Bahamas, account for $8.4
million of revenue reported in the Construction division segment.
December 31,
----------------------------------------------------
2002 2001 2000
---- ---- ----
Revenue by geographic areas:
U.S. and its territories $19,859,351 $21,562,985 $25,235,399
Netherlands Antilles 6,689,056 9,459,217 12,689,209
Antigua and Barbuda 10,962,572 10,534,677 12,593,564
French West Indies 4,998,990 6,384,890 9,158,988
Other foreign areas 10,845,877 6,945,746 5,571,023
------------ ----------- -----------
Total $53,355,846 $54,887,515 $65,248,183
=========== =========== ===========
Property, plant and equipment,
net, by geographic areas:
U.S. and its territories $18,324,928 $20,292,205 $21,186,263
Netherlands Antilles 270,114 285,045 344,305
Antigua and Barbuda 7,030,701 6,720,267 7,280,881
French West Indies 4,399,832 3,873,834 4,206,217
Other foreign areas 2,530 53,889 132,500
----------- ----------- -----------
Total $30,028,105 $31,225,240 $33,150,166
=========== =========== ===========
(12) Related Party Transactions
The Company leases a 3.4-acre parcel of real property in Deerfield
Beach, Florida from the Company's President, Mr. Donald L. Smith, Jr.,
of which a smaller portion is actually utilized by the Company. Annual
rent on the property was $95,400 in 2002, $49,303 in both 2001 and
2000. The lease was renewed for five years from January 1, 2002 with an
annual rent of $95,400. The new rent was based on comparable rental
prices for the utilized portion for similar properties in Deerfield
Beach.
At December 31, 2002, the Company had a note payable of $2.1 million to
Mr. Smith resulting from various advances made to the Company in
previous years, to provide long-term financing to the Company and
security for a payment-guarantee issued by the President on behalf of
an entity in the Bahamas. The note is unsecured and bears interest at
the prime rate. Presently, $300,000 dollars is due on demand and $1.8
56
million is due on July 1, 2004. Management believes that these terms
are similar to what the Company would be able to achieve if it was to
borrow this money from a bank. The board of directors has approved this
transaction in the past. Mr. Smith has the option to make the note due
on demand should a "Change of Control" occur. A Change of Control has
occurred if a person or group acquires 15 percent or more of the common
stock or announces a tender offer that, if successful, would result in
ownership by a person or group of 15 percent or more of the common
stock. See Note 7 of Consolidated Financial Statements.
At December 31, 2002, the Company had an investment and advances
totaling $186,000, representing a 1.2 percent interest in a real estate
joint venture in the Bahamas in which a director, Mr. Robert A. Steele,
and Mr. Smith participates with an equity interest of 1.0 and 11.3
percent, respectively. The investment is carried at cost; accordingly
no income or loss has been recorded from this investment. The Company
has a $28.2 million contract with the venture to perform land
preparation services. In connection with this contract, the Company
recorded revenue of $8.4 million during 2002. The backlog on the
contract as of December 31, 2002 was $3.0 million. As of December 31,
2002 the Company had trade receivables from the venture of
approximately $1.3 million and the cost and estimated earnings in
excess of billings was $1.5 million. Mr. Smith has guaranteed the
payment of the receivables from the entity, up to a maximum of $2.5
million.
The Company's joint venture subsidiary in Puerto Rico has transactions
with the joint venture partners. A company controlled by one of the
partners provides drilling and blasting services for the Company's
quarry in Guaynabo. The price for the services is negotiated
periodically, primarily by comparison to the cost of performing that
work by the Company. In 2001, the subsidiary entered into a 36-month
lease agreement for equipment located in the Aguadilla facility with
another company controlled by this partner. The agreement also contains
an option to buy the equipment. The price of the lease and the sales
price of the equipment were negotiated between the parties at arm's
length. There are no clear comparable prices in the market place, and
no third party evaluation of the fairness of the transaction was
completed. The subsidiary will recuperate its recorded book value of
the assets, should the purchase option be exercised.
The same subsidiary sells a significant portion of its products to a
company controlled by another joint venture partner. In 2002, the
Company's subsidiary's revenue from these sales was $3,452,000. This
partner is controlled by one of the Company's directors; Jose A.
Bechara, Jr. Esq. The price of the products is governed by firm supply
agreements, renegotiated every other year. Comparable prices
from other quarries are studied and used in the price negotiation.
Other assets include amounts due from officers and employees as a
result of payments made by the Company pursuant to a split-dollar life
insurance plan. The Company's advances to pay premiums are secured by a
pledge of the cash value of the issued policies. Amounts due to the
Company under the split-dollar life insurance plan were $974,418 and
$943,638 in 2002 and 2001, respectively. No payments were made since
July 2002 on these policies and no commitments exist to make any
further payments on the policies.
57
(13) Stock Option Plans
The Company adopted stock option plans for officers and employees in
1986, 1992 and 1999. While each plan terminates 10 years after the
adoption date, issued options have their own schedule of termination.
Until 1996, 2002 and 2009, options to acquire up to 300,000, 350,000
and 350,000 shares respectively, of common stock may be granted at no
less than fair market value on the date of grant.
All stock options granted pursuant to the 1986 Plan not already
exercisable, vest and become fully exercisable (1) on the date the
optionee reaches 65 years of age and for the six-month period
thereafter or as otherwise modified by the Company's Board of
Directors, (2) on the date of permanent disability of the Optionee and
for the six-month period thereafter, (3) on the date of a change of
control and for the six-month period thereafter, and (4) on the date of
termination of the Optionee from employment by the Company without
cause and for the six-month period after termination. Stock options
granted under the 1992 and 1999 Plan vest and become exercisable in
varying terms and periods set by the Compensation Committee of the
Board of Directors. Options issued under the 1992 and 1999 Plan expire
after 10 years.
The Company adopted a stock-option plan for directors in 1992 that
terminated in 2002. Options to acquire up to 50,000 shares of common
stock were granted at no less than the fair-market value on the date of
grant. The 1992 Directors' Plan provides each director an initial grant
of 8,000 shares and additional grants of 1,000 shares annually
immediately subsequent to their reelection as a director. Stock options
granted under the Directors' Plan have 10-year terms, vest and become
fully exercisable six months after the issue date. As the director's
plan was fully granted in 2000, the directors have received their
annual options since then from the employee plans.
Stock option activity by year was as follows:
Employee Plans Directors' Plan
----------------- -----------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
-------- --------------- ------- ---------------
Balance at
12/31/99 789,775 $3.45 49,000 $8.59
Granted 13,000 5.76 1,000 6.63
Exercised (13,200) 1.50 - -
Expired (5,000) 1.50 - -
-------- --------
Balance at
12/31/00 784,575 3.53 50,000 8.55
Granted 6,500 6.92 - -
Exercised (18,600) 1.74 - -
Expired (9,180) 7.00 - -
-------
58
Employee Plans Directors' Plan
----------------- -----------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
Balance at
12/31/01 763,295 3.56 50,000 8.55
Granted 38,500 5.93 - -
Exercised (32,600) 1.90 - -
Expired (10,000) 9.63 (16,000) 14.00
------- ------
Balance at
12/31/02 759,195 3.67 34,000 5.98
======= ======
Exercisable 557,968 4.03 34,000 5.98
======= ======
Available for
future grant 17,000 -
======== ==========
Weighted average information:
Total Outstanding Options Exercisable Options
------------------------------ -------------------
Weighted Weighted Weighted
Number Average Average Number Average
of Exercise Remaining of Exercise
Price Range Shares Price Life Shares Price
----------- ------ ----- --------- ------ --------
1.50 - 2.33 430,900 $1.85 7.3 287,325 $1.95
2.94 - 3.75 60,000 3.20 5.6 46,000 3.19
5.00 - 6.25 79,500 5.46 6.9 39,000 5.13
6.63 - 7.00 188,795 6.76 2.9 185,643 6.76
7.75 - 9.38 34,000 8.51 3.0 34,000 8.51
(14) Employee Benefit Plans
The Company sponsors a 401(k) plan for some employees over the age of
21 who have completed a minimum of 9 months of employment. The Company
matches employee contributions up to 3.0 percent of an employee's
salary. Company contributions totaled $139,790, $138,544 and $140,257
in 2002, 2001 and 2000, respectively.
(15) Costs and Estimated Earnings on Contracts
Included in the accompanying consolidated balance sheets under the
following captions:
December 31,
2002 2001
---- ----
Costs and estimated earnings in excess of billings $ 1,990,353 $ 229,056
Billings in excess of costs and estimated earnings (1,958) (414,837)
------------ ------------
$ 1,988,395 $ (185,781)
=========== ===========
59
2002 2001
---- ----
Costs incurred on uncompleted contracts $24,495,326 $19,770,486
Costs incurred on completed contracts 9,503,151 7,866,967
Estimated earnings 4,384,219 5,730,422
------------- ------------
38,382,696 33,367,875
Less: Billings to date 36,394,301 33,553,656
------------ -----------
$ 1,988,395 $ (185,781)
============ ============
(16) Commitments and Contingencies
The Company has contingent obligations and has made guarantees in
connection with acquisitions, joint ventures, employee and construction
bonding and a tax exemption. As part of the 1995, subsequently
renegotiated in 1999, acquisition of Societe des Carrieres de Grand
Case ("SCGC"), a French company operating a ready-mix concrete plant
and quarry in St. Martin, the Company agreed to pay the quarry owners,
who were also the owners of SCGC, a royalty payment of $500,000 per
year through July 2004 and rent of $50,000 per year through July 2005.
The agreement may be renewed, at the Company's option, for a successive
five-year period and would require annual payments of $500,000 and
$50,000 per year, respectively. At the end of the 15-year royalty
period, the Company has the option to purchase this 50-hectare property
for $4.4 million.
During the second quarter 2002, the Company issued a construction
contract performance guarantee together with one of the Company's
customers, Northshore Partners, Inc., ("Northshore"), in favor of
Estate Plessen Associates L.P. and JPMorgan Chase Bank, for $5.1
million. Northshore Partners is an important customer on St. Croix and
the construction contract that Northshore Partners has with Estate
Plessen Associate L.P. has requirements for the Company's construction
materials. Although there is no assurance, management does not
presently believe that this guarantee will have any material impact on
the Company's liquidity or capital resources or any material negative
impact on its financial position or results of operations. In the case
that Northshore is unable to fulfill its commitments of the
construction contract, the Company will be obligated to take
Northshore's place and finish the contract. The Company is closely
monitoring the progress of construction. The Company issued a letter of
credit for $500,000 as collateral for the transaction and has not yet
had any expenses in connection with this transaction. The construction
project is estimated to be finished within two years and the guarantee
expires two years after completion. The Company received an up front
fee of $154,000, and has recognized a receivable for additional
$52,000. At the same time, a long-term liability of the total amount
has been recorded, which may be recognized to income, once it is
determined that no liability exists for the project, less any amounts
paid by the Company in connection with the performance guarantee.
60
In June 2000, the Company entered into an amended Life Insurance and
Salary Continuation Agreement with the Company President. The President
shall receive a retirement benefit upon the sooner of his retirement
from his position after March 31, 2003, or a change in control of the
Company. Benefits to be received shall equal 75 percent of his base
salary, and shall continue for the remainder of his life. In the event
that a spouse survives him, then the surviving spouse shall receive a
benefit equal to 100 percent of his base salary for the shorter of five
years or the remainder of the surviving spouse's life. The Company will
recognize the expense of the retirement agreement over his expected
remaining period of active employment with the Company. The expense
related to this agreement was $560,000 in 2002, $480,000 in 2001 and
$220,000 in 2001. The accrued liability in connection with this
agreement was $1.3 million as of December 31, 2002 and the Company
estimates to accrue an additional $200,000 through March 2003. At that
point the Company estimates that the total accrual will be sufficient
to cover its obligations under the aforementioned agreement.
During the fourth quarter 2001, the Company's three subsidiaries in
Antigua were assessed $6.1 million in income taxes and withholding
taxes for the years 1995 through 1999. The Company is appealing the
assessments in the appropriate venues. The Company is owed a total of
$30.0 million from the Government of Antigua and Barbuda; see Note 3,
of which $6.8 million is reflected as a receivable in the Company's
financial statements. The difference between the gross balance and the
reflected balance is the result of the notes receivable being on the
cost recovery method from the notes inception through April 2000.
In the event that the appeal is denied, the Company believes it has the
right to offset any amounts owed to the Government against what is owed
to the Company. Therefore, the Company believes that if any tax is
accrued in the future, it will not have an immediate cash flow effect
on the Company, but will result in an offset between tax owed and
receivables outstanding. It is too early to predict the final outcome
of the appeals process or to estimate the ultimate amount of loss, if
any, to the Company. Based on the advice from local Antiguan tax
consultants and local Antiguan counsel, management believes the
Company's defenses to be meritorious and does not believe that the
ultimate outcome will have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
In the fall of 2000, Virgin Islands Cement and Building Products, Inc.
("VICBP"), a subsidiary of the Company, was under contract with the
Virgin Islands Port Authority ("VIPA") for the construction of the
expansion of the St. Croix Airport. During the project, homeowners and
residents of the Yellow Cedar Housing Community, located next to the
end of the expansion project, claimed to have experienced several days
of excessive dust in their area as a result of the ongoing construction
work. The homeowners of Yellow Cedar have filed two separate lawsuits
against VIPA and VICBP as co-defendants. One suit, filed in the U.S.
District Court by Mariepaul Antoine, Benjamin Ashe, et. al, vs. VIPA
et. al, case #2001,63 R/F, seeks equitable relief from nuisance,
specific performance and damages. The second suit, Louisa Williams et.
al vs. VIPA et. al filed in the Territorial Court of the U.S.V.I. case
#548/2000 seeks equitable relief from nuisance, specific performance
and damages. In both cases, VICBP as defendant has agreed to indemnify
VIPA for any civil action created during the course of work. Reliance
Insurance Company ("Reliance"), the general liability carrier for
VICBP, has taken the legal position that "dust" is a pollutant and,
61
therefore, the pollution exclusion clause applies and as a result
denies liability insurance coverage to VICBP. Corporate counsel in
Florida, as well as in the U.S. Virgin Islands, have advised the
Company that laws now in place should enable the Company to enforce the
duty to defend contained in the liability policy, thus affording the
Company a defense of both legal actions. The Pennsylvania Insurance
Commissioner placed Reliance in rehabilitation in October 2001, and
subsequently into liquidation. The Company has also presented claims
under the policy to the Florida Insurance Guaranty Association, the
V.I. Insurance Guaranty Association, and to the Pennsylvania Insurance
Commissioner. It is too early to predict the final outcome of this
matter or to estimate the potential risk of loss, if any, to the
Company.
In the late 1980s, Bouwbedrijf Boven Winden, N.V. ("BBW"), currently a
Devcon subsidiary in the Netherlands Antilles, supplied concrete to a
large apartment complex on the French side of St. Maarten. In the early
1990s the buildings began to develop exterior cracking and "pop outs."
In November 1993, BBW was named one of several defendants including the
building's insurer, in a suit filed by Syndicat des Coproprietaires la
Residence Le Flamboyant (condominium owners association of Le
Flamboyant), in the French court "Tribunal de Grande Instance de
Paris", case No. 510082/93. A French court assigned an expert to
examine the cause of the cracking and pop outs and to determine if the
cracking/pop outs are caused by a phenomenon known as alkali reaction
(ARS). The expert found, in his report dated December 3, 1998, that BBW
was responsible for the ARS. The plaintiff is seeking unspecified
damages, including demolition and replacement of the 272 apartments.
Based on the advice of legal counsel, a judgment assessed in a French
court would not be enforceable against a Netherlands Antilles company.
Thus, in order to obtain an enforceable judgment, the plaintiff would
have to file a successful claim in an Antillean court. It is too early
to predict the final outcome of this matter or to estimate the
potential risk of loss, if any, to the Company. Due to the lack of
enforceability, the Company decided not to continue the defense in the
French court. Therefore, the Company may not be aware of developments
of the court proceedings. Management believes the Company's defenses to
be meritorious and does not believe that the outcome will have a
material adverse effect on the consolidated financial position, results
of operations or cash flows of the Company.
The Company sold substantially all of its interest in a real estate
joint venture with the Government of Antigua and Barbuda to a third
party in 1990. In connection with this sale, the purchaser assumed the
Company's guarantee of payment to the Government of Antigua and Barbuda
made upon the formation of the joint venture. This guarantee, which
would become an obligation of the Company in the event of a default by
the purchaser, provides that net profits from the joint venture's
operations will equal or exceed $20,000 per month. No liability has
been incurred by the Company nor have payments been made by the Company
or the purchaser in connection with this guarantee. The guarantee
expires upon the earlier of the sale or disposal by the venture of its
real estate or September 2003. There are no current plans to sell or
dispose of any of the venture's property.
62
The Company is subject to federal, state and local environmental laws
and regulations. Management believes that the Company is in compliance
with these laws and regulations. Compliance with environmental
protection laws has not had a material adverse impact on the Company's
consolidated financial condition or results of operations and is not
expected to have a material adverse impact in the foreseeable future.
The Company is involved in other litigation and claims arising in the
normal course of business. The Company believes that such litigation
and claims will be resolved without a material adverse effect on the
Company's consolidated financial position or results of operations.
(17) Business and Credit Concentrations
The Company's customers are concentrated in the Caribbean and are
primarily involved in contracting. Credit risk may be affected by
economic and political conditions in the countries where the Company
operates. Potential concentrations of credit risk include receivables
and costs and estimated earnings in excess of billings. One customer
accounted for 15.7 percent of the Company's sales in 2002. No single
customer accounted for more than 10 percent of the Company's sales
in 2001 and 2000 and there are no receivables from a single customer
that represent more than 10 percent of total receivables as of
December 31, 2002 or 2001, other than the notes receivable from the
Government of Antigua and Barbuda and the receivable from the
construction project in the Bahamas. Although receivables are generally
not collateralized, the Company may place liens or their equivalent in
the event of nonpayment. The Company estimates an allowance for
doubtful accounts based on the creditworthiness of customers as well as
general economic conditions of the countries where it operates. An
adverse change in these factors would affect the Company's estimate of
bad debts.
The Company has a construction project with a backlog of $3.3 million.
A subsidiary, the Company's President and one of the Company's
directors are minority partners of, and the Company's President is a
member of the managing committee of, the entity developing the project.
See further Note 12.
The Company has separate union agreements with its employees on St.
Thomas, St. Croix and Antigua. The agreement on St. Thomas expires
March 2003, on St. Croix March 2006 and on Antigua November 2003. In
the past, there have been no labor conflicts.
Management believes that the Company's ability to produce its own sand
and stone gives it a competitive advantage because of the substantial
investment required to produce sand and stone, the difficulty in
obtaining the necessary environmental permits to establish quarries,
and the moratorium on mining beach sand imposed by most Caribbean
countries. If the Company is unable to produce its own sand and stone,
the consolidated financial position, results of operations, or cash
flows could be adversely affected.
63
The Company's aggregate in the quarry in Guaynabo, Puerto Rico, will
last an additional 2-4 years. The Company is searching for new quarry
sites. If such sites cannot be secured, the Company may be forced to
impair its quarry equipment.
(18) Sale of Businesses
In January 7, 2000, the Company closed a transaction to sell certain
concrete related assets on St. Thomas, USVI and the subsidiary Devcon
Masonry Products (BVI), Ltd., to a purchaser and the purchaser's
related parties. The selling price was $6 million in cash, a note for
$2.5 million payable over three years and 420,100 shares of Devcon
International Corp. held by the buyer. The shares were valued at $2.4
million at the day of closing. The book value of the assets sold,
including certain expenses and deferred gain due to a $1 million
contingency accrual, was $8.7 million. Therefore, the Company realized
in the first quarter of 2000 a gain on this transaction before tax of
$2.2 million. During 2001 the contingency was resolved and the
outstanding note was reduced by $1.0 million and the remaining note was
fully paid during 2001.
On February 3, 2000, the Company closed a transaction to sell real
property in St. Croix. The selling price was $2.3 million in cash, and
the book value of the property was $1.9 million. As a result, the
Company realized a gain on the transaction of approximately $336,000
before taxes.
On February 22, 2000, the Company closed a transaction to sell certain
bulk cement terminal assets on four of the islands in the Caribbean.
The purchasers were Union Maritima International (UMAR) and some of its
affiliated companies. The selling price was $19.6 million in cash. The
book value of the assets, including certain expenses and contingency
accruals, was $3.8 million, resulting in a gain on the transaction of
$15.8 million before taxes. The Company simultaneously entered into an
agreement to manage the terminals for one year. This management
agreement was amended and renewed on March 1, 2001 and 2002,
respectively, for an additional year, with a 90-day termination option
for both parties. The Company also entered into a supply agreement to
buy cement from the terminals for five years for its own use in the
Company's batch and block plants. The agreement has stipulations so
that the Company will be able to enjoy the best price available in the
local market from any cement supplier. The Company sold cement to third
parties in 1999 and entered into a one-year contract to distribute
cement on these four islands. This distribution agreement was
terminated on March 1, 2001. The Company has continued to distribute
cement on a non-exclusive basis on some of the islands for the buyers.
On March 16, 2000, the Company closed on a related transaction to sell
its subsidiary in Dominica to an affiliated company of UMAR. The
selling price was $4.1 million plus an earn-out of 50 percent of the
profits or losses of a portion of the Company's operations. The book
value of the assets, including certain expenses and contingency
accruals, was $3.0 million. The gain of $1.0 million on the transaction
was deferred to the first quarter of 2002, when the earn-out period
finished.
64
The Company has used the proceeds from these transactions to pay off
most of its equipment financing debt, bank debt and other debt. The
original gain on sale of businesses during 2000 was computed as
follows:
Aggregate selling price $36,849,822
Assets sold:
Receivables (2,155,172)
Inventory (857,146)
Property, plant and equipment (11,562,801)
Intangibles (573,323)
Other assets (528,947)
-----------
(15,677,389)
Liabilities assumed:
Accounts payable 353,768
Income taxes 84,153
-----------
437,921
Selling expenses (269,965)
Sales related accruals (976,485)
-----------
Total gain on sale of businesses 20,363,904
Deferred gain on sale of businesses (2,070,859)
-----------
Gain on sale of businesses $18,293,045
===========
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
We have had no changes in or disagreements with our independent certified public
accountants on accounting and financial disclosure.
65
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information on our directors and executive officers is incorporated
by reference to our Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report ("Proxy
Statement"). Information as to executive officers is included in Part I
of this report.
Item 11. Executive Compensation.
The information required for this item is also incorporated by
reference to our Proxy Statement. The information included in the proxy
statement pursuant to Rule 402(i), (k) and (l) is not incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required for this item is also incorporated by
reference to our Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required for this item is also incorporated by
reference to our Proxy Statement.
Item 14. Controls and Procedures
Within the 90 days prior to the date of this Annual Report, the Company
conducted an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer (its principal
executive officer and principal financial officer, respectively), of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rules
13a-14. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's
periodic SEC filings. There have been no significant changes in the
Company's internal controls or in other factors, which could
significantly affect internal controls, subsequent to the date the
Company carried out its evaluation.
66
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements.
An index to consolidated financial statements for the year ended
December 31, 2002 appears on page 33
(2) Financial Statement Schedule.
The following financial statement schedule for each of the years in the
three-year period ended December 31, 2002 is submitted herewith:
Form 10-K
Item (Page Number(s))
---- ---------------
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts.................. 75
All other financial schedules are omitted because they are not
required, inapplicable, or the information is otherwise shown in the
consolidated financial statements or notes thereto.
(3) Exhibits.
Exhibit Description
3.1 Registrant's Restated Articles of Incorporation (1)(3.1)
3.2 Registrant's Amended and Restated Bylaws (11) (3.2)
10.1 Registrant's 1986 Non-Qualified Stock Option Plan (2)(10.1)
10.2 Registrant's 1992 Stock Option Plan (7)(A)
10.3 Registrant's 1992 Directors' Stock Option Plan (7)(B)
10.4 V. I. Cement and Building Products Inc. 401(k) Retirement and
Savings Plan (10)(10.4)
10.5 Form of Indemnification Agreement between the Registrant, and its
directors and certain of its officers (4)(A)
10.6 St. John's Dredging and Deep Water Pier Construction Agreement
dated as of April 3, 1987, by and between Antigua and
Barbuda and Antigua Masonry Products, Limited (the "Set. Johns
Agreement") (4)(10.1)
10.7 Amendment No. 1 to the St. John's Agreement dated June 15,
1988(5)(10.2)
10.8 Amendment No. 2 to the St. John's Agreement dated December 7, 1988
(6) (10.34)
10.9 Amendment No. 3 to the St. John's Agreement dated January 23, 1989
(6) (10.35)
10.10 Amendment No. 4 to the St. John's Agreement dated April 5, 1989 (6)
(10.36)
10.11 Amendment No. 5 to the St. John's Agreement dated January 29, 1991
(6) (10.37)
10.12 Amendment No. 6 to the St. Johns Agreement dated November 30, 1993
(8)(10.39)
10.13 Amendment No. 7 to the St. John's Agreement, dated December 21,
1994 (10) (10.14)
67
10.14 Amendment No. 8 to the St. John's Agreement, dated October 23, 1996
(10) (10.15)
10.15 Guarantee dated June 12, 1989, from the Registrant to Banco Popular
de Puerto Rico (5)(10.6)
10.16 Lease dated October 31, 1989, between William G. Clarenbach and
Pricilla E. Clarenbach, as lessors, and Controlled
Concrete Products, Inc., as lessee (1)(10.26)
10.17 Lease dated April 13, 1981, between Mariano Lima and Genevieve Lima,
as lessors, and the Registrant, as lessee (1)(10.28)
10.18 Lease dated February 24, 1989, between Felix Pitterson, as lessor,
and V.I. Cement and Building Products, Inc., as lessee
(1)(10.30)
10.19 Lease dated September 1, 1989, between Donald L. Smith, Jr., as
lessor, and the Registrant, as lessee (1)(10.31)
10.20 Lease dated September 12, 1966, between His Honour Hugh Burrowes,
a Commander of the British Empire of Government House in
the Island of Antigua, as lessor, and The Antigua Sand and Aggregate
Limited, as lessee (1)(10.32)
10.21 Material Purchase Agreement, dated August 17, 1995, between
Bouwbedrijf Boven Winden, N.V. and Hubert Petit, Francois
Petit and Michel Petit (9) (10.41)
10.22 Stock Purchase Agreement, dated August 17, 1995, between the
Registrant and Hubert Petit, Francois Petit and Michel Petit
(9)(10.42)
10.23 Form of Note between Devcon International Corp. and
Donald L. Smith, Jr. (11)(10.31)
10.24 Asset Purchase Agreement between Caricement B.V., Union Maritima
International S.A. and Devcon International Corp. and its
subsidiaries dated February 22, 2000 (14)
10.25 Stock Purchase Agreement between Caribbean Construction and
Development, Ltd., Devcon International Corp. and Caricement
Antilles N.V. dated February 22, 2000 (14)
10.26 Purchase Agreement by and among Devcon International Corp.,
V.I. Cement and Building Products, Inc., Paulina Dean, St. Thomas
Concrete, Inc. and W. Kemble Ketcham dated January 7, 2000 (12)
10.27 Supply Agreement between Union Maritima International S.A.
and Devcon International Corp. dated December 29, 1999 (15)
(10.36)
10.28 Registrant's 1999 Stock Option Plan (13)
10.29 Second Amended and Restated Salary Continuation and Retirement
Benefit Agreement dated June 30, 2000 (16)(10.32)
10.30 Amendment No. 9 to the St. John's Agreement, dated April 28, 2000
(16)(10.33)
10.31 Antigua Delinquent Letter dated March 12, 2001 (17) (10.1)
21.1 Registrant's Subsidiaries (18)
23.1 Consent of KPMG LLP (18)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (18)
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (18)
(1) Incorporated by reference to the exhibit shown in parenthesis and
filed with the Registrant's Registration statement on Form S-2
(No. 33-31107).
(2) Incorporated by reference to the exhibit shown in the parenthesis
and filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1987 (the "1987 10-K").
68
(3) Incorporated by reference to the exhibit shown in the parenthesis
and filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988 (the "1988 10-K").
(4) Incorporated by reference to the exhibit shown in parenthesis and
filed with the Registrant's Proxy Statement dated May 30, 1989.
(5) Incorporated by reference to the exhibit shown in parenthesis and
filed with the Registrant's Form 8 dated August 17, 1989 to the
1988 10-K.
(6) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991.
(7) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Proxy Statement dated May
6, 1992.
(8) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993.
(9) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(10) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996.
(11) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998.
(12) Incorporated by reference to the exhibit showing in parenthesis
and filed with the Registrant's Report on Form 8K dated
January 7, 2000.
(13) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Report on Form S-8 dated December 7,
1999.
(14) Incorporated by reference to the exhibit showing in parenthesis
and filed with the Registrant's Report on Form 8K dated
February 22, 2000.
(15) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999
(16) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2000
(17) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Report on Form 10-Q dated November 9,
2001
(18) Filed herewith
Management employee contracts, compensatory plans and other arrangements
included as part of the exhibits referred to above are as follows:
10.1 Registrant's 1986 Non Qualified Stock Option Plan (2) (10.1)
10.2 Registrant's 1992 Stock Option Plan (7)(A)
10.3 Registrant's 1992 Directors' Stock Option Plan (7) (B)
10.4 V. I. Cement and Building Products, Inc. 401(k) Retirement and
Savings Plan (10) (10.4)
10.5 Second Amended and Restated Salary Continuation and Retirement
Benefit Agreement dated June 30, 2000. (16) (10.32)
10.6 Registrant's 1999 Stock Option Plan (13)
69
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed by the Registrant during the last quarter of
the period covered by this report.
70
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.
February 28, 2003 DEVCON INTERNATIONAL CORP.
BY:/S/ DONALD L. SMITH, JR.
--------------------------
Donald L. Smith, Jr.
Chairman, President and
Chief Executive Officer
Pursuant to the requirements 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 dates indicated.
February 28, 2003 DEVCON INTERNATIONAL CORP.
By:/S/ DONALD L. SMITH, JR.
--------------------------
Donald L. Smith, Jr.
Chairman, President and
Chief Executive Officer
February 28, 2003 By:/S/ RICHARD L. HORNSBY
--------------------------
Richard L. Hornsby
Executive Vice President
and Director
February 28, 2003 By:/S/ JAN A. NORELID
--------------------------
Jan A. Norelid
Vice President of Finance,
Chief Financial Officer and
Treasurer
February 28, 2003 By:/S/ ROBERT A. STEELE
--------------------------
Robert A. Steele
Director
71
February 28, 2003 By:/S/ ROBERT L. KESTER
--------------------------
Robert L. Kester
Director
February 28, 2003 By:/S/ W. DOUGLAS PITTS
--------------------------
W. Douglas Pitts
Director
February 28, 2003 By:/S/ JOSE A. BECHARA, JR.
--------------------------
Jose A. Bechara, Jr.
Director
72
CERTIFICATIONS
I, Donald L. Smith, Jr. certify that:
1. I have reviewed this annual report on Form 10-K of Devcon International
Corp.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared.
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the Evaluation Date).
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's Board of Directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls.
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 4, 2003 /s/ Donald L. Smith, Jr.
Donald L. Smith, Jr.
President and Chairman of the Board
73
CERTIFICATIONS
I, Jan A. Norelid, certify that:
1. I have reviewed this annual report on Form 10-K of Devcon International
Corp.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared.
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the Evaluation Date).
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's Board of Directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls.
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 4, 2003 /s/ Jan A. Norelid
Jan A. Norelid
Chief Financial Officer
74
Schedule II
Valuation and Qualifying Accounts
Allowance for
Doubtful Accounts Balance at Additions Balance
For the Year Beginning Charged to at End
Ended December 31, of Year Expense Deductions of Year
- ----------------- --------- ---------- ------------ ----------
2000 $4,352,609 $ 174,209 $ (1,704,861) $2,821,957
========== =========== ============ ==========
2001 $2,821,957 $ 278,960 $ (469,582) $2,631,335
========== =========== ============= ==========
2002 $2,631,335 $ 44,355 $ (294,824) $2,380,866
========== ============ ============= ==========
Allowance for
Doubtful Notes
Receivable Accounts Balance at Additions Balance
For the Year Beginning Charged to at End
Ended December 31, of Year Expense Deductions of Year
- ----------------- --------- ---------- ------------ ----------
2000 $ 913,216 $ 160,602 $ 62,278 $1,136,096
========== =========== ============== ==========
2001 $1,136,096 $ (116,265) $ ( 123,173) $ 896,658
========== =========== ============= ===========
2002 $ 896,658 $ 24,895 $ (526,508) $ 395,045
=========== ============= ============== ===========
Notes:
Deductions include amounts to reflect the sale of the Company's subsidiaries
Caribbean Construction and Development, Ltd and Devcon Masonry Products (BVI),
Ltd. in the year 2000.
Reduction in Allowance for Doubtful Notes Receivable in the year 2001 and 2002
represents collection of previously reserved amounts.
75
EXHIBIT SCHEDULE
Exhibit Description
21.1 Registrant's Subsidiaries
23.1 Consent of KPMG LLP
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
76
Exhibit 21.1
Antigua Cement, Ltd.
Antigua Heavy Constructors, Ltd.
Antigua Masonry Products, Ltd.
Bahamas Construction and Development, Ltd.
Bouwbedrijf Boven Winden, N.V.
Caribbean Cement Carriers, Ltd.
Caribbean Masonry Products, Ltd.
Cramer Construction, N.V.
Devcon Caribbean Purchasing Corp.
M21 Industries, Inc.
Proar Construction Materials Company, N.V.
Puerto Rico Crushing Company, Inc.
Societe des Carriers de Grand Case, S.A.R.L.
V.I. Cement and Building Products, Inc.
V.I. Excavation Equipment Rental, LLC
77
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Devcon International Corp. and Subsidiaries
We consent to incorporation by reference in the registration statements (No.
33-32968 and No. 33-59557) on Form S-8 of Devcon International Corp. and
subsidiaries of our report dated February 21, 2003, relating to the consolidated
balance sheets of Devcon International Corp. and subsidiaries as of December 31,
2002 and 2001, and the related consolidated statements of income, stockholders'
equity and comprehensive (loss) income, and cash flows for each of the years in
the three-year period ended December 31, 2002 and the related financial
statement schedule, which report appears in the December 31, 2002 annual report
on Form 10-K of Devcon International Corp. and subsidiaries.
/s/ KPMG LLP
Fort Lauderdale, Florida
February 21, 2003
78
Exhibit 99.1
CERTIFICATION PURSUANT TO
U.S.C. SECTION 1350,
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Devcon International Corp. (the
"Company") on Form 10-K for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, Jan
A. Norelid, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
Date: March 4, 2003 /s/ Jan A. Norelid
Jan A. Norelid
Chief Financial Officer
79
Exhibit 99.2
CERTIFICATION PURSUANT TO
U.S.C. SECTION 1350,
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Devcon International Corp. (the
"Company") on Form 10-K for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Donald L. Smith, Jr., Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
Date: March 4, 2003 /s/ Donald L. Smith, Jr.
Donald L. Smith, Jr.
Chief Executive Officer
80