SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File No. 0-7152
DEVCON INTERNATIONAL CORP.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-0671992
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1350 E. Newport Center Drive, Suite 201, Deerfield Beach, FL 33442
(Address of Principal Executive Offices) (Zip Code)
(954) 429-1500
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES X NO ______
-----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
YES NO X
----- ------
As of August 4, 2003 the number of shares outstanding of the Registrant's Common
Stock was 3,316,373.
2
Intentionally left blank
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
INDEX
Page Number
Part I. Financial Information:
Item 1. Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002 (unaudited)............... 4-5
Condensed Consolidated Statements of Operations Three and Six
Months Ended June 30, 2003 and 2002 (unaudited)............... 7
Condensed Consolidated Statements of Cash Flows Six Months Ended
June 30, 2003 and 2002 (unaudited)............................ 8-9
Notes to Condensed Consolidated Financial Statements
(unaudited).................................................... 10-16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 17-27
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 28
Item 4. Controls and Procedures....................................... 28
Part II. Other Information............................................. 29-30
3
PART I Financial Information
- --------------------------------------------------------
Item 1. Financial Statements
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(Unaudited)
June 30, December 31,
2003 2002
--------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 7,316,047 $ 8,977,293
Accounts and notes receivables, net 13,167,049 12,261,687
Costs and estimated earnings
in excess of billings 1,509,449 1,990,353
Inventories 3,939,744 4,416,278
Prepaid expenses and other current assets 1,215,524 667,174
---------------- --------------
Total current assets 27,147,813 28,312,785
Property, plant and equipment, net:
Land 1,432,068 1,462,068
Buildings 936,954 1,111,954
Leasehold improvements 3,271,404 3,494,392
Equipment 50,199,394 53,109,586
Furniture and fixtures 733,199 712,124
Construction in process 653,486 744,448
-------------- -----------
57,226,505 60,634,572
Less accumulated depreciation (31,830,088) (30,606,467)
------------ ------------
Total property, plant & equipment, net 25,396,417 30,028,105
Investments in and advances to
unconsolidated joint ventures and affiliates 374,460 373,251
Notes receivables, net 10,193,908 8,460,887
Other assets 1,647,385 1,262,333
------------- -------------
Total assets $64,759,983 $68,437,361
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
4
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(Unaudited)
(Continued)
June 30, December 31,
2003 2002
--------------- --------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade and other $ 4,784,369 $ 4,131,087
Accrued expenses and other liabilities 3,551,470 3,197,545
Line of credit 131,000 11,000
Current installments of long-term debt 342,895 378,500
Billings in excess of costs and estimated earnings 79,778 1,958
Income taxes payable 1,269,326 933,734
---------------- -------------
Total current liabilities 10,158,838 8,653,824
Long-term debt, excluding current installments 2,349,802 2,334,974
Deferred income taxes 47,081 65,356
Other long-term liabilities 4,001,172 2,357,952
------------- -------------
Total liabilities 16,556,893 13,412,106
Stockholders' equity:
Common stock: $0.10 par value. Authorized
15,000,000 shares, issued 3,403,173 in 2003
and 3,591,269 in 2002 , outstanding 3,302,373
in 2003 and 3,469,169 shares in 2002 340,317 359,126
Additional paid-in capital 9,179,907 9,704,937
Retained earnings 40,551,996 47,417,954
Accumulated other comprehensive loss -
cumulative translation adjustment (1,182,196) (1,611,983)
Treasury stock, at cost, 100,800 and 122,100
shares in 2003 and 2002, respectively (686,934) (844,779)
---------- -----------
Total stockholders' equity 48,203,090 55,025,255
----------- ------------
Commitments and contingencies
Total liabilities and stockholders' equity $64,759,983 $68,437,361
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
5
Intentionally left blank
6
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2003 and 2002
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
--------------- ------------- -------------- -------------
Materials revenue $ 10,090,439 $ 9,494,798 $18,698,206 $18,452,364
Construction revenue 4,299,273 4,003,445 7,754,140 8,432,102
-------------- ----------- ------------ ------------
Total revenue 14,389,712 13,498,243 26,452,346 26,884,466
Cost of materials (8,426,869) (7,555,964) (16,128,267) (15,396,502)
Cost of construction (3,990,243) (3,611,058) (7,955,197) (7,133,859)
-------------- ------------ ------------- ------------
Gross profit 1,972,600 2,331,221 2,368,882 4,354,105
Operating expenses:
Selling, general and administrative expenses (2,837,909) (2,774,855) (7,183,085) (5,632,105)
Impairment of assets - - (2,859,235) (7,423)
-------------- ------------ ------------- -----------
Operating loss (865,309) (443,634) (7,673,438) (1,285,423)
Other income (deductions):
Joint venture equity (loss) gain (6,149) 5,260 (5,746) 6,334
Gain on sale of equipment and property 225,625 23,022 232,038 108,470
(Loss) gain on sale of business - (7,422) - 1,040,973
Interest expense (44,714) (76,156) (81,419) (152,004)
Interest income 597,813 977,312 1,554,841 1,992,954
------------- ------------ ------------ ------------
772,575 922,016 1,699,714 2,996,727
(Loss) income before income taxes (92,734) 478,382 (5,973,724) 1,711,304
Income tax (expense) benefit (235,379) (65,949) 21,584 (361,484)
-------------- ------------- ------------- ------------
Net (loss) income $ (328,113) $ 412,433 $(5,952,140) $ 1,349,820
============= =========== ============ ===========
(Loss) earnings per share
Basic $ (0.10) $ 0.11 $ (1.75) $ 0.38
============== ============== ============== =============
Diluted $ (0.10) $ 0.11 $ (1.75) $ 0.35
============== ============== ============== =============
Weighted average number of shares outstanding
Basic 3,327,923 3,588,175 3,391,943 3,588,256
=========== =========== =========== ===========
Diluted 3,327,923 3,890,624 3,391,943 3,893,168
=========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
7
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002
(Unaudited)
June 30, June 30,
2003 2002
----------- ------------
Cash flows from operating activities:
Net (loss) income $(5,952,140) $ 1,349,820
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation and amortization 2,960,622 2,433,752
Deferred income taxes benefit (292,848) (155,871)
Provision for doubtful accounts and notes 42,309 168,543
Impairment of long-lived assets 2,859,235 7,423
Gain on sale of equipment and property (232,038) (108,470)
Gain on sale of business - (1,040,973)
Joint venture equity loss (gain) 5,746 (6,334)
Changes in operating assets and liabilities:
(Increase) decrease in accounts and notes receivables (3,681,492) 821,050
Decrease (increase) in costs and estimated
earnings in excess of billings 480,904 (1,620,724)
Decrease (increase) in inventories 542,982 (152,675)
Increase in prepaid expenses and
other current assets (558,829) (510,868)
Increase in other assets (100,000) (13,302)
Increase in accounts payable,
accruals and other liabilities 593,021 244,940
Increase (decrease) in billings in excess
of costs and estimated earnings 77,820 (359,415)
Increase in income taxes payable 335,592 479,733
Increase in other long-term liabilities 1,643,220 245,501
----------- -----------
Net cash (used in) provided by operating activities $(1,275,896) $ 1,782,130
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment $(1,341,533) $ (1,307,692)
Proceeds from sale of property and equipment 184,932 160,530
Payments received on notes 2,772,465 1,065,135
Investment in unconsolidated joint ventures (6,955) -
Issuance of notes (780,718) (236,840)
------------ ------------
Net cash provided by (used in) investing activities $ 828,191 $ (318,867)
----------- -----------
See accompanying notes to unaudited condensed consolidated financial statements.
8
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Continued)
June 30, June 30,
2003 2002
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock $ 119,621 $ 29,400
Purchase of treasury stock (1,419,433) (127,436)
Principal payments on debt (20,777) (757,490)
Net borrowings on credit lines 120,000 616,000
------------ ------------
Net cash used in financing activities $ (1,200,589) $ (239,526)
------------ ------------
Effect of exchange rate changes on cash (12,952) 32,621
Net (decrease) increase in cash and cash equivalents $ (1,661,246) $ 1,256,358
Cash and cash equivalents, beginning of period 8,977,293 7,994,327
------------ -----------
Cash and cash equivalents, end of period $ 7,316,047 $ 9,250,685
============ ===========
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 80,022 $ 157,151
============ ============
Income taxes $ 14,063 $ 18,168
============ ============
Supplemental disclosures of non-cash investing and financing activities:
Receipt of notes in settlement of receivables $ 3,446,456 $ 1,235,187
============ ==========
Reduction of deferred income $ - $ 1,142,537
============ ==========
Retirement of treasury stock $ 1,577,278 $ 250,798
============ ===========
Translation gain adjustment $ 429,787 $ 646,134
============ ===========
See accompanying notes to unaudited condensed consolidated financial statements
9
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The unaudited condensed consolidated financial statements include the accounts
of Devcon International Corp. and its majority-owned subsidiaries (the
"Company"). The accounting policies followed by the Company are set forth in
Note (l) to the Company's financial statements included in its Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 (the "2002 Form 10-K").
The unaudited condensed financial statements for the three and six months ended
June 30, 2003 and 2002 included herein have been prepared in accordance with the
instructions for Form 10-Q under the Securities Exchange Act of 1934, as
amended, and Article 10 of Regulation S-X under the Securities Act of 1933, as
amended. Certain information and footnote disclosures normally included in
financial statements prepared in conformity with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations relating to interim financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
Company's financial position as of June 30, 2003 and the results of its
operations for the three and six months ended June 30, 2003 and 2002 and cash
flows for the six months ended June 30, 2003 and 2002. The results of operations
for the three and six months ended June 30, 2003 and 2002 are unaudited and are
not necessarily indicative of the results to be expected for the full year. The
unaudited condensed consolidated financial statements included herein should be
read in conjunction with the financial statements and related footnotes included
in the Company's 2002 Form 10-K.
Earnings Per Share
Basic earnings-per-share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding during the period, increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued, by application of the treasury stock method. In 2003,
the dilutive potential common shares were not included in the computation of
diluted earnings per share, because the inclusion of the options would be
antidilutive. Certain options were not included in the computations of diluted
earnings per share because the options' exercise prices were greater than the
average market prices of the common shares.
June 30, 2003 June 30, 2002
Option price Options Option price Options
From To outstanding From To outstanding
---- ---- ----------- ---- ---- -----------
Anti-dilutive options 1.50 5.85 523,800 - - -
Dilutive options - - - 1.50 6.25 580,400
Not included options 6.49 9.38 245,795 6.63 9.63 232,795
10
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
Three Months Ended Six Months Ended
Weighted average number June 30, June 30, June 30, June 30,
of shares outstanding 2003 2002 2003 2002 _
----------- --------- ---------- -----------
Basic 3,327,923 3,588,175 3,391,943 3,588,256
Effect of dilutive securities: Options - 302,449 - 304,912
----------- --------- ---------- ------------
Diluted 3,327,923 3,890,624 3,391,943 3,893,168
========= ========= ========= =========
For additional disclosures regarding the employee stock options, see the 2002
Form 10-K.
Stock-based compensation
The Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees and Related Interpretations." No stock-based compensation cost is
reflected in net (loss) income for these plans, as all options granted under
these plans had an exercise price equal to or higher than the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net (loss) income and (loss) income per share as if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, "Accounting for Stock Based Compensation", to stock based compensation:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------------ ------------- -------------- -------------
Net (loss) income, as reported $(328,113) $412,433 $(5,952,140) $1,349,820
Deduct: total stock-based employee
Compensation expense determined
under fair value based method
for all awards, net of taxes (67,710) (33,928) (92,460) (84,548)
----------- ----------- ------------- -------------
Net (loss) income, as adjusted $(395,823) $ 378,505 $(6,044,600) $1,265,272
(Loss) earning per share:
Basic, as reported $ (0.10) $ 0.11 $ (1.75) $ 0.38
Diluted, as reported (0.10) 0.11 (1.75) 0.35
Basic, as adjusted (0.12) 0.11 (1.78) 0.35
Diluted, as adjusted (0.12) 0.10 (1.78) 0.32
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model.
11
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
Comprehensive (Loss) Income
The Company's total comprehensive (loss) income, comprised of net (loss) income
and foreign currency translation adjustments, for the six months ended June 30,
2003 and 2002 was as follows:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------------ ----------- ------------ ----------
Net (loss) income $ (328,113) $ 412,433 $(5,952,140) $1,349,820
Other comprehensive income
- foreign currency transaction adjustments 274,887 714,133 429,787 646,134
----------- ---------- ----------- ----------
Total comprehensive (loss) income $ (53,226) $1,126,566 $(5,522,353) $1,995,954
=========== ========== =========== ==========
Segment Reporting
The following sets forth the revenue and income before income taxes for each of
the Company's business segments for the three and six months ended June 30, 2003
and 2002:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------------ ----------- ------------ ----------
Revenue (including inter-segment)
Materials $ 9,891,726 $9,528,596 $18,518,646 $18,886,959
Construction 4,803,937 4,020,385 8,320,991 8,458,293
Elimination of inter-segment (305,951) (50,738) (387,291) (460,786)
----------- ----------- ----------- -----------
Total revenue $14,389,712 $13,498,243 $26,452,346 $26,884,466
=========== =========== =========== ===========
Operating (loss) income
Materials $ (363,000) $ (200,000) $(4,937,000) $(1,037,000)
Construction (285,000) (73,000) (1,382,000) 251,000
Unallocated corporate overhead (217,309) (170,634) (1,354,438) (499,423)
----------- ----------- ----------- -----------
Total operating loss (865,309) (443,634) (7,673,438) (1,285,423)
Other income, net 772,575 922,016 1,699,714 2,996,727
------------- ------------ ------------ ------------
(Loss) income before income taxes $ (92,734) $ 478,382 $ (5,973,724) $ 1,711,304
============ ============ ============ ===========
Retirement and severance expense
Included in selling, general and administrative expenses is retirement and
severance expense totaling $211,000 and $1.1 million for the three and six
months ended June 30, 2003, respectively, and $249,000 and $396,000 for the
three and six months ended June 30, 2002, respectively.
12
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
Impairment of long-lived assets and accelerated depreciation
The Company has two batch plants on Antigua and, during the second quarter, has
consolidated its operations to the main facility. Accordingly, the installation
cost of the plant that is being moved has been fully depreciated and the
original plant at the main facility that will be functioning as a spare plant
had its book value depreciated through accelerated depreciation to its estimated
fair value. The depreciation incurred in the second quarter was approximately
$275,000.
In the first quarter 2003, the Company recorded an impairment expense of $2.9
million. This consisted of the following items:
St. Martin crusher & concrete operations $2,119,000
Sint Maarten block plant 232,000
Aguadilla crusher plant 438,000
Other assets 70,000
-----------
Total $2,859,000
==========
The St. Martin/Sint Maarten operations were determined to be impaired due to
continuing losses. The Company cannot at this point project sufficient future
earnings to cover the long-lived assets. An impairment charge of $2,119,000 was
recorded to write down the St. Martin crusher and concrete plant to their
estimated fair value, using an estimated probable sales price as determinant of
the value. Management is reviewing its alternatives and has not yet made a
decision about future operational changes. The Sint Maarten concrete and
aggregate sales operations have an estimated fair value in excess of recorded
long-lived assets, and therefore no impairment was recorded for this part of the
business. The Sint Maarten block plant was impaired and an operational decision
has been made to close the plant and dismantle it within a short time. The
Company is currently importing part of its need for blocks from Devcon plants on
other islands.
The plant in Aguadilla, Puerto Rico, is leased to a third party, whose
extraction permit was cancelled in February this year. On April 10, the lessee
asked for a moratorium on payments, at the same time as he gave notice of the
extraction permit being cancelled. As a result of these actions, management's
expectation of future cash flows and the fact that the only source of revenue
for the plant has come from the lessee, the Company recorded an impairment
charge of $438,000 to write down the plant to its estimated fair value.
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
13
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
passage of time and changes in the estimated future cash flows underlying the
obligation. The Company was required to adopt SFAS 143 on January 1, 2003. The
adoption of SFAS 143 in the first quarter 2003 did not have a material effect
on the Company's financial position and results of operations.
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 in the first quarter 2003 did not 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 is effective for the Company for disposal activities initiated
after December 31, 2002. The adoption of SFAS 146 in the first quarter of 2003
did not have a material 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
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 unaudited
condensed consolidated financial statements. The application of the disclosure
portion of this standard will have no impact on our consolidated financial
position or results of operations. The Financial Accounting Standards Board
recently indicated that it will require stock-based employee compensation to be
recorded as a charge to earnings pursuant to a standard it is are currently
deliberating, which it believes will become effective on January 1, 2004. The
Company will continue to monitor the progress on the issuance of this standard
as well as evaluate the Company's position with respect to current guidance.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes
14
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a freestanding financial instrument that is within its
scope as a liability, (or an asset in some circumstances). SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the
Company's consolidated financial statements.
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" ("FIN 45"). 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. The disclosure requirements are effective for financial statements of
interim and annual periods ending after December 31, 2002. The adoption of FIN
45 did not have a material impact on the Company's financial position and
results of operations.
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.
Environmental Matters
The Company is involved, on a continuing basis, in monitoring its 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 the Company's
business, results of operations, or financial condition.
Antigua Tax Assessment
During the fourth quarter of 2001, the Company's three subsidiaries in Antigua
were assessed $6.1 million in income and withholding taxes for the years 1995
through 1999. The Company is appealing the assessments in the appropriate
venues. 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 the approximately $30 million receivable from the
Government of Antigua. 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
15
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
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.
Contingent Liabilities
Details regarding the Company's other contingent liabilities are described fully
in the Company's 2002 Form 10-K. During 2003, there have been no material
changes to the Company's contingent liabilities.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements, as well as the financial
statements and related notes included in the Company's 2002 Form 10-K. 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 Company and its representatives may, from time to time, make
written or verbal forward-looking statements, including statements contained in
the Company's filings with the Securities and Exchange Commission and in its
reports to stockholders. Generally, the inclusion of the 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 our 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, Sint 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
17
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 Changes in estimation of fair values of long-lived assets and their
retirement obligations due to changes in the used equipment market could
have a material effect on the consolidated financial statements.
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 that are
highly competitive on the basis of price and quality. We compete with local
suppliers of ready-mix, and local 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.
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.
18
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.
Critical Accounting Policies and Estimates
The Company has identified significant accounting policies that, as a result of
the judgments, uncertainties, uniqueness and complexities of the underlying
accounting standards and operations involved could result in material changes to
its financial condition or results of operations under different conditions or
using different assumptions. The Company believes its most significant
accounting policies are related to the following areas: estimations of cost to
complete construction contracts, allowance for credit losses, loss reserves for
inventories, estimation of fair value of long-lived assets and their retirement
obligations, accruals for deferred compensation agreements, Antiguan tax
assessment evaluation, tax on un-repatriated earnings, valuation of the Antigua
and Barbuda Government notes and the valuation allowance of deferred taxes.
Details regarding the Company's use of these policies and the related estimates
are described fully in the Company's 2002 Form 10-K. During 2003, there have
been no material changes to the Company's significant accounting policies that
impacted the Company's financial condition or results of operations.
Comparison of Three Months Ended June 30, 2003 with Three Months Ended June 30,
2002
Revenue
The Company's revenue during the second quarter of 2003 was $14.4 million as
compared to $13.5 million during the same period in 2002. This 6.6 percent
increase was primarily due to an increase of $596,000 in materials revenue, and
a smaller increase in construction revenue of $296,000.
The Company's materials division revenue increased 6.3 percent to $10.1 million
during the second quarter of 2003 as compared to $9.5 million for the same
period in 2002, due to an increase in sales of cement and block, while other
products remained approximately the same. However, St. Croix's revenue was 31.9
percent lower than the same quarter last year due to
19
declining demand for its aggregates and ready-mix products. Puerto Rico's
revenue also diminished, due to lower demand of aggregates on the island.
The construction economy on the island is continuing to show a negative trend.
We are encouraged to see increased revenue on St. Maarten/St. Martin for the
sale concrete and block products compared to both the first quarter of this
year and to the same quarter last year, however, the sale of aggregates is
still decreasing. In total, the island is showing improvements in revenue,
however, we can not determine whether this trend will continue. Antigua and
St. Thomas improved their volumes this quarter as compared to the same quarter
last year, and we believe that these islands will continue to show strong
revenue for the next one to two quarters.
Revenue from the Company's construction division increased 7.4 percent to $4.3
million during the second quarter of 2003 as compared to $4.0 million for the
same period in 2002. This increase is mainly due to new contracts that were
started in Antigua and Aruba, offset to a lesser degree by lower revenue in the
Bahamas and the US Virgin Islands. The Company's backlog of unfilled portions of
land development contracts at June 30, 2003 was $5.1 million, involving nine
contracts. The backlog of two contracts for a project in the Bahamas amounted to
$1.2 million. A Company subsidiary and our President are minority partners of
the entity developing this project. The Company expects that most of these
contracts will be completed during 2003. The Company is actively bidding and
negotiating additional projects in other areas of the Caribbean. The Company
cannot currently determine whether demand for this division's services will
increase, decrease or remain the same throughout 2003.
Cost of Materials
Cost of materials as a percentage of materials revenue increased to 83.4 percent
during the second quarter of 2003 from 79.6 percent during the same period in
2002. This was the result of decreased margins in the US Virgin Islands and
Antigua due to a change in the mix of products sold and to a large decrease in
sales in St. Croix with resulting negative effect on margins due to high fixed
costs in its operations, offset by an improved margin in St. Martin from
increased volumes.
Cost of Construction
Cost of construction as a percentage of construction revenue increased to 92.8
percent during the second quarter of 2003 from 90.2 percent during the same
period in 2002. This increase is primarily attributable to costs incurred as a
result of idle marine equipment and decreased margins on two contracts in the
Bahamas, offset to a lesser extent by improved margins on certain contracts in
the US Virgin Islands and Antigua. The estimated cost to complete, the varying
profitability levels of individual contracts and the stage of completion of such
contracts can affect the cost of construction and margins either positively or
negatively.
Operating Expenses
Selling, general and administrative expense ("SG&A expense") increased by 2.3
percent to $2.8 million for the second quarter of 2003. The increase in SG&A
expense was primarily due to accelerated depreciation of certain equipment (see
further discussion in notes to unaudited
20
condensed financial statements), offset to a lesser extent by lower bad debt
expense. As a percentage of revenue, SG&A expense decreased to 19.7 percent
during the second quarter as compared to 20.6 percent for the same period last
year, as a result of increased revenue, offset by a smaller increase in
overhead expense.
Operating Loss
The Company had an operating loss of $865,000 for the second quarter of 2003
compared to $444,000 for the same period in 2002. The Company's materials
division operating loss was $363,000 during the second quarter of 2003 compared
to $200,000 during the same period in 2002. This increase in operating loss is
primarily attributable to decreased gross margin on St. Croix, accelerated
depreciation of certain equipment on Antigua and losses in Puerto Rico, offset
to a lesser extent by improved profitability on Sint Maarten/St. Martin.
The Company's construction division had an operating loss of $285,000 during the
second quarter of 2003 compared to $73,000 during the same period in 2002. This
increase in operating loss was primarily attributable to decreased margins on
two contracts in the Bahamas, losses incurred as a result of idle marine
equipment. The varying profitability levels of individual contracts and the
stage of completion of such contracts can affect the cost of construction and
margins either positively or negatively.
Other Income (Deductions)
Gain on sale of equipment and property was $226,000 compared to $23,000 for the
same period in 2002. Interest income decreased in the second quarter of 2003 to
$598,000 compared to $977,000 for the same period in 2002, primarily due to a
decrease in the interest recognized on the note receivable from the Government
of Antigua and Barbuda ("Government"), offset to a lesser extent by interest
income from financed construction projects. The Government did not comply with
its payment obligations during the second quarter this year, and therefore
interest recognized on the notes were significantly lower than last year. The
Company does not expect the Government to comply with its payment obligations in
the third quarter; consequently, the Company believes that the interest to be
recognized on the notes in the third quarter will continue at a low level.
Income Taxes
The Company operates in various tax jurisdictions with various tax rates, and
depending on where profits or losses are recognized during the period, the
effective tax rate will vary. In certain jurisdictions certain income is not
taxable, and in certain jurisdictions, the Company enjoys certain tax
exemptions. The tax expense in the second quarter 2003 is due to taxes accrued
on earnings in the US Virgin Islands as the tax exemption benefit has expired
and the renewal of the benefits has not been approved by the local government.
The Company also incurred some withholding taxes on management fees charged by
the corporate office.
21
Net Income
The Company had a net loss of $328,000 during the second quarter of 2003 as
compared to net income of $412,000 during the same period in 2002.
Comparison of Six Months Ended June 30, 2003 with Six Months Ended June 30, 2002
Revenue
The Company's revenue during the first six months of 2003 was $26.5 million as
compared to $26.9 million during the same period in 2002. This 1.6 percent
decrease was primarily due to a decrease in construction revenue of $678,000
million, partially offset by an increase of $246,000 in materials revenue.
The Company's materials division revenue increased 1.3 percent to $18.7 million
during the first six months of 2003 as compared to $18.5 million for the same
period in 2002. This increase was due primarily to an increase in revenue of
cement concrete and block, offset to a lesser extent by a decrease in aggregate
sales of 9.6 percent. Antigua, St Martin/Sint Maarten and St Thomas showed an
increase in materials sales of approximately 10 percent as compared to the same
period last year, while St Croix, in particular, showed a 37.8 percent decrease,
due to a downturn of the construction economy on the island.
Revenue from the Company's construction division decreased 8.0 percent to $7.8
million during the first six months of 2003 as compared to $8.4 million for the
same period in 2002. This decrease is mainly due to reduction of work in the
Bahamas and on St. Croix, while St Thomas, Antigua and Aruba had increased
revenue. The Company's backlog of unfilled portions of land development
contracts at June 30, 2003 was $5.1 million, involving nine contracts. The
backlog of two contracts for a project in the Bahamas amounted to $1.2 million.
A Company subsidiary and our President are minority partners of the entity
developing this project. The Company expects that most of these contracts will
be completed during 2003. The Company is actively bidding and negotiating
additional projects in other areas of the Caribbean. The Company cannot
currently determine whether demand for this division's services will increase,
decrease or remain the same throughout 2003.
Cost of Materials
Cost of materials as a percentage of materials revenue increased to 86.3 percent
during the first six months of 2003 from 83.4 percent for the same period in
2002. This increase was primarily the result of a decrease in revenue on St.
Croix and Puerto Rico, which resulted in fixed costs of sales weighing heavier
on the margins for those islands, partially offset by improved sales and margins
on Sint Maarten/St. Martin and Antigua.
Cost of Construction
Cost of construction as a percentage of construction revenue increased to 102.6
percent during the first six months of 2003 from 84.6 percent during the same
period in 2002. This increase is
22
primarily attributable to additional costs incurred for the construction of the
golf course on Exuma, Bahamas that were not contemplated in the cost to
complete and for which no revenue has yet been recognized, and to losses
incurred as a result of idle marine equipment. Theestimated cost to complete,
the varying profitability levels of individual contracts and the stage of
completion of such contracts can affect the cost of construction and margins
either positively or negatively.
Operating Expenses
Selling, general and administrative expense increased by 27.5 percent to $7.2
million for the first six months of 2003 compared to $5.6 million for the same
period in 2002. The increase in SG&A expense was primarily due to increase of
severance and retirement expense, accelerated depreciation, professional fees,
and losses on foreign exchange. As a percentage of revenue, SG&A expense
increased to 27.2 percent during the first six months as compared to 20.9
percent for the same period last year.
The Company recorded impairment expense of $2.9 million in the first quarter of
2003 as further described in the notes to the unaudited condensed financial
statements.
Operating Loss
The Company had an operating loss of $7.7 million for the first six months of
2003 compared to $1.3 million for the same period in 2002. The Company's
materials division operating loss was $4.9 million during the first six months
of 2003 compared to $1.0 million during the same period in 2002. This increase
in operating loss is primarily attributable to impairment of assets in St.
Martin and other islands of $2.9 million, to accelerated depreciation of
$562,000 on assets in St. Thomas and Antigua, to operating losses on Sint
Maarten/St. Martin, St. Croix and Puerto Rico, to accrual of retirement and
severance expense, and consulting fees.
The Company's construction division had an operating loss of $1.4 million during
the first six months of 2003 compared to income of $251,000 during the same
period in 2002. This fluctuation in the result was primarily attributable to
losses on a contract in the Bahamas and losses incurred as a result of idle
marine equipment.
Other Income (Deductions)
At the time of the sale of its operations in Dominica, the Company entered into
a profit and loss participation agreement until March 31, 2002. During this time
the gain on the sale of the operations were deferred. At March 31, 2002, the
Company recognized a gain on sale of business of $1.0 million. Gain on sale of
equipment and property was $232,000 compared to $108,000 for the same period
last year. Interest income decreased in the first six months of 2003 to $1.6
million compared to $2.0 million for the same period in 2002, primarily due to a
decrease in the interest recognized on the note receivable from the Government
of Antigua. The Government did not comply with its payment obligations during
the second quarter this year, and therefore interest recognized on the notes was
much lower than the same period last year. The Company does not expect the
Government to comply with its payment obligations in the third quarter;
23
consequently, the Company believes that the interest to be recognized on the
notes in the third quarter will continue at a low level. Interest expense
decreased to $81,000 from $152,000 for the same period in 2002, primarily due to
decreased outstanding debt.
Income Taxes
The Company operates in various tax jurisdictions with various tax rates, and
depending on where profits or losses are recognized during the period, the
effective tax rate will vary. In certain jurisdictions certain income is not
taxable, and in certain jurisdictions, the Company enjoys certain tax
exemptions. The effective tax rate for the six months ended June 30, 2003 was
0.4 percent as compared to 21.1 percent for the same period in 2002, primarily
due to establishment of a valuation allowance on net operating losses created
during the current year.
Net Income
The Company had a net loss of $6.0 million for the first six months of 2003 as
compared to income of $1.3 million for the same period in 2002.
Liquidity and Capital Resources
The Company generally funds its working capital needs from operations and bank
borrowings. In the land development construction business, the Company must
expend considerable funds for equipment, labor and supplies to meet the needs of
particular projects. The Company's capital needs are greatest at the start of
any new contract, since the Company 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 all work
is complete, further increasing the need for capital. During the second quarter
of 2003, the Company provided long-term financing in the amount of $1.8 million
to certain customers who utilized its land development construction services and
purchased materials or equipment. The outstanding balances of the previously
financed construction services, materials and equipment totaled $7.1 million as
of June 30, 2003, all of which is due to be paid within the next three years.
The Company has also provided financing for other business ventures from time to
time. With respect to the Company's materials division, accounts receivable are
typically outstanding for a minimum of 60 days and in some cases much longer.
The nature of the Company's business requires a continuing investment in plant
and equipment, along with the related maintenance and upkeep costs of such
equipment. These purchases of equipment totaled $1.3 million during the first
six months this year and should result in cash expenditures of approximately
$3.0 million during the full year. The Company has, since the beginning of 2000,
funded most of these expenditures out of its current working capital. Management
believes the cash flow from operations, existing working capital, and funds
available from lines of credit will be adequate to meet the Company's needs
during the next 12 months. Historically, the Company has used a number of
lenders to finance a portion of its machinery and equipment purchases; however,
since 2001 there are no outstanding amounts owed 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 assurance can be
made.
24
As of June 30, 2003, the Company's liquidity and capital resources included cash
and cash equivalents of $7.3 million and working capital of $17.0 million. As of
June 30, 2003, total outstanding liabilities were $16.6 million. As of June 30,
2003, the Company had available lines of credit totaling $1.2 million.
Cash flows used in operating activities for the six months ended June 30, 2003
were $1.3 million compared to $1.8 million provided by operating activities for
the same period in 2002. The primary use of cash for the first six months in
2003 was an increase in receivables of $3.7 million, offset to a lesser extent
by an increase in other long-term liabilities of $1.6 million and an increase in
accounts payable, accruals and other liabilities of $593,000.
Net cash provided by investing activities was $828,000 in the first six months
of 2003. Purchases of property, plant and equipment were $1.3 million. The
Company issued new notes receivable for $780,000 and receipts on notes
receivable were $2.8 million. Net cash used in financing activities was $1.2
million for the first six months of 2003, consisting primarily of the purchase
of treasury stock.
The Company's accounts receivable averaged 57 days of sales outstanding as of
June 30, 2003. This is an increase compared to 53 days at the end of December
2002. The Company's materials segment improved to 51 days as compared to 58 days
at the end of last quarter, mainly due to faster collections in the US Virgin
Islands. The construction segment has deteriorated to 72 days as compared to 61
days at the end of last year. The slowdown was primarily due to slowdown in
collection for work in the Bahamas as well as start up of new contracts in Aruba
and Antigua, which adversely affected collections. The Company does not consider
notes receivable in this calculation.
The Company has an unsecured credit line of $1.0 million with a bank in Florida.
The credit line expires in June 2004 and the bank can also demand repayment of
the loan and cancellation of the overdraft facility, if certain financial or
other covenants are in default. The Company is in compliance with the covenants
as of June 30, 2003. There was an outstanding balance of $131,000 as of June 30,
2003. The interest rate on indebtedness outstanding under the credit line is at
a rate variable with LIBOR.
In May 2003, the Company entered into a joint venture with a utility equipment
company to own and/or operate reverse osmosis fresh water, waste water treatment
and power systems. The joint venture will be 80 percent owned by Devcon. As
projects are approved by the Company, Devcon will fund the venture with up to
$2.4 million in cash and loans plus a guarantee of up to an additional $2.4
million in project financing.
The Company has borrowed approximately $2.1 million from the Company President.
The note is unsecured and bears interest at the prime rate. Three hundred
thousand is due on demand, and $1.8 million is due on July 1, 2004. The
President has the option of making the note due on demand should a "Change of
Control" occur. A Change of Control has occurred if a person or group acquires
15.0 percent or more of the common stock or announces a tender offer, the
25
consummation of which would result in ownership by a person or group of 15.0
percent or more of the common stock.
The Company entered into an agreement with the Company President in September
2000, whereby Mr. Smith shall receive a retirement benefit. The accrued
liability as of June 30, 2003 was $1.6 million. The Company estimates that the
total accrual will be sufficient to cover its obligations under the
aforementioned agreement.
In September 2001, the Company decided to stop its operations on Aguadilla,
Puerto Rico. The plant in Aguadilla, Puerto Rico, is leased to a third party,
whose extraction permit was cancelled in February this year. On April 10, 2003,
the lessee asked for a moratorium on payments, at the same time as he gave
notice of the extraction permit being cancelled. As a result of these actions
and the fact that the only source of revenue for the plant has come from the
lessee, the Company recorded an impairment charge of $438,000 to write down the
plant to its estimated fair value.
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 $550,000 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 $550,000 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.
Receivables at June 30, 2003 include a net balance of $6.3 million, consisting
of promissory notes due from the Government of Antigua and Barbuda, of which
$5.4 million is classified as a long-term receivable. The gross balance of the
notes is $28.8 million. The notes were restructured on April 28, 2000 and call
for both quarterly and monthly principal and interest payments until maturity in
2015. During the second quarter, the Government did not make all the payments
due under the notes and is $435,000 in arrears in its payments; therefore, the
interest recognized on the notes was lower than expected. The Company expects
receipts of amounts due around the end of the year, when the annual rental
payment from the United States military base is received. However, the Company
believes that the Government will continue be in default during the next quarter
and therefore interest recognized will be lower than the same period of last
year. The notes are paid from agreed upon sources, which consist of lease
proceeds from the rental of a United States military base, fuel tax revenue,
proceeds from a real estate venture and other sources. Receipts recorded for the
six months ended June 30, 2003 were $1.9 million, of which $675,000 was recorded
as reduction of principal.
During the second quarter of 2002, the Company issued a construction contract
performance guarantee together with one of the Company's customers for $5.1
million. 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 from its commencement and the guarantee expires two years after
completion. The Company received an up front fee of $154,000, and has recognized
a receivable for an additional $52,000. At the same time, a long-term liability
of the total amount has been recorded, which
26
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.
Repurchase of Company Shares
On August 9, 2002 the Board of Directors ("Board") approved a plan for the
Company to purchase Company shares in the open market for up to $3.0 million.
The timing of share repurchases, the actual number of shares purchased and the
price to be paid will depend upon the availability of shares, the prevailing
market prices and other considerations which may in the opinion of the Board or
management affect the advisability of purchasing Devcon shares. Under this
program, the Company has repurchased 339,837 shares through June 30, 2003 at an
average rate of $6.71. The Company repurchased 62,400 shares during second
quarter of 2003 at an average price of $6.54. The Company retired 230,696 shares
during the first six months of 2003. As of June 30, 2003 the Company had 100,800
shares of treasury stock as compared to 122,100 as of December 31, 2002.
Related Party Transactions
The Company has certain transactions with some of the Directors or employees.
Details regarding the Company's transactions with related parties are described
fully in the Company's 2002 Form 10-K.
In April of 2003, the Company purchased 12,000 shares of Company stock from Mr.
R Steele, a director, at the prevailing market rate.
As of January 1, 2003, the Company entered into a payment deferral agreement
with a resort project in the Bahamas, in which the President and a Company
subsidiary are minority partners. The loan agreement calls for 50 percent
deferral of payments due for construction contract obligations incurred after
November 1, 2002, up to a maximum of $2.5 million. Several notes, which are
guaranteed partly by certain owners of the project, evidence the loan and the
President of the Company has issued a personal guarantee for the total amount
due under this loan agreement to the Company as of June 30, 2003.
The Company has a $28.0 million construction contract with an entity in the
Bahamas. The President and a subsidiary of the Company are minority shareholders
in the entity, owning 11.3 percent and 1.2 percent, respectively. Mr. Smith, the
President, is also a member of the entity's managing committee. Management
believes the contract has been entered into at arm's length and at terms and
conditions that the Company would offer its 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 during 2002, and $2.0 million through June 30,
2003. The backlog on the contract as of June 30, 2003 was $1.1 million. As of
June 30, 2003 the Company had trade and notes receivables from the venture of
approximately $3.1 million and the cost and estimated earnings in excess of
billings was $365,000. Mr. Smith has guaranteed the payment of the receivables
from the entity, up to a maximum of $2.5 million.
There have been no other material changes to the Company's related party
transactions.
27
Item 3. 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% of the Company's total operations.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company carried out an evaluation as of the end of the second quarter 2003,
under the supervision and participation of the Company's Chief Executive Officer
and Chief Financial Officer (the "Officers") of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Officers
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included the in the Company's periodic SEC filings, including this report.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
Internal Controls
There were no significant changes made in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
28
PART II. OTHER INFORMATION
- ---------------------------------------------
Item 1. Legal Proceedings
The Company is from time to time involved in routine litigation
arising in the ordinary course of its business, primarily related
to its construction activities.
The Company is subject to certain Federal, state and local
environmental laws and regulations. Management believes 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 the Company's 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 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
--------------------------------------------------
The Company held its Annual Shareholders Meeting on June 6, 2003.
The issues submitted to a vote of the security holders and the
results of the voting are as follows:
1) Election of six directors
For Withheld
Robert D. Armstrong 2,832,088 234,800
Jose A. Bechara, Jr., Esq. 2,831,488 235,400
Gustavo R. Benejam 2,832,088 234,800
James R. Cast 2,832,088 234,800
Richard L. Hornsby 2,832,088 234,800
W. Douglas Pitts 2,832,088 234,800
Donald L. Smith, Jr. 2,832,088 234,800
The Board consists of seven directors. All nominees were
elected to serve for a one-year period.
2) Proposal to approve and ratify the Company's Amended 1999
Stock Option Plan.
For Against Abstain
------------- ------- -------
1,690,714 648,141 2,500
29
3) Proposal to ratify the appointment of KPMG LLP as the Company's
auditor for 2003
For Against Abstain
------------- ------- -------
3,066,375 400 113
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31.1 Certification Pursuant to Rule 13a-14(a) &
15d-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification Pursuant to Rule 13a-14(a) &
15d-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
The Company filed form 8-K on May 13, 2003 giving information
about earnings and an upcoming conference call with analysts. The
Company filed form 8-K on June 11, 2003 giving information about
three newly elected directors and announcing the retirement of two
directors of the Company's Board of Directors.
30
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 12, 2003 /S/ JAN A. NORELID
-------------------
Jan A. Norelid
Chief Financial Officer and
Vice President, Finance
31
EXHIBIT INDEX
Exhibit No. Exhibit Description
31.1 Certification Pursuant to Rule 13a-14(a) & 15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) & 15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32
Exhibit 31.1
CERTIFICATION
I, Donald L. Smith, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Devcon
International Corp.
2. Based on my knowledge, this 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 report.
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 report is being prepared.
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 12, 2003 /s/ Donald L. Smith, Jr.
------------------------
Donald L. Smith, Jr.
President and Chairman of the Board
33
Exhibit 31.2
CERTIFICATION
I, Jan A. Norelid, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Devcon
International Corp.
2. Based on my knowledge, this 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 report.
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 report is being prepared.
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 12, 2003 /s/ Jan A. Norelid
------------------
Jan A. Norelid
Chief Financial Officer
34
Exhibit 32.1
CERTIFICATION PURSUANT TO
U.S.C. SECTION 1350,
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Devcon International Corp. (the
"Company") on Form 10-Q for the period ending June 30, 2003 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: August 12, 2003 /s/ Donald L. Smith, Jr.
-----------------------
Donald L. Smith, Jr.
Chief Executive Officer
Note: This certification is being furnished, not filed, as exhibit 32.1
35
Exhibit 32.2
CERTIFICATION PURSUANT TO
U.S.C. SECTION 1350,
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Devcon International Corp. (the
"Company") on Form 10-Q for the period ending June 30, 2003 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: August 12, 2003 /s/ Jan A. Norelid
------------------
Jan A. Norelid
Chief Financial Officer
Note: This certification is being furnished, not filed, as exhibit 32.2
36