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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, 2000
Commission file number 0-7152
DEVCON INTERNATIONAL CORP.
Florida Corporation TIN 59-0671992
1350 East Newport Center Drive, Suite 201, Deerfield Beach, FL 33442
(954) 429-1500
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $.10 par value
We have 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.
This document or its amendments does not include disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K nor will disclosure be made 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.
As of March 16, 2001, Devcon International Corp. had 3,662,985 shares
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of Devcon International Corp. as of March 16, 2000 was
approximately $9.1 million, based on the closing price on that date of $6.25 for
the Common Stock as reported on the Nasdaq National Market System. In this
calculation all executive officers, directors and 5 percent beneficial owners of
Devcon International Corp. are considered to be affiliates. This is not an
admission that such executive officers, directors or 5 percent beneficial owners
are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference from Devcon's definitive proxy statement (to be filed pursuant to
Regulation 14A)
PART I
Item 1. Business
General
In the Caribbean, Devcon International Corp. (the "Company") produces and
distributes ready-mix concrete, crushed stone, concrete block, and asphalt and
distributes bulk and 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. In prior years we referred to our
business as the concrete and related products and contracting divisions
segments. We will from hereafter refer to them as the materials and construction
divisions respectively.
During the first quarter of 2000 we sold our operations in Tortola and Dominica,
our concrete operations in St. Thomas and all our bulk cement terminals. Due to
these sales, our materials revenue in 2000 has diminished compared to 1999. The
operations in Tortola and Dominica had revenue of $9.5 million in 1999 and
$946,000 in 2000. The concrete operations in St. Thomas had revenue of $6.3
million in 1999 and no revenue in 2000. However, our quarry in St. Thomas
continues to supply sand and stone to the St. Thomas concrete operation. The
revenue from this supply was $2.1 million in 2000, therefore the net decrease in
revenue by selling the concrete operation in St. Thomas was approximately $4.2
million. The cement terminals we sold had sales of cement to third parties of
approximately $7.3 million in 1999. However, after the sale we entered into an
agreement with the buyer to distribute cement from the terminals we sold and,
pursuant to this arrangement, the sales of cement were $10.2 million to third
parties in 2000. The distribution agreement has been terminated as of March 1,
2001 and we have entered into a renewed terminal management contract with the
owners of the cement terminals. The loss of distribution offset by the renewed
terminal management contract will have a negative effect on our sales volume of
approximately $7.3 million in 2001 and on gross margins before allocation of
overhead cost of approximately $500,000.
We are a large producer and distributor of ready-mix concrete and quarry
products in these Caribbean islands:
Puerto Rico Commonwealth of Puerto Rico
St. Thomas United States Virgin Islands
St. Croix United States Virgin Islands
St. Maarten Netherlands Antilles
St. Martin French West Indies
Antigua West Indies
Our construction division performs earthmoving, excavating, and filling
operations, builds golf courses, roads, and utility infrastructures, dredges
waterways and constructs deep-water piers and marinas in the Caribbean. We have
historically provided these land development services to both private
enterprises and governments in the Caribbean. We believe that our relationships
with customers in the Caribbean give us a competitive advantage. Our project
managers have substantial experience in land development construction, and our
equipment is well suited for the Caribbean markets. We have equipment and
personnel in the Caribbean that, we believe, often allow us to start work more
quickly and less expensively than other contractors. While we can bid
competitively and cost-effectively for these
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land development contracts, our ability to mobilize quickly can sometimes cause
us to incur higher expense.
The following table sets forth financial highlights of our materials,
construction and other business. See further information in Note 11 of Notes to
Consolidated Financial Statements.
2000 1999 1998
-------- -------- --------
(In thousands)
Revenue (net of intersegment sales):
Materials $ 50,956 $ 55,313 $ 50,448
Construction 14,292 12,721 15,359
Other -- -- 371
-------- -------- --------
$ 65,248 $ 68,034 $ 66,178
======== ======== ========
Operating (loss) income (by segment)
Materials $ (1,608) $ (2,198) $ 693
Construction 1,266 (301) 714
Credit for litigation -- 1,160 461
Other -- -- 116
Unallocated corporate overhead (818) (879) (1,038)
-------- -------- --------
$ (1,160) $ (2,218) $ 946
======== ======== ========
Our executive offices are located at 1350 East Newport Center Drive, Suite 201,
Deerfield Beach, Florida 33442 and our telephone number is (954)429-1500. In
this document, the terms "Company" and "Devcon" refer to Devcon International
Corp. and its subsidiaries.
Business Development
From time to time, we investigate opportunities to expand our operations to
areas of the Caribbean where we presently have no business.
During the first quarter of 2000 we sold our operations in Tortola and Dominica,
our concrete operations in St. Thomas and all our bulk cement terminals. Due to
hurricane damages we have decided to close our Saba operations. See additional
information under Item 1 - Business-General.
Risks of Foreign Operations
Portions of our operation in 2000 were conducted in Caribbean foreign countries,
primarily Antigua and Barbuda, St. Maarten and St. Martin. In 2000, 49.7 percent
of our revenue was derived from foreign operations. Overseas contract work
performed by the parent U.S. corporation is not considered foreign-source
revenue for this calculation. For a summary of our revenue and earnings from
foreign operations, see Note 9 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
territories use the U.S. dollar as currency. The Company is also subject to U.S.
federal income tax
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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 2000 we manufactured and distributed ready-mix concrete, block and
crushed aggregate. We also distributed bulk and bagged cement. The different
activities on the islands are shown below:
Concrete Bulk and
Ready-Mix Quarry Block Bagged
Concrete Aggregates Production Cement
--------- ---------- ---------- ---------
Puerto Rico X
St. Thomas, U.S.V.I. S X X S
St. Croix, U.S.V.I. X X S
Tortola, British V.I. S S
Saba C C C
St. Maarten X X X S
St. Martin X X
Antigua X X X S
Dominica S S
The "S" in the above table corresponds to operations sold in the first quarter
of 2000 and "C" corresponds to closed operations during 2000.
Our materials business employed assets in 2000 such as:
o Quarries o Concrete Batch Plants
o Rock Crushing Plants o Fleet of Concrete Mixer Trucks
o Bulk Cement Terminals o Concrete Block Plants
o Cement Bagging Facilities o Asphalt Plants
See additional information under Item 1 - Business-General.
Ready-Mix Concrete and Concrete Block Our concrete batch plants mix cement,
sand, crushed stone, water and chemical additives to produce ready-mix concrete
for use in local construction. Our fleet of concrete mixer trucks deliver the
concrete to the customer's job site. At our concrete block plants, a
low-moisture concrete mixture is machine-formed, then dried and stored for later
sale. Usually, our ready-mix concrete operations and concrete block plants are
the area's largest or only facility.
Quarry Operations and Crushed Stone We own or lease quarry sites at which we
blast rock from exposed mineral formations. This rock is crushed to sizes
ranging from 3 1/2-inch stones down to manufactured sand. The resulting
aggregate is then sorted, cleaned and stored. The aggregate is sold to customers
and used in our operations to make concrete products. Our quarries are the
largest on five Caribbean islands. It is often less expensive to manufacture
crushed rock at our quarries than to import aggregate from off-island sources.
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Bulk and Bagged Cement In prior years, we owned and operated several bulk cement
terminals and leased a 6,000 metric ton cement ship. The cement for the
Company's terminals was purchased from a number of manufacturers located
throughout the Caribbean basin and delivered to the terminals via the bulk
cement ship. In the beginning of 2000, all of the Company's cement terminals
were sold, and the charter on the bulk cement ship was terminated. The effect of
this transaction was that we now enter the supply chain for cement at a later
stage, and purchase cement directly from the terminals we sold. The Company
purchases cement from these terminals for use in its concrete batch plants, and
for resale of bulk and bagged cement under an exclusive distribution agreement
with the owner of the terminals. The distribution agreement was cancelled as of
March 1, 2001.
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 and bulk cement to the customers' job sites.
Competition We have some competitors in the materials business in the locations
where we conduct business. We encounter competition from the producers of
asphalt, which is an alternative material to concrete for road construction. We
believe our materials market share, resources, facilities, local presence and
cost structure give us a competitive advantage in the eastern Caribbean markets
where we operate.
Construction Division
General We have completed land development construction projects, including
interstate highways, airport sites and runways, deep-water piers and marinas,
hydraulic dredging, golf courses, and industrial, residential and commercial
site development. We pursue the most profitable land development contracts
available in the Caribbean, rather than attempting to maintain a high volume.
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.
5
Operations We obtain leads for new projects from customers and engineering firms
with whom we have established relationships. First, we decide whether to submit
a bid or negotiate to undertake a particular project. We prepare and submit
timely proposals detailing what we believe will best meet the customer's
objectives. We have also provided long-term or short-term financing to obtain
more profitable construction contracts, and any financing by us in the future is
contingent upon our financial position and operating results. Project proposals
and bids are reviewed by our Vice President of Construction Operations and/or
our President. After a customer accepts our proposal, a formal contract is
negotiated. We are normally the prime contractor. We assign a project manager
and one of our seven 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, 2000 was $13.0 million involving 7 projects. One Bahamian project's
backlog amounts to $12.3 million at the end of 2000. A subsidiary and two of our
directors are minority partners, and our President is Chairman of the entity
developing this project. This partnership does not yet have the necessary
financing to complete the development of the project and there is uncertainty as
to whether it will obtain necessary financing. Therefore, the amount of the
backlog could substantially diminish and the timing of completion could vary.
The backlog of $13.0 million at the end of 2000 compares to $18.7 million
involving 6 projects at December 31, 1999. Since December 31, 2000 we have
entered into new construction and dredging contracts in the Caribbean amounting
to $8.1 million. We expect most of the current backlog to be completed during
2001, except for the project in the Bahamas.
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 bond
all contracts that so required.
Competition Land development construction is extremely competitive. 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. We believe that we compete effectively and have a favorable
competitive position in our Caribbean markets.
Other Operations
Marina Two of our subsidiaries owned a Virgin Islands general partnership formed
in 1988 to construct and operate a marina on a 4.92 acre parcel of land leased
from the U.S. Virgin Islands government. The marina was sold for $3.3 million on
February 3, 1998 and we recognized a loss of $108,000 in 1997.
Tax Exemptions and Benefits
Most of our offshore earnings are taxed at rates lower than U.S. statutory
federal income tax rates due to tax exemptions and lower prevailing tax rates
offshore. The U.S. Virgin Islands Industrial Development Commission granted us
tax exemptions on most of our U.S. Virgin Islands earnings through 2003.
6
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 our United States operations of: (1) earnings from our
U.S. Virgin Islands operations accumulated prior to April 1, 1988; or (2)
earnings from our Antigua, St. Martin and St. Maarten operations, would subject
us to U.S. federal income tax on the amounts distributed, less applicable taxes
paid in those jurisdictions. At December 31, 2000, $37.6 million of accumulated
earnings had not been distributed to our U.S. operations. 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 manner.
Our tax exemption and our ability to receive most of the current earnings from
our U.S. Virgin Islands operations without subjecting us to U.S. income taxes
reduce our income tax expense. For further information on our tax exemptions and
income taxes, see Note 8 of Notes to Consolidated Financial Statements.
Equipment
Both of our businesses require us to lease or purchase and maintain equipment.
As of December 31, 2000, our equipment included cranes, bulldozers, road
graders, rollers, backhoes, earthmovers, a hydraulic dredge, barges, rock
crushers, bulk cement handling equipment and concrete batch and block plants,
concrete mixer trucks, asphalt processing and paving equipment and other items.
Some of this equipment is encumbered by chattel mortgages. 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 division.
During 1998, 1999 and 2000 we invested a total of $184,000 for a 1.2 percent
interest in a real estate joint venture in the Bahamas. The upscale resort
project awaits final financing to finish its development, however, there is
uncertainty whether it will obtain this financing. Two of our directors have an
interest in the joint venture. See Note 12 of Notes to Consolidated Financial
Statements.
During the last three years we invested a total of $177,000 for a 33.3 percent
interest in a real estate company in Puerto Rico that owns the land where the
Aguadilla aggregate processing plant operates. During 2000 we recognized a loss
of $23,000 using the equity method of accounting.
Executive Officers
The executive officers of the Company are as follows:
Donald L. Smith, Jr., 79, a co-founder of the Company, has served as its
Chairman of the Board, President and Chief Executive Officer since its formation
in 1951.
7
Richard L. Hornsby, 65, 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.
Henry C. Obenauf, 71, was appointed Vice President-Engineering of the Company in
March 1989, after having served as Vice President of the Company since 1977. Mr.
Obenauf has been employed by the Company for over 33 years.
Jan A. Norelid, 47, 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, 48, was appointed Vice President-Construction Operations
for the Company in December 1992. Starting in March 1992, he served as Assistant
Vice President for Construction Operations-South Florida and Caribbean. Mr.
Smith joined the Company in 1976 and has served in supervisory and managerial
positions within the Company since that time.
Employees
At December 31, 2000 we employed 94 persons in the construction business in the
Caribbean, of whom 17 are members of a union. As of the same date, we employed
308 persons in our materials division, of whom 91 are members of a union.
Employee relations are considered satisfactory.
8
Item 2. Property
General
Nearly all of the real property that the Company owns or leases is utilized by
its materials division.
Other Property
We own undeveloped parcels of land in the U.S. Virgin Islands and Antigua.
The following table shows information on the property and facilities that we
owned or leased for our operations at December 31, 2000:
Lease Expiration
Description Location with all Options Area
----------- -------- ---------------- -----
Shared facilities
- -----------------
Principal executive offices Deerfield Beach 5/07 8,410 sq. ft. (1)
Maintenance shop for heavy equipment Deerfield Beach Month-to-Month 4.40 acres (1)(2)
Materials Segment
- -----------------
Concrete block plant and equipment St. Thomas 6/04 11.00 acres (1)
maintenance facility
Quarry St. Thomas - 8.50 acres
Quarry St. Thomas 2/08 44.00 acres (1)
Barge terminal St. Thomas Month-to-Month 1.50 acres (1)
Quarry St. Thomas 8/06 7.49 acres (1)
Concrete batch plant and office St. Croix - 3.20 acres
Quarry, rock crushing plant St. Croix - 61.34 acres
Maintenance shop St. Croix 7/10 6.00 acres (1)
Quarry St. Croix 5/03 10.78 acres (1)
Concrete batch plant, concrete block Antigua 9/16 22.61 acres (1)
plant, rock crushing plant, asphalt
plant, quarry and office
Concrete block plant St. Maarten Month-to-Month 3.00 acres (1)
Barge unloading facility St. Maarten 5/05 .30 acres (1)
Office building, batch plant, shop St. Maarten Month-to-Month 1.39 acres
Quarry, and concrete batch plant Saba 12/02 6.00 acres (1) (3)
Concrete batch plant St. Kitts Month-to-Month 1.00 acre (1) (3)
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)
Aggregate processing plant Aguadilla, P.R. 6/01 100.00 acres (1)(3)(4)
- ------------
(1) Underlying land is leased but equipment and machinery on the land are
owned by the Company.
(2) Leased from Donald L. Smith, Jr., the Company's Chief Executive. See
Note 12 of Notes to Consolidated Financial Statements.
(3) Acreage is estimated.
(4) Land is owned by the same owners as the operating company with small
change of percentage ownership.
9
Item 3. Legal Proceedings
We are sometimes involved in routine litigation arising in the ordinary course
of our business, primarily construction.
In the late 1980s, Bouwbedrijf Boven Winden, N.V., ("BBW") currently a Devcon
subsidiary in the Netherlands Antilles, supplied concrete to a large apartment
complex on the French side of St. Maarten. In the early 1990s the buildings
began to develop exterior cracking and "popouts." 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 popouts and to determine if the
cracking/popouts are caused by a phenomenon known as alkali reaction (ARS). The
expert found, in his report dated December 3, 1998, 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, the plaintiff would have to file the same
claim in an Antillean court. It is too early to predict the final outcome of
this matter. During 2000 no actions have been taken in or by the court.
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, 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 2000.
10
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.
2000 High Low
---- ---- ---
First Quarter $7.38 $5.13
Second Quarter 7.50 6.38
Third Quarter 7.47 6.25
Fourth Quarter 7.06 5.31
1999 High Low
---- ---- ---
First Quarter $2.75 $1.56
Second Quarter 3.44 1.44
Third Quarter 3.31 2.72
Fourth Quarter 5.78 2.88
As of March 7, 2001 there were 175 holders of record of the outstanding shares
of Common Stock plus more than 800 beneficial owners holding our Common Stock in
their brokers' name. The closing sales price for the Common Stock on March 16,
2001, was $6.25. We paid no dividends in 2000 or 1999. 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 dividends. No unregistered
securities were sold or issued in 2000, 1999 or 1998.
Item 6. Selected Financial Data
The following is our selected financial data which should be read in conjunction
with our Consolidated Financial Statements and accompanying notes and with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." This data is derived from our Consolidated Financial Statements
audited by KPMG LLP, independent certified public accountants. Our Consolidated
Financial Statements as of December 31, 2000 and 1999 and for each of the three
years ended December 31, 2000 and the independent auditors' report appear
elsewhere in this document.
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Year Ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Earnings Statement Data:
Materials revenue $ 50,956 $ 55,313 $ 50,448 $ 51,461 $ 52,987
Construction revenue 14,292 12,721 15,359 9,852 13,982
Other revenue -- -- 371 2,931 2,509
-------- -------- -------- -------- --------
Total revenue 65,248 68,034 66,178 64,244 69,478
Cost of materials 42,608 46,364 41,281 41,659 39,277
Cost of construction 11,461 11,000 12,900 9,709 12,458
Cost of other -- -- 246 2,311 1,913
-------- -------- -------- -------- --------
Gross profit 11,179 10,670 11,751 10,565 15,830
Operating expenses 12,339 12,888 10,806 23,143 12,359
-------- -------- -------- -------- --------
Operating (loss) income (1,160) (2,218) 945 (12,578) 3,471
Other income (deductions) 20,362 (821) (122) (2,651) (2,287)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes 19,202 (3,039) 823 (15,229) 1,184
Income taxes 715 273 339 307 383
-------- -------- -------- -------- --------
Income (loss) from
continuing
operations 18,487 (3,312) 484 (15,536) 801
Loss from discontinued
operations, net -- -- -- -- (488)
-------- -------- -------- -------- --------
Net earnings (loss) $ 18,487 $ (3,312) $ 484 $(15,536) $ 313
======== ======== ======== ======== ========
Earnings (loss) per share
from continuing operations:
Basic $ 4.80 $ (0.74) $ 0.11 $ (3.45) $ 0.18
Diluted $ 4.40 $ (0.74) $ 0.11 $ (3.45) $ 0.17
Weighted average
number of shares outstanding:
Basic 3,851 4,481 4,499 4,499 4,490
Diluted 4,202 4,481 4,520 4,499 4,597
Balance Sheet Data:
Working capital $ 14,035 $ 6,549 $ 6,910 $ 8,713 $ 12,063
Total assets 72,136 81,914 82,430 86,433 94,926
Long-term debt, excl
current portion 2,465 14,350 18,153 16,982 19,251
Stockholders' equity 52,434 39,436 43,641 42,816 59,552
12
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."
Net Income (Loss)
Net Gross Income Per Share
Sales Profit (Loss) Basic Diluted
----- ------ ------ ----- -------
(in thousands except for per share amounts)
2000
Fourth Quarter $15,584 $2,553 $ 441 $0.12 $0.11
Third Quarter 17,433 3,609 1,584 0.42 0.39
Second Quarter 16,494 3,006 671 0.17 0.16
First Quarter 15,737 2,011 15,791 3.94 3.66
1999
Fourth Quarter $14,532 $1,192 $(3,832) $(0.86) $(0.86)
Third Quarter 16,842 2,467 (70) (0.02) (0.02)
Second Quarter 18,425 3,791 463 0.10 0.10
First Quarter 18,235 3,220 127 0.03 0.03
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.
This Form 10-K contains certain "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which represent the Company's expectations and beliefs. These statements
involve risks and uncertainties that are beyond our control, and actual results
may differ materially depending on many factors, including the financial
condition of our customers, changes in domestic and foreign economic and
political conditions, demand for our services, and changes in our competitive
environment.
These and other factors could cause actual results or outcomes to differ
materially from those expressed in our forward-looking statements. Any
forward-looking statement speaks only as of the date it is made. We undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date it is made. It is not possible for management to
predict unanticipated factors or the effect they might have on our business.
Comparison of Year Ended December 31, 2000 with Year Ended December 31, 1999
Revenue
Our revenue was $65.2 million in 2000 and $68.0 million in 1999. This 4.1
percent decrease reflects a decrease in materials revenue, partially offset by
an increase in construction revenue.
Our materials revenue decreased 7.9 percent to $51.0 million in 2000 from $55.3
million in 1999. This decrease was primarily due to the sale of the concrete
operations on St. Thomas, Tortola and Dominica. Excluding the sale
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of these operations, materials revenue increased by 20.8%, primarily due to
increased demand for quarry products in St. Martin and Puerto Rico and increased
sale of cement in St. Croix. At this time, we cannot predict materials revenue
levels in 2001. However, the total volume may be decreased due to the
termination of our distribution agreement for the sale of cement.
Revenue from our construction division increased 12.3 percent to $14.3 million
in 2000 from $12.7 million in 1999. This increase resulted primarily from
increased activity with our dredge. Our backlog of unfilled portions of land
development contracts at December 31, 2000 was $13.0 million involving 7
projects, as compared to $18.7 million involving 6 projects at December 31,
1999. The backlog of the contract in the Bahamas at December 31, 2000 was $12.3
million. We expect most of this contract not to be completed during 2001. There
is uncertainty whether or not the project will receive its final financing.
Therefore, the amount of the backlog could substantially diminish and timing of
completion could vary. See Note 12 of Notes to Consolidated Financial Statements
and Item 7 "Liquidity and Capital Resources". Since December 31, 2000 we have
entered into new construction and dredging contracts in the Caribbean amounting
to $8.1 million. We expect to complete the other remaining contracts during
2001.
Cost of Materials
Cost of materials decreased slightly to 83.6 percent of materials revenue in
2000 from 83.8 percent in 1999. The cost decrease was due to improved sales
volumes and, therefore, better margins on St. Martin and Puerto Rico, offset to
a lesser extent by higher production costs in Antigua and lower margin on our
cement sales.
Cost of Construction
Cost of construction decreased to 80.2 percent of construction revenue in 2000
from 86.5 percent in 1999. Decreased costs as a percent of revenue were due to
higher profitability on some 2000 contracts, especially dredging contracts, and
the completion of contracts with very low or negative margins in 1999. Our gross
margins are also affected by the profitability of each contract and the stage of
completion.
Operating Expenses
Selling, general and administrative expenses ("SG&A expense") decreased by 13.1
percent to $11.3 million in 2000 from $13.0 million in 1999. This decrease is
primarily due to the sale of the operations in St. Thomas and Tortola and to
accruals established in 1999 in connection with collective bargaining
agreements. SG&A expense as a percentage of revenue decreased to 17.3 percent in
2000 from 19.1 percent in 1999.
In 1999 we reduced our provision for litigation by $1.2 million due to the
settlement of two major lawsuits.
Due to lower profitability, lower volumes and hurricane damages, management upon
its review in 2000 and 1999 of long-lived assets, determined that impairment had
occurred to some of our assets. An impairment expense was recognized of $702,000
in 2000 compared to $805,000 in 1999. In 2000, goodwill recorded in connection
with our purchase of our subsidiary in St. Martin was written down by $378,000
due to low profitability. In addition,
14
the remaining assets in Saba were determined to be impaired due to the closure
of its operations, and certain obsolete equipment was also determined to be
impaired. In 1999, a significant portion of our quarry assets in Saba were
written down and idle assets on St. Kitts and St. Croix were also determined to
be impaired.
Divisional Operating Loss
The operating loss was $1.2 million in 2000 compared to an operating loss of
$2.2 million in 1999. Our materials division had an operating loss of $1.6
million in 2000, representing an improvement of $591,000 compared to an
operating loss of $2.2 million in 1999. This reduction in the loss is primarily
due to improved profitability in St. Martin and Puerto Rico and accruals
recorded in 1999 in connection with collective bargaining agreements, offset to
a lesser extent by higher cement cost and the effect that the sale of our
operations in St. Thomas, Tortola and Dominica had on our operating income in
2000. Our construction division had operating income of $1.3 million in 2000
compared to an operating loss of $301,000 in 1999, an improvement of $1.6
million. This increase is primarily attributable to improved margins and a
$200,000 write down of a note in 1999.
Other Income
We recognized a gain on the sale of our cement terminals and the concrete
business in St. Thomas and the Tortola operation, in the aggregate amount of
$18.3 million. We had gains on sale of other property and equipment of $154,000
in 2000 compared to $14,000 in 1999. Our interest expense decreased to $913,000
in 2000 from $2.4 million in 1999 due to a substantial reduction of outstanding
debt, utilizing the proceeds of our sales of operations as mentioned above. Our
interest income increased to $2.5 million in 2000 compared to $630,000 in 1999.
Our interest income increased due to interest recognized on notes receivable due
from the Government of Antigua and Barbuda, and to a lesser extent to higher
levels of cash and cash equivalents. Previously we had estimated we would record
$2.1 million for year 2000 in interest from these Antigua notes, however, due to
the fact that the payments received were less than anticipated, the interest
recorded was $1.5 million. The decrease in payments was due to a delay in the
implementation of property taxes. We expect to record interest of $1.9 million
from these notes in 2001. The minority interest allocation of losses decreased
to $314,000 in 2000 from $830,000 in 1999, mainly due to improved result in our
operations in Puerto Rico.
Income Taxes
Income taxes increased to $716,000 in 2000 from $273,000 in 1999. 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. See Note 8 of Notes to Consolidated Financial Statements and "Business - Tax
Exemptions and Benefits."
Net Earnings (Loss)
Our net income was $18.5 million in 2000 compared to a net loss of $3.3 million
in 1999. This change in profitability was primarily attributable to the profit
recognized on the sales of assets in the beginning of the year, net interest
income, and to a lesser extent, reduced operating loss.
15
Comparison of Year Ended December 31, 1999 with Year Ended December 31, 1998
Revenue
Our revenue was $68.0 million in 1999 and $66.2 million in 1998. This 2.8
percent increase reflects an increase in materials revenue, partially offset by
decreases in construction and in other revenue.
Our materials revenue increased 9.6 percent to $55.3 million in 1999 from $50.4
million in 1998. This increase was primarily due to increased demand for this
division's products on certain Caribbean islands, partially offset by decreased
demand on other Caribbean islands, particularly due to disruptions from
hurricanes Georges and Lenny.
Revenue from our construction division decreased 17.2 percent to $12.7 million
in 1999 from $15.4 million in 1998. This decrease resulted from finishing some
medium-sized contracts during 1999 and a slowdown of our work in connection with
the $23.8 million contract in Exuma, Bahamas. Our backlog of unfilled portions
of land development contracts at December 31, 1999 was $18.7 million involving 6
projects, as compared to $16.3 million involving 10 projects at December 31,
1998. The backlog of the contract in the Bahamas at December 31, 1999 was $15.1
million. See Note 12 of Notes to Consolidated Financial Statements and Item 7
"Liquidity and Capital Resources".
Cost of Materials
Cost of materials rose slightly to 83.8 percent of revenue in 1999 from 81.8
percent in 1998. The cost increase was due to higher production costs in St.
Martin, Saba and Puerto Rico, offset to a lesser extent by improved sales
volumes and, therefore, better margins on Antigua and Dominica.
Cost of Construction
Cost of construction increased to 86.5 percent of revenue in 1999 from 84.0
percent in 1998. Increased costs as a percent of revenue were due to lower
profitability on some 1999 contracts. Our gross margins were also affected by
the profitability of each contract and the stage of completion.
Operating Expenses
Selling, general and administrative expenses ("SG&A expense") increased by 14.8
percent to $13.0 million in 1999 from $11.3 million in 1998. This increase is
primarily due to accruals in connection with collective bargaining agreements
and due to increased costs on some of the islands, most notably Antigua and St.
Martin. SG&A expense as a percentage of revenue increased to 19.1 percent in
1999 from 17.1 percent in 1998.
In the fourth quarter of 1998 we accrued $1.5 million for legal fees and a write
off of a receivable related to a Florida State Court judgment. We also reduced
our provision for litigation by $2.0 million, due to the partial settlement on
another lawsuit. In 1999 we reduced our provision for litigation by $1.2 million
due to the settlement of two major lawsuits.
Due to hurricane damages and lower volumes, management upon its review in 1999
of long-lived assets, determined that impairment had occurred to some of our
assets. A significant portion of our quarry assets in Saba were written down due
to hurricane damages on the island, particularly the adjacent harbor
16
used for export of aggregates. Idle assets on St. Kitts and St. Croix were also
impaired. An impairment loss was recognized of $805,000 in 1999, compared to no
expense in 1998.
Substantially due to the write down in 1999 of one note receivable in St. Croix
by $200,000, the provision for doubtful accounts in 1999 was an expense of
$231,000 compared to a benefit of $65,000 in 1998.
Divisional Operating (Loss) Income
The operating loss was $2.2 million in 1999 compared to income of $945,000 in
1998. Our materials division had an operating loss of $2.2 million in 1999,
representing a decrease of $2.9 million compared to income of $693,000 in 1998.
This decrease in profitability was primarily due to accruals in connection with
collective bargaining agreements, the impairment of assets on Saba and St.
Kitts, and losses incurred on Puerto Rico and St. Martin, offset to a small
extent by improved profit margin on some islands. Our construction division had
an operating loss of $301,000 in 1999 compared to income of $714,000 in 1998, a
deterioration of $1.0 million. This decrease is mainly attributable to lower
activity specifically due to the slowdown of the contract in the Bahamas and a
$200,000 write down of a note.
Other Income
We had gains on sale of property and equipment of $14,000 in 1999 compared to
$507,000 in 1998. We recognized in 1998 $278,000 in profit on the sale of our
share of the CorbKinnon joint venture. Our interest expense increased to $2.4
million in 1999 from $2.1 million in 1998. This increase is due to increased
loan balances and rising interest rates in 1999. Our interest income decreased
to $630,000 in 1999 compared to $1.1 million 1998. This is due to our
recognizing less income from cash receipts in excess of anticipated amounts from
agreed upon sources from the notes receivable due from the Government of Antigua
and Barbuda.
Income Taxes
Income taxes decreased to $273,000 in 1999 from $339,000 in 1998. Our tax rate
varies depending on the level of our earnings in the various tax jurisdictions
where we operate, the level of operating loss carry-forwards and tax exemptions
available to us. See Note 8 of Notes to Consolidated Financial Statements and
"Business - Tax Exemptions and Benefits."
Net (Loss) Earnings
Our net loss was $3.3 million in 1999 compared to income of $484,000 in 1998.
This change in profitability was primarily attributable to decreased gross
profit of $1.1 million, accrual of severance of $1.0 million, an impairment loss
of $805,000, increased provision for doubtful accounts and notes of $231,000,
increased interest cost of $295,000, reduced interest income of $448,000, offset
to a lesser extent by an increased credit for litigation of $699,000 and
increased minority interest income of $670,000.
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
17
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. 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 will be adequate to meet our needs during
the next 12 months.
As of December 31, 2000, our liquidity and capital resources included cash and
cash equivalents of $8.2 million and working capital of $14.0 million. As of
December 31, 2000, total outstanding liabilities were $19.7 million compared to
$42.5 million as of December 31, 1999. As of December 31, 2000, available lines
of credit totaled $1.3 million.
Cash flow provided by operating activities for the year ended December 31, 2000
was $2.3 million compared with $2.4 million for the year ended December 31,
1999. The primary use of cash for operating activities during the year ended
December 31, 2000 was an increase in receivables of $4.5 million and an increase
in costs in excess of billings and estimated earnings of $1.1 million. The
primary source of cash from operating activities was an increase in accounts
payable and accrued expenses of $2.3 million.
Net cash provided by in investing activities was $17.8 million in 2000.
Purchases of property, plant, and equipment were $5.0 million. The purchases
were to a large extent paid in cash. Proceeds from disposition of businesses
were $23.2 million and purchases of treasury stock was $2.7 million.
We turned our fiscal year-end accounts receivable, excluding notes and employee
receivables, approximately 5.1 times in 2000 compared to 5.7 times in 1999. The
reduction resulted from a lower turnover rate for the materials division
accounts receivable, due to a reduction in the turnover rate in the U.S. Virgin
Islands and St. Martin. The construction division showed a small improvement.
On November 1, 1999, we extended a $1.0 million note to the venture in the
Bahamas, secured by equipment and guarantees. As of December 31, 2000 $826,000
was outstanding. See Note 3 of Notes to Consolidated Financial Statements. As of
December 31, 2000 we had trade receivables, net of billings in excess of costs
and estimated earnings, from the venture of approximately $2.0 million;
subsequent to the year-end we received $778,000 in payments and issued $630,000
in additional contract billings. Our President has personally guaranteed $1.2
million of the outstanding trade receivables from the venture. We expect to
receive interim payments from the venture's cash resources to cover our
incremental costs while the venture is seeking its total financing.
The Company entered into a credit agreement with a Caribbean bank in November
1996 for a total credit of $7.0 million. One part of the credit agreement is a
term loan for $6.0 million, which was fully paid in 2000. The second part is a
revolving line of credit of $1.0 million. The credit line has a review and
re-approval process in July of each year until 2002. We had $300,000
18
outstanding under this line of credit at December 31, 2000. The interest rate on
amounts borrowed under both loans varies with the prime rate.
We have a $500,000 unsecured overdraft facility from a commercial bank in the
Caribbean. The facility is due on demand and bears interest at 14.0 percent per
annum. At December 31, 2000, the Company had no borrowings outstanding under
this line.
At December 31, 2000 we had borrowed approximately $2.1 million from the Company
President. The note to the President is unsecured and bears interest at a rate
variable with the prime rate. Eight hundred thousand is due on demand and $1.3
million is due on April 1, 2002.
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 should result in a net
cash expenditure of approximately $3.5 million. At present, management believes
that our inventory of construction equipment is adequate for our current
contractual commitments and operating activities. New construction contracts
may, depending on the nature of the contract and job location and duration,
require us to make significant investments in heavy construction equipment.
During 2000 we sold equipment with an original cost basis of approximately
$657,000 and a net book value of approximately $146,000. The net proceeds were
approximately $254,000. During 2000 we also sold real property in the Caribbean
with net proceeds of $591,000. We realized a gain of approximately $154,000 on
these transactions. We believe we have available funds or can obtain sufficient
financing for our contemplated equipment replacements and additions.
Historically, we have used a number of lenders to finance a portion of our
machinery and equipment purchases. At December 31, 2000, amounts outstanding to
these lenders totaled $1.3 million. These loans are typically repaid over a
three to five-year term in monthly principal and interest installments.
A significant portion of our outstanding debt bears interest at variable rates.
A substantial increase in interest rates could negatively impact us.
Our notes receivable at December 31, 2000 include $7.5 million in promissory
notes from the Government of Antigua with approximately $138,000 classified as a
current receivable.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
We do not believe that there is any material market risk exposure with respect
to derivative or other financial instruments that would require disclosure under
this item.
19
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 21
Financial Statements:
Consolidated Balance Sheets 22-23
December 31, 2000 and 1999
Consolidated Statements of Operations 24
For Each of the Years in the Three-Year Period
Ended December 31, 2000
Consolidated Statements of Stockholders' Equity 25
and Comprehensive Income for Each of the Years
in the Three-Year Period Ended December 31, 2000
Consolidated Statements of Cash Flows 26-27
For Each of the Years in the Three-Year Period
Ended December 31, 2000
Notes to Consolidated Financial Statements 28-50
Schedule II - Valuation and Qualifying Accounts 57
20
Independent Auditors' Report
The Board of Directors and Stockholders
Devcon International Corp.:
We have audited the consolidated financial statements of Devcon International
Corp. and subsidiaries (the "Company") as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and this financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and this
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Devcon International
Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Fort Lauderdale, Florida
March 26, 2001
21
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
Assets 2000 1999
- ------ ------------ ------------
Current assets:
Cash $ 2,056,963 $ 1,406,941
Cash equivalents 6,109,991 4,737,311
Receivables, net 13,800,628 12,878,643
Costs in excess of billings and
estimated earnings 1,405,898 258,780
Inventories 2,938,099 3,829,450
Assets held for sale -- 7,559,066
Prepaid expenses and other assets 593,691 803,166
------------ ------------
Total current assets 26,905,270 31,473,357
Property, plant and equipment, net
Land 1,455,045 1,920,539
Buildings 1,217,706 2,372,240
Leasehold improvements 3,203,760 3,516,202
Equipment 51,090,785 52,380,167
Furniture and fixtures 802,615 785,359
Construction in process 1,024,035 3,091,160
------------ ------------
58,793,946 64,065,667
Less accumulated depreciation (25,643,780) (25,722,376)
------------ ------------
33,150,166 38,343,291
Investments in unconsolidated joint
ventures and affiliates, net 281,819 277,081
Receivables, net 10,797,177 9,556,539
Intangible assets, net of accumulated
amortization -- 936,829
Other assets 1,001,639 1,326,917
------------ ------------
Total assets $ 72,136,071 $ 81,914,014
============ ============
See accompanying notes to consolidated financial statements.
22
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
December 31, 2000 and 1999
2000 1999
------------ ------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable, trade and other $ 7,175,610 $ 4,926,700
Accrued expenses and other liabilities 2,945,490 3,103,083
Deposit on sale of assets -- 8,000,000
Notes payable to banks 300,000 625,000
Current installments of long-term debt 1,501,656 6,956,246
Billings in excess of costs and
estimated earnings 535,547 1,026,316
Income taxes 412,454 287,423
------------ ------------
Total current liabilities 12,870,757 24,924,768
Long-term debt, excluding current
installments 2,464,834 14,349,708
Minority interest in consolidated
subsidiaries 474,444 932,325
Deferred income taxes 366,095 647,672
Deferred gain on sale of businesses 2,070,859 --
Other liabilities 1,454,618 1,623,331
------------ ------------
Total liabilities 19,701,607 42,477,804
Stockholders' equity
Common stock, $0.10 par value
Authorized 15,000,000 shares,
Issued 3,836,285 in 2000 and
4,498,935 in 1999, outstanding
3,664,985 and 4,457,135
shares in 2000 and 1999,
respectively 383,628 449,894
Additional paid-in capital 10,279,284 12,064,133
Accumulated other comprehensive loss -
cumulative translation adjustment (2,037,502) (1,594,577)
Retained earnings 45,018,868 28,674,264
Treasury stock (1,209,814) (157,504)
------------ ------------
Total stockholders' equity 52,434,464 39,436,210
------------ ------------
Commitments and contingencies
Total liabilities and
stockholders' equity $ 72,136,071 $ 81,914,014
============ ============
See accompanying notes to consolidated financial statements.
23
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
For Each of the Years in the Three-Year Period Ended December 31, 2000
2000 1999 1998
------------ ------------ ------------
Materials revenue $ 50,956,382 $ 55,312,885 $ 50,448,275
Construction revenue 14,291,801 12,720,918 15,358,591
Other revenue -- -- 371,386
------------ ------------ ------------
Total revenue 65,248,183 68,033,803 66,178,252
Cost of materials (42,607,478) (46,364,378) (41,281,263)
Cost of construction (11,461,423) (10,999,585) (12,899,491)
Cost of other -- -- (245,880)
------------ ------------ ------------
Gross profit 11,179,282 10,669,840 11,751,618
Operating expenses:
Selling, general and
administrative (11,302,430) (13,012,443) (11,333,598)
(Provision for) recovery of
doubtful accounts and notes (334,811) (230,517) 66,892
Impairment of long-lived assets (702,345) (804,695) --
Credit for litigation -- 1,160,137 460,794
------------ ------------ ------------
Operating (loss) income (1,160,304) (2,217,678) 945,706
------------ ------------ ------------
Other income (deductions):
Joint venture equity loss (23,166) (17,700) (39,000)
Gain on sale of property
and equipment 153,561 13,620 507,256
Gain on sale of businesses 18,293,045 -- --
Interest expense (913,456) (2,408,414) (2,113,224)
Interest income 2,464,971 629,735 1,078,186
Minority interest 313,748 830,484 160,820
Other income 73,965 131,540 283,970
------------ ------------ ------------
20,362,668 (820,735) (121,992)
------------ ------------ ------------
Income (loss) before
income taxes 19,202,364 (3,038,413) 823,714
Income taxes (715,756) (273,231) (339,441)
------------ ------------ ------------
Net earnings (loss) $ 18,486,608 $ (3,311,644) $ 484,273
============ ============ ============
Earnings (loss) per common
share - basic $ 4.80 $ (0.74) $ 0.11
============ ============ ============
Earnings (loss) per common
share - diluted $ 4.40 $ (0.74) $ 0.11
============ ============ ============
Weighted average number of common
shares outstanding - basic 3,850,566 4,481,304 4,498,935
============ ============ ============
Weighted average number of common
shares outstanding - diluted 4,201,537 4,481,304 4,520,460
============ ============ ============
See accompanying notes to consolidated financial statements.
24
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For Each of the Years in the Three-Year Period Ended December 31, 2000
Accumulated
Additional Other
Common Paid-in Comprehensive Retained Treasury
Stock Capital (Loss)Income Earnings Stock Total
------- ---------- ---------- ---------- ---------- ----------
Balance at
Dec. 31, 1997 449,894 12,064,133 (1,200,000) 31,501,635 -- 42,815,662
Comprehensive income:
Net earnings 484,273 484,273
Currency translation
adjustment 340,624 340,624
---------- ---------- ---------
Comprehensive income 340,624 484,273 824,897
------- ---------- ---------- ---------- ---------- ----------
Balance at
Dec. 31, 1998 449,894 12,064,133 (859,376) 31,985,908 -- 43,640,559
Comprehensive loss:
Net loss (3,311,644) (3,311,644)
Currency translation
adjustment (735,201) (735,201)
---------- ----------- ----------
Comprehensive loss (735,201) (3,311,644) (4,046,845)
Repurchase of 41,800 shares (157,504) (157,504)
------- ---------- ---------- ---------- ---------- ----------
Balance at
Dec. 31, 1999 449,894 12,064,133 (1,594,577) 28,674,264 (157,504) 39,436,210
Comprehensive income:
Net earnings 18,486,608 18,486,608
Currency translation
adjustment (442,925) (442,925)
---------- ---------- ----------
Comprehensive income (442,925) 18,486,608 18,043,683
Repurchase of
805,350 shares (5,074,229) (5,074,229)
Retirement of
675,850 shares (67,586) (1,812,329) (2,142,004) 4,021,919 -
Exercise of stock options 1,320 27,480 28,800
------- ---------- ---------- ---------- ---------- ----------
Balance at
Dec. 31, 2000 383,628 10,279,284 (2,037,502) 45,018,868 (1,209,814) 52,434,464
======= ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
25
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Each of the Years in the Three-Year Period Ended December 31, 2000
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ 18,486,608 $ (3,311,644) $ 484,273
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities:
Depreciation and amortization 5,174,699 6,371,683 5,864,659
Deferred income tax benefit (253,898) (19,404) (735)
Joint venture equity loss 23,166 17,700 39,000
Joint venture advance write-off -- -- 50,000
Provision for (recovery of)
doubtful accounts and notes 334,811 230,517 (66,892)
Impairment on long-lived assets 702,345 804,695 --
Gain on sale of property
and equipment (153,561) (13,620) (507,256)
Gain on sale of business (18,293,045) -- --
Credit for litigation -- (1,160,137) (460,794)
Minority interest in loss of
consolidated subsidiaries (313,748) (830,484) (160,820)
Changes in operating assets and liabilities:
(Increase) decrease in
receivables (4,455,005) (512,426) 632,885
(Increase) decrease in costs
in excess of billings and
estimated earnings (1,147,118) 451,777 (380,850)
Decrease in inventories 2,788 625,161 310,403
Decrease (increase) in other
assets 136,307 (193,316) 544,672
Increase (decrease) in accounts
payable and accrued expenses 2,268,072 (956,287) (553,814)
(Decrease) increase in billings
in excess of costs and estimated
earnings (490,769) 711,309 177,599
Increase (decrease) in income
taxes payable 228,684 53,046 (216,407)
Increase (decrease) in other
non-current liabilities 45,177 90,640 (486,724)
------------ ------------ ------------
Net cash provided by operating
activities $ 2,295,513 $ 2,359,210 $ 5,269,199
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
26
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For Each of the Years in the Three-Year Period Ended December 31, 2000
2000 1999 1998
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and
equipment $ (4,981,110) $ (8,282,294) $ (7,589,323)
Proceeds from disposition of
property, plant and equipment 845,325 787,425 3,861,128
Proceeds and deposits from
disposition of business 23,196,405 8,000,000 --
Issuance of notes (414,000) (1,016,000) (514,135)
Payments on notes 1,888,224 4,101,724 2,751,379
Purchase of treasury stock (2,684,700) (157,504) --
Advances to affiliates (27,904) (57,411) (153,020)
Advances from affiliates -- -- 89,067
------------ ------------ ------------
Net cash provided by (used in)
investing activities 17,822,240 3,375,940 (1,554,904)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of stock 28,800 -- --
Proceeds from debt 810,389 6,952,371 7,956,147
Principal payments on debt (18,609,240) (9,339,019) (10,116,587)
Net (repayments) borrowings from
bank overdrafts (325,000) 536,892 (296,365)
------------ ------------ ------------
Net cash (used in) financing
activities (18,095,051) (1,849,756) (2,456,805)
------------ ------------ ------------
Net increase in cash
and cash equivalents 2,022,702 3,885,394 1,257,490
Cash and cash equivalents at
beginning of year 6,144,252 2,258,858 1,001,368
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 8,166,954 $ 6,144,252 $ 2,258,858
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 986,386 $ 2,415,150 $ 2,241,507
============ ============ ============
Cash paid for income taxes $ 732,702 $ 237,790 $ 264,986
============ ============ ============
Supplemental non-cash items:
During each of 2000, 1999 and 1998, the Company recorded a translation
adjustment of $(442,925), $(735,201) and $340,624 respectively, related to its
subsidiary in St. Martin.
During 1998 the company exchanged shares in a joint venture and $260,000 cash
for three concrete pump trucks valued at $885,000.
See accompanying notes to consolidated financial statements
27
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 bulk and
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. Significant 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% are accounted for by using the cost
method.
(c) Revenue Recognition
Materials Division
Revenue is recognized when the products are delivered.
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 estimatable, are charged to earnings. 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.
Other
Other revenue consists of revenue from a marina that the
Company sold in 1998. Revenue was recognized when products or
services were delivered.
28
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits and all
highly liquid debt instruments with an original maturity of
three months or less.
(e) 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.
(f) Inventories
The cost of sand, stone, cement and concrete block inventories
is determined using average costs approximating the first-in,
first-out (FIFO) method and is not in excess of market. All
other inventories are stated at the lower of average cost or
market.
(g) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
is calculated on the straight-line method over the estimated
useful life of each asset. Leasehold improvements are
amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset.
Useful lives or lease terms for each asset type are summarized
below:
Buildings 15 - 40 years
Leasehold improvements 3 - 55 years
Equipment 3 - 20 years
Furniture and fixtures 3 - 10 years
Assets not required for the Company's current or future
business operations are classified as assets held for sale.
(h) Foreign Currency Translation
All balances denominated in foreign currencies are remeasured
at year-end rates to the respective functional currency of
each consolidating company.
29
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 decreased
equity by $442,925 in 2000, $735,201 in 1999, and increased
equity by $340,624 in 1998.
(i) Intangible Assets
The excess of cost over the fair value of net assets in
acquired subsidiaries, and costs of non-compete agreements,
are amortized over five to fifteen year periods on a
straight-line basis. The Company regularly evaluates the
recoverability of its intangible assets and their amortization
periods to determine whether an adjustment to the carrying
value or a revision to the estimated useful lives is
appropriate. No intangible assets were remaining as of
December 31, 2000.
(j) Earnings (Loss) Per Share
The Company computes earnings per share in accordance with the
provisions of Statement of Financial Accounting Standards No.
128, "Earnings per Share," which establishes standards for
computing and presenting basic and diluted earnings per share.
Basic earnings per share are computed by dividing net earnings
(loss) by the weighted average number of shares outstanding
during the period. Diluted earnings per share are computed
assuming the exercise of stock options and the related income
tax effects if not antidilutive. For loss periods, common
share equivalents are excluded from the calculation, as their
effect would be antidilutive. See Note 2 of Notes to
Consolidated Financial Statements for the computation of basic
and diluted earnings per share.
(k) Foreign Operations
Some of the Company's operations are conducted in foreign
areas of the Caribbean. In 2000, 49.7 percent of the Company's
revenue was derived from foreign operations. Overseas contract
work performed by the parent U.S. corporation is not
considered foreign revenue for purposes of this calculation.
(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
30
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The
Company and certain of its domestic subsidiaries file
consolidated federal and state income tax returns.
Subsidiaries located in U.S. possessions and foreign countries
file individual income tax returns. U.S. income taxes are not
provided on undistributed earnings which are expected to be
permanently reinvested by foreign subsidiaries, unless the
earnings can be repatriated in a tax-free manner.
(m) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements
in conformity with generally accepted accounting principles.
Actual results could differ from these estimates.
(n) Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of."
This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by comparing the
carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed
the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value
less costs to sell.
In accordance with its policy, the Company recorded a charge
of approximately $702,000 in 2000 and $805,000 in 1999 for the
impairment of long-lived assets. The impairment of the assets
on Saba occurred due to the decision to close the business.
Impairment of goodwill recognized for the subsidiary on St.
Martin was due to low profitability. The materials segment had
$659,000 and the construction segment had $43,000 of
impairment losses in 2000.
31
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(o) Stock Option Plans
The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations, in accounting for its fixed plan
stock options. As such, compensation expense would be recorded
on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123,
"Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 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 No. 123.
(p) Reclassification
Certain prior year amounts have been reclassified to conform
with the current year presentation.
(2) Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share data:
2000 1999 1998
--------- --------- ---------
Weighted average number of
common shares outstanding -
basic 3,850,566 4,481,304 4,498,935
Effect of dilutive securities:
Options 350,971 -- 21,525
--------- --------- ---------
Weighted average number of
common shares outstanding -
diluted 4,201,537 4,481,304 4,520,460
========= ========= =========
Options to purchase 560,300 shares of common stock at prices ranging
from $2.17 to $3.75 per share, were outstanding for the year ended
December 31, 1999, but were not included in the computation of diluted
earnings per share because the inclusion of the options would be
antidilutive. The options expire on various dates.
The Company acquired a total of 805,350 of its outstanding common
shares in 2000, of which 420,100 were received in partial consideration
for the sale of the concrete operation in St. Thomas and the Tortola
operation and 385,250 shares were repurchased on the Nasdaq market at
an average cost of $6.97 per share.
During 2000, the Company retired 675,850 shares and as of December 31,
2000 the Company had 171,300 shares of treasury stock, which may be
used for exercise of stock options or may be retired.
32
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Receivables
Receivables consist of the following:
December 31,
-----------------------------
2000 1999
----------- -----------
Materials division trade accounts $10,679,035 $11,549,371
Construction division trade
accounts receivable, including
retainages 4,248,595 3,078,395
Accrued interest and other receivables 338,214 86,277
Notes and other receivables due from the
Government of Antigua and Barbuda, net 7,669,420 8,421,855
Trade notes receivable - other 5,373,493 4,282,719
Due from employees and officers 247,101 282,390
----------- -----------
28,555,858 27,701,007
Allowance for doubtful accounts
and notes (3,958,053) (5,265,825)
----------- -----------
$24,597,805 $22,435,182
=========== ===========
Receivables are classified in the consolidated balance sheets as
follows:
December 31,
-----------------------------
2000 1999
----------- -----------
Current assets $13,800,628 $12,878,643
Non-current assets 10,797,177 9,556,539
----------- -----------
$24,597,805 $22,435,182
=========== ===========
Included in notes and other receivables are unsecured notes due from
the Government of Antigua and Barbuda totaling a net amount of
$7,483,329 and $8,247,941 in 2000 and 1999, respectively, approximately
$138,000 of which is classified as a current receivable. In April 2000
the Company amended the agreement with the Government of Antigua and
Barbuda. The interest rate on the notes receivable was reduced from 10%
to 6%. Since April 28, 2000 the Company has been recognizing interest
income on the notes receivable for all payments. Prior to that date the
Company recognized interest only for payments received in excess of
agreed upon amounts. The gross balance of the notes is $30.7 million.
The notes call for both quarterly and monthly principal and interest
payments until maturity in 2015. The notes are being paid with the
government's revenue from certain defined sources. The agreed upon
sources are lease proceeds from a rental of a United States military
base, fuel tax revenues and proceeds from a real estate venture. From
time to time in the future the Company expects to forgive part of the
gross balance to pay taxes and duties; therefore the notes may be paid
off prior to the scheduled maturity. Cash receipts during 2000 were
$2.1 million. Interest income recognized in 2000, 1999 and 1998 was
$1,538,540, $417,147 and $746,120, respectively. The government has
been delayed in their implementation of certain property taxes which
were to provide funds for increased payments and, therefore, the agreed
to additional payments of approximately $730,000 have not been
received. Previously the Company had estimated that the Company would
33
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
record $2.1 million for year 2000 in interest from these Antigua notes,
however, due to the fact that the payments received were less than was
anticipated, the interest recorded was $1.5 million. We expect to
record interest of $1.9 million from these notes in 2001. The Company
will only record interest on the notes for payments received.
Antigua-Barbuda Government Development Bonds 1994-1997 series amounting
to $186,091 and $173,914 in 2000 and 1999, respectively, are included
in the total due from the government of Antigua and Barbuda.
The Company also has net trade receivables from various Antiguan
government agencies of $29,796 and $75,179 in 2000 and 1999,
respectively. Several of the Company's customers perform services for
the Antiguan government and depend on payments from the government to
satisfy their obligations to the Company.
Trade notes receivable - other consist of the following:
December 31,
------------------------
2000 1999
---------- ----------
Unsecured promissory notes receivable
with varying terms and maturity dates $455,992 $ 456,729
Notes receivable with varying terms and
maturity dates, secured by real estate
and equipment 951,058 858,800
8.0 percent note receivable, due on demand,
secured by first mortgage on real property 817,788 817,788
Notes receivable bearing interest at 2.0
percent over prime interest rate, secured
by real estate -- 549,402
8.0 percent note receivable, due in
installments from August 2001 through
July 2005, secured by land and building 600,000 600,000
Note receivable bearing interest at the
prime rate due in installments through
November 2001 secured by equipment 826,433 1,000,000
Note receivable bearing interest at
the prime rate due in installments
from January 2001 through December 2003,
secured by land, equipment and stock 1,722,222 --
---------- ----------
$5,373,493 $4,282,719
========== ==========
34
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Inventories
December 31,
-------------------------
2000 1999
---------- ----------
Inventories consist of the following:
Sand, stone, cement and concrete block $2,422,566 $2,539,005
Maintenance parts 275,589 971,818
Other 239,944 318,627
---------- ----------
$2,938,099 $3,829,450
========== ==========
(5) Investments in Unconsolidated Joint Ventures and Affiliates
December 31,
-------------------------
2000 1999
---------- ----------
Real Estate $281,819 $277,081
At December 31, 2000, the Company had equity interests in two real
estate ventures consisting of a 1.2 percent equity interest in a real
estate project in the Bahamas (see Note 12) and a 33.3 percent interest
in a real estate company in Puerto Rico. Equity losses of $23,166 and
$17,700 were recognized in 2000 and 1999, respectively, on all ventures
accounted for under the equity method.
(6) Fair Value of Financial Instruments
The carrying amount of financial instruments including cash, cash
equivalents, most of the receivables - net, other current assets,
accounts payable trade and other, accrued expenses and other
liabilities, notes payable to banks, and current installments of
long-term debt approximated fair value at December 31, 2000 because of
the short maturity of these instruments. The carrying value of debt and
most notes receivable approximated fair value at December 31, 2000
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.
(7) Long-term Debt
Long-term debt consists of the following:
December 31,
-------------------------------
2000 1999
---------- -----------
Installment notes payable in
monthly installments through
June 2004, bearing interest at a
weighted average rate of 8.5
percent and secured by equipment
with a carrying value of
approximately $1,530,000 $1,284,878 $13,352,505
35
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31,
-------------------------------
2000 1999
---------- -----------
Notes and mortgages payable in
installments through July 2003,
bearing interest at 9.50 percent
and secured by real property with
a carrying value of approximately
$249,000 140,625 158,213
Unsecured notes payable due through
2002 bearing interest at a weighted
average rate of 5.9 percent 465,987 903,594
Unsecured note payable to the Company's
President, $800,000 due on demand with
the balance due April 1, 2002 and
bearing interest at the prime interest
rate 2,075,000 3,275,000
Unsecured note payable due in
installments from 2001 through 2005,
balloon payment of $500,000 due on
January 1, 2006, interest at 2.0
percent over prime interest rate
(note was paid off in March 2000) -- 1,000,000
Note payable to a bank under a
$1,000,000 line of credit, due on
demand, bearing interest at 1 percent
over the prime rate secured by equipment
and property 300,000 425,000
Notes payable to a bank under a $200,000
line of credit, due on demand, bearing
interest at the prime rate -- 200,000
Bank term loan of $6,000,000 due in
monthly installments from December
1996 through November 2002 and bearing
interest at 1 percent over the prime
interest rate. Secured by notes
receivable from the Government of
Antigua and real property and
equipment (Note was paid off in
January 2000) -- 2,616,642
---------- -----------
Total debt outstanding $4,266,490 $21,930,954
========== ===========
The effective interest on all debt outstanding was 9.5 percent at
December 31, 2000 and 9.3 percent at December 31, 1999. A large portion
of this debt was paid off in the first quarter of 2000. For further
information see Note 18 of Notes to Consolidated Financial Statements.
36
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Outstanding debt is shown in the consolidated balance sheets under the
following captions:
December 31,
---------------------------
2000 1999
---------- -----------
Current installments of long-term debt $1,501,656 $ 6,956,246
Notes payable to banks 300,000 625,000
Long-term debt 2,464,834 14,349,708
---------- -----------
$4,266,490 $21,930,954
========== ===========
The total maturities of all outstanding debt subsequent to December 31,
2000 are as follows:
2001 $1,801,656
2002 2,054,902
2003 399,315
2004 10,617
2005 --
Thereafter --
----------
$4,266,490
==========
(8) Income Taxes
Income tax expense (benefit) consists of:
Current Deferred Total
--------- --------- ---------
2000:
Federal $ 502,826 $ (32,539) $ 470,287
State -- -- --
Foreign 466,828 (221,359) 245,469
--------- --------- ---------
$ 969,654 $(253,898) $ 715,756
========= ========= =========
1999:
Federal $ -- $ (19,404) $ (19,404)
State -- -- --
Foreign 292,635 -- 292,635
--------- --------- ---------
$ 292,635 $ (19,404) $ 273,231
========= ========= =========
1998:
Federal $ -- $ (735) $ (735)
State -- -- --
Foreign 340,176 -- 340,176
--------- --------- ---------
$ 340,176 $ (735) $ 339,441
========= ========= =========
The significant components of deferred income tax benefit attributable
to income or loss from continuing operations for the year ended
December 31, 2000, 1999 and 1998 are as follows:
December 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Deferred income tax expense
(benefit) $ 2,648,463 $ (668,163) $(1,691,364)
(Decrease) increase in
valuation allowance for
deferred tax assets (2,902,361) 648,759 1,690,629
----------- ----------- -----------
$ (253,898) $ (19,404) $ (735)
=========== =========== ===========
37
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The actual expense differs from the "expected" tax expense computed by
applying the U.S. federal corporate income tax rate of 34% to income
(loss) before income taxes is as follows:
2000 1999 1998
----------- ----------- -----------
Computed "expected"
tax expense (benefit) $ 6,528,804 $(1,033,060) $ 280,063
Increase (reduction) in
income taxes resulting from:
State taxes net of federal
tax expense -- -- 36,928
Repatriated earnings of
foreign subsidiary 2,035,275 901,000 561,000
Intercompany interest income
untaxed by foreign
jurisdiction -- (27,600) (451,008)
Tax incentives granted to
foreign subsidiaries (2,864,131) -- (496,580)
Nontaxable capital gains (1,156,048) -- --
Adjustment to prior year
deemed dividends from
foreign subsidiaries -- (155,852) (1,496,000)
Net operating loss not
utilized 47,594 20,696 41,012
Change in deferred tax
valuation allowance (2,902,361) 648,759 1,690,629
Differences in effective
rate in foreign
jurisdiction and other (973,377) (80,712) 173,397
----------- ----------- -----------
$ 715,756 $ 273,231 $ 339,441
=========== =========== ===========
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and (b) net operating loss carryforwards.
Significant portions of the deferred tax assets and liabilities results
from the tax effects of temporary difference:
December 31,
-------------------------
2000 1999
----------- -----------
Deferred tax assets:
Allowance for bad debts $ 220,380 $ 254,849
Net operating loss carry-forwards 4,949,521 7,532,204
Reserves and other 435,492 1,278,110
Deferred income 366,958 --
----------- -----------
Total gross deferred tax assets 5,972,351 9,065,163
Less valuation allowance (5,310,513) (8,212,874)
----------- -----------
Net deferred tax assets 661,838 852,289
----------- -----------
38
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31,
-------------------------
2000 1999
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally
due to differences in depreciation
and capitalized interest (787,592) (1,231,941)
Total gross deferred tax
liabilities (787,592) (1,231,941)
----------- -----------
Net deferred tax liabilities $ (125,754) $ (379,652)
=========== ===========
Net deferred tax liabilities:
Net current deferred tax assets $ 240,341 $ 268,020
Net non-current deferred tax
liabilities (366,095) (647,672)
----------- -----------
$ (125,754) $ (379,652)
=========== ===========
The valuation allowance for deferred tax assets as of December 31, 2000
was $5.3 million or about 89 percent of the potential deferred tax
benefit.
In April 1988, the U.S. Virgin Islands Industrial Development
Commission (IDC) granted one of the Company's subsidiaries a 10-year
tax exemption expiring in April 1998. With some conditions and
exceptions, the Company's (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
previous benefits.
At December 31, 2000, approximately $37.6 million of foreign
subsidiaries' earnings have not been distributed and no U.S. income
taxes have been provided on them. These earnings are considered
permanently reinvested in the subsidiaries' operations, unless the
earnings can be repatriated in a tax-free manner, and when earned, did
not require income tax recognition under U.S. laws. Should the foreign
subsidiaries distribute these earnings to the parent company or provide
access to these earnings, taxes at the U.S. federal tax rate, net of
foreign tax credits, may be incurred.
At December 31, 2000, the Company had accumulated net operating loss
carryforwards available to offset future taxable income in its
Caribbean operations of about $14.6 million, which expire at various
times through the year 2010.
39
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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,
------------------------
2000 1999
----------- -----------
Current assets $ 7,225,459 $14,529,863
Advances to the Company 9,923,726 4,135,354
Property, plant and equipment, net 11,963,903 15,727,631
Investments in joint ventures and
affiliates, net 184,184 183,207
Notes receivable, net 8,218,904 7,685,329
Other assets 56,848 925,723
----------- -----------
Total assets $37,573,024 $43,187,107
=========== ===========
Current liabilities $ 3,161,433 $ 6,560,519
Long-term debt -- 1,527,621
Equity 34,411,591 35,098,967
----------- -----------
Total liabilities and equity $37,573,024 $43,187,107
=========== ===========
2000 1999 1998
------------ ------------ ------------
Revenue $ 32,419,421 $ 38,093,152 $ 34,361,166
Gain on sale of business 9,751,585 -- --
Income (loss) pretax 10,343,782 (904,252) 256,140
Net income (loss) 10,309,560 (1,170,284) (111,385)
(10) Lease Commitments
The Company leases real property, buildings and equipment under
operating leases that expire over one to fifty-five years. Future
minimum lease payments under noncancellable operating leases as of
December 31, 2000 are as follows:
Operating
Leases
-----------
Years ending December 31,
2001 $ 1,454,050
2002 1,342,427
2003 1,281,994
2004 1,207,556
2005 1,122,886
Thereafter 7,415,566
-----------
Total minimum lease payments $13,824,479
===========
Total operating lease expense was $3,473,030 in 2000, $4,118,946 in
1999 and $3,985,965 in 1998. Some operating leases provide for
contingent rentals or royalties based on related sales and production;
contingent expense amounted to $112,770 in 2000, $9,422 in 1999 and
$130,370 in 1998. Included in the above minimum lease commitments are
40
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
royalty payments due to the owners of the Societe des Carrieres de
Grand Case (SCGC) quarry. See Note 16.
During November 1997, the Company sold its leasehold right on a long
term land lease with the Dutch government of St. Maarten, and recorded
a $240,000 loss on disposition of leasehold. The property was partially
vacated during 1998, and the Company entered into a month-to-month
lease for a portion of the property.
On February 3, 1998, the Company sold Crown Bay Marina on St. Thomas,
U.S. Virgin Islands, for $3.3 million, which approximated the net book
value and related costs of disposition. Proceeds were utilized to repay
about $3.0 million in debt on the property. The related long term
operating lease was assigned to the new owner.
(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 and construction. Materials includes
manufacturing and distribution of ready-mix concrete, block, crushed
aggregate and cement. Construction consists of land development
construction projects. The accounting policies of the segments are the
same as those described in the summary of significant accounting
policies.
December 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenue (incl. inter-segment):
Materials $ 51,466,445 $ 55,718,952 $ 50,923,706
Construction 14,421,338 13,289,689 15,358,591
Other -- -- 371,386
Elimination of inter-segment
revenue (639,600) (974,838) (475,431)
------------ ------------ ------------
Total $ 65,248,183 $ 68,033,803 $ 66,178,252
============ ============ ============
Operating (loss) income:
Materials $ (1,607,653) $ (2,198,221) $ 693,331
Construction 1,266,349 (300,594) 713,689
Other -- -- 115,686
Credit for litigation -- 1,160,137 460,794
Unallocated corporate
Overhead (819,000) (879,000) (1,037,794)
------------ ------------ ------------
Total $ (1,160,304) $ (2,217,678) $ 945,706
============ ============ ============
Total assets:
Materials $ 46,852,093 $ 55,210,123 $ 55,369,245
Construction 10,983,399 10,720,392 12,906,969
Other 14,300,579 15,983,499 14,153,905
------------ ------------ ------------
Total $ 72,136,071 $ 81,914,014 $ 82,430,119
============ ============ ============
41
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Depreciation and
amortization:
Materials $3,596,902 $4,723,099 $4,285,242
Construction 1,577,797 1,648,584 1,556,891
Other -- -- 22,526
---------- ---------- ----------
Total $5,174,699 $6,371,683 $5,864,659
========== ========== ==========
Capital expenditures:
Materials $2,854,719 $7,924,195 $4,565,167
Construction 2,126,391 358,099 3,024,156
---------- ---------- ----------
Total $4,981,110 $8,282,294 $7,589,323
========== ========== ==========
Operating (loss) income is revenue less operating expenses. In
computing operating (loss) income, the following items have not been
added or deducted: interest expense, income tax expense, equity in
earnings from unconsolidated joint ventures and affiliates, interest
and other income, minority interest and gain or loss on sales of
equipment. The note receivable from the Government of Antigua and
Barbuda is included in identifiable assets, other.
Revenue by geographic area includes only sales to unaffiliated
customers, as reported in the Company's consolidated statements of
operations. Foreign contract work performed by a U.S. domiciled company
of $7,593,363 is considered foreign revenue for the purpose of the
following table:
December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenue by geographic areas:
U.S. and its territories $25,235,399 $22,970,710 $24,374,409
Netherlands Antilles 12,689,209 8,725,220 8,646,509
Antigua and Barbuda 12,593,564 11,822,155 10,785,627
French West Indies 9,158,988 8,718,285 6,324,012
Other foreign areas 5,571,023 15,797,433 16,047,695
----------- ----------- -----------
Total $65,248,183 $68,033,803 $66,178,252
=========== =========== ===========
Long-lived assets by geographic areas:
U.S. and its territories $21,186,263 $18,849,542 $25,860,450
Netherlands Antilles 344,305 1,232,142 2,218,336
Antigua and Barbuda 7,280,881 8,501,170 6,105,165
French West Indies 4,206,217 4,581,460 5,749,216
Other foreign areas 132,500 5,178,977 6,006,396
----------- ----------- -----------
Total $33,150,166 $38,343,291 $45,939,563
=========== =========== ===========
42
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Related Party Transactions
The Company leases a 4.4 acre parcel of real property in Florida from
the Company's President. Annual rent on the property was $49,303 in
2000, 1999, and 1998, respectively.
At December 31, 2000, the Company had a note payable of $2.1 million to
the Company's President resulting from various advances made to the
Company in previous years. The note is unsecured and bears interest at
a rate variable with the prime rate. Eight hundred thousand dollars is
due on demand and $1.3 million is due on April 1, 2002. The President
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.
At December 31, 2000 the Company had an investment and advances
totaling $184,000 representing 1.2 percent interest in a real estate
joint venture in which the President and one Board member also
participate with equity interests of 11.3 percent and 1.0 percent,
respectively. The investment is carried at cost, accordingly no income
or loss has been recorded from this investment. The Company has a $23.8
million contract with the venture to perform land preparation services.
In connection with this contract, the Company has recorded revenue of
$2.7 million during 2000. The backlog on the contract as of December
31, 2000 was $12.3 million. The project has not yet received its total
financing and completion of the project is pending additional
financing. The Company has been advised by this entity that it has
received a loan commitment letter from a bank, has entered into a
contract with a reputable hotel chain for management of the hotel being
built, and has received further financial commitments from other
sources. All commitments are subject to significant conditions that the
entity is currently working on fulfilling. Until the financing
transaction is consummated there is uncertainty whether or not the
project will receive its final financing. The Company is monitoring the
situation closely.
On November 1, 1999, the Company extended a $1.0 million note to the
venture, secured by equipment. See Note 3 of Notes to Consolidated
Financial Statements. As of December 31, 2000 the Company had trade
receivables, net of billings in excess of costs and estimated earnings,
from the venture of approximately $2.0 million. The Company's President
has personally guaranteed up to $1.2 million of the outstanding trade
receivables from the venture, subject to exhaustion by the Company of
all other remedies. The Company expects to receive interim payments
from the venture's cash resources to cover its incremental costs while
the venture is seeking its total financing. Subsequent to year-end the
Company received $778,000 in payments from the venture and issued
$636,000 in additional contract billings.
Other assets include amounts due from officers and employees as a
result of payments made by the Company pursuant to a split-dollar life
insurance plan. The Company's advances to pay premiums are secured by a
pledge of the cash value of the issued policies. Amounts due to the
43
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Company under the split-dollar life insurance plan was $853,488 in 2000
and $763,337 in 1999, respectively.
(13) Stock Option Plans
The Company adopted stock option plans for officers and employees in
1986, 1992 and 1999. While each plan terminates 10 years after the
adoption date, issued options have their own schedule of termination.
Until 1996, 2002 and 2009, options to acquire up to 300,000, 350,000
shares, and 350,000 shares respectively, of common stock may be granted
at no less than fair market value on the date of grant.
All stock options granted pursuant to the 1986 Plan not already
exercisable, vest and become fully exercisable (1) on the date the
optionee reaches 65 years of age and for the six-month period
thereafter or as otherwise modified by the Company's Board of
Directors, (2) on the date of permanent disability of the optionee and
for the six-month period thereafter, (3) on the date of a change of
control and for the six-month period thereafter, and (4) on the date of
termination of the optionee from employment by the Company without
cause and for the six-month period after termination.
Stock options granted under the 1992 and 1999 Plan vest and become
exercisable in varying terms and periods set by the Compensation
Committee of the Board of Directors. Options issued under the 1992 and
1999 Plan expire after 10 years.
The Company adopted a stock-option plan for directors in 1992 that
terminates in 2002. Options to acquire up to 50,000 shares of common
stock may be 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
have 10-year terms, vest and become fully exercisable six months after
the issue date. Stock option activity by year was as follows:
Employee Plans Directors' Plan
--------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ ---------
Balance at
12/31/97 395,775 $5.11 35,000 $10.83
Granted 110,000 3.15 3,000 3.00
Exercised -- -- -- --
Expired (4,000) 6.75 -- --
------- ------
Balance at
12/31/98 501,775 4.67 38,000 10.21
Granted 318,000 1.57 11,000 2.97
Exercised - -- -- --
Expired (30,000) 3.75 -- --
-------- ------
Balance at
12/31/99 789,775 3.45 49,000 8.59
Granted 13,000 5.76 1,000 6.63
Exercised (13,200) 1.50 -- --
Expired (5,000) 1.50 -- --
------- -------
44
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Employee Plans Directors' Plan
------------------- ----------------
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Balance at
12/31/00 784,575 $3.53 50,000 $8.55
======= ======
Exercisable 437,125 $4.56 50,000 $8.55
======= ======
Available for
future grant 62,000
=======
Weighted average information:
Total Outstanding Options Exercisable Options
----------------------------- -------------------
Weighted Weighted
Number Averag Weighted Number Average
of Exercise Remaining of Exercise
Price Range Shares Price Life Shares Price
----------- ------- -------- --------- ------- --------
$1.50 - $ 2.33 472,100 $1.82 8.0 years 196,075 $2.10
$2.94 - $ 6.25 115,000 $3.98 7.4 years 55,000 $3.97
$6.63 - $14.00 247,475 $7.59 4.1 years 236,050 $7.60
The per-share weighted-average fair value of stock options granted during
2000, 1999 and 1998 was $1.10, $1.89 and $2.46 respectively, on the grant
date using the Black Scholes option-pricing model with the following
assumptions:
2000 1999 1998
-------- -------- --------
Expected dividend yield -- -- --
Expected price volatility 39.8% 51.5% 38.5%
Risk-free interest rate 6.5% 5.4% 5.6%
Expected life of options 10 years 10 years 10 years
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for stock options in
the consolidated financial statements. 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 earnings or loss
would have been the pro forma amounts below:
2000 1999 1998
-------------- ------------- -----------
Net earnings (loss),
as reported $ 18,486,608 $ (3,311,644) $ 484,273
Net earnings (loss),
pro forma $ 18,288,801 $ (3,471,627) $ 335,277
Basic earnings (loss)
per share from
continuing operations,
as reported $ 4.80 $ (0.74) $ 0.11
============== ============= ===========
Basic earnings (loss)
per share from
continuing operations,
pro forma $ 4.75 $ (0.77) $ 0.07
============== ============= ===========
45
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Employee Benefit Plans
The Company sponsors a 401(k) plan for some employees over the age of
21 with 1,000 hours of service in the previous 12 months of employment.
The Company matches employee contributions up to 3.0 percent of an
employee's salary. Company contributions totaled $140,257 in 2000,
$167,975 in 1999, and $160,446 in 1998.
(15) Costs and Estimated Earnings on Contracts
Included in the accompanying consolidated balance sheets under the
following captions:
December 31,
---------------------------
2000 1999
------------ ------------
Costs in excess of billings
and estimated earnings $ 1,405,898 $ 258,780
Billings in excess of costs
and estimated earnings (535,547) (1,026,316)
------------ ------------
$ 870,351 $ (767,536)
============ ============
2000 1999
------------ ------------
Costs incurred on uncompleted contracts $ 4,810,581 $ 8,164,993
Costs incurred on completed contracts 22,395,159 17,463,450
Estimated earnings 6,212,302 5,622,786
------------ ------------
33,368,042 31,251,229
Less: Billings to date (32,497,691) (32,018,765)
------------ ------------
$ 870,351 $ (767,536)
============ ============
(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 acquisition of Societe
des Carrieres de Grand Case ("SCGC"), a French company operating a
ready-mix concrete plant and quarry in St. Martin, the Company agreed
to pay the quarry owners, who were also the owners of SCGC, a royalty
payment of $550,000 per year through August 2005. The agreement may be
renewed, at the Company's option, for a successive five-year period and
would require annual payments of $550,000 per year. At the end of the
15-year royalty period, the Company has the option to purchase this
50-hectare property for $4.4 million.
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% of his base salary,
and shall continue for the remainder of his life. In the event that he
is survived by a spouse, then the surviving spouse shall receive a
benefit equal to 100% of his base salary for the shorter of five years
46
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
or the remainder of the surviving spouse's life. The Company will
recognize the expense of the retirement agreement over his expected
remaining period of active employment with the Company. The expense
related to this agreement was $220,000 in 2000.
In the late 1980s, Bouwbedrijf Boven Winden, N.V., ("BBW") currently a
Devcon subsidiary in the Netherlands Antilles, supplied concrete to a
large apartment complex on the French side of St. Maarten. In the early
1990s the buildings began to develop exterior cracking and "popouts."
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 popouts and to determine if the
cracking/popouts are caused by a phenomenon known as alkali reaction
(ARS). The expert found, in his report dated December 3, 1998, 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, the
plaintiff would have to file the same claim in an Antillean court. It
is too early to predict the final outcome of this matter and no actions
have been taken in or by the court during 1999 and 2000. 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 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.
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 sold substantially all of its interest in a real estate
joint venture with the Government of Antigua and Barbuda to a third
party in 1990. In connection with this sale, the purchaser assumed the
Company's guarantee of payment to the Government of Antigua and Barbuda
made upon the formation of the joint venture. This guarantee, which
would become an obligation of the Company in the event of a default by
the purchaser, provides that net profits from the joint venture's
operations will equal or exceed $20,000 per month. No liability has
been incurred by the Company nor have payments been made by the Company
or the purchaser in connection with this guarantee. The guarantee
expires upon the earlier of the sale or disposal by the venture of its
real estate or September 2003. There are no current plans to sell or
dispose of any of the venture's property.
47
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 in excess of billings and estimated earnings. No single
customer accounted for more than 10% of the Company's sales in 2000,
1999 or 1998 and there are no receivables from a single customer that
represent more than 10% of total receivables as of December 31, 2000 or
1999, other than the notes receivable from the Government of Antigua
and Barbuda and the receivable from the construction project in the
Bahamas. Although receivables are generally not collateralized, the
Company may place liens or their equivalent in the event of nonpayment.
The Company estimates an allowance for doubtful accounts based on the
creditworthiness of customers as well as general economic conditions of
the countries where it operates. An adverse change in these factors
would affect the Company's estimate of bad debts.
The Company has a construction project with a backlog of $12.3 million.
A subsidiary and two of the Company's directors are minority partners
of, and the Company's President is Chairman of, the entity developing
the project. This partnership does not yet have the financing to
complete the project, therefore, the amount of the backlog could
substantially diminish and the timing of completion of the contract
could vary.
The Company has separate union agreements with its employees on St.
Thomas, St. Croix and Antigua. The agreement on St. Thomas expires
March 2003, on St. Croix March 2001 and on Antigua November 2000. The
Company is currently finalizing new contracts for the unions on St.
Croix and Antigua. There can be no assurance that said agreements will
be renewed without labor disturbances or conflicts. In the past there
have been no labor conflicts.
Management believes 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.
48
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) Sale of Businesses
In January 7, 2000 the Company closed a transaction to sell certain
concrete related assets on St. Thomas, USVI and the subsidiary Devcon
Masonry Products (BVI), Ltd. to a purchaser and the purchaser's related
parties. The selling price was $6 million in cash, a note for $2.5
million payable over three years and 420,100 shares of Devcon
International Corp. held by the buyer. The shares were valued at $2.4
million at the day of closing. The book value of the assets sold,
including certain expenses and deferred gain due to a $1 million
contingency accrual, was $8.7 million. Therefore, the Company realized
in the first quarter of 2000 a gain on this transaction before tax of
$2.2 million.
On February 3, 2000 the Company closed a transaction to sell real
property in St. Croix. The selling price was $2.3 million in cash, and
the book value of the property was $1.9 million. As a result, the
Company realized a gain on the transaction in the first quarter of
approximately $336,000 before taxes.
On February 22, 2000 the Company closed a transaction to sell certain
bulk cement terminal assets on four of the islands in the Caribbean.
The purchasers were Union Maritima International (UMAR) and some of its
affiliated companies. The selling price was $19.6 million in cash. The
book value of the assets, including certain expenses and contingency
accruals, was $3.8 million, resulting in a gain on the transaction of
$15.8 million before taxes. The Company simultaneously entered into an
agreement to manage the terminals for one year. This management
agreement was amended and renewed on March 1, 2001 for an additional
year, with a 90-day termination option for both parties. The Company
also entered into a supply agreement to buy cement from the terminals
for five years for its own use in the Company's batch and block plants.
The agreement has stipulations so that the Company will be able to
enjoy the best price available in the local market from any cement
supplier. The Company sold cement to third parties in 1999 and entered
into a one-year contract to distribute cement on these four islands.
This distribution agreement was terminated on March 1, 2001.
On March 16, 2000 the Company closed on a related transaction to sell
its subsidiary in Dominica to an affiliated company of UMAR. The
selling price was $4.1 million plus an earnout of 50% 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 $1.1 million on the transaction will be deferred
to the first quarter of 2002, when the earnout period has finished.
49
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has used the proceeds from these transactions to pay off
most of its equipment financing debt, bank debt and other debt. The
gain on sale of businesses is computed as follows:
Aggregate selling price $ 36,849,822
Assets sold:
Receivables (2,155,172)
Inventory (857,146)
Property, plant and equipment (11,562,801)
Intangibles (573,323)
Other assets (528,947)
------------
(15,677,389)
Liabilities assumed:
Accounts payable 353,768
Income taxes 84,153
------------
437,921
Selling expenses (269,965)
Sales related accruals (976,485)
------------
Total gain on sale of businesses 20,363,904
Deferred gain on sale of businesses (2,070,859)
------------
Gain on sale of businesses $ 18,293,045
============
50
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.
51
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information on our directors and executive officers is incorporated
by reference to the 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.
Information as to executive officers is included in Part I of this
report.
Item 11. Executive Compensation.
The information required for this item is also incorporated by
reference to our Proxy Statement. The information included in the proxy
statement pursuant to Rule 402(i), (k) and (l) is not incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required for this item is also incorporated by
reference to our Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required for this item is also incorporated by
reference to our Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements.
An index to consolidated financial statements for the year ended
December 31, 2000 appears on page 20.
(2) Financial Statement Schedule.
The following financial statement schedule for each of the years in the
three-year period ended December 31, 2000 is submitted herewith:
Form 10-K
Item (Page Number(s)
---- --------------
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts............. 57
All other financial schedules are omitted because they are not
required, inapplicable, or the information is otherwise shown in the
consolidated financial statements or notes thereto.
52
(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 1, 1989, between Donald L. Smith, Jr., as
lessor, and the Registrant, as lessee(1)(10.31)
10.20 Lease dated September 12, 1966, between His Honour Hugh Burrowes, a
Commander of the British Empire of Government House in the Island of
Antigua, as lessor, and The Antigua Sand and Aggregate Limited, as
lessee(1)(10.32)
10.21 Material Purchase Agreement, dated August 17, 1995, between Bouwbedrijf
Boven Winden, N.V. and Hubert Petit, Francois Petit and Michel
Petit (9) (10.41)
10.22 Stock Purchase Agreement, dated August 17, 1995, between the Registrant
and Hubert Petit, Francois Petit and Michel Petit (9)(10.42)
10.23 Loan Agreement dated November 12, 1996 between V. I. Cement and Building
Products, Inc.and Banco Popular de Puerto Rico (10) (10.31)
53
10.24 $1,000,000 Promissory Note dated November 12, 1996 between V. I.
Cement and Building Products, Inc. and Banco Popular de Puerto Rico
(10) (10.33)
10.25 Form of Note between Devcon International Corp. and Donald L. Smith, Jr.
(11)(10.31)
10.26 Asset Purchase Agreement between Caricement B.V., Union Maritima
International S.A. and Devcon International Corp. and its subsidiaries
dated February 22, 2000 (14)
10.27 Stock Purchase Agreement between Caribbean Construction and Development,
Ltd., Devcon International Corp. and Caricement Antilles N.V. dated
February 22, 2000 (14)
10.28 Purchase Agreement by and among Dev on International Corp., V.I. Cement
and Building Products, Inc., Paulina Dean, St. Thomas Concrete, Inc.
and W. Kemble Ketcham dated January 7, 2000 (12)
10.29 Supply Agreement between Union Maritima International S.A. and Devcon
International Corp. dated December 29, 1999 (15)(10.36)
10.30 Distributorship Agreement between Union Maritima International S.A. and
Devcon International Corp. dated February 22, 2000 (15)(10.36)
10.31 Registrant's 1999 Stock Option Plan (13)
10.32 Second Amended and Restated Salary Continuation and Retirement Benefit
Agreement dated June 30, 2000 (16)
10.33 Amendment No. 9 to the St. John's Agreement, dated April 28, 2000 (16)
21.1 Registrant's Subsidiaries (16)
23.1 Consent of KPMG LLP (16)
(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.
(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.
54
(11) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.
(12) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Report on Form 8K dated January 7, 2000.
(13) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Report on Form S-8 dated December 7, 1999.
(14) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Report on Form 8K dated February 22, 2000.
(15) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999
(16) Filed herewith
Management employee contracts, compensatory plans and other arrangements
included as part of the exhibits referred to above are as follows:
10.1 Registrant's 1986 Non Qualified Stock Option Plan (2) (10.1)
10.2 Registrant's 1992 Stock Option Plan (7)(A)
10.3 Registrant's 1992 Directors' Stock Option Plan (7) (B)
10.4 V. I. Cement and Building Products, Inc. 401(k) Retirement and Savings
Plan (10) (10.4)
10.5 Second Amended and Restated Salary Continuation and Retirement
Benefit Agreement dated June 30, 2000. (16)
10.6 Registrant's 1999 Stock Option Plan (13)
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed by the Registrant during the last
quarter of the period covered by this report.
55
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 27, 2001 DEVCON INTERNATIONAL CORP.
BY:/S/ DONALD L. SMITH, JR.
------------------------
Donald L. Smith, Jr.
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 27, 2001 DEVCON INTERNATIONAL CORP.
By:/S/ DONALD L. SMITH, JR.
------------------------
Donald L. Smith, Jr.
Chairman, President and
Chief Executive Officer
March 27, 2001 By:/S/ RICHARD L. HORNSBY
----------------------
Richard L. Hornsby
Executive Vice President
and Director
March 27, 2001 By:/S/ JAN A. NORELID
------------------
Jan A. Norelid
Vice President of Finance,
Chief Financial Officer and
Treasurer
March 27, 2001 By:/S/ ROBERT A. STEELE
--------------------
Robert A. Steele
Director
March 27, 2001 By:/S/ ROBERT L. KESTER
--------------------
Robert L. Kester
Director
March 27, 2001 By:/S/ W. DOUGLAS PITTS
--------------------
W. Douglas Pitts
Director
March 27, 2001 By:/S/ JOSE A. BECHARA, JR.
------------------------
Jose A. Bechara, Jr.
Director
56
Schedule II
Valuation and Qualifying Accounts
Allowance for
Doubtful Accounts Balance at Additions Balance
For the Year Beginning Charged to at End
Ended December 31, of Year Expense Deductions of Year
- ------------------ ------- ------- ---------- -------
1998 $4,984,839 $ (36,191) $ (243,613) $4,705,035
========== =========== =========== ==========
1999 $4,705,035 $ (174) $ (352,252) $4,352,609
========== ============ ============ ==========
2000 $4,352,609 $ 174,209 $ (1,704,861) $2,821,957
========== =========== ============ ==========
Allowance for
Doubtful Notes
Receivable Accounts Balance at Additions Balance
For the Year Beginning Charged to at End
Ended December 31, of Year Expense Deductions of Year
- ------------------ ------- ------- ---------- -------
1998 $ 813,226 $ (30,701) $ (100,000) $ 682,525
========== =========== ========== ==========
1999 $ 682,525 $ 230,691 $ -- $ 913,216
========== =========== ========== ==========
2000 $ 913,216 $ 160,602 $ 62,277 $1,136,095
========== =========== ========== ==========
Note: Deductions include amounts to reflect the sale of CCD and DMP in the
year 2000.
57
EXHIBIT INDEX
Exhibit Description
------- -----------
10.32 Second Amended and Restated Salary Continuation and
Retirement Benefit Agreement dated June 30, 2000
10.33 Amendment No. 9 to the St. John's Agreement, dated
April 28, 2000
21.1 Registrant's Subsidiaries
23.1 Consent of KPMG LLP