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, 2003
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 March 12, 2004, Devcon International Corp. had 3,307,073 shares
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of Devcon International Corp. as of June 30, 2003 was
approximately $5.9 million, based on the closing price on that date of $6.41. 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, 13 and 14) is
incorporated by reference from Devcon's definitive proxy statement (to be filed
pursuant to Regulation 14A)
Intentionally left blank
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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
Sint 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. Total assets by segment and other information are further
described in Note 11 of notes to consolidated financial statements.
2003 2002 2001
---- ---- ----
(In thousands)
Revenue (net of intersegment sales):
......Materials $38,209 $37,733 $39,703
......Construction 17,104 15,623 15,185
-------- -------- --------
...... $55,313 $53,356 $54,888
======= ======= =======
Operating (loss) income (by segment)
......Materials $ (5,974) $ (671) $ 23
......Construction (467) (1,260) 1,173
......Unallocated corporate overhead (2,662) (1,115) (1,188)
--------- --------- --------
...... $ (9,103) $ (3,046) $ 8
======== ======== ==========
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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,
------------------------------------------
2003 2002 2001
---- ---- ----
Revenue by geographic areas: (In thousands)
U.S. and its territories $17,958 $19,859 $21,563
------- ------- ------
Netherlands Antilles 10,128 6,689 9,459
Antigua and Barbuda 14,323 10,963 10,535
French West Indies 5,828 4,999 6,385
Other foreign areas 7,076 10,846 6,946
Total foreign ------- ------- ------
countries 37,355 33,497 33,325
------- ------- ------
Total (including U.S.) $55,313 $53,356 $54,888
====== ====== =======
Long-lived assets, net, by geographic areas:
U.S. and its territories $15,280 $18,325 $20,292
------- ------- -------
Netherlands Antilles 145 270 285
Antigua and Barbuda 6,133 7,030 6,720
French West Indies 2,389 4,400 3,874
Other foreign areas 2 3 54
------- ------ -------
Total foreign countries 8,669 11,703 10,933
------- ------ -------
Total (including U.S.) $23,949 $30,028 $31,225
======= ======= =======
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 increasing in activity, and we expect continued increases for
the next year. The materials business has shown small improvement in revenue in
the last year compared to 2002.
From time to time, we evaluate 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. We are also
reviewing other strategic options. For instance we entered into a venture in
water desalination and sewage treatment plants, see further below.
In February 2003, the Company's subsidiary in Sint Maarten entered into an
agreement with the Island Territory of Sint Maarten, N. A. to sell up to 197
medium-priced homes, priced at
4
approximately $100,000 per home, in a developed subdivision owned by the Island
Government. The Company has built two model homes, and has started to finance
the construction of homes for buyers after receipt of firm sales contracts with
mortgage financing approved by local banks. Initially, the mortgage financing
was dependent on the establishment of a mortgage guarantee fund by the Island
Government. This fund was approved in March 2004. However, certain local banks
started to offer financing before the guarantee fund was in place. Therefore,
development of houses started in the fourth quarter of 2003. As the Company is
traditionally engaged in land development contracting, we have hired
subcontractors to perform all of the residential construction. We also, to the
extent possible, sell construction materials to the subcontractors. We estimate
to recognize revenue of $2-$4 million in 2004, with relatively small margin,
and as of December 31, 2003 we have invested $369,000 in the development.
In June 2003, we formed a joint venture in the water desalination and sewage
treatment business. Our business model is to invest in a utility plant and sell
the water or service on a long-term contract to resorts, industrial plants or
communities. The Company had no revenue and incurred $100,000 of expenses during
2003. However, the marketing efforts for water and sewage system contracts have
resulted in construction leads and contracts. We are reviewing and bidding on a
number of possible water and sewage system contracts, but there is no assurance
that any of them will result in firm contracts.
We have made loans to a concrete producer on the island of St. Kitts. These
loans are secured by mortgages on a building located at the cruise ship port
shopping center and a 4-acre ocean front parcel. Construction of the building is
to be completed early in the second quarter of 2004. No leases of space in the
building have been concluded and various alternatives for development of the
ocean front parcel are being analyzed. We have an option to convert a portion of
these loans to equity in both the building and the parcel.
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. We decided to stop
concrete block production on Sint Maarten in 2003 and the plant is being
dismantled during 2004, blocks are being supplied by other Devcon subsidiaries
and from third parties to the St. Martin/Sint Maarten market.
We have made a strategic decision to outsource to third parties the delivery of
concrete to our customers. In St. Martin, Sint Maarten, and Antigua we have sold
and leased our concrete trucks and concrete pump trucks to former employees that
are now in the concrete delivery and pumping business, and we intend to do the
same on St. Croix. In some of our quarries we have outsourced the drilling for
blasting holes and some of the loading and pushing of rock material. Also, we
have in some instances sold or leased equipment to former employees or third
parties for them to perform the work. The overall effect of these decisions has
been a reduction of fixed costs; resulting in a larger percentage of costs being
directly sales-related.
RISKS OF FOREIGN OPERATIONS
The majority of our operations in 2003 were conducted in foreign countries
located in the Caribbean, primarily Antigua and Barbuda, Sint Maarten, St.
Martin and the Bahamas. In 2003,
5
67.5 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 2003, 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:
2003 2002 2001
---- ---- ----
Revenue (net of intersegment sales): (In thousands)
Ready-mix concrete $14,360 $13,270 $14,068
Aggregates 16,042 17,444 17,984
Concrete block 4,395 4,108 4,445
Cement 2,310 1,724 2,851
Other 1,102 1,187 355
------- ----- ------
$38,209 $37,733 $39,703
======= ======= =======
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
Sint Maarten X X X X
St. Martin X X X X
Antigua X X X X X
Our Materials division employed assets in 2003 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.
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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. A third party-managed 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. 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 sold as boulders or
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 The Company purchases cement from local cement terminals on the
islands, 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
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 and
concrete block plants, and 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. Most competitors, such as ready-mix
and concrete block producers, have a disadvantage compared to our material
costs, but have an advantage over us in respect to lower overhead costs. The
competition has put pressure on prices in the market, and we have not been able
to increase the prices in some markets to the extent of our cost increases.
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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 customers'
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. During 2003, we
financed $2.0 million and as of the end of 2003, there were outstanding balances
totaling $3.5 million. 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, 2003 was approximately $5.6 million involving 12 projects. One
Bahamian project's backlog amounted to approximately $288,000 at the end of
2003. A subsidiary, our President and a director are minority owners, and our
President is also a member of the managing committee of the entity developing
this project. The backlog of $5.6 million involving 12 projects at the end of
2003 compares to $5.6 million involving 6 projects at December 31, 2002. Since
December 31, 2003, through February 20, 2004, we have entered into smaller new
construction contracts in the Caribbean. We are currently in final negotiations
for several contracts and we presently expect the division to increase its
volume in 2004. We expect most of the current backlog to be completed during
2004.
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 throughout the Caribbean basin. During 2003, there
was one customer in the Bahamas, for whom we recorded revenue of $4.9 million
in the year. Our President, a director, and the Company are minority
shareholders of this entity.
8
COMPETITION Land development construction is extremely competitive. We compete
with smaller local contractors as well as larger U.S. 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 Economic Development Commission ("EDC") granted us tax exemptions
on most of our U.S. Virgin Islands earnings through March 2003. We have applied
for an extension of this tax exemption, however, there is no guarantee that 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 EDC completed a compliance review on our subsidiary in the US
Virgin Islands on February 6, 2004. The compliance review covers the period from
April, 1998 through March 31, 2003 and resulted from the Company's application
to request an extension of tax exemptions from the EDC. We are working with the
EDC to resolve the issues raised. One of those issues is whether certain items
of income qualified for exemption benefits under the Company's then existing tax
exemption including notice of failure to make gross receipts tax payments of
$504,919 and income taxes of $2,240,070, not including interest and penalties.
This is the first time that a position contrary to ours or any position on this
specific issue has been raised by the EDC. We intend to vigorously contest the
EDC's interpretation.
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 Sint 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
concerning foreign tax credits. At December 31, 2003, $31.7 million of
accumulated earnings had not been distributed to the parent company. We have not
provided for U. S. federal income 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 or cash-flow neutral
manner.
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, 2003, our equipment included cranes, bulldozers, road
graders, rollers, backhoes, earthmovers, a hydraulic dredge, barges, rock
crushers, concrete
9
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 partially opened in December 2003 and is expected to finish the
rest of its hotel construction by early 2004. Our President and a director, have
an interest in the joint venture. See Note 12 of notes to consolidated financial
statements.
During the period 1998 through 2003 we invested a total of $190,000 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 2003,
we recorded expenses of $8,000 from this joint venture under the equity method
of accounting. In January 2004, the local government advised us that it intends
to expropriate a portion of the real estate in Aguadilla. We responded to the
expropriation proceeding by filing a complaint in February 2004. If the
government completes the expropriation we believe it would not materially effect
our financial position or results of operations. We have guaranteed a third of a
bank loan that has a balance of $329,000 as of December 31, 2003.
The Company has owned a 50 percent interest in ZSC South since the early 1970s.
This is a joint venture that currently owns one parcel of vacant land in South
Florida. Mr. W. Douglas Pitts, a director, owns a five percent interest in the
joint venture; Courtelis Company manages the joint venture's operations. Mr.
Pitts is the President of Courtelis Company. During 2003 one lot was sold and we
recognized earnings of $116,000 from that transaction. If the last lot is sold,
the joint venture will be dissolved.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
Donald L. Smith, Jr., 82, 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, 68, 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.
10
Jan A. Norelid, 50, 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, 51, son of the President, 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, 46, son of the President, 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, 2003, we employed 91 persons in the Construction division, of
whom 10 are members of a union. As of the same date, we employed 202 persons in
our Materials division, of whom 69 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.
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, 2003:
11
Lease Expiration
Description Location with all Options Area
----------- -------- ---------------- -----
Shared facilities
- -----------------
Principal executive offices Deerfield Beach 5/04 8,410 sq. ft. (1)
Maintenance shop for heavy equipment Deerfield Beach 12/06 1.82 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 Month-to-Month 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 Sint Maarten Month-to-Month 3.00 acres (1)
Barge unloading facility Sint Maarten 5/05 0.30 acres (1)
Office building, batch plant, shop Sint 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 the Company owns equipment and machinery
on the property.
(2) Leased from the wife of Donald L. Smith, Jr., the Company's Chief
Executive Officer. See Note 12 of notes to consolidated financial
statements.
(1) 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.
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
12
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 for unspecified
damages 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 clause 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, the Pennsylvania Insurance Commissioner, and to our excess
liability insurance carrier Zurich Insurance Company. 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 Sint 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.
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,
13
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 2003.
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.
2003 High Low
---- ----- ----
Fourth Quarter $7.49 $6.76
Third Quarter 7.50 6.27
Second Quarter 7.25 6.21
First Quarter 6.93 5.83
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
As of March 12, 2004 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 March 12,
2004, was $8.01. We paid no dividends in 2003 or 2002. 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 2003, 2002 or 2001.
EQUITY COMPENSATION PLANS
The table below provides information relating to our equity compensation plans
as of December 31, 2003.
14
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 shareholders 801,595 $4.11 179,000
Not approved by shareholders - - -
Total 801,595 $4.11 179,000
(1) excluding shares reflected in first column
There are no other shares of capital stock issued other than common stock. No
employment 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 issued to employees and directors, 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, as amended. Options to purchase 50,000 shares were
issued to Matrix Desalination Inc at an exercise price of $6.38 in May 2003. The
vesting of the options issued to Matrix is dependent on the consummation of
certain investments for DevMat Utility Resources, LLC.
REPURCHASES OF COMPANY SHARES
Year 2003 Total purchases Average Purchased as 1) Maximum yet to
of shares price part of publicly be purchased
of common stock paid announced plan under the plan 2)
---------------- --------- -------------- -----------------
January 21 to 23 15,200 $6.78 15,200 $2,036,584
March 7 to 31 131,796 6.90 131,796 1,128,042
April 14 18,300 6.83 18,300 1,003,047
May 21 18,400 6.31 18,400 886,943
June 3 to 16 25,700 6.49 25,700 720,207
December 8 20,000 7.20 20,000 576,207
-------- ---- -------- ---------
Total 229,396 $6.82 229,396 $576,207
1) Total number of shares of common stock purchased as part of a
publicly announced plan. The plan is to repurchase up to
$3,000,000 of shares of common stock.
2) Maximum approximate dollar value that may yet be utilized under the
plan announced on August 13, 2002.
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
15
from our consolidated financial statements audited by KPMG LLP, independent
certified public accountants.
FINANCIAL DATA Year Ended December 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands, except per share amounts)
STATEMENT OF
OPERATIONS DATA:
Materials revenue $38,209 $37,733 $39,703 $50,956 $55,313
Construction revenue 17,104 15,623 15,185 14,292 12,721
------ ------- ------ ------ ------
Total revenue 55,313 53,356 54,888 65,248 68,034
Cost of materials 33,305 30,754 32,182 42,608 46,364
Cost of construction 15,254 14,790 12,447 11,461 11,000
------ ------ ------ ------ ------
Gross profit 6,754 7,812 10,259 11,179 10,670
Operating expenses 15,857 10,858 10,251 12,339 12,888
------ ------ ------ ------ ------
Operating (loss) income (9,103) (3,046) 8 (1,160) (2,218)
Other income (expense) 2,874 4,643 3,252 20,362 (821)
----- ----- ----- ------ ------
(Loss) income from operations
before income taxes (6,229) 1,597 3,260 19,202 (3,039)
Income tax expense (2,388) (396) (830) (715) (273)
----- ----- ----- ------ ------
Net (loss) income $(8,617) $ 1,201 $ 2,430 $18,487 $(3,312)
======= ======= ======= ======= =======
(Loss) income per share:
Basic $ (2.57) $ 0.34 $ 0.67 $ 4.80 $ (0.74)
Diluted $ (2.57) $ 0.31 $ 0.61 $ 4.40 $ (0.74)
Weighted average number of shares outstanding:
Basic 3,352 3,572 3,632 3,851 4,481
Diluted 3,352 3,874 3,963 4,202 4,481
BALANCE SHEET DATA:
Working capital $15,840 $19,659 $16,203 $14,035 $ 6,549
Total assets 64,419 68,437 67,952 72,136 81,914
Long-term debt, excluding
current portion 2,424 2,335 2,455 2,465 14,350
Stockholders' equity 45,549 55,025 53,845 52,434 39,436
16
The Company has not made any material accounting changes in the past five years,
except for the change of recording receipts on notes receivable from the Antigua
Government using the cost-recovery method to the accrual method. We disposed of
several businesses in year 2000, as more precisely described in Note 18 of notes
to consolidated financial statements of our Form 10-K dated December 31, 2002
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)
2003
Fourth Quarter $14,802 $ 2,198 $ (3,296) $ (1.00) $(1.00)
Third Quarter 14,059 2,187 631 0.19 0.18
Second Quarter 14,390 1,973 (328) (0.10) (0.10)
First Quarter 12,062 396 (5,624) (1.63) (1.63)
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
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.
SUMMARY
MATERIAL DIVISION
Our Material division has had decreasing revenue during the last two quarters
and the losses increased during the year, from $120,000 during the third quarter
of 2003 to $910,000 during the
17
fourth quarter of 2003. The loss in the fourth quarter of 2003 should also be
compared to a profit of $561,000 during the fourth quarter 2002. As a result of
heavy rains during the fourth quarter of 2003, our aggregate production was
decreased compared to the third quarter 2003, as well as compared to the fourth
quarter 2002. This, combined with lower average sales prices on our aggregates
due to change of product mix, decreased our margins even further. The heavy
rains were at the highest levels for decades. Our cost of block production
increased in St. Thomas due to production difficulties during a period of
increased production levels. We have started to import block into Sint Maarten
from external sources to reduce our cost of block in that market. The results
of our ready mix operations improved on most islands, partly from increased
revenue, but also from improved delivery costs. The Company began to outsource
the ready-mix delivery on various islands during 2003; management believes that
reduced cost effect should continue in the foreseeable future.
CONSTRUCTION DIVISION
Our construction business improved every quarter during 2003. We are seeing
improved volumes and margins in most of our locations. The year started with an
operating loss of $1.1 million in the first quarter, a loss of $285,000 in the
second quarter, followed by operating income of $253,000 and $662,000 in the
third and fourth quarters, respectively. We are projecting strong continuing
volumes and profits for at least the whole year of 2004. The dredge started
being utilized again in the fourth quarter of 2003 and has contracts to operate
for at least the first six months of 2004.
WATER DESALINATION AND SEWAGE TREATMENT BUSINESS
We entered into a joint venture with Matrix Desalination in June 2003 to buy,
own and operate utility plants. We have incurred $100,000 in expenses during the
year. We have not been able to sell any systems, yet. However the marketing
efforts for water and sewage system contracts have resulted in leads and
contracts for our Construction division. We are reviewing and bidding on a
number of possible water and sewage system contracts, but there is no assurance
that any of them will result in firm contracts.
ANTIGUA NOTE
During the year the Government of Antigua did not meet all of its payment
obligations. However, we expect the Government to fulfill most of its payment
obligations due in 2004 and to continue making payments until the amount
recorded in our financial statements as of December 31, 2003 is paid. The
recorded principal balance is expected to be paid in full by December 31, 2009.
Due to the reduction of payments, we only recorded $1.9 million of interest
income from the Antigua Government in 2003 as compared to $2.9 million in 2002.
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,
18
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 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 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.
19
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.
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 outcome of tax litigation in Antigua and the compliance review of
our EDC benefits in the U.S. Virgin Islands.
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.
o Our ability to execute and profitably perform any contracts in the
water desalination or sewage treatment business.
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
20
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
Our discussion of our financial condition and results of operations is an
analysis of the consolidated financial statements, which have been prepared in
conformity 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, impairment charges,
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. 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. 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. We estimate costs to complete our construction contracts
based on experience from similar work in the past. If the conditions of
the work
21
to be performed change 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.
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 retirement agreements with the Company's
President and certain other employees. This accrual is based on the life
expectancy of these persons and an assumed discount rate, weighted
average of 5.7 percent. Should the actual longevity vary significantly
from the United States insurance norms, or should the discount rate used
to establish the present value of the 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 contingent liability of $6.1 million, excluding 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 $29.1 million, and
we have the right of to offset against any amounts owed to the
government. See Notes 3 and 8 of notes to consolidated financial
statements.
o The EDC completed a compliance review on our subsidiary in the US
Virgin Islands on February 6, 2004. The compliance review covers the
period from April 1, 1998 through March 31, 2003 and resulted from the
Company's application to request an extension of tax exemptions from
the EDC. The Company is working with the EDC to resolve the issues
raised. One of those issues is whether certain items of income
qualified for exemption benefits under the Company's then existing tax
exemption, including notice of failure to make gross receipts tax
payments of $504,919 and income taxes of $2,240,070, not including
interest and penalties. This is the first time that a position
contrary to the
22
Company's or any position on this specific issue has been raised by
the EDC. The Company intends to vigorously contest the EDC's
interpretation. In light of these recent events, and based on
discussions with legal counsel, the Company has established a tax
accrual at December 31, 2003 for such exposure which approximates the
amounts set forth in the EDC notice.
o We have $31.7 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 or cash-flow neutral
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 $10.8 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
received for accrued interest. Should the payments from the government
diminish substantially or become uncertain, we may have to revert to
the cost-recovery method, impair the notes or adjust the implicit
interest rate based on estimated future cash flows. This could decrease
our earnings significantly. See Note 3 of notes to consolidated
financial statements. The Government did not make certain of its
payments due in the fourth and prior quarters of 2003 and, consequently,
in the fourth quarter of 2003, the Company recorded $503,000 less in
interest income compared to the average of the first three quarters of
2003. The amount past due was $1.4 million as of December 31, 2003. We
do not believe that the current delay in payments materially affects the
recoverability of the recorded amount of the notes receivable.
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.
o We determine our fixed assets recoverability on a subsidiary level or
group of asset level. If we, as a result of our valuation in the future,
assess the assets not to be recoverable, a negative adjustment to the
book value of those assets may occur. On the other hand, if we impair an
asset, and the asset continues to produce income, we may record earnings
higher than they should have been if no impairment had been recorded.
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
23
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, 2003 WITH YEAR ENDED DECEMBER 31, 2002
TOTAL REVENUE
Our revenue was $55.3 million in 2003 and $53.4 million in 2002. This 3.7
percent increase reflects an increase in construction revenue and a smaller
increase in materials revenue.
Our materials revenue increased 1.3 percent to $38.2 million in 2003 from $37.7
million in 2002. This increase was primarily due to an increase in the sale of
concrete, block and cement, offset to a lesser extent by a reduced sale of
aggregates. Concrete and block revenue increased 12.2% and 7.0%, respectively,
mainly due to increased volumes on St. Martin, primarily due to a significant
project on the island. Aggregates sales decreased in St. Croix by 40.4 percent
and on Puerto Rico by 17.0 percent. This reduction was due to reduced activity,
as well as heavy rains in the 4th quarter of 2003. We are not sure that the
concrete volume increases on St. Martin will be sustainable; however, we believe
that aggregates volumes will increase during the next two quarters. We also
anticipate that aggregates volumes on St. Croix and Puerto Rico will increase
during 2004. At this time we cannot predict total materials revenue in 2004.
Revenue from our Construction division increased 9.5 percent to $17.1 million in
2003 from $15.6 million in 2002. This increase resulted primarily from increased
activity on Antigua and Aruba. Our backlog of unfilled portions of land
development contracts at December 31, 2003 was approximately $5.6 million
involving 12 projects, as compared to approximately $5.6 million involving 6
projects at December 31, 2002. From December 31, 2003 through February 20, 2004,
we entered into some additional construction contracts. We are currently in
final negotiations for several contracts and we expect the division to increase
its volume in 2004. We expect the current backlog to be completed during 2004.
COST OF MATERIALS
Cost of materials increased to 86.6 percent of materials revenue from 81.5
percent in 2002. This increase was primarily the result of reduced margins in
the U.S. Virgin Islands from the sale of lower margin products and lower
volumes, and reduced margins on Puerto Rico, due to lower volumes and high fixed
costs. The margins on St. Martin improved during the year, but are not
satisfactory. We have been able to secure new sales agreements. With improved
volumes, we believe that the profitability should improve.
24
COST OF CONSTRUCTION
Cost of construction decreased to 89.2 percent of construction revenue in 2003
from 94.7 percent in 2002. This decrease is primarily attributable to the marine
equipment having profitable work at the end of 2003 and being able to obtain
more profitable construction contracts during 2003, 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 12.0
percent to $10.9 million in 2003 from $9.7 million in 2002. The increase in SG&A
expense was primarily due to $634,000 in accelerated depreciation of assets in
St. Thomas and Antigua; $668,000 of increased consulting fees, including an
expense of $97,000 related to the water desalination business. We also had an
increase in property and other taxes of $311,000, offset by reduced insurance
expense of $149,000, and reduced labor and labor related expenses of $438,000.
As a percentage of revenue, SG&A expense increased to 19.7 percent during 2003
as compared to 18.5 percent during the previous year.
Due to lower profitability and lower volumes affecting certain assets,
management upon its review in the first quarter 2003 of long-lived assets,
determined that impairment had occurred to some of our assets. An impairment
expense of $2.9 million was recognized in 2003 compared to $16,000 in 2002. The
Company has two batch plants on Antigua and, during the second quarter,
consolidated its operations to the main facility. Accordingly, the installation
cost of the plant that was 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 expense recorded 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 could not 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
25
impaired and an operational decision has been made to close the plant and
dismantle it. 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. On
September 1, 2003 the third party received its extraction permit and has started
aggregates processing operations.
During the year the Company incurred additional retirement and severance expense
due the retirement of several executives of the Company, termination of truck
and equipment operators, as well as a reduction in the interest rate used in the
net present value calculation of the obligations. The total expense for 2003 was
$2.1 million, as compared to $1.1 million in 2002. The Company has taken
measures to diminish said retirement cost in the future; nevertheless, the
retirement expense can vary in the future due to fluctuations in the interest
rate to discount future obligations to present value. Future severance cost can
be affected by strategic initiatives of the Company, and should be offset by
future savings. The 401(k) savings-plan matching in the U.S., has been slightly
increased so that additional retirement costs will not be necessary when an
employee retires from the Company. Currently, a senior executive intends to
retire at the end of 2004. The total cost for his retirement agreement, which
was finalized in December 2003, will be approximately $545,000. During the
fourth quarter 2003, we recorded $232,000 of expense for past services and the
balance of approximately $313,000 will be recorded over his remaining service
time in 2004.
OPERATING (LOSS) INCOME
We had an operating loss of $9.1 million in 2003, compared to a loss of $3.0
million in 2002. Our Materials division had an operating loss of $6.0 million in
2003, compared to $672,000 in 2002. This increased operating loss is mainly due
to a $2.9 million impairment of long-lived assets in St. Martin and Puerto Rico,
$634,000 of accelerated depreciation in St. Thomas and Antigua and $2.1 million
lower gross margins on sales. The lower gross margin resulted primarily from the
quarry operations. We had unusually heavy rains on most islands we operate in
the fourth quarter of 2003. This resulted in reduced volumes in St. Croix and
Puerto Rico and the gross margins were reduced by $1.1 million and $730,000,
respectively. The change in product mix on St. Thomas resulted in a lower
average selling price, even though costs remained basically the same. St. Thomas
also suffered from production problems in its block plant, which had a material
adverse effect on margins. Accordingly, the gross margin in St. Thomas was
reduced by $973,000. Operations volumes increased in Sint Maarten/St. Martin,
which resulted in an $839,000 increase in gross margin. SG&A expense was
slightly reduced for the division.
Our Construction division had an operating loss of $467,000 in 2003 compared to
$1.3 million in 2002. This decrease was primarily attributable to the marine
division's having some profitable work in 2003 and being idle in 2002. We also
had improved margins on certain contracts during 2003. The current backlog is
the same as at the end of 2002; however, we believe we can achieve
26
success in our current negotiations and bids for new contracts. We believe that
we will see continuing improved results for the division in 2004.
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. We realized joint venture equity earnings of $107,000, primarily from a
sale of a parcel of land in South Florida. Gain on sale of equipment was
$306,000 in 2003, compared to $180,000 for the previous year. Our interest
expense decreased to $151,000 in 2003 from $167,000 in 2002 due to reduced
interest rates. Our interest income was $2.6 million in 2003, a reduction from
$3.6 million compared to the previous year. Interest recognized on notes
receivable due from the Government of Antigua and Barbuda decreased in 2003 by
$1.1 million, while interest received on outstanding accounts receivable
increased. The gain on joint-venture equity is derived primarily from a sale of
a lot in a South Florida joint venture in 2003.
INCOME TAX EXPENSE
Income tax expense increased to $2.4 million in 2003 from $395,000 in 2002.
During 2003, the Company recognized a tax exposure accrual related to the
compliance notice received from the EDC in the U.S. Virgin Islands where it
mentions the Company's failure to make gross receipts tax payments of $504,919
and income taxes of $2,240,070, not including interest and penalties. We believe
we have valid defenses to the notice and intend to vigorously challenge the
notice. 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 negative 38.3 percent in
2003 as compared to 24.8 percent in 2002. 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.
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
27
on Puerto Rico, offset to a lesser extent by improved volumes on Antigua.
We believe the poor result on Sint 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.
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.
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
Operating expenses 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
28
increased operating loss is mainly due to the operations on Sint Maarten/St.
Martin, offset to a lesser extent by improved results on other islands, in
particular Antigua and St. Thomas. The operations in Sint 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 Sint 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.
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 due to
losses in Puerto Rico cannot be allocated to the joint venture partners, as
their equity has been exhausted.
INCOME TAX BENEFIT (EXPENSE)
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.
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 2003, we financed $2.0 million, and the
outstanding balance of the financed construction contracts as of December 31,
2003 was $3.5 million, all of which is due to be paid at different
29
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, 2003, 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, 2003, our liquidity and capital resources included cash and
cash equivalents of $10.0 million, working capital of $15.8 million and
available lines of credit of $1.4 million. Total outstanding liabilities were
$18.9 million as of December 31, 2003, compared to $13.4 million a year earlier.
Cash flow provided by operating activities for the year ended December 31, 2003
was $1.0 million compared with $4.1 million for the year ended December 31,
2002. The primary use of cash for operating activities during the year ended
December 31, 2003 was an increase in receivables of $5.3 million and a decrease
in accounts payable and accrued expenses of $243,000. The primary source of cash
from operating activities was mainly an increase in taxes payable of $2.7
million, an increase in deferred gain and other non-current liabilities of $1.8
million, a decrease in inventories of $976,000, a decrease in billings in excess
of costs and estimated earnings of $820,000 and an increase in billing in excess
of costs and estimated earnings of $674,000.
Net cash provided by investing activities was $1.4 million in 2003, including
payments received on notes of $4.8 million, partially offset by purchases of
property, plant, and equipment of $2.9 million. Net cash used in financing
activities was $1.4 million, including purchases of treasury stock of $1.6
million, partially offset by issuance of stock of $142,000.
Our accounts receivable averaged 59 days of sales outstanding ("DSO") as of
December 31, 2003. This is an increase in DSO from 53 days at the end of
December 2002. The Company's Materials division increased its DSO to 55 days as
compared to 50 days at the end of the previous year. The increase in DSO was
particularly noticeable in St. Croix, Puerto Rico and Sint Maarten. The slowdown
in the economy of St. Croix and Puerto Rico has had a negative effect on our
collections. The Construction division also increased its DSO to 68 days as
compared to 61 days at the end of last year. The increase was due to large
receivables in Aruba as well as increasing activity in Antigua during the fourth
quarter of 2003. 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, 2003, we had no amount outstanding under this line.
This facility was put in place to help cash management strategies. We have
similar
30
overdraft facilities with Caribbean banks totaling $385,000. At December
31, 2003, we had no outstanding amounts on these facilities.
At December 31, 2003 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, 2005.
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 $2.9 million in 2003. At present, management believes that our
inventory of construction equipment is adequate for our current contractual
commitments and operating activities. We believe we have available funds or can
obtain sufficient financing for our contemplated equipment replacements and
additions. 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. During 2003 we sold equipment with
an original cost basis of $1.9 million and a net book value of $1.6 million. The
net proceeds, consisting of cash and notes receivable, were $1.9 million. We
realized a gain of approximately $306,000 on these transactions.
In September 2001, the Company decided to stop its operations in Aguadilla,
Puerto Rico. There was no material impact on the consolidated financial
statements. The Company has leased, with the 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
amount of income after depreciation and interest on the equipment.
Our notes receivable at December 31, 2003 include $6.0 million in promissory
notes from the Government of Antigua, with approximately $246,000 classified as
a current receivable. See Notes 3, 8 and 16 of notes to consolidated financial
statements.
Our issued guarantees are 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:
2005 to 2007 to 2009
Total 2004 2006 2008 and beyond
-------- ------ ------ ------ ----------
Long term debt $ 2,602,000 $ 300,000 $1,770,000$ - $ 532,000
Capital leases 173,000 51,000 100,000 22,000 -
Operating leases 3,343,000 1,260,000 1,377,000 379,000 327,000
Employment contracts 320,000 320,000 - - -
Other non-current liabilities 4,255,000 - 2,497,000 1,094,000 664,000
----------------------------- ----------- -------------- ------------
Total $10,693,000 $1,931,000 $5,744,000 $1,495,000 $1,523,000
31
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 are sometime involved in litigation; the outcome of such litigation may in
the future have an impact on our liquidity. See item 3 above.
OFF BALANCE SHEET TRANSACTIONS
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."
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
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
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 was finished in September 2003 and the guarantee expires two years after
this date. The Company received an up front fee of $154,000. At the same time, a
long-term liability of the same 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.
We have guaranteed part of a bank loan to a real estate company in Puerto Rico
that we are 33 percent owner of. The total outstanding balance was as of
December 31, 2003 $329,000, of which our guarantee is one third. The loan has
monthly payments of principal and interest at LIBOR plus 2%.
32
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 consolidated financial statements.
RELATED PARTY TRANSACTIONS
We have engaged in transactions with some of our Directors or employees. See
Note 12 of notes to consolidated financial statements and item 13 of Part
III
We lease from the wife of the Company President, Mr. Donald L. Smith, Jr., a
1.8-acre parcel of real property in Deerfield Beach, Florida. This property is
being used for our equipment logistics and maintenance activities. The annual
rent for the period 1996 through 2001 was $49,000,. 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,
as evaluated by management.
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, 2005. 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. See Liquidity and Capital Resources above.
We have a $29.7 million construction contract with an entity in the Bahamas. Mr.
Smith and Robert Armstrong are minority shareholders in the entity, 11.3 and
1.55 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 $4.9 million during 2003. The backlog on the contract as of
December 31, 2003 was $288,000. As of December 31, 2003 we had trade and note
receivables from the venture of approximately $3.4 million and the cost and
estimated earnings in excess of billings was $269,000. Mr. Smith has guaranteed
the payment of certain receivables from the entity, up to a maximum of $2.7
million, subject to exhaustion by us of all other remedies.
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. In 2002, 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. 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.
33
The same subsidiary sells a significant portion of its products to a company
controlled by another joint venture partner. In 2003 our subsidiary's revenue
from these sales was $2.5 million. 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 included in 2002 amounts due from two officers as a result of
payments made by the Company pursuant to a split-dollar life insurance plan. In
December 2003 the split dollar agreements were cancelled and the Company
received from the officers the full amount owed.
We purchased from then director, Robert A. Steele, in a private transaction in
April 2003, 12,000 shares of the Company's common stock at the prevailing market
rate. The total payment was $82,000.
Mr. James R. Cast, a director, in his tax and consulting practice, has provided
services to us and to Mr. Donald Smith, Jr. privately, for more than ten years.
We paid Mr. Cast $58,000 for the consulting services provided to the Company in
2003. Mr. Smith paid Mr. Cast $ 21,000 for the same period.
The Company owns a 50% interest in ZSC South, a joint venture, which owns two
parcels of vacant land in South Florida. Mr. W. Douglas Pitts, a director, owns
a 5% interest in the joint venture; Courtelis Company, manages the joint
venture's operations and Mr. Pitts is the President of Courtelis Company. ZSC
South sold a parcel of land in June 2003 and paid the Company's net share of the
proceeds, $140,000. At the time of sale of the property Mr. Pitts received a
real estate commission for the sale of $13,000.
The Company sells products to corporations controlled by Mr. Robert D.
Armstrong. The amount of product sold is less than 5% of our gross receipts. We
purchase products from corporations controlled by Mr. Armstrong. The purchases
totaled $9,000 in 2003. Corporations controlled by Mr. Armstrong sometimes offer
to sell asphalt to customers in St. Croix to whom the Company may also quote
concrete and aggregate products in competition with the asphalt. The Company
also sometimes competes for construction contracts with corporations controlled
by Mr. Armstrong.
We have entered into a retirement agreement with Mr. Richard Hornsby, our Senior
Vice President and director. He will retire from the company at the end of 2004.
During 2005 he will still receive his full salary. From 2006 he will receive
annual payments of $32,000 for life.
Company policies and codes provide that related party transactions be approved
in advance by either the Audit Committee or a majority of disinterested
directors. As indicated, the Company has a construction contract, totaling
$29.7 million as of December 31, 2003, with an entity in the Bahamas in which
Messrs. Smith and Armstrong are minority shareholders. During the year, a
Company subsidiary commenced certain additional work for this entity for it
which it has billed or is billing approximately $1.5 million, of which $510,000
has been paid through March 15, 2004. The Company did not obtain Audit
Committee approval prior to doing the additional work. Subsequently, the Audit
Committee has reviewed the work and determined that the terms and conditions
under which the Company entered into such work were similar to the terms and
34
conditions of work the Company has agreed to perform for unrelated third
parties. In addition to the guarantee Mr. Smith has provided with respect to
earlier work for this entity as described above, Mr. Smith has guaranteed
$270,000 of the amount due for this work. Taking into consideration the amount
paid for this work, available Company offsets, Mr. Smith's guarantee and other
factors, the Company believes that this work will be profitable for the Company.
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 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 SFAS
145 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 SFAS 145 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
35
the effect of the method used on reported results. Theprovisions 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. The application of the disclosure portion of this
standard will have no impact on the Company's consolidated financial position
or results of operations.
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 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. FIN
45 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 FIN 45 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 consolidated financial position and results of
operations.
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R") (revised
December 2003), "Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51" ("ARB 51"), which addresses how a
business enterprise should evaluate whether it has a controlling interest in an
entity though means other than voting rights and accordingly should consolidate
the entity. FIN 46R replaces FIN 46, which was issued in January 2003. Before
concluding that it is appropriate to apply ARB 51 voting interest consolidation
model to an entity, an enterprise must first determine that the entity is not a
variable interest entity (VIE). As of the effective date of FIN 46R, an
enterprise must evaluate its involvement with all entities or legal structures
created before February 1, 2003, to determine whether consolidation requirements
of FIN 46R apply to those entities. There is no grandfathering of existing
entities. Public companies must apply either FIN 46 or FIN 46R immediately to
entities created after January 31, 2003 and no later than the end of the first
reporting period that ends after March 15, 2004. The adoption of FIN 46 did not
have a material impact on the Company's consolidated financial position and
results of operations.
36
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 adoption did
not have an impact on the Company's financial position and results of
operations.
In December 2003, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 104, Revenue Recognition. SAB 104 revises or
rescinds portions of the interpretive guidance included in Topic 13 of the
codification of staff accounting bulletins in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104 did not have a material
impact on the Company's consolidated financial position and results of
operations.
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.
37
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 39
Financial Statements:
Consolidated Balance Sheets 40-41
December 31, 2003 and 2002
Consolidated Statements of Operations 42
For Each of the Years in the Three-Year Period
Ended December 31, 2003
Consolidated Statements of Stockholders' Equity 43
and Comprehensive (Loss) Income for Each of the Years
in the Three-Year Period Ended December 31, 2003
Consolidated Statements of Cash Flows 44-45
For Each of the Years in the Three-Year Period
Ended December 31, 2003
Notes to Consolidated Financial Statements 46-70
38
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.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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, 2003 and 2002, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Fort Lauderdale, Florida
March 5, 2004
39
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2002
ASSETS 2003 2002
---------- ---------
Current assets:
Cash and cash equivalents $10,030,006 $ 8,977,293
Accounts and notes receivable, net 12,638,671 12,261,687
Costs and estimated earnings in excess of billings 1,170,572 1,990,353
Inventories 3,520,687 4,416,278
Prepaid expenses and other current assets 670,435 667,174
---------- ----------
Total current assets 28,030,371 28,312,785
Property, plant and equipment, net
Land 1,432,068 1,462,068
Buildings 597,366 1,111,954
Leasehold improvements 3,200,796 3,494,392
Equipment 47,018,090 53,109,586
Furniture and fixtures 700,988 712,124
Construction in process 861,723 744,448
--------------- ---------------
53,811,031 60,634,572
Less accumulated depreciation (29,861,762) (30,606,467)
------------- -------------
Total property, plant and equipment, net 23,949,269 30,028,105
Investments in unconsolidated joint
ventures and affiliates, net 349,413 373,251
Notes receivable excluding
current installments, net 10,919,100 8,460,887
Other long-term assets 1,170,589 1,262,333
------------- -------------
Total assets $64,418,742 $68,437,361
=========== ===========
See accompanying notes to consolidated financial statements.
40
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
December 31, 2003 and 2002
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
--------- ----------
Current liabilities:
Accounts payable, trade and other $ 3,606,120 $ 4,131,087
Accrued expenses and other liabilities 3,927,906 3,197,545
Line of credit - 11,000
Current installments of long-term debt 351,355 378,500
Billings in excess of costs and estimated earnings 676,207 1,958
Income tax payable 3,629,215 933,734
-------------- ------------
Total current liabilities 12,190,803 8,653,824
Long-term debt, excluding current installments 2,424,143 2,334,974
Other long-term liabilities 4,254,728 2,423,308
------------- -------------
Total liabilities 18,869,674 13,412,106
Stockholders' equity:
Common stock, $0.10 par value. Authorized
15,000,000 shares, issued 3,383,173 in 2003
and 3,591,269 in 2002, outstanding 3,296,373
in 2003 and 3,469,169 shares in 2002 338,317 359,126
Additional paid-in capital 9,208,980 9,704,937
Retained earnings 37,740,039 47,417,954
Accumulated other comprehensive loss -
cumulative translation adjustment (1,148,402) (1,611,983)
Treasury stock, at cost, 86,800 and 122,100
shares in 2003 and 2002, respectively (589,866) (844,779)
-------------- --------------
Total stockholders' equity 45,549,068 55,025,255
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity $64,418,742 $68,437,361
=========== ===========
See accompanying notes to consolidated financial statements.
41
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
For Each of the Years in the Three-Year Period Ended December 31, 2003
2003 2002 2001
--------------- ----------------- ---------------
Materials revenue $38,209,247 $37,732,839 $39,702,788
Construction revenue 17,103,848 15,623,007 15,184,727
------------ ------------ -----------
Total revenue 55,313,095 53,355,846 54,887,515
Cost of materials (33,304,509) (30,753,566) (32,181,968)
Cost of construction (15,254,280) (14,790,454) (12,446,142)
------------ ------------ ------------
Gross profit 6,754,306 7,811,826 10,259,405
Operating expenses:
Selling, general and administrative (10,902,483) (9,732,100) (9,602,519)
Severance and retirement (2,095,563) (1,110,545) (617,845)
Impairment of assets (2,859,235) (15,542) (30,570)
----------- -------------- --------------
Operating (loss) income (9,102,975) (3,046,361) 8,471
------------ ------------ ---------------
Other income (expense):
Joint venture equity earnings 107,162 8,540 28,733
Gain on sale of property and equipment 305,744 180,091 70,678
Gain on sale of businesses - 1,040,973 -
Interest expense (151,119) (167,174) (434,802)
Interest income, receivables 2,444,541 3,401,711 3,273,893
Interest income, banks 167,349 178,819 250,891
Minority interest - - 51,798
Other income - - 10,041
------------------ ------------------ -------------
2,873,677 4,642,960 3,251,232
----------- ----------- -----------
(Loss) income before
income tax expense (6,229,298) 1,596,599 3,259,703
Income tax expense (2,388,157) (395,264) (829,334)
--------------- ------------- -------------
Net (loss) income $(8,617,455) $1,201,335 $ 2,430,369
=========== ========== ===========
(Loss) income per common share - basic $ (2.57) $ 0.34 $ 0.67
============== ============== ===============
(Loss) income per common share - diluted $ (2.57) $ 0.31 $ 0.61
============== ============== ===============
Weighted average number of shares outstanding
Basic 3,351,817 3,572,488 3,631,703
========== ========= ==========
Diluted 3,351,817 3,873,752 3,963,278
========== ========= ==========
See accompanying notes to consolidated financial statements.
42
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, 2003
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings (Loss) Income Stock Total
----- ------ -------- ------------- ----- -----
Balance at Dec. 31, 2000 $383,628 $10,279,284 $45,018,868 $(2,037,502) $(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 46,941,249 (2,516,382) (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 47,417,954 (1,611,983) (844,779) 55,025,255
Comprehensive income:
Net income (8,617,455) (8,617,455)
Currency translation adjustment 463,581 463,581
----------
Comprehensive income (8,153,874)
Repurchase of 229,396 shares (1,563,433) (1,563,433)
Retirement of 264,696 shares (26,469) (731,417) (1,060,460) 1,818,346 -
Issuance of 50,000 stock options 99,414 99,414
Exercise of 56,600 stock options 5,660 136,046 141,706
------- -------- --------- --------- --------- ----------
Balance at Dec. 31, 2003 $338,317 $9,208,980 $37,740,039 $(1,148,402) $(589,866) $45,549,068
======== ========== =========== =========== ========= ===========
See accompanying notes to consolidated financial statements.
43
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Each of the Years in the Three-Year Period Ended December 31, 2003
2003 2002 2001
---------- -------- --------
Cash flows from operating activities:
Net (loss) income $(8,617,455) $1,201,335 $2,430,369
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Non-cash stock compensation 99,414 - 127,843
Depreciation and amortization 5,354,040 4,908,597 4,895,406
Deferred income tax benefit (367,722) (463,703) (152,775)
Provision for doubtful accounts and notes 71,939 69,250 162,695
Impairment on long-lived assets 2,859,235 15,542 30,570
Gain on sale of property and equipment (305,744) (180,091) (70,678)
Gain on sale of business - (1,040,973) -
Joint venture equity loss (earnings) 32,838 (8,540) (28,733)
Minority interest in loss of
consolidated subsidiaries - - (51,798)
Changes in operating assets and liabilities:
(Increase) decrease in accounts
and notes receivables, net (5,296,437) 552,929 (1,781,028)
Decrease (increase) in costs and
estimated earnings in excess of billings 819,781 (1,761,297) 1,176,842
Decrease (increase) in inventories 975,506 (533,776) (806,664)
Decrease (increase) in prepaid expenses
and other current assets 38,433 58,656 (59,950)
Decrease (increase) in other long-term assets 402,237 (21,544) (90,151)
(Decrease) increase in accounts payable,
accrued expenses and other liabilities (242,655) 944,197 (3,152,347)
Increase (decrease) in billings in excess
of costs and estimated earnings 674,249 (412,879) (120,710)
Increase in income tax payable 2,695,481 234,616 467,391
Increase in other long-term liabilities 1,846,955 517,458 355,989
----------- ------------ ------------
Net cash provided by operating activities $ 1,040,095 $4,079,777 $3,332,271
------------- ---------- ----------
See accompanying notes to consolidated financial statements.
44
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For Each of the Years in the Three-Year Period Ended December 31, 2003
2003 2002 2001
------------ ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment $(2,949,008) $(3,376,098) $(4,515,495)
Proceeds from disposition of property,
plant and equipment 411,748 240,351 219,617
Issuance of notes (830,689) (472,419) (564,000)
Payments received on notes 4,773,895 2,226,966 2,682,546
Investments in unconsolidated joint ventures (9,000) - (5,306)
--------------- ------------------ --------------
Net cash provided by (used in)
investing activities 1,396,946 (1,381,200) (2,182,638)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of stock 141,706 62,040 32,400
Purchase of treasury stock (1,563,433) (987,790) (700,925)
Proceeds from debt 56,160 - 1,896,761
Principal payments on debt (45,847) (884,432) (2,240,056)
Net (repayment) borrowing, lines of credit (11,000) 11,000 (300,000)
--------------- ------------- -------------
Net cash used in financing activities (1,422,414) (1,799,182) (1,311,820)
------------ ---------- -----------
Effect of exchange rate changes on cash 38,086 83,571 (10,440)
Net increase (decrease) in cash
and cash equivalents 1,052,713 982,966 (172,627)
Cash and cash equivalents, beginning of year 8,977,293 7,994,327 8,166,954
------------- ------------ ------------
Cash and cash equivalents, end of year $10,030,006 $ 8,977,293 $ 7,994,327
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 151,119 $ 172,320 $ 416,472
============= ============ ============
Cash paid for income taxes $ 71,234 $ 366,933 $ 288,223
============== ============ ============
Supplemental non-cash items:
Issuance of notes in settlement
of receivables $ 4,503,032 $ 1,709,905 $ 3,972,607
============ =========== ===========
Reduction of note receivable
and deferred income $ 51,463 $ 1,142,537 $ 1,000,000
============== =========== ===========
Retirement of treasury stock $ 1,818,346 $ 1,230,262 $ 823,488
============ =========== ============
See accompanying notes to consolidated financial statements.
45
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 an agreement
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. Revenue in an amount
equal to cost incurred is recognized prior to contracts
reaching 25% completion. The related earnings are not
recognized until the period in which such percentage
completion is attained. It is the Company's judgment that
until a project reaches 25%
46
completion, there is insufficient information to determine
with a reasonable level of assurance what the estimated
profit on the project will be. 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.
(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 - 30 years
Leasehold improvements 3 - 35 years
Equipment 3 - 20 years
Furniture and fixtures 3 - 10 years
47
(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.
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 2003, 2002
and 2001 of approximately $2.9 million, $16,000 and $14,000,
respectively. The Construction division recorded charges for
impairment losses of $17,000, in 2001.
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 could not
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,
48
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,
using an estimated probable sales price for parts of the
plant as determinant of the value, and an operational
decision has been made to close the plant and dismantle it.
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 2003.
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,
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,
using an estimated probable sales price as determinant of the
value. On September 1, 2003, the third party received its
extraction permit and restarted aggregates processing
operations and paying the lease.
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 impairment charges of $70,000, $16,000
and $31,000 in 2003, 2002 and 2001, respectively.
(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 $463,581, $904,399 and $(478,880) in
2003, 2002 and 2001, respectively. Gains or losses on foreign
currency transactions are reflected in the net income of the
period. The (expense) income recorded in selling, general &
administrative expenses was $(40,287), $(122,215) and $65,143
in 2003, 2002, and 2001, 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.
49
(k) (LOSS) INCOME 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 under
the treasury stock method 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
that includes the enactment date. A valuation allowance on
deferred tax assets is established when the management
considers it is more likely than not that some portion or all
of the deferred tax assets will not be realized. 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 or cash-flow neutral 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
50
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 2003, 2002 and 2001 was $2.32, $2.70 and $3.88,
respectively, on the grant date, using the Black Scholes
option-pricing model with the following assumptions:
2003 2002 2001
---- ---- ----
Expected dividend yield - - -
Expected price volatility 25.5% 20.6% 34.0%
Risk-free interest rate 3.0% 5.0% 5.3%
Expected life of options 5.3 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:
2003 2002 2001
------------- ------------- ----------------
Net (loss) income, as reported $(8,617,455) $1,201,335 $2,430,369
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 (136,320) (91,762) (192,548)
------------- ------------ ------------
Pro forma net (loss) income $(8,753,775) $1,109,573 $2,322,197
Basic (loss)income per share, as reported $ (2.57) $ 0.34 $ 0.67
======= ======= =======
Basic (loss)income per share, pro forma $ (2.61) $ 0.31 $ 0.64
======= ======= =======
Diluted (loss)income per share,as reported $ (2.57) $ 0.31 $ 0.61
======= ======= =======
Diluted (loss)income per share, pro forma $ (2.61) $ 0.29 $ 0.31
======= ======= =======
51
(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:
2003 2002 2001
------------ ---------- -----------
Weighted average number of
shares outstanding - basic 3,351,817 3,572,488 3,631,703
Effect of dilutive securities:
Options - 301,264 331,575
--------------- ---------- ----------
Weighted average number of
shares outstanding - diluted 3,351,817 3,873,752 3,963,278
========= ========= =========
Not included options above (anti-dilutive) 285,852 - -
Shares outstanding:
Beginning outstanding shares 3,469,169 3,586,585 3,664,985
Repurchase of shares (229,396) (150,016) (97,000)
Issuance of shares 56,600 32,600 18,600
------------- ------------- -----------
Ending outstanding shares 3,296,373 3,469,169 3,586,585
========= ========= =========
(3) RECEIVABLES
December 31,
------------------------------
2003 2002
---- ----
Materials division trade accounts $ 7,695,999 $ 7,312,785
Construction division trade accounts
receivable, including retainage 4,227,313 3,364,260
Accrued interest and other receivables 532,045 192,726
Notes and bonds due from the
Government of Antigua and Barbuda, net 6,093,528 6,855,946
Trade notes receivable - other 6,698,039 5,521,931
Due from employees 479,753 250,837
-------------- --------------
25,726,677 23,498,485
Allowance for doubtful accounts and notes (2,168,906) (2,775,911)
-------------- --------------
$23,557,771 $20,722,574
=========== ===========
Allowance for doubtful accounts and notes 2003 2002 2001
------------ ---------- -----------
Beginning balance $2,775,911 $3,527,993 $3,958,053
Allowances charged to operations, net 71,939 69,250 162,695
Direct write-downs charged to the allowance (678,944) (821,332) (592,755)
---------- ---------- ----------
Ending balance $2,168,906 $2,775,911 $3,527,993
========== ========== ==========
Recovery of previously written off receivables: $ 17,724 $ 41,870 $ 32,165
=========== =========== ============
52
Receivables are classified in the consolidated balance sheets
as follows:
December 31,
2003 2002
---- ----
Current assets $12,638,671 $12,261,687
Non-current assets 10,919,100 8,460,887
------------- -------------
$23,557,771 $20,722,574
=========== ===========
Included in notes and other receivables are unsecured notes due from
the Government of Antigua and Barbuda (the "Government") totaling a net
amount of $6,024,867 and $6,787,286 in 2003 and 2002, respectively, of
which approximately $246,000 and $525,000 are classified as current
receivable in 2003 and 2002, respectively. 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 $29.1 million and $30.0 million as
of December 31, 2003 and 2002, 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
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. The Government did not fulfill its
payment obligations in 2003. 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 $246,000, $399,000, $626,000, $983,000, and $1,537,000 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 $2.7 million and $3.4 million, in 2003 and
2002, respectively. Interest income recognized in 2003, 2002 and 2001
was $1,860,162, $2,932,749, and $2,385,842, respectively. The Company
records payments received, first to the projected principal reductions
for the period, then to accrued interest, and lastly to additional
53
reduction of principal. Interest income is recognized on the notes only
to the extent payments are received or amounts are offset against money
owed to the Government. The Government was delayed in certain of its
payments during the last three quarters of 2003 and, consequently, the
Company recorded approximately $1,033,000 less in interest income in
2003 compared to 2002. Subsequent to year-end, the Company has not
received payment for all past due amounts from 2003.
Antigua-Barbuda Government Development Bonds 1994-1997 series amounting
to $68,661 in 2003 and 2002, are included in the total due from the
Government. The Company also has net trade receivables from various
Government agencies of $117,757 and $281,396 in 2003 and 2002,
respectively.
Trade notes receivable - other consist of the following:
December 31,
---------------------------------------
2003 2002
---- ----
Unsecured promissory notes receivable with varying
terms and maturity dates through 2008 $1,230,397 $1,091,509
Notes receivable with varying terms and maturity
dates through 2014, secured by property or equipment 2,026,665 2,373,700
10.0 percent note receivable, due on demand,
secured by first mortgage on real property 120,370 120,370
Unsecured promissory notes receivable bearing interest at 8.0 percent
with varying maturity dates through 2006, guaranteed by Company
President and various owners of debtor 2,467,773 -
Unsecured notes receivable bearing interest
at 1.0 percent over the prime rate,
due in monthly installments through 2005 852,834 1,436,352
8.0 percent note receivable, secured by property - 500,000
--------- ---------
Trade notes receivable $6,698,039 $5,521,931
========== ==========
(4) INVENTORIES
Inventories consist of the following: December 31,
-------------------------------------
2003 2002
---- ----
Sand, stone, cement and concrete block $3,135,064 $3,974,619
Maintenance parts 133,757 141,244
Other 251,866 300,415
------------ ------------
$3,520,687 $4,416,278
========== ==========
54
(5) INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES AND AFFILIATES
At December 31, 2003 and 2002, 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 of $107,162, $8,540 and $28,733, were
recognized in 2003, 2002, and 2001, 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, the majority 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, 2003 because of the short maturity of these instruments.
The carrying value of debt and most notes receivable approximated fair
value at December 31, 2003 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, 2003 was $6.0 million. The
effective interest rate of the notes was 29.4 percent in 2003. The
notes call for monthly and quarterly payments until maturity in 2015.
(7) DEBT
Debt consists of the following:
December 31,
-----------------------------------------
2003 2002
---- ----
Installment notes payable in monthly installments through 2008, bearing
interest at a weighted average rate of 6.9 percent and secured by
equipment with
a carrying value of approximately $250,000 $ 173,466 $ 111,442
Unsecured note payable to the Company's President,
$300,000 due on demand with the balance due
July 1, 2005, bearing interest at the prime interest rate 2,070,000 2,070,000
Unsecured notes payable due through 2011, bearing
interest at a rate of 7.0 percent 532,032 532,032
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 $2,775,498 $2,724,474
========== ==========
55
Prime rate was 4.0 and 4.25 percent as of the end of 2003 and 2002,
respectively. 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 Sint 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. The amounts outstanding under
these lines of credit were $0 and $11,000 as of December 31, 2003 and
2002, respectively.
The effective interest on all debt outstanding, excluding lines of
credit, was 4.9 percent at December 31, 2003 and 5.4 percent at
December 31, 2002. Outstanding debt is shown in the consolidated
balance sheets under the following captions:
December 31,
2003 2002
---- ----
Current installments of long-term debt $ 351,355 $ 378,500
Lines of credit - 11,000
Long-term debt 2,424,143 2,334,974
----------- -----------
$2,775,498 $2,724,474
========== ==========
The total maturities of all debt subsequent to December 31, 2003 are
as follows:
2004 $ 351,355
2005 1,858,783
2006 11,293
2007 11,799
2008 10,236
Thereafter 532,032
----------
$2,775,498
==========
(8) INCOME TAXES
Income tax (benefit) expense consists of: Current Deferred Total
------- -------- -------
2003:
Federal $ 215,051 $ (326,326) $ (111,275)
Foreign 2,540,828 (41,396) 2,499,432
---------- ----------- -----------
$2,755,879 $(367,722) $2,388,157
========== ========= ==========
2002:
Federal $ (27,635) $(457,650) $ (485,285)
Foreign 886,602 (6,053) 880,549
----------- ------------ -----------
$ 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
========== ========= ==========
56
The actual expense differs from the "expected" tax (benefit) expense
computed by applying the U.S. federal corporate income tax rate of 34
percent to (loss) income before income taxes is as follows:
2003 2002 2001
---- ---- -----
Computed "expected"
tax (benefit) expense $(2,117,961) $ 542,844 $1,108,299
Increase (reduction) in income
taxes resulting from:
Distribution of deemed dividends 2,117,883 527,000 141,100
Intercompany interest income
untaxed by foreign jurisdiction - - (137,194)
Tax incentives granted to
foreign subsidiaries (646,055) (1,503,562) (1,165,713)
Net operating loss not utilized 49,178 149,877 27,985
Change in deferred tax
valuation allowance 1,111,311 3,260,063 (918,862)
Additional foreign taxes 2,178,074 - -
Differences in effective rate in
foreign jurisdiction and other (304,273) (2,580,958) 1,773,719
------------- ------------ -------------
$ 2,388,157 $ 395,264 $ 829,334
=============== ============ ==========
Significant portions of the deferred tax assets and liabilities
results from the tax effects of temporary difference:
December 31,
-------------------------------------------
Deferred tax assets: 2003 2002
---- ----
Allowance for bad debts $ 212,701 $ 120,318
Net operating loss carry-forwards 9,422,395 8,618,371
Reserves and other 1,478,857 850,053
----------- ----------
Total gross deferred tax assets 11,113,953 9,588,441
Less valuation allowance (9,729,381) (8,618,070)
----------- -----------
Net deferred tax assets 1,384,572 970,371
----------- ------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capitalized interest (526,126) (479,647)
------------ ------------
Total gross deferred tax liabilities (526,126) (479,647)
------------ ------------
Net deferred tax asset $ 858,446 $ 490,724
=========== ============
Net deferred tax assets (liabilities):
Net current deferred tax assets $ 354,223 $ 312,529
Net non-current deferred tax assets 504,223 178,195
----------- ------------
$ 858,446 $ 490,724
=========== ============
57
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making the assessment. The valuation
allowance for deferred tax assets as of December 31, 2003 was $9.7
million or about 87.5 percent of the potential deferred tax benefit.
The change in valuation allowance was $1,111,311, $3,260,063 and
$(918,862) in 2003, 2002 and 2001, respectively.
In April 1988, the U.S. Virgin Islands Economic Development Commission
(EDC) 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. The Company has applied for an extension of this tax
exemption; however, there is no guarantee that 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
will be an increased expense.
The EDC completed a compliance review on the Company's subsidiary in
the US Virgin Islands on February 6, 2004. The compliance review covers
the period from April, 1998 through March 31, 2003 and resulted from
the Company's application to request an extension of tax exemptions
from the EDC. The Company is working with the EDC to resolve the issues
raised. One of those issues is whether certain items of income
qualified for exemption benefits under the Company's then existing tax
exemption, including notice of failure to make gross receipts tax
payments of $504,919 and income taxes of $2,240,070, not including
interest and penalties. This is the first time that a position contrary
to the Company's or any position on this specific issue has been raised
by the EDC. The Company intends to vigorously contest the EDC's
interpretation. In light of these recent events, and based on
discussions with legal counsel, the Company has established a tax
accrual at December 31, 2003 for such exposure which approximates the
amounts set forth in the EDC notice.
At December 31, 2003, approximately $31.7 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 or cash-flow
neutral manner, and when earned, did not require income tax recognition
under U.S. laws.
58
Should the foreign subsidiaries distribute these earnings to the
parent company or provide access to these earnings, taxes of
approximately $10.8 million at the U.S. federal tax rate
of 34 percent, net of foreign tax credits, may be incurred. At
December 31, 2003, the Company had accumulated net operating loss
carry-forwards available to offset future taxable income in its
Caribbean operations of about $24.4 million, which expire at various
times through the year 2010.
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
$29.1 million from the Government of Antigua and Barbuda; see further
Note 3, of which $6.0 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,
--------------------------------------------
2003 2002
---- ----
Current assets $17,815,342 $17,539,443
Advances to the Company 3,209,011 6,082,030
Property, plant and equipment, net 8,779,156 11,703,177
Investments in joint ventures and
affiliates, net 1,686,491 186,490
Notes receivable, net 9,414,459 7,490,948
Other assets 579,178 6,998
-------------- ----------------
Total assets $41,483,637 $43,009,086
=========== ===========
Current liabilities $ 3,767,196 $ 2,983,530
Long-term debt 1,475,805 889,416
Equity 36,240,636 39,136,140
------------ ------------
Total liabilities and equity $41,483,637 $43,009,086
=========== ===========
59
2003 2002 2001
---- ---- ----
Revenue $32,291,779 $20,476,404 $25,607,906
Income before income taxes 425,569 820,251 3,440,105
Net income 165,101 439,251 2,853,800
(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, 2003 are as
follows:
Operating
Years ending December 31, Leases
------
2004 $1,260,214
2005 857,788
2006 519,245
2007 246,709
2008 132,584
Thereafter 326,787
----------
Total minimum lease payments $3,343,327
==========
Total operating lease expense for real property and buildings was
$1,796,518, $1,869,548 and $1,977,537 in 2003, 2002 and 2001,
respectively. Total operating lease and rental expense for equipment
was $1,375,990, $1,092,640, and $903,455, in 2003, 2002 and 2001,
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 rent
expense amounted to $14,846, $17,464, and $10,755 in 2003, 2002 and
2001, 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.
60
December 31,
2003 2002 2001
---- ---- ----
Revenue (including inter-segment):
Materials $38,070,207 $37,740,458 $40,985,155
Construction 17,996,972 15,796,199 15,282,867
Elimination of inter-segment revenue (754,084) (180,811) (1,380,507)
------------- ------------- ------------
Total $55,313,095 $53,355,846 $54,887,515
=========== =========== ===========
Operating (loss) income:
Materials $(5,973,604) $ (670,988) $ 23,330
Construction (467,106) (1,260,373) 1,173,141
Unallocated corporate overhead (2,662,265) (1,115,000) (1,188,000)
------------ ------------ ------------
Total (9,102,975) (3,046,361) 8,471
Other income, net 2,873,677 4,642,960 3,251,232
------------ ------------ ------------
(Loss) income before taxes $(6,229,298) $1,596,599 $3,259,703
============ ========== ==========
Total assets:
Materials $38,149,092 $44,017,013 $43,787,877
Construction 14,265,800 13,635,796 13,441,816
Other 12,003,850 10,784,552 10,722,054
----------- ----------- -----------
Total $64,418,742 $68,437,361 $67,951,747
=========== =========== ===========
Depreciation and amortization:
Materials $ 3,771,954 $ 3,384,336 $ 3,309,717
Construction 1,582,086 1,524,261 1,585,689
------------- ------------- ------------
Total $ 5,354,040 $ 4,908,597 $ 4,895,406
============ =========== ===========
Capital expenditures:
Materials $ 1,541,826 $ 2,080,756 $ 3,709,789
Construction 1,407,182 1,295,342 805,706
------------- ------------- -------------
Total $ 2,949,008 $ 3,376,098 $ 4,515,495
============ ============ ===========
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
property, equipment and businesses. 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 $4.9
million and $8.4
61
million of revenue in 2003 and 2002, respectively, reported in the
Construction division segment.
December 31,
----------------------------------------------------- -
2003 2002 2001
---- ---- ----
Revenue by geographic areas:
U.S. and its territories $17,958,025 $19,859,351 $21,562,985
Netherlands Antilles 10,128,137 6,689,056 9,459,217
Antigua and Barbuda 14,323,248 10,962,572 10,534,677
French West Indies 5,827,903 4,998,990 6,384,890
Other foreign areas 7,075,782 10,845,877 6,945,746
------------- ------------ -------------
Total $55,313,095 $53,355,846 $54,887,515
=========== =========== ===========
Property, plant and equipment, net, by geographic areas:
U.S. and its territories $15,280,515 $18,324,928 $20,292,205
Netherlands Antilles 145,308 270,114 285,045
Antigua and Barbuda 6,132,782 7,030,701 6,720,267
French West Indies 2,389,147 4,399,832 3,873,834
Other foreign areas 1,517 2,530 53,889
--------------- --------------- ---------------
Total $23,949,269 $30,028,105 $31,225,240
=========== =========== ===========
(12) RELATED PARTY TRANSACTIONS
The Company leases a 1.8-acre parcel of real property in Deerfield
Beach, Florida from the wife of the Company's President, Mr. Donald L.
Smith, Jr. Annual rent on the property was $95,400 in both 2003 and
2002 and $49,303 in 2001. The lease was renewed for five years
beginning January 1, 2002 with an annual rent of $95,400. The rent was
based on comparable rental prices for similar properties in Deerfield
Beach.
At December 31, 2003, 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
million is due on July 1, 2005. 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 approved this
transaction. 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, 2003, 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
62
Mr. Smith and Mr. Armstrong, a director, participate with an equity
interest of 11.3 and 1.55 percent, respectively. The investment
is carried at cost; accordingly no income or loss has been recorded
from this investment. The Company has a $29.7 million contract with
the venture to perform land preparation services. In connection with
this contract, the Company recorded revenue of $4.9 million during
2003. The backlog on the contract as of December 31, 2003 was
$288,000. As of January 1, 2003, the Company entered into an agreement
with the partnership to defer payment of 50% of its regular contract
billings issued for work from September, 2002 and onwards, up to a
maximum amount of $2.5 million. The total deferral is $2.4 million.
The Company's President has personally guaranteed the $2.4 million
deferral, subject to exhaustion by the Company of all other remedies.
The deferral of payment is for three years from the date invoices
become due. Interest of eight percent annually will accrue and become
payable at maturity. The Company President has also guaranteed
$270,000 for work done in December 2003 to be paid by June 1, 2004. As
of December 31, 2003 the Company had trade and note receivables from
the venture of approximately $3.4 million and the cost and estimated
earnings in excess of billings was $269,000.
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. 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 2003, the
Company's subsidiary's revenue from these sales was $2.5 million. 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.
As of December 31, 2002, other assets included amounts due from
officers of the Company as a result of payments made by the Company
pursuant to a split-dollar life insurance plan. In December 2003 the
split-dollar life agreements were cancelled and the Company was repaid
the amounts owed.
The Company purchased from the CFO, Jan A. Norelid, in a private
transaction in May 2002, 11,400 shares of the Company's common stock at
the prevailing market rate. The total payment was $74,000.
63
The Company purchased from then director, Robert A. Steele, in a
private transaction in April 2003, 12,000 shares of the Company's
common stock at the prevailing market rate. The total payment was
$82,000.
The Company owns a 50% interest in ZSC South, a joint venture, which
currently owns one parcel of vacant land in South Florida. Mr. W.
Douglas Pitts, a director, owns a 5% interest in the joint venture;
Courtelis Company, manages the joint venture's operations and Mr. Pitts
is the President of Courtelis Company. ZSC South sold a parcel of land
in June 2003 and the Company recognized net earnings of $116,000 from
that transaction. At the time of sale, Mr. Pitts received a real estate
commission of $13,000.
Mr. James R. Cast, a director, has a tax and consulting practice, which
provides services to the Company and privately to Mr. Donald Smith, Jr.
The Company paid Mr. Cast $58,000 and $35,000 for his services to the
Company in 2003 and 2002, respectively. Mr. Smith paid Mr. Cast $21,000
and $19,000 for his services in 2003 and 2002, respectively.
The Company sells products to corporations controlled by Mr. Robert D.
Armstrong. The amount of product sold is less than 5% of the Company's
gross receipts. The Company purchases products from corporations
controlled by Mr. Armstrong. Corporations controlled by Mr. Armstrong
sometimes offer to sell asphalt to customers in St. Croix to whom the
Company may also quote concrete and aggregate products in competition
with the asphalt. The Company also sometimes competes for construction
contracts with corporations controlled by Mr. Armstrong.
The Company has entered into a retirement agreement with Mr. Richard L.
Hornsby, Senior Vice President and director, who will retire from the
Company at the end of 2004. During 2005 he will still receive his full
salary and beginning 2006 he will receive annual payments of $32,000,
for as long as he lives. During 2003, the Company recorded an expense
of $232,000 for services rendered; this amount will be paid out in
2005. The Company will expense, the net present value of the obligation
to pay Mr. Hornsby $32,000 annually for life, over his estimated
remaining service period at the Company, i.e. during 2004. The net
present value of the future obligation is presently estimated at
$313,000.
(13) STOCK OPTION PLANS
The Company adopted stock option plans for officers and employees in
1986, 1992 and 1999, and amended the 1999 plan in 2003. 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 600,000 shares, respectively, of
common stock may be granted at no less than fair market value on the
date of grant.
The amendment of the 1999 stock option plan was approved at the
shareholders' meeting in June 2003. The amendment increased the number
of available shares available for option grants from 350,000 to
600,000. The amended plan's full text was filed with the Company's
proxy statement to the 2003 annual shareholders' meeting.
64
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
12/31/00 784,575 3.53 50,000 8.55
Granted 6,500 6.92 - -
Exercised (18,600) 1.74 - -
Expired (9,180) 7.00 - -
-------
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
Granted 93,000 6.79 - -
Exercised (51,600) 2.41 (5,000) 3.47
Expired (18,000) 6.18 (10,000) 7.61
------- ------
12/31/03 782,595 4.07 19,000 5.78
======= ======
Exercisable 600,701 3.97 19,000 5.78
======= ======
Available for
future grant 179,000 -
======== ======
65
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 - 2.33 386,300 $1.86 6.2 305,325 $1.88
2.94 - 3.63 54,000 3.20 4.6 52,000 3.21
5.00 - 5.85 69,500 5.44 6.1 37,900 5.16
6.49 - 7.00 263,795 6.77 4.5 196,476 6.72
8.13 - 9.38 28,000 8.49 2.1 28,000 8.49
-------- ------ --- -------- ------
Total 801,595 $4.11 5.4 619,701 $4.03
(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 $133,872, $139,790, and $138,544
in 2003, 2002 and 2001, respectively.
(15) COSTS AND ESTIMATED EARNINGS ON CONTRACTS
Included in the accompanying consolidated balance sheets under the
following captions:
December 31,
2003 2002
---- ----
Costs and estimated earnings in excess of billings $ 1,170,572 $ 1,990,353
Billings in excess of costs and estimated earnings (676,207) (1,958)
------------ ---------------
$ 494,365 $ 1,988,395
=========== ===========
2003 2002
---- ----
Costs incurred on uncompleted contracts $36,097,492 $24,495,326
Costs incurred on completed contracts 6,445,243 9,503,151
Estimated earnings 5,888,676 4,384,219
------------- -------------
48,431,411 38,382,696
Less: Billings to date 47,937,046 36,394,301
------------ ------------
$ 494,365 $ 1,988,395
============ ============
66
(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.
The Company has guaranteed 33 percent of a bank loan to a real estate
company in Puerto Rico that the Company is 33 percent owner of. The
total outstanding balance as of December 31, 2003 was $329,000, of
which the Company has guaranteed one third. The loan has monthly
payments of principal and interest of LIBOR plus 2%.
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 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 was finished in September 2003 and the guarantee
expires two years after this date. The Company received an up front fee
of $154,000. At the same time, a long-term liability of the same 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.
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
recognized the expense of the retirement agreement over his then
expected remaining period of active employment with the Company. The
expense
67
related to this agreement was $464,000 in 2003, $560,000 in 2002 and
$480,000 in 2001. The accrued liability of the present value of the
estimated future payments was $1.7 million as of December 31, 2003. In
calculating the reserve the Company used a discount factor of 4.8% and
actuarial longevity tables. The Company estimates that the total
accrual will be sufficient to cover its obligations under the
aforementioned agreement; however, any change in discount rate or
longevity may materially change the recorded liability in the future.
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
$29.1 million from the Government of Antigua and Barbuda; see Note 3,
of which $6.0 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
for unspecified damages 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, 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 clause contained in the liability
policy, thus affording the Company a defense of both legal actions. The
Pennsylvania Insurance Commissioner placed Reliance
68
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, the Pennsylvania Insurance Commissioner, and to the
Company's excess liability insurance carrier Zurich Insurance Company.
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 Sint 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 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
69
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
2003 and 2002 and there are no receivables from a single customer that
represent more than 10 percent of total receivables as of December 31,
2003 or 2002, other than the $6.0 million notes receivable from the
Government of Antigua and Barbuda and $3.4 million 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 $288,000. A
subsidiary, the Company's President and one of the Company's directors
are minority partners, 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 for Antigua expired
November 2003 and a renewal agreement is currently being negotiated.
The agreement for St. Thomas was renewed in 2003. This agreement and
the one for St. Croix will expire in March 2006. 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.
The Company's aggregate in the quarry in Guaynabo, Puerto Rico, will
last an additional 2-3 years. The Company is searching for new quarry
sites. If such sites cannot be secured, the Company will need to
re-evaluate the recoverability of its quarry equipment and may incur an
impairment charge.
(18) SALE OF BUSINESSES
On March 16, 2000, the Company closed on a 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.
70
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.
Item 9A CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
provide reasonable assurance that information required to be disclosed
in the reports the Company files with the SEC is recorded, processed,
summarized and reported within the time periods specified in the rules
and forms of the SEC. As of end of the period covered by this Annual
Report on Form 10-K, 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 design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rules
13a-15. 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, at the reasonable
assurance level, to ensure that information required to be included and
disclosed by the Company (including its consolidated subsidiaries) in
reports that it files under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules
and forms. There have been no significant changes in the Company's
internal controls over financial reporting or in other factors during
the year ended December 31, 2003, that have materially affected, or are
reasonably likely to materially affect, our internal controls over
financial reporting.
71
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 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.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required for this item is also 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.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required for this item is also 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.
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.
72
An index to consolidated financial statements for the year ended
December 31, 2003 appears on page 39.
(2) Financial Statement Schedule.
All 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)
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 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)
10.20 Material Purchase Agreement, dated August 17, 1995, between
Bouwbedrijf Boven Winden, N.V. and Hubert Petit, Francois Petit and
Michel Petit (9) (10.41)
73
10.21 Stock Purchase Agreement, dated August 17, 1995, between the
Registrant and Hubert Petit, Francois Petit and Michel Petit (9)
(10.42)
10.22 Form of Note between Devcon International Corp. and Donald L.
Smith, Jr. (11)(10.31)
10.23 Asset Purchase Agreement between Caricement B.V., Union Maritima
International S.A. and Devcon International Corp. and its
subsidiaries dated February 22, 2000 (12)
10.24 Stock Purchase Agreement between Caribbean Construction and
Development, Ltd., Devcon International Corp. and Caricement
Antilles N.V. dated February 22, 2000 (12)
10.25 Supply Agreement between Union Maritima International S.A.and
Devcon International Corp. dated December 29, 1999 (13)(10.36)
10.26 Second Amended and Restated Salary Continuation and Retirement
Benefit Agreement dated June 30, 2000 (14)(10.32)
10.27 Amendment No. 9 to the St. John's Agreement, dated April 28, 2000
(14)(10.33)
10.28 Antigua Delinquency Letter dated March 12, 2001 (15) (10.1)
10.29 Registrant's 1999 Stock Option Plan, as amended (16)
10.30 Operating Agreement of Devcon/Matrix Utility Resources, LLC (17)
10.31 Option agreement for Devcon to buy all of Matrix assets (17)
10.32 Stock option agreement for Matrix to buy Devcon Shares (17)
21.1 Registrant's Subsidiaries (17)
1.1 Consent of KPMG LLP (17)
31.1 Chief Executive Officer's certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002(18)
31.2 Chief Financial Officer's certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002(18)
32.1 Chief Executive Officer's certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(18)
32.2 Chief Financial Officer's 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").
(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.
74
(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
February 22, 2000.
(13) 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
(14) 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
(15) Incorporated by reference to the exhibit showing in parenthesis
and filed with the Registrant's Report on Form 10-Q dated
November 9, 2001
(16) Incorporated by reference to the exhibit showing in parenthesis
and filed with the Registrant's Report on Form 14A dated
May 2, 2003
(17) 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. (14) (10.32)
10.6 Registrant's 1999 Stock Option Plan, as amended (16)
(b) Reports on Form 8-K.
Form 8-K was filed on November 12, 2003 due to press release issued on
November 11, 2003 regarding the Company's result for the third quarter
of 2003.
75
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.
March 17, 2004 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, the
following persons on behalf of the registrant and in the capacities and on the
dates indicated have signed this report below.
March 17, 2004 DEVCON INTERNATIONAL CORP.
By:/S/ DONALD L. SMITH, JR.
Donald L. Smith, Jr.
Chairman, President and
Chief Executive Officer
March 17, 2004 By:/S/ RICHARD L. HORNSBY
Richard L. Hornsby
Executive Vice President
and Director
March 17, 2004 By:/S/ JAN A. NORELID
Jan A. Norelid
Vice President of Finance,
Chief Financial Officer
and Treasurer
March 17, 2004 By:/S/ ROBERT D. ARMSTRONG
Robert D. Armstrong
Director
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March 17, 2004 By:/S/ JOSE A. BECHARA, JR.
Jose A. Bechara, Jr.
Director
March 17, 2004 By:/S/ GUSTAVO R. BENEJAM
Gustavo R. Benejam
Director
March 17, 2004 By:/S/ JAMES R. CAST
James R. Cast
Director
March 17, 2004 By:/S/ W. DOUGLAS PITTS
W. Douglas Pitts
Director
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EXHIBIT SCHEDULE
EXHIBIT DESCRIPTION
10.30 Operating Agreement of Devcon/Matrix Utility Resources, LLC
10.31 Option agreement for Devcon to buy all of Matrix assets
10.32 Stock option agreement for Matrix to buy Devcon Shares
7.0 Registrant's Subsidiaries
1.0 Consent of KPMG LLP
31.1 Chief Executive Officer's certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer's certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer's certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Chief Financial Officer's certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
78
Exhibit 10.30
OPERATING AGREEMENT OF DEVCON/MATRIX UTILITY RESOURCES, LLC
This Operating Agreement ("Operating Agreement") is made and entered
into this 29th day of May, 2003 by and between Devcon International Corp., a
Florida corporation ("Devcon"), and Matrix Desalination, Inc., a Michigan
corporation ("Matrix") (Devcon and Matrix are sometimes hereinafter referred to
individually as a "Member" and collectively as the "Members").
ARTICLE I
INTRODUCTION
1. Formation of Limited Liability Company. The Members have formed DEVCON/MATRIX
UTILITY RESOURCES LLC (the "Company"), by filing Articles of Organization (the
"Articles") with the Florida Department of State. The Company's business shall
be conducted under the Company's name until such time as the Managing Member
designates otherwise and files amendments to the Articles in accordance with
applicable law.
This Operating Agreement is subject to, and governed by, the
Florida Limited Liability Company Act and the Articles. In the event of a direct
conflict between the provisions of this Operating Agreement and the mandatory
provisions of the Act or the provisions of the Articles, such provisions of the
Act or the Articles, as the case may be, are controlling.
2. Purpose. The Company has been formed for the purposes of:
(a) engaging in the business of operating and owning reverse osmosis, waste
water and power generation systems (the "Systems"), and utilizing the Systems to
sell water and power to third parties; and
(b) engaging in such other lawful activities permitted to limited liability
companies by the Florida Limited Liability Company Act as are incidental,
necessary and appropriate to the foregoing.
It is expected that the Company will conduct its business through wholly-owned
corporate or other entities, and that the Company will form such an entity in
each country in which Systems are to be built, operated or owned.
ARTICLE II
DEFINITIONS
As used in this Operating Agreement, the following terms shall have the
meanings hereinafter set forth, except as otherwise provided herein:
1. Accountants. The certified public accountants for the Company,
as may be selected from time to time by the Managing Member.
2. Act. The Florida Limited Liability Company Act, as it may be
amended from time to time.
79
3. Additional Contribution Percentage Interest. The percentage of additional
capital contributions (as described in Article VII, paragraph 3) that each
Member has agreed to contribute to the Company, as set forth on Attachment 3, as
such percentage may be adjusted from time to time pursuant to the terms hereof.
4. Additional Member. Any person or Entity admitted as a Member
pursuant to Article IV, paragraph 1 of this Operating Agreement.
5. Adjusted Net Income and Adjusted Net Loss. The net income or
loss of the Company during any stated period resulting from the Company's
operations, as calculated by the Company's Accountants for federal income tax
purposes.
6. Affiliate. When used with reference to a specified "Person"
(which term shall include any individual, partnership, corporation, joint
venture, trust or other entity or association) shall mean (i) any Person who,
directly or indirectly, through one or more intermediaries, controls or is
controlled by or is under common control with the specified Person, (ii) any
Person who is an officer of, partner in or trustee of, or serves in a similar
capacity with respect to, the specified Person or of which the specified Person
is an officer, partner or trustee, or with respect to which the specified
Person serves in a similarcapacity, (iii) any Person who, directly or
indirectly, is the beneficial owner of ten percent (10%) or more of any class
of equity securities of, or otherwise has a substantial beneficial interest in,
the specified Person or of which the specified Person is directly or
indirectly the owner of ten percent (10%) ormore of any class of equity
securities or in which the specified Person has a substantial beneficial
interest, or (iv) any Person who controls, or is controlled by, an Affiliate
as defined under items (ii) through (iii) above.
7. Available Cash. Cash of the Company, excluding cash proceeds
from a Terminating Capital Transaction, if any, and after provision for
payments of debt and for a reasonable working reserve for the management and
operation of the Company's business, as determined from time to time by and in
the sole discretion of the Managing Member to be available for distribution to
the Members.
8. Bankruptcy. As used in this Operating Agreement, the term
"Bankruptcy," with respect to Company or a Member, shall refer to: (i) the
appointment of a receiver, conservator, rehabilitator or similar officer for
the Company, a Member or any parent corporation of any Member, unless the
appointment of such officer shall be vacated and such officer discharged within
sixty (60) days of the appointment; (ii) the taking of possession of, or the
assumption of control over, all or any substantial part of the property of the
Company, any Member or any parent corporation of any Member by any receiver,
conservator, rehabilitator or similar officer or by the United States
government or any agency thereof, unless such property is relinquished within
sixty (60) days of the taking; (iii) the filing of a petition in bankruptcy or
the commencement of any proceeding under any present or future federal or state
law relating to bankruptcy, insolvency, debt relief or reorganization of
debtors by or against the Company, any Member or any parent corporation of any
Member, provided, if filed against the Company, any Member or the parent
corporation of any Member, such petition or proceeding is not dismissed within
sixty (60) days of the filing of the petition or the commencement of the
proceeding; (iv) the making of an assignment for the benefit of creditors or a
private composition, arrangement or adjustment with the creditors of the
Company, any Member or any parent corporation of a Member; or (v) the
commencement of any proceedings supplementary to the execution of any judgment
against the Company, any Member or any parent corporation of any Member, where
the amount of the judgment exceeds 50% of the current assets of the debtor,
unless such proceeding is dismissed within thirty (30) days of the date it was
commenced.
80
9. Business. Business shall have the meaning as set forth in Article
IV, paragraph 9 hereof.
10. Capital Accounts. Throughout the full term of the Company, each
Member shall have a separate Capital Account determined and maintained in
accordance with the provisions of Treasury Regulations Section 1.704-1(b)(2)
(iv) as promulgated from time to time under Code Section 704(b).
11. Capital Contribution. The amount of cash or the agreed fair
market value of property contributed by each Member to the capital of the
Company, as reflected in the books of the Company, and any future contributions
of capital determined pursuant to Article VII hereof.
12. Capital Transaction. An Interim Capital Transaction or a
Terminating Capital Transaction.
13. Code. The Internal Revenue Code of 1986, as amended from time to
time, or any corresponding provision or provisions of any federal internal
revenue law enacted in substitution of the Internal Revenue Code of 1986.
14. Event of Termination. Any of the events that result in
dissolution of the Company as set forth in Article XII hereof.
15. Interest or Interests. The entire ownership interest of a
Member in the Company at any particular time, including such Member's rights to
any and all distributions, allocations and other incidents of participation in
the Company to which such Member may be entitled as provided in this Operating
Agreement and under applicable law, together with the obligations of such
Member to comply with all of the terms and provisions of this Operating
Agreement and the Act, and further including its Capital Account hereunder.
16. Interim Capital Transaction. A transaction pursuant to which the
Company borrows funds or refinances existing debt, a sale, condemnation,
exchange, abandonment or other disposition of a portion (which is less than
substantially all) of the assets of the Company, an insurance recovery or any
other transaction, other than a Terminating Capital Transaction, that, in
accordance with generally accepted accounting principles, is considered capital
in nature.
17. Operating Agreement. This Operating Agreement, as originally
executed and as amended from time to time, and the terms "hereof," "hereto,"
"hereby" and "hereunder," when used with reference to this Operating Agreement,
refer to this Operating Agreement as a whole, unless the context requires
otherwise.
18. Project. Project shall have the meaning as set forth in Article
IV, paragraph 7 hereof.
19. Percentage Interest. The percentage interest of a Member in
Company, as set forth on Attachment 2, as such percentage may be adjusted from
time to time pursuant to the terms hereof.
20. Substitute Member means any person or entity who or which is
admitted to the Company as a Member pursuant to Article X, paragraph 3.
21. Terminating Capital Transaction. A sale, condemnation, exchange
or other disposition, whether by foreclosure, abandonment or otherwise, of all
or substantially all of
81
the then remaining assets of the Company or a transaction that will result in
a dissolution of the Company.
ARTICLE III
GENERAL PROVISIONS
1. Prior Agreements. The terms of this Operating Agreement, to the
extent that they are inconsistent with any other instrument governing the
affairs of the Company, including, but not limited to, any prior agreements,
letters or understandings between the Members, shall supersede such instruments
to thefullest extent permitted by law.
2. Title to Members' Interests. Each of the Members declares,
warrants and represents that, as of the date hereof, such Member owns,
possesses, controls and has good, valid and marketable title to the Interest
acquired by such Member, free and clear of all liens, claims and rights of
others, except for liens of the Members on the Interests of one another.
ARTICLE IV
MEMBERS
1. Admission of Additional Members. The Members may admit to the
Company one or more Additional Members, who will participate in the voting,
profits, losses, available cash flow and ownership of the assets of the
Company on such terms as are determined by the Members, and such Additional
Members shall be allocated gain, loss, income or expense by such method as may
be provided in this Operating Agreement, and if no method is specified, then
as may be permitted by Section 706(d) of the Code.
2. Certificates for Membership Interests. A Member's Interest in the
Company may be represented by a Certificate of Membership. The exact contents
of a Certificate of Membership are to be determined by the Members.
3. Limitation on Liability. No Member shall be liable under a
judgment, decree or order of the court, or in any other manner, for a debt,
obligation or liability of the Company, except as provided by law.
4. No Individual Authority. Unless expressly provided herein, no
Member, acting alone, has any authority to act for, or to undertake or assume,
any obligation, debt, duty or responsibility on behalf of, any other Member or
the Company.
5. No Member Responsible for Other Member's Commitment. In the event
that any Member (or any of such Member's shareholders, partners, members,
owners or Affiliates) has incurred any indebtedness or obligation prior to the
date hereof that relates to or otherwise affects the Company, neither the
Company nor any other Member shall have any liability or responsibility for or
with respect to such indebtedness or obligation unless such indebtedness or
obligation is assumed by the Company pursuant to the remaining Members'
unanimous consent. Furthermore, neither the Company nor any Member shall be
responsible or liable for any indebtedness or obligation that is hereafter
incurred by any other Member (or any of such Member's shareholders, partners,
members, owners or Affiliates). In the event that a Member (or any of such
Member's shareholders, partners, members, owners or Affiliates (collectively,
the "Liable Member")), whether prior to or after the date hereof, incurs (or
has incurred) any debt or obligation for which neither the Company nor any of
the other Members has agreed to have any responsibility or liability, the
Liable Member shall indemnify and hold the Company and the other Members
harmless from any liability, obligation, cost or expense they may incur in
respect thereof, including, but not limited to, reasonable attorneys' fees at
all stages.
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6. Overall Management Vested in Managing Member. Except as expressly
provided otherwise herein or otherwise agreed, management of the Company is
vested in the Managing Member, who shall have all management responsibility
and authority.
(a) By their execution of this Operating Agreement, the Members
appoint Devcon as the Managing Member, who shall hold this position until it is
no longer a Member or until its resignation as a Managing Member, whichever
shall first occur. Devcon shall have the right, at any time, to appoint a
successor Managing Member for itself. In the event Devcon resigns as Managing
Member without designating a successor Managing Member, the Members, by
majority vote based on their Percentage Interests, shall elect a Managing
Member.
(b) The Managing Member shall discharge its duties as the
Managing Member
(i) in good faith,
(ii) with the care an ordinarily prudent person
in a like position would exercise under similar
circumstances,
(iii) in a manner it reasonably believes to be in the best
interest of the Company.
(c) In discharging its duties, the Managing Member is entitled
to rely on information, opinions, reports or statements, including financial
statements and other financial data as prepared or presented by:
(i) one or more Members or employees of the
Company who the Managing Member reasonably believes
to be reliable and competent in the matters presented,
(ii) legal counsel, public accountants, and other persons
as to matters the Managing Member reasonably believes
are within the person's professional or expert
competence, or
(iii) a committee of Members of which it is not a member,
if the Managing Member reasonably believes the
committee merits confidence.
(d) In discharging its duties, the Managing Member may consider such
factors as it deems relevant, including the long-term prospects and interests
of the Company and its Members and the social, economic, legal or other effects
of any action on the employees, suppliers and customers of the Company.
(e) The Managing Member shall not be liable for any action taken as
Managing Member or any failure to take any action so long as it performs its
duties of the position in compliance with this paragraph 6.
(f) The Managing Member shall have full and exclusive authority to
manage the operations and affairs of the Company, and to make all decisions
regarding the business of the Company, providing such time and attention of
personnel of Managing Member as the Managing Member may from time to time deem
necessary, but otherwise may engage in other similar or dissimilar business
endeavors that do not directly compete with the business of the Company,
without being expected to account to the Company or to offer any business
83
opportunity to the Company or any Member.The Managing Member is authorized to
submit any Company claim or liability to arbitration or reference. No person,
firm or governmental body dealing with the Company shall be required to inquire
into, or obtain any other documentation as to the authority of the Managing
Member to take any such action permitted herein, and third parties shall have
the right to rely upon the Managing Member's authority to bind the Company to
deeds of conveyance or commitments without the need to make further inquiry of
the other Members. The execution by the Managing Member of any such contract,
mortgage, bill of sale, deed of conveyance or commitment shall bind the Company
to same. Without limiting the generality of the foregoing, the Managing Member
shall have the full and complete power and authority to take any and all of
the following actions on behalf of the Company:
(i) To enter into any and all financing arrangements
to provide the funds to acquire, improve,
refinance, maintain and repair the Company's
property, including without limitation, the power
to borrow money for the Company and mortgage,
encumber, pledge or grant security interests in
Company property; and to execute any and all notes,
mortgages, instruments and any modifications,
renewals or extensions thereof in connection with
such financing or refinancing, and to execute all
required security agreements with respect to Company
property and to execute any other documents which may
be required in connection with providing security for
such loans;
(ii) To lease Company property for such periods of time and
upon such terms as are deemed advisable, and to modify
or terminate any such lease and to evict tenants for
any cause;
(iii) To enter into contracts and bind the Company or its
properties and assets;
(iv) To hire superintendents, management agents and other
required personnel to carry out the business of the
Company; and
(v) To pay bills for ordinary and extraordinary expenses.
(g) The Managing Member shall perform the following under this
Operating Agreement without compensation: maintain all bank accounts and
management of cash, record all entries in the general ledger based on generally
accepted accounting principles, record sales entries in the general ledger
based on information provided by the Business, maintain fixed asset sub-ledger,
maintain accounts payable sub-ledger and process invoices for payments,
reconcile all sub-ledgers to the general ledger, prepare and sign checks,
maintain all historic accounting files for seven years, summarize accounting
information to monthly management report, prepare work papers for local tax
expert to file income and other tax returns, provide assistance to the Business
on accounting issues, provide technical support as it relates to computers and
accounting systems, prepare and file any additional official reporting that may
be needed locally for the Business. The Managing Member shall be reimbursed
for expenses incurred by it as Managing Member pursuant to this Agreement or
such agreements as shall be entered into between the Managing Member and
Company from time to time. Upon the sale or refinancing of Company property,
any accrued or unpaid fees due to the Managing Member shall be paid as a debt
of the Company.
84
(h) The Managing Member, acting on behalf of the Company, may employ
third parties or Affiliates to provide services to the Company, such as
management (other than those management services described in the prior
paragraph), repair, maintenance or brokerage services. Fees for all such
services are to be determined by the Managing Member in its sole discretion.
7. Marketing Management. Matrix shall provide the marketing and
sales efforts and management required for the promotion of the Company's
business, and shall perform those services without compensation; provided,
however, that Devcon shall, as part of its responsibilities as managing Member,
provide up to $5,000 in expenses per month for th first 12 months after the
Company's formation to support these marketing efforts, which amount shall
first be applied to invoices from the consulting firm of Poole McKinley &
Blosser. In its capacity as marketing manager, Matrix will seek opportunities
for building, operating, owning and leasing Systems (each, a "Project"), and
present such opportunities to the Company. The Company agrees to determine
whether to proceed with each Project after an appropriate written proposal is
received from Matrix, and to make such decision within a commercially
reasonable time period. The decision whether to proceed with each Project shall
be within the sole discretion of the Managing Member.
8. Contracts with Members. (a). It is expected that the business of
the Company will be conducted through wholly-owned corporate entities that are
to be formed in each country in which Systems are to be built, operated and
owned. For these purposes, the Company's wholly-owned entities will contract
with Matrix (or an Affiliate of Matrix) to build and operate each System that
has been approved as a Company Project. Matrix agrees that its proposals for
construction and operation of each System shall be priced based upon a "Gross
Margin" (as defined below) to Matrix of no more than twenty-five percent (25%).
"Gross Margin" shall mean selling price less direct labor, material cost and
manufacturing plant overhead, all to be calculated in accordance with the
contractor's prior accounting practices, consistently applied. The Managing
Member shall have the right, at Company expense, to audit Matrix' books of
account to determine conformity with the provisions of this paragraph. The
Managing Member, in its sole discretion, shall have the right to require that
Matrix execute and agree to the filing of appropriate security agreements and
UCC financing statements to provide for a security interest in inventory,
work-in-process and finished Systems adequate to cover any advances made to
Matrix under contracts for the fabrication of each System.
(b). It is possible that one or more of the Company's wholly-owned
entities may contract with Devcon (or an Affiliate of Devcon) to provide site
work or materials in connection with building Systems. Devcon agrees that its
proposals, if any, for site work or providing materials shall be priced based
upon a Gross Margin to Devcon of no more than twenty-five percent (25%). Matrix
shall have the right, at Company expense, to request an audit of Devcon's books
of account to determine conformity with the provisions of this paragraph.
(c). All other purchases by the Company or its subsidiaries of goods
or services from any Member shall be at a 5% discount from the lowest amounts
for substantially similar goods or services that have been charged by that
Member to any of its other customers during the prior six (6) months.
9. Company Opportunities. The commercial success of the Company is
dependent upon Matrix' knowledge and experience in the business of marketing,
building, owning, operating and leasing Systems (the "Business"). Accordingly,
Matrix has agreed that it shall offer all opportunities that it encounters for
owning, operating and leasing Systems first to the Company before making any
such opportunity available to any other Person (with the exception of a
current project that is known as Emerald Bay). Devcon acknowledges that Matrix
is in
85
the business of marketing and selling Systems, and that such activities
shall not be considered competitive with the Business of the Company or a
violation of any duties Matrix may have to the Company, so long as Matrix
offers all opportunities that it encounters for owning, operating and leasing
Systems first to the Company before making such opportunities available to any
other Person. Matrix acknowledges that Devcon is seeking other opportunities
outside of the Company for investing capital in the ownership of water
treatment, wastewater treatment and power generation facilities and that such
activities shall not be considered competitive with the Business of the Company
or a violation of any duties Devcon may have to the Company.
ARTICLE V
OFFICERS
1. Officers. The Members shall determine the officers of this Company, which may
consist of a Chief Executive Officer who shall be the President, one or more
Vice Presidents, a Secretary, a Treasurer, and such other officers as may be
determined from time to time by the Members. The same person may hold any two or
more offices. The officers shall be elected by the Members and shall meet such
qualifications as shall be determined by the Members.
2. Term of Office. Unless otherwise provided herein or at the time of an
officer's election, each person named as an officer of the Company shall hold
office until the meeting of the Members following or concurrent with the next
succeeding annual meeting of the Members, and until such officer's successor
shall have been elected and qualified; or until such officer's earlier
resignation, removal from office or death.
3. Removal of Officers. Any officer or agent elected or appointed by the Members
may be removed by the Members whenever, in their judgment, the best interests of
the Company would be served thereby.
4. Vacancies. Any vacancy, however occurring, in any office may be filled by
the Members.
ARTICLE VI
COMPANY DECISIONS
Unless otherwise provided herein, Company decisions shall be made by
Members representing a majority of the Percentage Interests. No decision
concerning the following matters in this Article VI shall be made unless all
Members shall unanimously approve them:
1. Articles of Organization and Operating Agreement. The adoption of new
Articles of Organization or Operating Agreement of Company, or any amendment
thereof or repeal thereof.
2. Managing Member. Any changes to the rights, powers or authority of the
Managing Member as provided in this Operating Agreement.
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ARTICLE VII
CAPITAL CONTRIBUTIONS AND LOANS
1. General. Each of the Members has agreed to contribute the initial
capital amounts as described on Attachment 1.
2. Maintenance of Capital Accounts. An individual Capital Account shall be
established and maintained on behalf of each Member, including any Additional or
Substitute Member who shall hereafter receive an Interest in the Company. The
Capital Account of each Member consists of (i) the amount of cash the Member has
contributed to the Company, plus (ii) the agreed fair market value of any
property the Member has contributed to the Company, less any liabilities assumed
by the Company or to which such property is subject, plus (iii) the amount of
profits or income (including tax-exempt income) allocated to such Member, less
(iv) the amount of losses and deductions allocated to such Member, less (v) the
amount of all cash distributed to such Member, less (vi) the fair market value
of any property distributed to such Member, net of any liability assumed by such
Member or to which such property is subject, less (vii) such Member's share of
any other expenditures which are not deductible by the Company for federal
income tax purposes or which are not allowable as additions to the basis of
Company property, and (viii) subject to such other adjustments as may be
required under the Code.
3. Additional Capital Contributions. If and when, from time to time, the
Managing Member determines that the Company is in need of additional funds
beyond those described in Article VII, paragraph 1, in order to (i) pay expenses
of the Company, (ii) acquire capital assets for and on behalf of the Company,
(iii) ensure that the Company shall not be in default of its obligations under
any agreement or instrument to which the Company is a party or (iv) provide
adequate working capital for the Company ("Shortfall Amount"), the Members shall
use their commercially reasonable best efforts to obtain institutional financing
for the Company in an amount equal to the Shortfall Amount. In the event that
institutional financing shall be unavailable in such amount and on such terms
and conditions as the Managing Member shall determine to be necessary or
appropriate, the Managing Member may require, subject to the provisions of
Article VI hereof, that the Members contribute the Shortfall Amount in the form
of additional Capital Contributions. Each of the Members shall be notified, in
writing, in accordance with Article XV hereof, of such Member's obligation to
contribute such Member's share of the Shortfall Amount ("Shortfall Notice").
Each of the Members shall be obligated to contribute an amount equal to the
Shortfall Amount multiplied by each Member's Additional Contribution Percentage
Interest, as set forth on Attachment 3, within thirty (30) days of the Shortfall
Notice.
4. Failure to Contribute. (a). If any Member (hereinafter referred to as
"Defaulting Party") shall fail to make any additional Capital Contribution it is
required to make hereunder at the time and in the manner required hereby, any
other Member (hereinafter referred to as the "Advancing Party") may advance the
same directly to the Company on behalf of the Defaulting Party. Any sums so
advanced shall bear interest until repaid, in favor of the Advancing Party (and
chargeable solely against the Interest of the Defaulting Party) at prime rate
plus 4%, but in no event less than 12%. The prime rate for such loans shall be
the amount as reported from time to time in the Wall Street Journal. The sum so
advanced and the interest thereon shall be paid to the Advancing Party in
accordance with Article VIII, paragraph 2 herein, or upon termination of the
Company subject, however, to the priority schedule established under Article XII
hereof. The Advancing Party shall have a lien on the Defaulting Party's Interest
for such amount as is equal to the sum advanced by the Advancing Party, together
with interest thereon and costs of collection thereof, including attorneys'
fees. The lien may be enforced and foreclosed in the same manner as a security
interest in favor of the Advancing Party under the Uniform
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Commercial Code of Florida, as amended from time to time. A Member who is not
the Defaulting Party, as defined herein, shall be under no obligation to make
the advance provided for herein on behalf of a Defaulting Party.
(b). In the alternative, a Member making an advance on behalf of the
Defaulting Party may, at its sole option and at any time after sixty (60) days
of Defaulting Party's default, exercise the right upon ten (10) days written
notice to have its loan treated as a Capital Contribution and to have the
Percentage Interests of the Advancing Party and the Defaulting Party adjusted to
reflect the amount of such additional advance, in accordance with the formula
set forth in Attachment 4.
(c). In the event that any payment is not made by any Member as
required hereunder, then all remedies set forth herein or under applicable law
not in conflict herewith shall be cumulative, and the exercise of one right
shall not preclude or waive the exercise of any further or future right.
5. Other Matters Relating to Capital Contributions.
(a) No interest shall be paid on any Capital Contribution.
(b) Loans by any Member to the Company shall not be considered Capital
Contributions.
(c) No Member shall have the right to withdraw its Capital Contribution or to
demand and receive property of the Company or any distribution in return for its
Capital Contribution, except with the prior written consent of the Members or as
otherwise specifically provided in this Operating Agreement.
(d) A Member shall not be liable to fund any deficit in the Member's Capital
Account at any time. Notwithstanding any other provision in this Agreement, if a
Member unexpectedly receives an adjustment, allocation or distribution described
in Treasury Regulations ss. 1.704-1(b)(2)(ii)(d)(4), ss. 1.704-1(b)(2)(ii)(d)(5)
or ss. 1.704-1(b)(2)(ii)(d)(6), and the unexpected adjustment, allocation or
distribution results in a deficit balance in the Capital Account of that Member,
the Member will be allocated items of income and gain in an amount and manner
sufficient to eliminate the deficit balance or the increase in the deficit
balance as quickly as possible. It is intended that this Section 5(d) will meet
the requirements of a "qualified income offset," as defined in Treasury
Regulations ss. 1.704-1(b)(2)(ii)(d), and this Section 5(d) is to be interpreted
and applied consistent with that intention.
ARTICLE VIII
ALLOCATIONS AND DISTRIBUTIONS
1. Allocations from Operations and Capital Transactions. The Adjusted Net Income
or Adjusted Net Loss of the Company from operations, and any income (including
gain) or losses resulting from any Capital Transactions, as calculated for
federal income tax purposes and reported by the Company on its U.S. Partnership
Return of Income for each "Accounting Year" (as hereinafter defined), or portion
thereof, during the term of this Operating Agreement, shall be allocated to the
Members pro rata in accordance with their respective Percentage Interests as
listed on Attachment 2.
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2. Distribution of Available Cash. The Available Cash of the Company shall be
distributed quarterly to the Members as follows and in the following order of
priority; provided, however, that no distribution shall be made to the extent
that following such distribution all the liabilities of the Company (other than
liabilities to the Members on account of their Capital Contributions) exceed the
assets of the Company:
(a) First, to the Members in payment of the principal amounts and accrued
interest owing to the Members in respect of any loans (including lines of
credit) made by the Members to the Company, payable in accordance with the
relative principal amount of each Member's loans or extended line of credit.
Amounts so distributed shall be applied first to accrued interest and then to
principal; and
(b) Second, to the Members, pro rata, in accordance with their respective
Percentage Interests.
3. Distribution in Cash Only. No Member, in such Member's capacity as a Member,
shall have the right to demand or receive property other than cash from the
Company for any reason whatsoever and no Member shall have the right to sue for
partition of the Company or the assets of the Company.
4. Allocation of Income and Distributions in Respect of Interests Transferred.
(a) If any Interest in the Company is transferred or is increased or decreased
by reason of the admission of a new Member or otherwise during any fiscal year
of the Company, each item of income, gain, loss, deduction or credit of the
Company for such fiscal year shall be assigned pro rata to each day in the
particular period of such fiscal year to which such item is attributable (i.e.,
the day on or during which it is accrued or otherwise incurred) and the amount
of each such item so assigned to any such day shall be allocated to the Member
based upon such Member's respective Percentage Interest in the Company at the
close of such day.
(b) Distributions of the Company's assets in respect of a Member's Interest
shall be made only to the Member who, according to the books and records of the
Company, is the holder of record of the Interest in respect of which such
distributions are made on the actual date of distribution. Notwithstanding any
provision above to the contrary, gain or loss of the Company realized in
connection with a sale or other disposition of any of the assets of the Company
shall be allocated solely to the parties owning Interests in the Company as of
the date such sale or other disposition occurs.
ARTICLE IX
MANDATORY ANNUAL DISTRIBUTIONS
Annual Distribution of Cash. Notwithstanding the provisions of Article
VIII, paragraph 2, in any fiscal year in which the Company has taxable income,
the Company shall, within 90 days after the end of the fiscal year, make a
distribution to each Member at least equal to the highest applicable federal
income tax rate for a corporation multiplied by the amount of taxable income
attributable to that Member, less the amounts of all distributions made to the
Member during the applicable fiscal year; provided, however, that such
distributions shall not be required to be made to the extent that (a) they would
violate the provisions of Florida law with respect to distributions to Members,
(b) they would render the Company insolvent, or (c) the Company does not have
sufficient cash to make the distributions.
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ARTICLE X
RESTRICTIONS ON TRANSFER
1. Transferability Restricted. No Member may voluntarily or involuntarily
(whether by operation of law or otherwise) sell, assign, transfer, devise,
encumber, pledge, give, bequeath, hypothecate, or otherwise dispose of
("Transfer") any or all of the Interest, now or hereafter legally or
beneficially owned by a Member, except to any other Member, unless such Member
has obtained the prior written consent of the other Member(s), which consent may
be withheld in the Member(s)' sole discretion and then only subject to the
conditions of Article X, Paragraph 3. Each of the initial Members acknowledges
that the restrictions contained in this paragraph are reasonable, given that
both Matrix and Devcon are providing unique services to the Company, and that a
significant inducement to each of them becoming Members in the Company is the
ability of the other Member to provide the services required of it under this
Operating Agreement.
2. Bankruptcy; Death or Involuntary Transfer by a Member. Neither the
bankruptcy, death nor involuntary transfer by a Member, nor the disability or
declaration of incompetence of a Member shall dissolve the Company, but the
rights of such Member to share in the profits and losses of the Company and to
receive distributions of funds shall, on the happening of such event, be
governed by this Article X.
3. Transfers by Members. In the event that, pursuant to the provisions of this
Operating Agreement, a Member's Interest may be transferred, the assignee of
such Member shall not become a Substitute Member unless:
(a) The assignee elects to become a Substitute Member by delivering notice
of such election to the Company;
(b) The remaining Members unanimously consent to the election; and
(c) The assignee agrees in writing to be bound by the provisions of this
Operating Agreement.
If the conditions of this Paragraph 3 are met, the assignee shall have
the right to become a Substitute Member. In such event, the Members shall
prepare (or cause to be prepared) an amendment to this Operating Agreement and
to the Articles of Organization, if necessary, to be signed and sworn to by each
of the Members (including the assigning Member) and by the assignee. Unless
named in this Operating Agreement or admitted to the Company as provided in this
Operating Agreement, no person shall be considered a Member. In the absence of
the substitution (as provided herein) of a Substitute Member for an assigning
Member, any payment to an assigning Member shall acquit the Company and the
Members of any liability to any other persons who may be interested in such
payment by reason of an assignment by such Member.
4. Additional Conditions. No transfer shall be effected by any Member unless the
Company has received from such Member (a) if deemed necessary by the other
Member(s), an opinion of counsel in form, substance and from counsel
satisfactory to counsel for the Company to the effect that (i) the proposed
transfer does not require registration under applicable federal or state
securities laws, including in each case, the rules and regulations promulgated
thereunder; and (ii) that such transfer shall not cause the Company to be
terminated for Federal income tax purposes pursuant to Code Section 708; and (b)
an amount equal to all reasonable costs and expenses (including reasonable
attorneys' fees) incurred or reasonably expected to be incurred by the Company
in connection with such transfer. Furthermore, no Member shall transfer all or
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any part of its Interest if such transfer would constitute an event of default
under any material contract to which the Company is a party or by which it is
bound or affected.
5. Bring Along Rights. If at any time or from time to time, Members representing
60% or more of the Percentage Interests in the Company propose to sell (in one
or more series of related transactions) all, but not less than all, of the
Interests owned by them to any Person or Persons (other than to one or more
Affiliates of such Members) in an arm's length, bona fide transaction, then such
selling Members may at their option give notice signed by each of them to all of
the other Members of the proposed sale, setting forth the name and address of
the prospective transferee and the proposed terms and conditions of the offer.
Delivery of such notice to such other Members shall give rise to an obligation
by the recipients of such notice to include in the sale to the proposed
transferee, on the same terms and conditions, all, but not less than all, of the
Interests owned by such other Members. In any case in which the right of Members
pursuant to this paragraph is triggered, then the provisions of Article X,
paragraph 1 shall not apply.
6. Effect of a Transfer Not in Compliance with this Article. Any purported
transfer of an Interest in violation of the provisions of this Operating
Agreement shall be, as between the parties thereto and the Company, null and
void ab initio; provided, however, that any transfer resulting from the order of
any court having jurisdiction with respect to the disposition of an Interest or
by operation of law shall be effective to vest in a third party the rights of an
assignee. An assignee that does not become a Substitute Member shall have no
rights, powers or privileges of a Member arising under this Operating Agreement,
the Articles or applicable law, including without limitation, any right to
require any information or account of the Company transactions or to inspect the
Company's books; an assignee that does not become a Substitute Member shall be
entitled only to receive the share of the profits or other compensation by way
of income, or the return of the contribution to which its assignor would
otherwise be entitled. Furthermore, no such assignee shall be entitled to
exercise any powers or give or withhold any consents or approvals required or
with respect to such Interest.
ARTICLE XI
BOOKS OF ACCOUNT, FINANCIAL STATEMENTS
AND FISCAL MATTERS
1. Books of Account. The Managing Member shall keep (or cause to be kept)
adequate books of account of the Company, wherein shall be recorded and
reflected all of the Percentage Interests and the Capital Contributions of the
Members and all of the expenses and transactions of the Company. The books of
account shall be kept at the principal office or the principal place of business
of Company, and each Member shall have, at reasonable times during normal
business hours, free access to and the right to inspect and, at such Member's
expense, copy such books of account and all records of the Company, including a
list of the names and addresses and Member Interests held by each of the
Members. All books and records of the Company shall be kept on the basis of an
annual accounting period ending on December 31 ("Accounting Year "), except for
the final accounting period, which shall end on the dissolution or termination
of the Company without reconstitution.
2. Bank Accounts. The funds of the Company shall be deposited in such bank or
banks as the Managing Member shall deem appropriate. Only the Managing Member or
its designee shall have the authority to withdraw or direct payment of such
funds.
3. Accounting Decisions. All decisions regarding accounting matters, except as
otherwise specifically set forth herein, must be made by the Managing Member.
The Managing Member may rely on the advice of the Accountants as to whether such
decisions are in accordance with accounting methods followed for federal and
state income tax purposes.
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4. Tax Returns and Reports. The Managing Member, at the Company's expense, shall
cause income tax returns and reports for the Company to be prepared and timely
filed with the appropriate authorities. The Managing Member shall also, at the
Company's expense, cause to be prepared and timely filed, with appropriate
federal and state regulatory and administrative bodies, all reports required to
be filed with such entities under then current applicable laws, rules and
regulations. Any Member shall be provided with a copy of any such report upon
request without expense.
5. Tax Status. Any provision hereof to the contrary notwithstanding, solely for
United States federal income tax purposes, the Company hereby recognizes and
agrees that it shall be subject to all provisions of Subchapter K of Chapter 1
of Subtitle A of the Code. The filing with the Internal Revenue Service of U.S.
Returns of Partnership Income shall not be construed to expand the purposes of
the Company or any obligations or liabilities of the Members.
6. Income Tax Elections. The Company may make all elections for federal and
state income tax purposes, including, but not limited to, the following:
(a) To the extent permitted by applicable law and regulations, an election to
use an accelerated depreciation method on any depreciable unit of the assets of
the Company; and
(b) In case of a transfer of all or part of the Interest of any Member, an
election, pursuant to Sections 734, 743 and 754 of the Code, as amended (or
corresponding provisions of future law) to adjust the basis of the assets of the
Company.
7. Tax Matters Partner. The Managing Member shall be the "tax matters partner"
of the Company.
ARTICLE XII
TERMINATION
1. The Company shall be dissolved, its assets shall be disposed of, and its
affairs wound up only upon the soonest to occur of any one or more of the
following events ("Event of Dissolution"):
(a) The sale of all or substantially all of the assets of the Company;
(b) The date on which Company shall suffer a Bankruptcy; or
(c) The unanimous written election by the Members to dissolve.
2. Upon the dissolution of the Company, the Managing Member shall make a final
accounting of the business and affairs of the Company and shall proceed with
reasonable promptness to liquidate the business, property and assets of the
Company and to distribute the proceeds in the following order of priority:
(a) To the payment of expenses of any sale, disposition or transfer of the
Company's assets in liquidation of the Company;
(b) To the payment of just debts and liabilities (including any accrued, but
unpaid interest) of the Company (including to any Members); provided, however,
that in the
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event that there are insufficient proceeds to pay all debts and
liabilities under this subsection 2(b), such debts and liabilities shall be paid
in the order or priority provided by law and, among claims of equal priority,
ratably to the extent funds are available;
(c) To the establishment of any reserve that the Managing Member may determine,
in its sole discretion, to be reasonably necessary and adequate for any
contingent liabilities and obligations of the Company or the Members arising out
of or in connection with the Company's business; and
(d) To the Members in accordance with their Capital Account balances, as
determined after taking into account all contributions, distributions and
allocations for all periods.
3. The Managing Member may elect to distribute the remaining property and assets
of the Company, if any, in kind, in lieu of selling them, based upon the then
existing fair market value thereof and after allocating to the Members, in
accordance with their respective Percentage Interests in the Company, any
unrealized gain inherent in such assets.
4. The wind-up of the affairs of the Company shall be conducted by the Managing
Member. In liquidating the assets of the Company, all tangible assets of a
saleable value shall be sold at such price and terms as the Managing Member
determines to be fair and equitable. Any Member may purchase such assets at such
sale. It shall not be necessary to sell any intangible assets of the Company. A
reasonable time shall be allowed for the orderly liquidation of the assets of
the Company and the discharge of liabilities to creditors to minimize the losses
that might otherwise occur upon liquidation.
ARTICLE XIII
INDEMNIFICATION
The Company shall indemnify the Managing Member, the Members, and each of
their respective officers, directors, agents, attorneys and employees (each, an
"Indemnitee") to the fullest extent now or hereafter permitted by applicable law
in the event that an Indemnitee was or is made or is threatened to be made a
party to or a witness in any threatened, pending or completed action, suit,
proceeding or appeal, whether civil, criminal, administrative or investigative,
by reason of the fact that the Indemnitee was or is the Managing Member, a
Member, an Officer or acting in some other capacity for the Company, both as to
action in his official capacity and as to action in another capacity while
holding such office or position, where he acts or acted in that capacity at the
Company's request, against all reasonable expenses (including attorneys' fees
and disbursements), judgments, fines (including excise taxes and penalties) and
amounts paid in settlement actually and reasonably incurred by the Indemnitee in
connection with such action, suit, proceeding or appeal. This covenant is
intended to cover all actions, suits, proceedings and appeals arising out of or
connected with the Indemnitee's service to the Company, even if the Indemnitee
is no longer providing such service when such action, suit, proceeding or appeal
arises or is threatened. Expenses incurred by the Indemnitee in connection with
any action, suit, proceeding or appeal, as described herein, shall be paid by
the Company in advance of the final disposition of such action, suit, proceeding
or appeal within twenty days of the Company's receipt of an appropriate
undertaking by the Indemnitee to repay such amount if it is ultimately
determined that he is not entitled to be indemnified by the Company under
applicable law.
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ARTICLE XIV
REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS
1. Representations of Devcon. Devcon is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Florida, and has
full power and authority to carry on its business as presently conducted and to
own and operate the properties and assets now owned and operated by it. The
execution and delivery of this Operating Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Devcon and all other necessary corporate action by Devcon
has been taken. This agreement has been duly and validly executed and delivered
by Devcon, constitutes the legal, valid and binding agreement of Devcon, and is
enforceable in accordance with its terms. No filing with or consent by any
governmental authority or other person is required for the valid consummation of
the transactions contemplated hereby.
2. Representations of Matrix. Matrix is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Michigan, and has
full power and authority to carry on its business as presently conducted and to
own and operate the properties and assets now owned and operated by it. The
execution and delivery of this Operating Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Matrix and all other necessary corporate action by Matrix
has been taken. This agreement has been duly and validly executed and delivered
by Matrix, constitutes the legal, valid and binding agreement of Matrix, and is
enforceable in accordance with its terms. No filing with or consent by any
governmental authority or other person is required for the valid consummation of
the transactions contemplated hereby.
3. Rights to Matrix Systems. Matrix represents and warrants to Devcon and the
Company that it owns or otherwise holds all rights necessary to make, use, sell,
offer for sale, advertise and distribute the Systems free and clear from all
claims, liens and encumbrances of third parties.
4. Publicity. The parties hereto agree to cooperate in the drafting of any press
releases or other public disclosure that relates to the Company. Neither shall
make any public disclosure relating to the Company or the other party without
the consent of such other party. Notwithstanding the foregoing, in the event
that a party hereto (the "Disclosing Party") is advised by counsel that public
disclosure relating to the Company, its operations, or the other party is
required, the Disclosing Party shall provide to the other party a copy of the
proposed disclosure in advance of its public release and shall use all
reasonable efforts to seek the comments of the other party prior to its
publication.
5. Certain Covenants. As a condition to the formation of the Company and the
execution of this Operating Agreement by Devcon, a shareholder of Matrix has
agreed to continue his personal guarantees of $2,000,000 for a line of credit
from a financial institution to Matrix, to maintain his current loan to Matrix
in the principal amount of US$350,000, and to maintain such guarantee and loan
for a minimum of two years from the date of this Operating Agreement
(collectively, the "Shareholder Covenants"). The Shareholder Covenants
constitute a material inducement to Devcon in entering into this Agreement, such
that if the Shareholder Covenants are breached, it would constitute a basis for
Devcon to withhold further performance under this Operating Agreement until such
time as arrangements are made satisfactory to Devcon, in its sole discretion, to
replace the financial benefit to Matrix of the Shareholder Covenants.
6. FCPA Compliance. The parties to this Agreement acknowledge that they are
familiar with the terms of the Foreign Corrupt Practices Act (15 U.S.C. sec.
78dd-1, et. seq.)
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("FCPA") and agree that they each shall make adequate provision for compliance
with the FCPA as it relates to the operations of the Company.
7. Other Agreements. As a condition to the formation of the Company and the
execution of this Operating Agreement by Devcon and Matrix, Devcon and Matrix
have entered into a certain Stock Option Agreement and a certain Option
Agreement, each dated the date of this Operating Agreement.
ARTICLE XV
MISCELLANEOUS
1. Notices. All notices, demands and other communications given hereunder shall
be in writing and shall be deemed to have been duly given (a) upon hand delivery
thereof, (b) upon electronic transmission (email or telefax) and written
confirmation of receipt within 24 hours after transmission, (c) upon receipt of
any overnight deliveries, or (d) on the fifth (5th) business day after mailing
United States registered or certified mail, return receipt requested, postage
prepaid, if to the Company, at the address more fully set forth above and, if to
any of the Members, at the addresses set forth as follows, or at such other
address, or to such other person and at such address for that person, as any
party shall designate in writing for such purpose in the manner hereinabove set
forth:
If to Devcon: With a copy to:
Devcon International Corporation Brian Foremny
1350 E. Newport Center Drive, Suite 201 Atkinson, Diner et al
Deerfield Beach, FL 33442 1946 Tyler Street
Attn: Jan Norelid, Chief Financial Officer Hollywood, FL 33020
Facsimile: (954) 427-2936 Facsimile: (954) 920-2711
If to Matrix: With a copy to:
Matrix Desalination, Inc. Stephen A. Schorr, P.A.
3255 S.W. 11th Ave. 625 N.E. 3rd Ave.
Fort Lauderdale, FL 33315 Fort Lauderdale, FL 33304
Attn: Whitney Irons, President Facsimile: (954) 667-0899
Facsimile: (954) 524-5216
2. Entire Agreement. This Operating Agreement, together with the Articles, sets
forth all the promises, covenants, agreements, conditions and understandings
between the parties hereto, and supersedes all prior agreements, understandings,
inducements or conditions expressed or implied, oral or written.
3. Binding Effect: No Assignment. This Operating Agreement shall be binding upon
the parties hereto, their heirs, administrators, successors and permitted
assigns. Except as provided herein, no party may assign or transfer its
interests herein, or delegate its duties hereunder, without the written consent
of the other party.
4. Amendments. All amendments to this Operating Agreement must be in writing
and signed by all the Members.
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5. No Waiver. No waiver of any provision of this Operating Agreement shall be
effective unless it is in writing and signed by the party against whom it is
asserted, and any such written waiver shall only be applicable to the specific
instance to which it relates and shall not be deemed to be a continuing or
future waiver.
6. Gender and Use of Singular and Plural. All pronouns shall be deemed to refer
to the masculine, feminine, neuter, singular or plural, as the identity of the
party or parties, or their personal representatives, successors and assigns may
require.
7. Counterparts. This Operating Agreement and any amendments may be executed in
one or more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
8. Headings. The article and section headings contained in this Operating
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of the Agreement.
9. Governing Law. This Operating Agreement shall be construed in accordance with
the laws of the State of Florida and venue for any proceeding arising between
the parties in any manner pertaining or related to this Operating Agreement
shall, to the extent permitted by law, be in Broward County, Florida.
10. Further Assurances. The parties hereto will execute and deliver such further
instruments and do such further acts and things as may be reasonably required to
carry out the intent and purposes of this Operating Agreement.
11. Provisions Severable. This Operating Agreement is intended to be performed
in accordance with, and only to the extent permitted by, all applicable laws,
ordinances, rules and regulations of the jurisdiction in which the parties do
business. If any provision of this Operating Agreement, or the application
thereof to any person or circumstance, shall, for any reason or to any extent,
be invalid or unenforceable, the remainder of this Operating Agreement and the
application of such provision to other persons or circumstances shall not be
affected thereby, but rather shall be enforced to the greatest extent permitted
by law.
12. Arbitration. Any controversy or claim related to or arising out of this
Agreement shall be settled by binding arbitration to take place in Broward
County, Florida, conducted under the Commercial Arbitration Rules of the
American Arbitration Association. In any arbitration proceeding, the Florida
Rules of Evidence shall apply. The arbitrator's decision shall be in writing and
shall present findings of fact and conclusions of law, in accordance with
appropriate Florida judicial or statutory precedents. Judgment on the
arbitrator's award may be entered and enforced in any court of competent
jurisdiction. Neither party will be precluded from seeking provisional remedies
in the courts including, but not limited to, temporary restraining orders and
preliminary injunctions, to protect its rights and interests, but such relief
will not be sought as a means to avoid or stay arbitration. This paragraph
provides the sole recourse for the settlement of any dispute arising under or in
connection with this Agreement. In any arbitration between the parties, the
prevailing party shall be entitled to reasonable attorneys' fees and all costs
of proceedings incurred in enforcing this Agreement in addition to any other
amount of recovery ordered in such arbitration.
13. Remedies. Each party hereto recognizes and agrees that the violation of any
term, provision or condition of this Operating Agreement may cause irreparable
damage to the other parties which may be difficult to ascertain, and that the
award of any sum of damages may not be adequate relief to such parties. Each
party, therefore, agrees that, in addition to other remedies
96
available in the event of a breach of this Operating Agreement, any other party
shall have a right to equitable relief including, but not limited to, the
remedy of specific performance.
14. No Third Party Rights. Unless otherwise expressly stated herein, the
provisions of this Operating Agreement are for the exclusive benefit of the
parties hereto, and no other person, including creditors of any party hereto,
shall have any right or claim against any party by reason of this Operating
Agreement or be entitled to enforce any provision herein against any party
hereto.
15. Subsequent Members. Any person who becomes a Member of the Company after the
execution of this Operating Agreement shall be deemed a party to, and shall be
bound by the terms of, this Operating Agreement.
16. Facsimile Signatures. A facsimile signature to this Operating Agreement
shall be deemed, for all purposes, an original and shall have the same effect as
an original signature.
IN WITNESS WHEREOF, each Member whose signature appears below has
executed, acknowledged, and caused this Operating Agreement to be delivered as
of the day and year first above written.
DEVCON INTERNATIONAL CORP. MATRIX DESALINATION, INC.
By: /s/ Donald L. Smith, Jr. By:_/s/ Whitney Irons
--------------------------------- -----------------------
The undersigned, a shareholder of MATRIX DESALINATION, INC., is executing this
Agreement as of the day and year first above written for the limited purposes of
agreeing to be bound by the provisions of Article XIV, Paragraph 5 of this
Agreement.
_/s/ Edward A. Fuller_
- ---------------------
Edward A. Fuller
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ATTACHMENT 1
TO OPERATING AGREEMENT OF
DEVCON/MATRIX UTILITY RESOURCES LLC
FUNDING COMMITMENTS
Devcon has agreed to make available up to US$2,400,000, to the Company, as
follows: $600,000 in the form of a capital contribution ("Devcon Contribution"),
and $1,800,000 in the form of a loan ("Devcon Loan") (collectively, the "Devcon
Initial Commitment"). The Company may draw down the Devcon Initial Commitment as
funds are needed for Company operations. Funds drawn on the Devcon Initial
Commitment shall be applied pro rata to the Contribution and to the Loan (that
is, each dollar drawn upon shall be considered $0.25 in Contribution and $0.75
in Loan). The Devcon Loan shall be represented by one or more promissory notes
of the Company, bearing interest at prime rate plus 2%, but in no event less
than 10%. The prime rate for the Loan shall be the amount as reported from time
to time in the Wall Street Journal. Interest on the Devcon Loan shall be payable
monthly. Principal on the Devcon Loan shall be payable quarterly from Available
Cash, but shall not be paid in any tax year if such payments of principal would
prevent the Mandatory Distribution for that tax year to Matrix, as required
under Article IX of this Operating Agreement.
If the Devcon Initial Commitment has been used in full and additional funds are
required for Company operations, Devcon agrees that it shall provide appropriate
guarantees to assist the Company in securing up to an additional US$2,400,000
from one or more financial institutions, on terms and conditions acceptable to
Devcon, in its sole discretion. Devcon shall use its commercially reasonable
best efforts in attempting to obtain such institutional financing, but shall not
be required to provide collateral as security for the financings. Devcon's
inability to secure such additional financing shall not be considered a default
of Devcon's obligations under this Operating Agreement. The Company shall pay
Devcon annually a guarantee fee of 2% of the gross amount of any loans
guaranteed.
If the funds described above in this Attachment 1 have been used in full and
additional funds are required for Company operations, Devcon and Matrix have
agreed, pursuant to Article VII., paragraph 3, of the Operating Agreement, that
they shall provide such additional funds in the percentages described in
Attachment 3 to this Operating Agreement. The terms of the Operating Agreement
shall control in determining whether such additional funds shall be provided in
the form of Member capital contributions, Member loans or Member guarantees of
loans from financial institutions.
98
ATTACHMENT 2
TO OPERATING AGREEMENT OF
DEVCON/MATRIX UTILITY RESOURCES LLC
PERCENTAGE INTERESTS
Member Percentage
Devcon International Corporation 80%
Matrix Desalination, Inc. 20%
----
Total 100%
99
ATTACHMENT 3
TO OPERATING AGREEMENT OF
DEVCON/MATRIX UTILITY RESOURCES LLC
ADDITIONAL CONTRIBUTION PERCENTAGE INTERESTS
Member Percentage
Devcon International Corporation 90%
Matrix Desalination, Inc. 10%
----
Total 100%
100
ATTACHMENT 4
TO OPERATING AGREEMENT OF
DEVCON/MATRIX UTILITY RESOURCES LLC
ADJUSTMENT OF DEFAULTING PARTY'S INTEREST
Terms used with initial capitals in this Attachment to the Operating Agreement
for DEVCON/MATRIX UTILITY RESOURCES LLC ("Operating Agreement") that are not
defined in this Attachment shall have the meanings as defined in the Operating
Agreement. In accordance with Article VII, paragraph 4(b) of the Operating
Agreement, the Percentage Interests of the Advancing Party and the Defaulting
Party shall be adjusted to reflect the amount of additional advances as follows:
the Percentage Interest of the Defaulting Party shall be automatically decreased
to a revised Percentage Interest ("Revised Percentage Interest") derived as
follows:
Assuming that Matrix is the Defaulting Party, then the first time this
calculation is made, the following formula shall be used ("First Adjustment"):
Matrix' Revised Percentage Interest
= [(20%) x (CA) + 10% x(Contrib) + (MContrib)] x 100%
---------------------------------------------------
(CA) + (Contrib)
Where:
o (CA) equals the total of the Capital Accounts of the Members as of
the close of business on the day before the additional advance
that requires the calculation set forth in this Attachment
("Advance").
o (Contrib) equals the total of the Capital Contributions being made by all the
Members that comprise the Advance. o (MContrib) equals the Capital Contribution
being made by Matrix as part of the Advance.
For any adjustments after the First Adjustment, the following formula shall be
used:
Matrix' Revised Percentage Interest
= [(Y%) x (CA) + (Z%) x (Contrib) + (MContrib)] x 100%
--------------------------------------------------
(CA) + (Contrib)
Where:
o (CA), (Contrib) and (MContrib) are as defined above.
o (Y%) equals the Revised Percentage Interest of Matrix as most recently
previously adjusted.
o (Z%) equals (Y%) minus 10%.
The Revised Percentage Interest, calculated as described above, shall be
considered as Matrix' Percentage Interest for all purposes of the Operating
Agreement from the date Devcon gives its (10) days' written notice to have its
loan treated as a Capital Contribution, as referred to in Article VII, paragraph
4(b) of the Operating Agreement. At the same time, Devcon's Percentage Interest
shall be increased to 100% minus Matrix' Revised Percentage Interest.
Notwithstanding the foregoing, Matrix' Percentage Interest shall not be
decreased below 10%.
101
In the event that one or more calculations are made in accordance with the
provisions of this ATTACHMENT 4 with the effect that Matrix' Percentage Interest
is reduced below 20%, and if subsequently one ore more additional advances are
made as Capital Contributions in accordance with Article VII, paragraph 4(b) of
the Operating Agreement, then upon each such subsequent Capital Contribution,
Matrix shall have the right to make an additional advance toward the Capital
Contribution in excess of the amount required of Matrix by the formulas set
forth above in this ATTACHMENT 4, for the purpose of earning back its Percentage
Interest (but not to an amount in excess of 20%) (the "Buy-back"). The
calculation of Matrix' Percentage Interest in the case of a Buy-back shall be
based on the formulas set forth above, applied in accordance with the agreement
of the Members.
102
Exhibit 10.31
OPTION AGREEMENT
ASSET PURCHASE
This Agreement ("Option Agreement") is made and entered into this 29th
day of May, 2003 by and between Devcon International Corp., a Florida
corporation ("Optionee"), and Matrix Desalination, Inc., a Michigan corporation
("Company").
W I T N E S E T H:
WHEREAS, Company is in the business of designing, building and
operating reverse osmosis, waste water and power generation systems (the
"Systems");
WHEREAS, Company and Optionee have formed a Florida Limited Liability
Company to engage in the business of building, operating and owning Systems, and
leasing the Systems to third parties;
WHEREAS, Company wishes to grant the Optionee an option to purchase all
of its business assets on the terms and conditions set forth in this Option
Agreement ("Option") and in the Asset Purchase Agreement that is attached to
this Option Agreement as Exhibit "A" ("Asset Purchase Agreement");
WHEREAS, Optionee wishes to receive the Option, in accordance with the
price and terms contained below;
WHEREAS, Company and Optionee acknowledge that during the term of this
Option Agreement, it is possible that a third party might make an offer to buy
the Company, and that in such event the parties wish to provide for the right of
Optionee to purchase the Company on substantially the same terms and conditions
as the third party offer; and
WHEREAS, Company and Optionee have entered into an additional option
agreement dated the same date as this Option Agreement under which Optionee has
agreed to provide Company with an option to acquire certain shares of Company
Common Stock (the "Additional Option").
NOW, THEREFORE, for and in consideration of the following mutual
covenants and conditions, and other good and valuable consideration, the parties
agree as follows:
1. Recitals. The foregoing recitals are true and correct and are
incorporated herein by reference.
2. Option. Company hereby grants Optionee the option to purchase all the assets
of the Company ("Assets"), as such assets are more fully described in the Asset
Purchase Agreement.
103
3. Term of Option. The Option shall become exercisable on the third anniversary
of the date of this Option Agreement, and shall expire on the fifth anniversary
of the date of this Agreement (that is, on May 29, 2008) ("Option Term").
4. Exercise of Option. Optionee may exercise the Option, by giving written
notice to Company ("Notice of Exercise") in accordance with the provisions for
notice set forth below in this Option Agreement.
5. Purchase Price.
(a) Calculation. The purchase price ("Purchase Price") for the Assets
shall be the greater of: (i) an amount payable in US dollars, calculated by
multiplying 5.5 times the "Averaged EBITDA" (as defined below); and (ii) the
total liabilities of the Company as stated on the face of the most recent
balance sheet included in the "Financial Statements" (as defined below).
(b) Certain Definitions. As used in this Option Agreement, the
following terms shall have the meanings hereinafter set forth, except as
otherwise provided herein:
i. "Averaged EBITDA" shall mean the quotient derived by dividing the sum
of the EBITDA for all of the Relevant Periods, by the Number of
Relevant Accounting Periods.
ii. "Closing Date" shall have the meaning as defined in Section 6 of this
Agreement.
iii. "Company's Financial Statements" shall mean, as to full fiscal years,
the audited financial statements of the Company certified by the
Company's independent public accountants, and as to periods subsequent
to a full fiscal year, the balance sheets, statements of income,
changes in stockholders' equity and cash flows of the Company , all
prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods covered
thereby.
iv. "EBITDA" shall mean the Company's earnings before interest, taxes,
depreciation and amortization, as such amount is determined from the
Company's Financial Statements for the Relevant Periods.
v. "Fiscal Year" means a fiscal year of the Company, which begins on each
January 1st and ends on each December 31st.
vi. "Applicable Fiscal Years" shall mean those fiscal years of the Company
that begin after December 31, 2002 and end on or before the Notice
Date.
vii. "Notice Date" shall mean the date on which the Notice of Exercise is
given.
viii. "Number of Relevant Accounting Periods" shall mean a sum derived by
adding the following: (.1) for each Applicable Fiscal Year, the number
1; and (.2) for a Partial Fiscal
104
year, a decimal derived by dividing the number of full calendar months
in the Partial Fiscal Year by the number 12.
ix. A "Partial Fiscal Year" means the incomplete Fiscal Year (if any) that
occurs during the Relevant Period (for purposes of illustration, a
Partial fiscal Year will occur if the Notice Date occurs at anytime
other than during the month of January).
x. "Relevant Period" shall mean the time period that begins on January 1,
2003 and ends on the last day of the month before the Notice Date.
6. Closing. The closing for the purchase of the Assets shall occur at a
time and place agreed to by the parties, but in the absence of
agreement, it shall occur at the headquarters offices of the Optionee
on the fortieth (40) business day after the Notice Date ("Closing
Date"). This forty business day period shall serve as a period during
which Optionee shall be given the opportunity to perform a due
diligence investigation on Company and the Assets being transferred.
During this period, Company shall permit (and shall cause each of its
Subsidiaries to permit) representatives of Optionee to have full access
to all premises, properties, personnel, books, records (including tax
records), contracts, and documents of or pertaining to each of Company
and its Subsidiaries and shall furnish Optionee with copies of such
documents and instruments and with such information with respect to the
affairs of Company as Optionee may from time-to-time request. No
investigation by Optionee shall affect in any manner the
representations and warranties made by Company or Company's
stockholders in this Option Agreement or the related Asset Purchase
Agreement, nor any other certificate or agreement furnished or to be
furnished by Company to Optionee or its representatives in connection
herewith or pursuant hereto, and the right of Optionee to rely on them.
Company shall use its best efforts to keep Optionee fully informed as
to the affairs of Company and advise Optionee of all important matters
pertaining to Company prior to Closing. Upon completion of this due
diligence review, Optionee shall determine, in its sole discretion,
whether it wishes to proceed with the closing for the purchase of the
Assets (the due diligence review and the right of the Optionee to
determine whether to close after such review are sometimes referred to
herein as the "Due Diligence Review"). If Optionee elects not to close
on the purchase of the Assets because of circumstances discovered in
the Due Diligence Process, and such circumstances are capable of being
cured, the Optionee may elect, in its sole discretion, to extend the
Closing Date to a date that is not more than 24 months from the
originally scheduled Closing Date, to give the parties an opportunity
to cure. At the closing, the Purchase Price shall be paid via wire
transfer or delivery of other immediately available US funds.
7. Right of First Refusal
(a) If the Company or its shareholders (collectively, the "Offerees")
receive a "Bona Fide Offer" (as defined below) to engage in a
reorganization, merger, consolidation, share exchange, sale of Company
stock, or sale or other disposition of all or substantially all of the
assets of the Company with the effect that the Company or its assets
would be owned or controlled by a third party other than the Company's
current shareholders (each, a "Business Transaction"), and any of the
Offerees desires to proceed with the proposed Business Transaction,
such Offerees ("Transferors") shall first offer such Business
Transaction to the Optionee by delivery of a written
105
offer (the "Offer") to the Optionee, which Offer shall set forth (i) a
copy of the Bona Fide Offer, (ii) the name and address of each bona
fide prospective purchaser (the "Transferee"), including in the case
of any Transferee who is not an individual, the names and addresses of
the individuals directly or indirectly controlling such Transferee, and
(iii) any and all other material terms (the "Terms") of the proposed
Transfer, including without limitation, the purchase price offered by
each Transferee and the manner in which such purchase price shall be
paid. The Offer shall be irrevocable until the expiration of the Offer
in accordance with this Section 7.
(b) Within thirty (30) business days after the receipt of the Offer by the
Optionee ("Offer Date"), the Optionee may elect either to engage in the
Business Transaction with the Transferors in place of the Transferee,
or exercise the Option to purchase the Company's Assets as set forth
above in this Option Agreement. Optionee may exercise this election by
giving written notice to the Transferors in accordance with the
provisions for notice set forth below in this Option Agreement. If the
Optionee elects to engage in the Business Transaction, then the Closing
of the Business Transaction shall take place on substantially the same
terms and conditions as set forth in the Bona Fide Offer, and the
closing shall occur at a time and place agreed to by the parties, but
in the absence of agreement, it shall occur at the headquarters offices
of the Optionee on the fortieth (40) business day after the Optionee
gives written notice to the Transferors of its election to engage in
the Business Transaction. The closing shall be subject to a "Due
Diligence Review" (as defined above) by Optionee. If the Optionee
elects to exercise the Option to purchase the Company's Assets as set
forth above in this Option Agreement, then the terms and conditions of
the Option shall apply.
(e) Should any Bona Fide Offer contain terms for consideration to be paid
to Transferors other than cash, cash equivalents or promissory notes of
the proposed purchaser, then the cash value of such Offer's terms shall
be determined in good faith by the parties, subject to binding
arbitration provided for elsewhere in this Option Agreement.
(g) If within thirty (30) business days after the Offer Date "(Offer
Period"), the Optionee does not elect either to engage in the Business
Transaction with the Transferors in place of the Transferee, or
exercise the Option to purchase the Company's Assets as set forth above
in this Option Agreement, then the Transferors may engage in the
Business Transaction with the Transferee upon the precise terms and
conditions set forth in the Bona Fide Offer; provided, however, that if
the Transferors fail to consummate any such Transfer within sixty (60)
days after the expiration of the Offer Period, the right of the
Transferors to close on the Business Transaction without first offering
the Business Transaction to the Optionee shall cease, and the Company,
its stock and its assets shall again become subject to all of the
restrictions of this Option Agreement. If, in the course of the
negotiations with a prospective Transferee, terms are agreed upon which
are more favorable to the prospective Transferee than the terms
described in the Offer ("Revised Terms"), the Transferor shall not
close on the Business Transaction without first submitting another
Offer to the Optionee which shall set forth such new terms, and the
Optionee shall have the right to accept such new Offer in accordance
with this Section 7; provided, however, that if the Revised Terms
constitute a change in the purchase price for the Business Transaction
of less than five percent (5%) of the purchase price that was offered
to the Optionee, then the Transferors may close on the Business
Transaction without first submitting the new terms to the Optionee.
106
(h) The restrictions set forth in this Section 7 shall apply separately to
each and every Business Transaction, and no election by the Optionee
not to engage in a Business Transaction on any one occasion or
occasions, nor any waiver or failure to elect to purchase on such
occasion, shall be deemed to be a waiver generally, or otherwise alter
or affect in any way the obligations of the Company and its
shareholders, with respect to any other proposed Business Transaction.
(i) "Bona Fide Written Offer" shall mean a written offer to engage in a
Business Transaction, which written offer: (.1) states that not less
than ten (10%) percent of the offered purchase price contained in the
written offer (the "Down Payment") has been placed in escrow with an
attorney licensed to practice in the United States, who has agreed to
serve as escrow agent and whose name is set forth in the written offer;
(.2) provides evidence that the Down Payment has been paid to the
escrow agent prior to the date of the written offer; (.3) identifies
all the prospective purchasers under the written offer and represents
and warrants that none of them are "Affiliates" (as defined below) of
the Transferees.
(j) "Person" shall mean any individual, partnership, corporation, joint
venture, trust or other entity or association.
(k) "Affiliate" shall mean (i) any Person who, directly or indirectly,
through one or more intermediaries, controls or is controlled by or is
under common control with the specified Person, (ii) any Person who is
an officer of, partner in or trustee of, or serves in a similar
capacity with respect to, the specified Person or of which the
specified Person is an officer, partner or trustee, or with respect to
which the specified Person serves in a similar capacity, (iii) any
Person who, directly or indirectly, is the beneficial owner of ten
percent (10%) or more of any class of equity securities of, or
otherwise has a substantial beneficial interest in, the specified
Person or of which the specified Person is directly or indirectly the
owner of ten percent (10%) or more of any class of equity securities or
in which the specified Person has a substantial beneficial interest, or
(iv) any Person who controls, or is controlled by, an Affiliate as
defined under items (ii) through (iii) above.
8. Financial Statements. Beginning on the third anniversary of this Option
Agreement and continuing for so long as this Option Agreement remains
in effect, the Company shall deliver to Optionee: (a) within 90 days
after the end of each fiscal year of the Company, audited Financial
Statements for such fiscal year; and (b) within 45 days after the close
of each of the first three calendar quarters in each year, a copy of
the unaudited Financial Statements for such calendar quarter.
9. Notices. All notices, demands and other communications given hereunder
shall be in writing and shall be deemed to have been duly given (a)
upon hand delivery thereof, (b) upon electronic transmission (email or
telefax) and written confirmation of receipt within 24 hours after
transmission, (c) upon receipt of any overnight deliveries, or (d) on
the fifth (5th) business day after mailing United States registered or
certified mail, return receipt requested, postage prepaid, if to the
Company, at the address more fully set forth above and, if to any of
the Members, at the addresses set forth as follows, or at such other
address, or to such other person and at such address for that person,
as any party shall designate in writing for such purpose in the manner
hereinabove set forth:
107
If to Optionee: With a copy to:
Devcon International Corporation Brian Foremny
1350 E. Newport Center Drive, Suite 201 Atkinson, Diner et al
Deerfield Beach, FL 33442 1946 Tyler Street
Attn: Jan Norelid, Chief Financial Officer Hollywood, FL 33020
Facsimile: (954) 427-2936 Facsimile: (954) 920-2711
If to Company: With a copy to:
Matrix Desalination, Inc. Stephen A. Schorr, P.A.
3255 S.W. 11th Ave. 625 N.E. 3rd Ave.
Fort Lauderdale, FL 33315 Fort Lauderdale, FL 33304
Attn: Whitney Irons, President Facsimile: (954) 667-0899
Facsimile: (954) 524-5216
10. Entire Agreement. This Option Agreement sets forth all the promises,
covenants, agreements, conditions and understandings between the parties hereto,
and supersedes all prior agreements, understandings, inducements or conditions
expressed or implied, oral or written.
11. Binding Effect: No Assignment. This Option Agreement shall be binding upon
the parties hereto, their heirs, administrators, successors and permitted
assigns. Optionee shall have the unrestricted right to assign its rights, powers
and privileges under this Option Agreement to any related or unrelated third
party. Except as provided herein, no party may assign or transfer its interests
herein, or delegate its duties hereunder, without the written consent of the
other party.
12. Amendments. All amendments to this Option Agreement must be in writing and
signed by all parties.
13. No Waiver. No waiver of any provision of this Option Agreement shall be
effective unless it is in writing and signed by the party against whom it is
asserted, and any such written waiver shall only be applicable to the specific
instance to which it relates and shall not be deemed to be a continuing or
future waiver.
14. Gender and Use of Singular and Plural. All pronouns shall be deemed to refer
to the masculine, feminine, neuter, singular or plural, as the identity of the
party or parties, or their personal representatives, successors and assigns may
require.
15. Counterparts. This Option Agreement and any amendments may be executed in
one or more counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument.
16. Headings. The article and section headings contained in this Option
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of the Agreement.
17. Governing Law. This Option Agreement shall be construed in accordance with
the laws of the State of Florida and venue for any proceeding arising between
the parties in any
108
manner pertaining or related to this Option Agreement shall, to the extent
permitted by law, be in Broward County, Florida.
18. Further Assurances. The parties hereto will execute and deliver such further
instruments and do such further acts and things as may be reasonably required to
carry out the intent and purposes of this Option Agreement.
19. Provisions Severable. This Option Agreement is intended to be performed in
accordance with, and only to the extent permitted by, all applicable laws,
ordinances, rules and regulations of the jurisdiction in which the parties do
business. If any provision of this Option Agreement, or the application thereof
to any person or circumstance, shall, for any reason or to any extent, be
invalid or unenforceable, the remainder of this Option Agreement and the
application of such provision to other persons or circumstances shall not be
affected thereby, but rather shall be enforced to the greatest extent permitted
by law.
20. Arbitration. Any controversy or claim related to or arising out of this
Agreement shall be settled by binding arbitration to take place in Broward
County, Florida, conducted under the Commercial Arbitration Rules of the
American Arbitration Association. In any arbitration proceeding, the Florida
Rules of Evidence shall apply. The arbitrator's decision shall be in writing and
shall present findings of fact and conclusions of law, in accordance with
appropriate Florida judicial or statutory precedents. Judgment on the
arbitrator's award may be entered and enforced in any court of competent
jurisdiction. Neither party will be precluded from seeking provisional remedies
in the courts including, but not limited to, temporary restraining orders and
preliminary injunctions, to protect its rights and interests, but such relief
will not be sought as a means to avoid or stay arbitration. This paragraph
provides the sole recourse for the settlement of any dispute arising under or in
connection with this Agreement. In any arbitration between the parties, the
prevailing party shall be entitled to reasonable attorneys' fees and all costs
of proceedings incurred in enforcing this Agreement in addition to any other
amount of recovery ordered in such arbitration.
21. Remedies. Each party hereto recognizes and agrees that the violation of any
term, provision or condition of this Option Agreement may cause irreparable
damage to the other parties which may be difficult to ascertain, and that the
award of any sum of damages may not be adequate relief to such parties. Each
party, therefore, agrees that, in addition to other remedies available in the
event of a breach of this Option Agreement, any other party shall have a right
to equitable relief including, but not limited to, the remedy of specific
performance.
22. No Third Party Rights. Unless otherwise expressly stated herein, the
provisions of this Option Agreement are for the exclusive benefit of the parties
hereto, and no other person, including creditors of any party hereto, shall have
any right or claim against any party by reason of this Option Agreement or be
entitled to enforce any provision herein against any party hereto.
23. Facsimile Signatures. A facsimile signature to this Option Agreement shall
be deemed, for all purposes, an original and shall have the same effect as an
original signature.
IN WITNESS WHEREOF, each of the parties has executed, acknowledged, and
caused this Option Agreement to be delivered as of the day and year first above
written.
DEVCON INTERNATIONAL CORP. MATRIX DESALINATION, INC.
By: _/s/Donald L. Smith, Jr. By: _/s/ Whitney Irons
------------------------- -------------------------
109
The undersigned, constituting all of the shareholders of MATRIX DESALINATION,
INC., are executing this Option Agreement as of the day and year first above
written for the limited purposes of agreeing to be bound by the provisions of
Section 7 of this Option Agreement.
/s/ Edward A. Fuller
- -----------------------
Edward A. Fuller
_/s/ Whitney Irons
- -----------------------
Whitney Irons
110
Exhibit "A"
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered
into as of ______________, 200_, by and among and Matrix Desalination, Inc.,
a Michigan corporation ("Seller") and Devcon International Corp., a Florida
corporation ("Buyer").
RECITALS:
WHEREAS, Seller is in the business (the "Business") of designing,
building and operating reverse osmosis, waste water and power generation systems
(the "Systems");
WHEREAS, Seller desires to sell and Buyer desires to purchase all of
Seller's assets and Seller's good will associated with the Business, as more
fully described below, and
WHEREAS, Seller has the requisite power and authority to consummate the
transactions contemplated herein.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants, agreements and recitals contained herein, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Incorporation of Recitals. The foregoing recitals are hereby incorporated
by reference and made a part of this Agreement.
2. Transfer of Assets; Assumption of Liabilities.
2.1 Purchased Assets.
(a) Pursuant to the provisions set forth in this Agreement, Seller shall cause
to be sold, conveyed, transferred, assigned, and delivered to Buyer, and
Buyer shall purchase and acquire, all the tangible and intangible assets of
Seller and the goodwill of the Business as defined on Schedule 2.1 hereto
(collectively, the "Assets").
(b) At the "Closing" (as defined below"), all the Assets shall be transferred
to Buyer free and clear of any and all liens, encumbrances, mortgages,
security interests, pledges, claims, equities and restrictions or charges
of any kind or nature whatsoever (collectively, "Liens").
2.2 Excluded Assets. It is specifically understood and agreed to
by the parties hereto that Buyer is not purchasing Seller's existence as a
corporation, minute books or stock books.
2.3 Method of Conveyance. The sale, transfer, conveyance,
assignment and delivery of the Assets to Buyer in accordance with Section 2.1
hereof shall be effected on the "Closing Date" (as defined herein) by the
Seller's execution and delivery to Buyer of a Bill of Sale.
111
2.4 Assumed Liabilities. Buyer shall not assume any of the
"Liabilities" (as defined below) of the Seller or the Business of any nature
whatsoever, and the Assets shall be subject to no obligations or liabilities;
provided, however, that Buyer, in its sole discretion, may determine to assume
certain of Sellers leases for real or personal property. In any event, (a)
Seller shall pay and satisfy all liabilities relating to the Business and the
Assets, including without limitation all accounts payable, and (b) on or prior
to Closing Seller shall pay any outstanding balance owed by Seller to any
equipment financer or secured party, and at Closing Seller shall furnish Buyer
with appropriate evidence of satisfaction of such indebtedness and the
termination of all security interests related thereto, in each case in form and
substance satisfactory to Buyer. For the purposes of this agreement, "Liability"
means any liability whether known or unknown, asserted or unasserted, absolute
or contingent, accrued or unaccrued, liquidated or unliquidated and due or to
become due.
3. Purchase Price.
3.1 Payment of the Purchase Price. The Purchase Price (the
"Purchase Price") for the Assets purchased by Buyer hereunder shall be
US$[insert amount determined an accordance with the Option Asset Agreement to
which this Agreement is an Exhibit], which shall be paid to the Seller via wire
transfer or delivery of other immediately available US funds.
4. Closing.
4.1 Closing Date. Subject to the terms and conditions set forth in
this Agreement, the closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Buyer located at
_______________________ on ______________ [insert date determined an accordance
with the Option Asset Agreement to which this Agreement is an Exhibit], or such
other date as shall be mutually agreed upon in writing by the parties hereto.
The date on which the Closing shall occur is referred to herein as the "Closing
Date."
5. Representations and Warranties of Seller. As a material inducement to
Buyer to enter into this Agreement and consummate the transactions contemplated
hereby, Seller, Whitney Irons and Edward A. Fuller hereby jointly and severally
represent and warrant to Buyer as of the Date hereof and as of the Closing Date
as follows:
5.1 Power and Authority. Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Michigan, and has full power and authority to carry on its business as
presently conducted and to own and operate the properties and assets now owned
and operated by it. Seller has the power, legal capacity and authority to
execute and deliver this Agreement and the other agreements and instruments for
which provision is made herein to be executed and delivered by the Seller and to
perform its obligations under this Agreement and such other agreements and
instruments to which it is a party. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by Seller, the Board of Directors of Seller and the
shareholders of Seller, and all other necessary corporate action by Seller has
been taken. This Agreement and such other agreements and instruments constitute
valid and binding obligations of Seller
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enforceable against Seller in accordance with their respective terms. All
action on the part of Seller or any other party necessary for the authorization,
execution, delivery and performance by Seller of this Agreement will be
performed on or prior to the Closing Date including, without limitation, the
obtaining of all approvals and consents required for a valid and effective
transfer of the Assets.
5.2 Title to Assets; No Warranty of Fitness. The Seller has good,
marketable and unencumbered title to all of the Assets, free and clear of all
mortgages, security interests, charges, encumbrances, liens, assessments,
agreements and title defects of any nature whatsoever. Upon consummation of the
transactions contemplated hereby, Buyer will acquire good, marketable and
unencumbered title to the Assets, free and clear of all mortgages, security
interests, charges, encumbrances, liens, assessments, agreements and title
defects of any nature whatsoever. The Assets are in good condition, reasonable
wear and tear excepted.
5.3 Contracts; Compliance; Employees. Neither Seller nor any of
the Assets is subject to or bound by any agreement, license, lease,
understanding, arrangement or commitment, whether oral or written, contingent,
fixed or otherwise, except for the agreements set forth in Schedule 5.3 attached
hereto (the "Contracts"). All insurance policies and coverage currently
maintained by or applicable to Seller or the Assets are also described on
Schedule 5.3. Each Contract is a legal, valid and binding obligation of the
parties thereto and is in full force and effect. No event has occurred and no
condition or state of facts exists (or would exist upon the giving of notice or
the lapse of time or both) that would become or cause a material breach, default
or event of default thereunder, would give to any other person the right to
cause a termination or would cause an acceleration of any obligation under any
Contract. There are no outstanding defaults under the Contracts, the Contracts
are otherwise in good standing and the only amounts due thereunder are for
services or for use and occupancy of the premises on or after Closing.
5.1 No Violation: Litigation.
(a) The execution and delivery of this Agreement by the Seller, the performance
by the Seller of its obligations and the consummation of the transactions
contemplated hereunder will not result in (I) a violation of any law,
statue, rule, regulation, judgment or decree (each, a "Law") of any
domestic or foreign court or governmental, administrative or regulatory
authority, agency or instrumentality (each, a "Governmental Authority")
applicable to the Seller, the Business or the Assets; (II) a breach of, or
constitute a default under any agreement or instrument to which the Seller
is a party or by which the Seller, the Business or the Assets are bound; or
(III) the creation or imposition of any Lien upon the Assets or constitute
an event which, after notice or lapse of time or both, would result in any
of the foregoing.
(b) No "Litigation" (as defined herein) is pending or threatened (I) against
the Seller or the Assets, or (II) that (A) seeks to prevent or delay the
consummation of the transactions contemplated by this Agreement, (B)
challenges any of the terms or conditions of such transactions, or (C)
seeks damages in connection therewith. To the best of Seller's knowledge,
no reasonable basis or set of circumstances exists which could give rise to
any Litigation. "Litigation" means any claim, action, suit, proceeding or
investigation at law or
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in equity or otherwise in, before or by any Governmental Authority or
before any public or private arbitrator or arbitration board or panel.
5.5 No Consents. No consent, approval, authorization or other action by,
or filing with, any Governmental Authority (each, a "Governmental Approval") or
other third party is required to be obtained or made by the Seller in connection
with the execution, delivery and performance of this Agreement and the other
agreements and instruments contemplated herein to which the Seller is a party
and the consummation by the Seller of the transactions contemplated hereby and
thereby.
5.6 Financial Statements "Financial Statements" shall mean the audited
financial statements of the Seller for the two fiscal years ended just prior to
the Closing Date and the unaudited balance sheets, statements of income, changes
in stockholders' equity and cash flows of the Seller for the periods subsequent
to the last full fiscal year and up through the month ending just prior to the
Closing Date. The Financial Statements (including the Notes thereto) have been
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods covered thereby, present
fairly the financial condition of Seller and its subsidiaries as of such dates
and the results of operations of Seller and its subsidiaries for such periods,
are correct and complete, and are consistent with the books and records of
Seller and its subsidiaries (which books and records are correct and complete);
provided, however, that the unaudited Financial Statements may lack footnotes
and other presentation items.
5.7 Undisclosed liabilities. None of Seller and its Subsidiaries has any
Liability (and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
any of them giving rise to any Liability), except for (i) Liabilities set forth
on the face of the most recent balance sheet included in the Financial
Statements ("Most Recent Balance Sheet") and (ii) Liabilities that have arisen
after the date of the Most Recent Balance Sheet in the ordinary course of
business (none of which results from, arises out of, relates to, is in the
nature of, or was caused by any breach of contract, breach of warranty, tort,
infringement, or violation of law).
5.8 Compliance with Laws. Seller is in compliance with all applicable
laws and regulations relating to the employment of labor and employment
practices; Seller has not engaged in any unfair labor practice; there is no
labor strike, slowdown, stoppage, grievance or other labor difficulty pending or
threatened against Seller; there are no pension, profit sharing, savings,
thrift, medical benefit, death benefit, disability, vacation, sick leave,
bonuses, commissions, or other fringe benefit plans or policies applicable to
the employees of Seller except as listed on Schedule 5.8 and Seller and the
Assets are not subject to the Employee Retirement Income Security Act of 1974,
as amended. Seller, the Assets and the operation thereof and all Systems that
Seller has sold or operates are in compliance with all applicable laws and
regulations, including without limitation those dealing with occupational safety
and health and those dealing with hazardous, toxic, polluting, radioactive,
flammable, explosive or similar substances, underground storage tanks, petroleum
products or derivatives and all other environmentally sensitive materials or
substances subject to regulation by or under any federal, state and local laws
and ordinances relating to the protection of the environment or the keeping, use
or disposition of environmentally hazardous materials, substances or wastes, all
amendments to any of them, and all rules and regulations issued
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pursuant to any of such laws or ordinances (collectively, "Environmental Laws").
Seller holds all licenses, permits and authorizations required for the use of
the Assets and the operations of the Business, which licenses, permits and
authorizations are listed in Schedule 5.8 attached hereto.
5.9 Leased Premises. To the best knowledge of Seller, all buildings and
structures leased by Seller ("Leased Premises") are in good condition and
repair, subject only to normal wear and tear, and all improvements on such
property comply with all applicable ordinances, regulations and zoning or other
laws and do not encroach on property of others. To the best knowledge of Seller,
there are no restrictive covenants, ordinances, regulations or zoning or other
laws that in any material way restrict or prohibit the use of the lands,
buildings or structures comprising the Leased Premises. As of the date hereof,
to the best knowledge of Seller, there is no pending or threatened change of any
such ordinance, regulation or zoning or other law affecting such property and
there is no pending or threatened condemnation of any such property.
5.10 Equipment Leases. All tangible personal property and assets owned or
leased by Seller and used in the operations of the Business are described on
Schedule 1(a) attached hereto. Except as set forth in Schedule 5.10, all
machinery and equipment owned by and used in Seller's operations which are
included in the Assets conform to all applicable ordinances, regulations and
zoning or other laws. Except as described on Schedule 5.10, all tangible
personal property and assets which are included in the Assets are in good
operating condition and repair, subject only to normal wear and tear. Seller has
delivered to Buyer true and correct copies of all leases relating to personal
property and, except as described in Schedule 5.10 attached hereto, all such
leases are in full force and effect, no event of default has been declared
thereunder and, to the best knowledge of Seller, no basis for any default
exists. No such lease of personal property is subject to termination or
modification as a result of the transactions contemplated hereby.
5.11 Material Misstatements. Neither this agreement nor any Schedule
attached hereto nor any document furnished by Seller hereunder contains or will
contain any untrue statement of a material fact or omits or will omit to state
any material fact which is necessary to make the statements contained herein or
therein not misleading.
6. Representations and Warranties of the Buyer. As a material inducement
to Seller to enter into this Agreement and consummate the transactions
contemplated hereby, Buyer hereby represents and warrants to the Seller as of
the date hereof and as of the Closing Date as follows:
6.1 Power and Authority. Buyer has the power, legal capacity and authority to
execute and deliver this Agreement and the other agreements and instruments
for which provision is made herein to be executed and delivered by Buyer
and to perform its obligations under this Agreement and such other
agreements and instruments for which provision is made herein to be
executed and delivered by Buyer. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the Board of Directors of Buyer and all
other necessary corporate action by Buyer has been taken. This Agreement
and such other agreements and instruments constitute valid and binding
obligations of Buyer enforceable against Buyer in accordance with their
respective terms. All action on the part of the Buyer or any other party
necessary for the
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authorization, execution, delivery and performance by Buyer of this
Agreement will be performed on or prior to the Closing Date.
6.2 No Violation: Litigation.
(a) The execution and delivery of this Agreement by Buyer, the performance by
Buyer of its obligations and the consummation of the transactions
contemplated hereunder will not result in (I) a violation of any Law of any
Governmental Authority applicable to Buyer; or (II) a breach of, or
constitute a default under any agreement or instrument to which Buyer is a
party or by which Buyer is bound.
(b) No Litigation is pending or threatened against Buyer that seeks to prevent
or delay the consummation of the transactions contemplated by this
Agreement, challenges any of the terms or conditions of such transactions,
or seeks damages in connection therewith. To the best of Buyer's knowledge,
no reasonable basis or set of circumstances exists which could give rise to
any Litigation.
6.3 No Consents. No Governmental Approval or other third party consent,
approval or authorization is required to be obtained or made by Buyer in
connection with the execution, delivery and performance of this Agreement and
the other agreements and instruments contemplated herein to which Buyer is a
party and the consummation by Buyer of the transactions contemplated hereby and
thereby.
7. Condition to Closing.
7.1 Conditions to the Obligation of Buyer. The obligation of Buyer to proceed
with the Closing is subject to the satisfaction on or prior to the Closing
Date of all the following conditions, any one or more of which may be
waived in whole or in part by the Buyer in its sole discretion:
(a) Seller shall have complied with all of the respective covenants and
agreements contained herein, and all of the representations and warranties
of the Seller contained in this Agreement shall be true on and as of the
Closing Date as if made anew on and as of the Closing Date.
(b) Buyer shall have received the following documents, in each case in form and
substance reasonable satisfactory to Buyer and its counsel: (I) All
Contracts to be assumed by Buyer as well as any and all other contracts
that are in force by and between Seller and any other third party which
relates to the Assets being purchased;, (II) appropriate bills of sale and
other documents conveying the Assets and transferring the other property to
be conveyed to Buyer hereunder, and (III) certificates of Seller's officers
and shareholders, in form and substance satisfactory to Buyer, certifying
as to the accuracy of Seller's representations and warranties and the
fulfillment of the conditions precedent to Buyer's obligations hereunder.
(c) No Litigation shall be pending or threatened and no order, injunction or
decree shall have been entered by any Governmental Authority which in the
Buyer's sole discretion would prohibit, restrict or delay consummation of
the transactions contemplated by this Agreement.
(d) All consents and approvals of third parties which are required to
consummate the transactions contemplated herein shall have been obtained
and delivered to the Buyer. Any Leases that Buyer determines to assume
shall have been be assigned to, and assumed by, Buyer, with the lessors'
written consents to assumption (containing appropriate estoppel
information).
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(e) From the date hereof until the Closing Date, there shall have occurred no
adverse changes or events that singularly or as whole would have a material
adverse effect on the Business or the Assets.
(f) Buyer shall receive complete releases of all liens and security interests
on the Assets, if any.
(g) Buyer shall receive any reports that it deems reasonably necessary, in its
sole discretion, to confirm compliance with Environmental Laws.
(h) Buyer shall have entered into a three-year Noncompetition Agreement with
Seller and its shareholders in substantially the form of Exhibit I attached
hereto; provided, however, that it shall not be a condition for Buyer to
have entered into a Noncompetition Agreement with Whitney Irons unless
Buyer shall first have offered to Irons an employment agreement to continue
to work in the Business, with terms and conditions regarding salary and
noncompetition no less favorable to Irons than those described in Schedule
7.1(h).
7.2 Conditions to the Obligation of Seller. The obligation of Seller to proceed
with the Closing is subject to the satisfaction on or prior to the Closing Date
of all the following conditions, any one or more of which may be waived in whole
or in part by the Seller in its sole discretion.
(a) The Buyer shall have complied with all of the respective covenants and
agreements contained herein, and all of the representations and warranties
of the Buyer contained in this Agreement shall be true on and as of the
Closing Date as if made anew on and as of the Closing Date.
(b) Seller shall have been paid the Purchase Price as provided in Section 3 of
this Agreement.
(c) No Litigation shall be pending or threatened and no order, injunction or
decree shall have been entered by any Governmental Authority which in the
Seller's sole discretion would prohibit, restrict or delay consummation of
the transactions contemplated by this Agreement.
(d) All consents and approvals of third parties that are required to consummate
the transactions contemplated herein shall have been obtained.
8. Risk of Loss. Prior to the Closing, the risk of loss of, damage to, or
destruction of the Assets shall remain with Seller, and the legal doctrine
known as the "Doctrine of Equitable Conversion" shall not be applicable to
this Agreement or to any of the transactions contemplated hereby. On and
after the Closing Date, the risk of loss of, damage to, or destruction of
the Assets shall be with Buyer.
9. Further Assurances. The Seller shall, from time to time after the Closing,
upon the request of Buyer, execute, acknowledge and deliver all such
further deeds, assignments, transfers, conveyances, assurances and other
documents as may be required to transfer to and to vest in Buyer all right,
title and interest of the Seller in and to the Assets and the Business and
to protect the right, title and interest of Buyer in and to the Assets and
the Business.
10. Notices. Notices required or permitted hereunder will be effective if
delivered by (a) certified mail, return receipt requested, or (b) hand
delivery or overnight courier, to the address given below:
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If to Buyer: With a copy to:
Devcon International Corporation Brian Foremny
1350 E. Newport Center Drive, Suite 201 Atkinson, Diner et al
Deerfield Beach, FL 33442 1946 Tyler Street
Attn: Jan Norelid, Chief Financial Officer Hollywood, FL 33020
Facsimile:_(954) 427-2936 Facsimile: (954) 920-2711
If to Seller: With a copy to:
Matrix Desalination, Inc. Stephen A. Schorr, P.A.
3255 S.W. 11th Ave. 625 N.E. 3rd Ave.
Fort Lauderdale, FL 33315 Fort Lauderdale, FL 33304
Attn: Whitney Irons, President Facsimile: (954) 667-0899
Facsimile:_(954) 524-5216
All notices delivered hereunder shall be marked "PERSONAL AND CONFIDENTIAL." Any
party may change the address or number to which notices are to be addressed by
giving the other parties notice in the manner herein set forth. Any notice given
in accordance with the requirements of this Section shall be deemed to have been
received when delivered by overnight courier or by electronic transmission, if
confirmation of receipt is provided by the party to be charged with notice, or,
if mailed, on the third business day following the date upon which such notice
shall have been deposited in the U.S. mails, prepaid, return receipt requested.
11. Employees. Schedule 11 contains a list of all employees of Seller,
including their salaries, titles and positions. Buyer is not assuming any
of Seller's agreements with employees, but Buyer may offer employment to
such of Seller's employees as Buyer determines in its sole discretion;
provided, however, that Buyer is not obligated to make any such offer.
12. Non-Competition. Seller covenants and agrees that it will not, for a period
of three (3) years after the Closing Date, either directly or indirectly,
without the Buyer's prior written consent, by itself or in partnership or
in conjunction with or as a manager or agent of any other person, firm,
corporation or other entity, or by providing employees, officers or
directors to any other person, firm, corporation or other entity, undertake
or carry on or be engaged or have any financial or other interest in, or in
any other manner advise or assist any person, firm, corporation or other
entity engaged or interested in, business that competed with the Business
or any other business involving the designing, building, fabricating,
manufacturing or operating reverse osmosis, waste water or power generation
systems; provided, however, that Seller may continue to be an owner and
operator of a project that is known as Emerald Bay. Seller acknowledges
that in the event of its violation of the covenants contained in this
Section 12, Buyer's damages will be difficult to ascertain and Buyer's
remedy at law will be inadequate. Accordingly, Seller agrees that, in
addition to such remedies as Buyer may have at law, Buyer shall be entitled
to specific performance of such covenants and to an injunction to prevent
any continuing violation thereof.
If any of the provisions of or covenants contained in this Section 12
is hereafter construed to be invalid or unenforceable in any jurisdiction, the
same shall not affect the remainder of the
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provisions or the enforceability thereof in any other jurisdiction, which shall
be given full effect, without regard to the invalidity or unenforceability in
such other jurisdiction. If any of the provisions of or covenants contained in
this Section 12 are held to be unenforceable in any jurisdiction because of the
duration or geographical scope thereof, the parties agree that the court making
such determination shall have the power to reduce the duration or geographical
scope of such provision or covenant and, in its reduced form, said provision or
covenant shall be enforceable; provided, however, that the determination of
such court shall not affect the enforceability of this Section 12 in any other
jurisdiction.
13. Governing Law. The validity, interpretation and performance of this
Agreement will be determined in accordance with the laws of the State of
Florida applicable to contracts made and to be performed wholly within the
state.
14. Counterparts.This Agreement may be executed in counterparts, each of which
will be deemed an original, but both of which together shall constitute one
and the same instrument. The parties agree that signatures transmitted by
facsimile shall for all purposes be considered as effective as original
executed documents delivered in person.
15. Captions; Gender; References. The headings, subheadings and captions in
this Agreement and in any appendix, exhibit or schedule hereto are for
reference purposes only and are not intended to affect the meaning or
interpretation of this Agreement. For purposes of this Agreement, the use
of masculine pronouns shall be deemed to include feminine and neuter
pronouns, as appropriate. References in this Agreement to sections,
subsections, schedules or exhibits are to sections, subsections, schedules
or exhibits in or to this Agreement unless otherwise stated. Unless
explicitly stated to the contrary, words such as "hereof", "herein",
"hereunder" and words of similar meaning shall refer to this Agreement as a
whole and not to any particular section or subsection.
16. Entire Agreement; Amendments, etc. This Agreement, together with the [list
other principal closing agreements] contains the entire agreement among the
parties hereto with respect to the subject matter hereof and supersedes all
prior negotiations, discussions, agreements, arrangements and
understandings, written or oral, relating to the subject matter of this
Agreement. No amendment or modification of, or any waiver of any provision
of, this Agreement shall be effective against a party unless set forth in a
writing signed by such party.
17. Arbitration. Any controversy or claim related to or arising out of this
Agreement shall be settled by binding arbitration to take place in
Broward County, Florida, conducted under the Commercial Arbitration
Rules of the American Arbitration Association. In any arbitration
proceeding, the Florida Rules of Evidence shall apply. The arbitrator's
decision shall be in writing and shall present findings of fact and
conclusions of law, in accordance with appropriate Florida judicial or
statutory precedents. Judgment on the arbitrator's award may be entered
and enforced in any court of competent jurisdiction. Neither party will be
precluded from seeking provisional remedies in the courts including, but
not limited to, temporary restraining orders and preliminary
injunctions, to protect its rights and interests, but such relief will
not be sought as a means to avoid or stay arbitration. This paragraph
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provides the sole recourse for the settlement of any dispute arising under
or in connection with this Agreement. In any arbitration between the
parties, the prevailing party shall be entitled to reasonable attorneys'
fees and all costs of proceedings incurred in enforcing this Agreement
in addition to any other amount of recovery ordered in such arbitration
18. Successors and Assigns; No Third Party Beneficiaries; Assignment;
Severability. This Agreement shall be binding upon the parties hereto and
their respective successors and permitted assigns. This Agreement is not
intended to, and shall not be construed to, create any rights as a
third-party beneficiary or otherwise in favor of any person or entity who
is not a party to this Agreement or a successor or permitted assign of a
party to this Agreement. No party hereto shall assign this Agreement
without the other party's prior written consent, except that Buyer may
assign its rights and delegate its duties hereunder to any of its
affiliates. If any provision of this Agreement is held to be
unenforceable, invalid or void to any extent for any reason, that
provision shall remain in force and effect to the maximum extent
allowable, if any, and the enforceability and validity of the remaining
provisions of this Agreement shall not be affected thereby.
19. Indemnification. Seller, Whitney Irons and Edward A. Fuller agree to
indemnify and hold harmless Buyer and its affiliates as well as their
officers and directors from and against any and all losses, obligations,
Liabilities, damages or claims which may be asserted against or incurred
by Buyer in connection with any breach of the representations, warranties,
covenants or agreements of Seller contained in this Agreement. Buyer
agrees to indemnify and hold harmless Seller and its affiliates as well as
their officers and directors from and against any and all losses,
obligations, Liabilities, damages or claims which may be asserted against
or incurred by Seller in connection with any breach of the
representations, warranties, covenants or agreements of Seller contained
in this Agreement. For these purposes, Liabilities include but are not
limited to reasonable legal, professional fees and or expenses incurred
in connection with investigation, prosecution or defending the matter. The
limitations on the indemnification provisions set forth in this Section 19
are not intended to limit other rights and remedies of the parties hereto
arising under this Agreement at law or in equity.
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IN WITNESS WHEREOF, each of the parties has caused this Asset Purchase Agreement
to be duly executed and delivered as of the date first above written.
MATRIX DESALINATION, INC. DEVCON INTERNATIONAL CORP.
By:______________________________ By:__________________________
Name:____________________________ Name:________________________
Title:___________________________ Title:_______________________
The undersigned, constituting all of the shareholders of MATRIX DESALINATION,
INC., are executing this Agreement as of the day and year first above written
for the limited purposes of agreeing to be bound by the provisions of Sections 5
and 19 of this Agreement, and agreeing to enter into the Noncompetition
Agreement described in Section 7.1 of this Agreement.
- -------------------------------
Whitney Irons_______________
- -------------------------------
Edward A. Fuller________________
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Schedule 2.1
ASSETS
"Assets" means all right, title, and interest in and to all of the assets of
Seller, including without limitation, all of its (a) real property, leaseholds
and subleaseholds therein, improvements, fixtures, and fittings thereon, and
easements, rights- appurtenants thereto (such as appurtenant rights in and to
public of-way, and other streets ), (b) tangible personal property (such as
machinery, equipment, inventories of raw materials and supplies, manufactured
and purchased parts, goods in process and finished goods, furniture,
automobiles, trucks, tractors, trailers, tools, jigs, and dies), (c)
Intellectual Property, goodwill associated therewith, licenses and sublicenses
granted and obtained with respect thereto, and rights thereunder, remedies
against infringements thereof, and rights to protection of interests therein
under the laws of all jurisdictions, (d) leases, subleases, and rights
thereunder, (e) agreements, contracts, indentures, mortgages, instruments,
Security Interests, guaranties, other similar arrangements, and rights
thereunder, (f) accounts, notes, and other receivables, (g) securities (such as
the capital stock in its Subsidiaries), (h) claims, deposits, prepayments,
refunds, causes of action, choses in action, rights of recovery, rights of set
off, and rights of recoupment (including any such item relating to the payment
of Taxes), (i) franchises, approvals, permits, licenses, orders, registrations,
certificates, variances, and similar rights obtained from governments and
governmental agencies, (j) books, records, ledgers, files, documents,
correspondence, lists, plats, architectural plans, drawings, specifications,
creative materials, advertising and promotional materials, studies, reports, and
other printed or written materials, and (k) cash (except for any "excess cash"
as described below); provided, however, that the Acquired Assets shall not
include (i) the corporate charter, qualifications to conduct business as a
foreign corporation, arrangements with registered agents relating to foreign
qualifications, taxpayer and other identification numbers, seals, minute books,
stock transfer books, blank stock certificates, and other documents relating to
the organization, maintenance, and existence of Seller as a corporation, (ii)
any of the rights of Seller under this Agreement (or under any side agreement
between Seller on the one hand and Buyer on the other hand entered into on or
after the date of this Agreement), (iii) rights in and with respect to the
assets associated with its Employee Benefit Plans or (iv) "excess cash," which
shall mean any cash beyond an amount required to provide the Seller with
adequate working capital.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (f) all computer software (including data and
related
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documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium).
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Schedule 5.3
CONTRACTS
PART I
[The only Contracts being assumed by Buyer are those for sales of products to be
delivered to Seller's customers after the Closing Date and for services to be
rendered to Seller's customers after the Closing Date. These Contracts are to be
described on this Schedule 5.3, Part I.]
PART II
[All other Contracts of Seller that are not being assumed by Buyer are to be
described on this Schedule 5.3, Part II]
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Schedule 7.1(h)
EMPLOYMENT AGREEMENT TERMS
As a condition to Buyer's right to require that Whitney Irons ("Irons") execute
a noncompetition agreement ("Noncompetition Agreement") under Section 7.1(h) of
the Asset Purchase Agreement to which this Schedule is attached, Buyer must
first have offered to Irons an employment agreement ("Employment Agreement") to
continue to work in the Business for a period of no less than two (2) years in
South Florida (unless otherwise agreed to by Whitney Irons). The terms and
conditions of the Employment Agreement with respect to noncompetition and salary
shall be no less favorable to Irons than the following:
1. Under the Employment Agreement, Irons' salary shall be at least
$125,000 annually, adjusted initially and annually from a reference
date of May 29, 2003 for the Consumer Price Index applicable to the
"South Region, Urban, All Items" as reported from time to time by the
Bureau of Labor Statistics. (In lieu of the $125,000 salary, Buyer may
offer a package of salary of less than $125,000 with a bonus to provide
more than $125,000 total compensation, but it shall be within Irons'
sole discretion whether to accept or reject the alternative described
in this sentence.)
2. Under the Employment Agreement, Irons shall agree not to compete with
the Business for so long as he is an employee of the Business and for
three years thereafter.
3. Under the Employment Agreement, if Irons is terminated for "Cause"
(as defined below), then he shall be subject to the three-year
Noncompetition Agreement. "Cause" shall mean any of the following:
(i) conviction of Irons of a felony; or (ii) a material act of
dishonesty or breach of trust on the part of Irons resulting or
intended to result directly or indirectly in personal gain or
enrichment at the expense of the Company; or (iii) the material
failure to faithfully perform such duties as may be duly assigned to
Irons or an act of willful misconduct or gross negligence by Irons in
the performance of his material duties or obligations to the Company,
and if such act is capable of cure, Irons shall be given written
notice and such act shall not be deemed a basis for Cause if cured
within 30 days after written notice is received by Irons specifying
the alleged failure in reasonable detail.
4. Under the Employment Agreement, if Irons is terminated without Cause,
then he shall not be subject to the three-year Noncompetition
Agreement.
5. Under the Employment Agreement, if Irons terminates his employment with
the Business in the absence of a material breach by the Business of the
payment or other material provisions of the Employment Agreement, then
he shall be subject to the three-year Noncompetition Agreement.
If Irons rejects the offered Employment Agreement with salary and noncompetition
terms as outlined above, then he shall be subject to the Noncompetition
Agreement.
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Exhibit I
NONCOMPETITION AGREEMENT
THIS AGREEMENT, made as of the __ day of __________, 200__by
and among Devcon International Corp., a Florida corporation ("Buyer"), Matrix
Desalination, Inc., a Michigan corporation ("Seller"), Whitney Irons, an
individual residing in _____,___________ ("Irons"), and Edward A., Fuller,
an individual residing in ________________, __________ ("Fuller")
WITNESSETH:
WHEREAS, by agreement between Buyer and Seller dated __________,
_________ (the "Purchase Agreement"), Buyer agreed to purchase from Seller all
of the assets related to or used in the business and operations of Seller
("Business"), with such transaction being closed on ________, 200__ (the
"Closing Date");
WHEREAS, it is understood that such purchase includes the purchase of
the goodwill of the Business;
WHEREAS, Irons and Fuller are the shareholders of Seller;
WHEREAS, Buyer would be irreparably injured if Seller, Irons, or
Fuller, (individually, a "Covenantor" and collectively, the "Covenantors") were
to disclose any of the confidential information concerning the business and
operations of the Business which Covenantors have or may acquire or if any of
the Covenantors were to enter into any business competition with the Business;
and
WHEREAS, the obligations of Buyer under the Purchase Agreement are
expressly subject to certain covenants and conditions set forth therein,
including the execution and delivery of this Agreement by Covenantors and Buyer.
NOW, THEREFORE, in consideration of all the terms and conditions
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Noncompetition.
(a) Each Covenantor covenants and agrees that he or it will not, for a
period of three (3) years after the Closing Date, without the Buyer's prior
written consent, by himself or itself or in partnership or in conjunction with
or as an employee, officer, director, shareholder, manager, consultant or agent
of any other person, firm, corporation or other entity, either directly or
indirectly, undertake or carry on or be engaged or have any financial or other
interest in, or in any other manner advise or assist any person, firm,
corporation or other entity engaged or interested in, designing, building or
operating reverse osmosis, waste water and power generation systems (the
"Systems") or any business that is competitive with the Business, carried on in
the State of Florida or in the "Caribbean Islands" (as defined on Exhibit A
hereto.
(b) Each Covenantor hereby agrees to hold in strict confidence all
secret or confidential information (other than such information as is publicly
available from a source other than Covenantor) relating to the Business and not,
without the prior written consent of Buyer, to disclose such information to
anyone.
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(c) Each Covenantor agrees and warrants that the covenants contained
herein are reasonable, that valid consideration has been and will be received
therefor and that the agreements set forth herein are the result of arms-length
negotiation between the parties hereto.
(d) Each Covenantor acknowledges that in the event of any violation of
the covenants contained in Section 1 hereof, Buyer's damages will be difficult
to ascertain and Buyer's remedy at law will be inadequate. Accordingly, each
Covenantor agrees that, in addition to such remedies as Buyer may have at law,
Buyer shall be entitled to specific performance of such covenants and to an
injunction to prevent any continuing violation thereof.
(e) If any of the provisions of or covenants contained in this Section
1 is hereafter construed to be invalid or unenforceable in any jurisdiction, the
same shall not affect the remainder of the provisions or the enforceability
thereof in any other jurisdiction, which shall be given full effect, without
regard to the invalidity or unenforceability in such other jurisdiction. If any
of the provisions of or covenants contained in this Section 1 is held to be
unenforceable in any jurisdiction because of the duration or geographical scope
thereof, the parties agree that the court making such determination shall have
the power to reduce the duration or geographical scope of such provision or
covenant and, in its reduced form, said provision or covenant shall be
enforceable; provided, however, that the determination of such court shall not
affect the enforceability of this Section 1 in any other jurisdiction.
(f) The Covenantors' agree that the closing under the Purchase
Agreement provides significant benefits to each of them and sufficient and
adequate consideration for the obligations that they are undertaking in this
Agreement.
2. Binding Agreement. This Agreement shall be binding upon, and inure to the
benefit of each Covenantor and the Buyer and their respective heirs, successors
and assigns.
3. Consolidation, Merger, or Sale of Assets. Nothing in this Agreement shall
preclude Buyer from consolidating or merging into or with, or transferring all
or substantially all of its assets or the assets associated with the business
and operation of the Business to, another corporation or other business entity
which assumes this Agreement and all obligations and undertakings of Buyer
hereunder. In addition, nothing shall preclude Buyer from changing its name at
any time after the date hereof. Upon such a consolidation, merger, transfer of
assets and assumption, or name change, the term the "Buyer" as used herein,
shall mean such corporation or other business entity, and this Agreement shall
continue in full force and effect.
4. Waiver of Compliance; Consents. Except as otherwise provided in this
Agreement, any failure of any of the parties to comply with any obligation,
representation, warranty, covenant, agreement or condition herein may be waived
by the party entitled to the benefits thereof only by a written instrument
signed by the party granting such waiver, but such waiver or failure to insist
upon strict compliance with such obligation, representation, warranty, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Whenever this Agreement requires or
permits consent by or on behalf of any party hereto, such consent shall be given
in writing in a manner consistent with the requirements for a waiver of
compliance as set forth in this Section 4.
5. Notices. Notices required or permitted hereunder will be effective if
delivered by (a) certified mail, return receipt requested, or (b) hand delivery
or overnight courier, to the address given below:
127
If to Buyer: With a copy to:
Devcon International Corporation Brian Foremny
1350 E. Newport Center Drive, Suite 201 Atkinson, Diner et al
Deerfield Beach, FL 33442 1946 Tyler Street
Attn: Jan Norelid, Chief Financial Officer Hollywood, FL 33020
Facsimile:_(954) 427-2936 Facsimile: (954) 920-2711
If to Seller: With a copy to:
Matrix Desalination, Inc. Stephen A. Schorr, P.A.
3255 S.W. 11th Ave. 625 N.E. 3rd Ave.
Fort Lauderdale, FL 33315 Fort Lauderdale, FL 33304
Attn: Whitney Irons, President Facsimile: (954) 667-0899
Facsimile:_(954) 524-5216
If to Irons:
Matrix Desalination, Inc.
3255 S.W. 11th Ave.
Fort Lauderdale, FL 33315
Attn: Whitney Irons, President
Facsimile:_(954) 524-5216
If to Fuller:
Any party may change the address or number to which notices are to be addressed
by giving the other parties notice in the manner herein set forth. Any notice
given in accordance with the requirements of this Section shall be deemed to
have been received when delivered by overnight courier or by electronic
transmission, if confirmation of receipt is provided by the party to be charged
with notice, or, if mailed, on the third business day following the date upon
which such notice shall have been deposited in the U.S. mails, prepaid, return
receipt requested.
6. Counterparts. This Agreement may be executed in one or more counterparts,
none of which need contain the signatures of all parties, each of which shall be
deemed an original, and all of which together shall constitute one and the same
instrument. It shall not be necessary in making proof of this Agreement to
produce or account for more than the number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto. The
parties agree that signatures transmitted by facsimile shall for all purposes be
considered as effective as original executed documents delivered in person.
7. Governing Law. The validity, interpretation and performance of this Agreement
will be determined in accordance with the laws of the State of Florida
applicable to contracts made and to be performed wholly within the state.
8. Captions; Gender; References. The headings, subheadings and captions in this
Agreement and in any appendix, exhibit or schedule hereto are for reference
purposes only and are not intended to affect the meaning or interpretation of
this Agreement. For purposes of this Agreement, the use of masculine pronouns
shall be deemed to include feminine and neuter pronouns, as appropriate.
References in this Agreement to sections, subsections, schedules or exhibits are
to sections, subsections, schedules or exhibits in or to this Agreement unless
otherwise stated. Unless explicitly stated to the contrary, words
128
such as "hereof", "herein", "hereunder" and words of similar meaning shall
refer to this Agreement as a whole and not to any particular section or
subsection.
9. Entire Agreement; Amendments, etc. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof and
supersedes all prior negotiations, discussions, agreements, arrangements and
understandings, written or oral, relating to the subject matter of this
Agreement. No amendment or modification of, or any waiver of any provision of,
this Agreement shall be effective against a party unless set forth in a writing
signed by such party.
10. Arbitration. Any controversy or claim related to or arising out of this
Agreement shall be settled by binding arbitration to take place in Broward
County, Florida, conducted under the Commercial Arbitration Rules of the
American Arbitration Association. In any arbitration proceeding, the Florida
Rules of Evidence shall apply. The arbitrator's decision shall be in writing and
shall present findings of fact and conclusions of law, in accordance with
appropriate Florida judicial or statutory precedents. Judgment on the
arbitrator's award may be entered and enforced in any court of competent
jurisdiction. Neither party will be precluded from seeking provisional remedies
in the courts including, but not limited to, temporary restraining orders and
preliminary injunctions, to protect its rights and interests, but such relief
will not be sought as a means to avoid or stay arbitration. This paragraph
provides the sole recourse for the settlement of any dispute arising under or in
connection with this Agreement. In any arbitration between the parties, the
prevailing party shall be entitled to reasonable attorneys' fees and all costs
of proceedings incurred in enforcing this Agreement in addition to any other
amount of recovery ordered in such arbitration
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date first above written.
ATTEST: DEVCON INTERNATIONAL CORP.
By: __________________________ By: ___________________
Title: _______________________ Title: ________________
ATTEST: MATRIX DESALINATION, INC.
By:___________________________ By:_____________________
Title:________________________ Title:__________________
WITNESS:
- ------------------------- ----------------------
Whitney Irons
WITNESS:
- ------------------------- ----------------------
Edward A. Fuller
129
EXHIBIT A
CARIBBEAN ISLANDS
For the purposes of this Agreement, "Caribbean Islands" shall mean:
Anguilla
Antigua and Barbuda
Aruba
Bahamas
Barbados
Bermuda
Bonaire
British Virgin Islands
Cayman Islands
Curacao
Dominica
Dominican Republic
Grenada
Guadeloupe
Guyana
Haiti
Jamaica
Martinique
Puerto Rico
Saba
St Barthelemy
St Eustatius
St Kitts
St Lucia
St Martin
St Vincent
Trinidad and Tobago
Turks and Caicos
US Virgin Islands
130
Exhibit 10.32
STOCK OPTION AGREEMENT
DEVCON INTERNATIONAL CORPORATION
This Agreement ("Stock Option Agreement") is made and entered into
this 29th day of May, 2003 by and between Devcon International Corp., a Florida
corporation ("Company"), and Matrix Desalination, Inc., a Michigan corporation
("Optionee").
W I T N E S E T H:
WHEREAS, Company and Optionee have formed a Florida Limited Liability
Company ("LLC") to engage in the business of operating and owning reverse
osmosis, waste water and power generation systems (the "Systems"), and utilizing
the Systems to sell water and power to third parties, and have entered into an
Operating Agreement of even date herewith with respect to the operations of the
LLC ("Operating Agreement");
WHEREAS, Optionee has granted Company an option to purchase all of its
business assets on the terms and conditions set forth in an asset option
agreement of even date herewith ("Asset Option Agreement");
WHEREAS, as further consideration for Optionee entering into the Asset
Option Agreement, Company has agreed to grant Optionee an option to acquire
certain shares of the Company's common stock; and
WHEREAS, Optionee wishes to receive the Option, on the price and terms
contained below.
NOW, THEREFORE, for and in consideration of the following mutual
covenants and conditions, and other good and valuable consideration, the parties
agree as follows:
17. Recitals. The foregoing recitals are true and correct and are
incorporated herein by reference.
18. Option. The Company hereby grants to Optionee an option to purchase an
aggregate of up to fifty thousand (50,000) shares of Common Stock of the Company
(each, a "Share") at the price of six dollars and thirty eight cents, U.S. (U.S.
$6.38) per share (which has been determined to be the market value of the Common
Stock on the date hereof) (the "Option"), subject to the following conditions:
(a) The Option shall not be exercisable to any extent until
and unless the LLC shall have acquired at least one System, at which
time the Option shall become exercisable with respect to ten thousand
(10,000) Shares.
131
(b) Thereafter, the Option shall become exercisable in
additional increments of ten thousand (10,000) Shares for each System
that the LLC acquires, to a maximum of fifty thousand (50,000) Shares
once the LLC has acquired five (5) Systems.
(c) Notwithstanding any other provision of this Agreement, the
Option shall expire no later than five years from the date hereof.
19. Exercise of Option. The Option may be exercised by delivering to the Company
at the office of the Corporate Secretary (i) a written notice, signed by the
Optionee, stating the number of Shares to be purchased hereunder, (ii) payment
in an amount equal to the full purchase price of the Shares then to be
purchased, and (iii) in the event the Option is exercised by any person other
than the Optionee, evidence satisfactory to the Company that such person has the
right to exercise the Option. Upon the due exercise of the Option, the Company
shall issue in the name of the person exercising the Option, and deliver to the
Optionee, one or more certificates for the Shares in respect of which the Option
shall have been so exercised. The Optionee acknowledges that the Optionee does
not have any rights as a shareholder in respect of any Shares as to which the
Option shall not have been duly exercised and that no rights as a shareholder
shall arise in respect of any such Shares until and except to the extent that a
certificate or certificates for such Shares shall have been issued.
20. Adjustments. In case there shall be a merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure such
that Shares of Common Stock are changed into or become exchangeable for a larger
or smaller number of Shares, the number of Shares subject to outstanding Options
shall be increased or decreased in direct proportion to the increase or decrease
in the number of Shares of Common Stock by reason of such change in corporate
structure. The number of Shares shall always be a whole number, and the purchase
price per share of any outstanding Options shall, in the case of an increase in
the number of Shares, be proportionately reduced, and in the case of a decrease
in the number of Shares, shall be proportionately increased.
21. Securities Laws. Optionee acknowledges that Shares issued pursuant to this
Stock Option Agreement will not be registered under the Securities Act of 1933,
as amended, or under any applicable blue sky or state securities law
(collectively, the "Applicable Securities Laws") on the grounds that the
offering and sale of securities contemplated by this Agreement are exempt from
registration pursuant to Section 4(2) of the Securities Act, and exempt from
qualification pursuant to available exemptions in the various states, and that
the Company's reliance upon such exemptions is predicated in party upon
Optionee's representation that the Shares are being acquired for Optionee's
account, and not for the account of another person, and that Optionee recognizes
that the Shares must be held indefinitely unless they are subsequently
registered under the Applicable Securities Laws or an exemption from such
registration is available. Certificates representing the Shares will bear a
legend covering the matters contained in this section.
22. Notices. All notices, demands and other communications given hereunder shall
be in writing and shall be deemed to have been duly given (a) upon hand delivery
thereof, (b) upon electronic transmission (email or telefax) and written
confirmation of receipt within 24 hours after transmission, (c) upon receipt of
any overnight deliveries, or (d) on the fifth (5th) business day after mailing
United States registered or certified mail, return receipt requested, postage
prepaid, at the
132
addresses set forth as follows, or at such other address, or to such other
person and at such address for that person, as any party shall designate in
writing for such purpose in the manner hereinabove set forth:
If to Company: With a copy to:
Devcon International Corporation Brian Foremny
1350 E. Newport Center Drive, Suite 201 Atkinson, Diner et al
Deerfield Beach, FL 33442 1946 Tyler Street
Attn: Jan Norelid, Chief Financial Officer Hollywood, FL 33020
Facsimile: (954) 427-2936 Facsimile: (954) 920-2711
If to Optionee: With a copy to:
Matrix Desalination, Inc. Stephen A. Schorr, P.A.
3255 S.W. 11th Ave. 625 N.E. 3rd Ave.
Fort Lauderdale, FL 33315 Fort Lauderdale, FL 33304
Attn: Whitney Irons, President Facsimile: (954) 667-0899
Facsimile: (954) 524-5216
23. Entire Agreement. This Stock Option Agreement sets forth all the promises,
covenants, agreements, conditions and understandings between the parties hereto
on the subject matter hereof, and supersedes all prior agreements,
understandings, inducements or conditions expressed or implied, oral or written,
on the subject matter hereof.
24. Binding Effect: No Assignment. This Stock Option Agreement shall be binding
upon the parties hereto, their heirs, administrators, successors and permitted
assigns. Except as provided herein, no party may assign or transfer its
interests herein, or delegate its duties hereunder, without the written consent
of the other party.
25. Amendments. All amendments to this Stock Option Agreement must be in
writing and signed by all the Members.
26. No Waiver. No waiver of any provision of this Stock Option Agreement shall
be effective unless it is in writing and signed by the party against whom it is
asserted, and any such written waiver shall only be applicable to the specific
instance to which it relates and shall not be deemed to be a continuing or
future waiver.
27. Gender and Use of Singular and Plural. All pronouns shall be deemed to refer
to the masculine, feminine, neuter, singular or plural, as the identity of the
party or parties, or their personal representatives, successors and assigns may
require.
28. Counterparts. This Stock Option Agreement and any amendments may be executed
in one or more counterparts, each of which shall be deemed an original but all
of which together will constitute one and the same instrument.
29. Headings. The article and section headings contained in this Stock Option
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of the Agreement.
133
30. Governing Law. This Stock Option Agreement shall be construed in accordance
with the laws of the State of Florida and venue for any proceeding arising
between the parties in any manner pertaining or related to this Stock Option
Agreement shall, to the extent permitted by law, be in Broward County, Florida.
31. Further Assurances. The parties hereto will execute and deliver such further
instruments and do such further acts and things as may be reasonably required to
carry out the intent and purposes of this Stock Option Agreement.
32. Provisions Severable. This Stock Option Agreement is intended to be
performed in accordance with, and only to the extent permitted by, all
applicable laws, ordinances, rules and regulations of the jurisdiction in which
the parties do business. If any provision of this Stock Option Agreement, or the
application thereof to any person or circumstance, shall, for any reason or to
any extent, be invalid or unenforceable, the remainder of this Stock Option
Agreement and the application of such provision to other persons or
circumstances shall not be affected thereby, but rather shall be enforced to the
greatest extent permitted by law.
33. Arbitration. Any controversy or claim related to or arising out of this
Agreement shall be settled by binding arbitration to take place in Broward
County, Florida, conducted under the Commercial Arbitration Rules of the
American Arbitration Association. In any arbitration proceeding, the Florida
Rules of Evidence shall apply. The arbitrator's decision shall be in writing and
shall present findings of fact and conclusions of law, in accordance with
appropriate Florida judicial or statutory precedents. Judgment on the
arbitrator's award may be entered and enforced in any court of competent
jurisdiction. Neither party will be precluded from seeking provisional remedies
in the courts including, but not limited to, temporary restraining orders and
preliminary injunctions, to protect its rights and interests, but such relief
will not be sought as a means to avoid or stay arbitration. This paragraph
provides the sole recourse for the settlement of any dispute arising under or in
connection with this Agreement. In any arbitration between the parties, the
prevailing party shall be entitled to reasonable attorneys' fees and all costs
of proceedings incurred in enforcing this Agreement in addition to any other
amount of recovery ordered in such arbitration.
34. No Third Party Rights. Unless otherwise expressly stated herein, the
provisions of this Stock Option Agreement are for the exclusive benefit of the
parties hereto, and no other person, including creditors of any party hereto,
shall have any right or claim against any party by reason of this Stock Option
Agreement or be entitled to enforce any provision herein against any party
hereto.
35. Facsimile Signatures. A facsimile signature to this Stock Option Agreement
shall be deemed, for all purposes, an original and shall have the same effect as
an original signature.
IN WITNESS WHEREOF, the parties have executed, acknowledged, and caused
this Stock Option Agreement to be delivered as of the day and year first above
written.
DEVCON INTERNATIONAL CORP. MATRIX DESALINATION, INC.
By:/s/_Donald L. Smith, Jr. By: _/s/ Whitney Irons
------------------------- ------------------------
134
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.
DevMat Utility Resources, LLC.
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
135
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Devcon International Corp.;
We consent to the incorporation by reference in the registration statements (No.
33-32968, No. 33-59557 and No. 333-92231) on Form S-8 of Devcon International
Corp. and subsidiaries of our report dated March 5, 2004, with respect to the
consolidated balance sheets of Devcon International Corp. and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity and comprehensive (loss) income, and cash flows
for each of the years in the three-year period ended December 31, 2003, which
report appears in the December 31, 2003 annual report on Form 10-K of Devcon
International Corp. and subsidiaries.
/s/ KPMG LLP
Fort Lauderdale, Florida
March 17, 2004
136
Exhibit 31.1
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 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: March 17, 2004 /s/ Donald L. Smith, Jr.
Donald L. Smith, Jr.
President and Chairman of the Board
137
Exhibit 31.2
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 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: March 17, 2004 /s/ Jan A. Norelid
Jan A. Norelid
Chief Financial Officer
138
Exhibit 32.1
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, 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: March 17, 2004 /s/ Donald L. Smith, Jr.
Donald L. Smith, Jr.
Chief Executive Officer
139
Exhibit 32.2
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, 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: March 17, 2004 /s/ Jan A. Norelid
Jan A. Norelid
Chief Financial Officer