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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, 1998
Commission file number 0-7152
DEVCON INTERNATIONAL CORP.
FLORIDA CORPORATION TIN 59-0671992
1350 E. NEWPORT CENTER DR. 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 19, 1999, Devcon International Corp. had 4,498,935 shares
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of Devcon International Corp. as of March 19, 1999 was
approximately $3.9 million, based on the closing price on that date of $2.13 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.
We are a large producer and distributor of ready-mix concrete and quarry
products in these Caribbean islands:
Puerto Rico United States Territory
St. Thomas United States Virgin Islands
St. Croix United States Virgin Islands
Tortola British Virgin Islands
Saba Netherlands Antilles
St. Maarten Netherlands Antilles
St. Martin French West Indies
Antigua West Indies
Dominica West Indies
Our contracting 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 contracting, and our
equipment is well-suited for the Caribbean markets. We have equipment and
personnel in the Caribbean that, we believe, often allows us to start work more
quickly and less expensively than other contractors. While we can bid
competitively and complete cost-effectively these 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 concrete and related
products, contracting and other business:
1998 1997 1996
---- ---- ----
(In thousands)
Revenue (net of intersegment sales):
Concrete and related products................................$50,448 $ 51,461 $52,987
Contracting.................................................. 15,359 9,852 13,982
Other........................................................ 371 2,931 2,509
------- -------- -------
Total...................................................$66,178 $ 64,244 $69,478
======= ======== =======
Operating (loss) income (by segment):
Concrete and related products................................$ 693 $ (4,322) 4,864
Contracting.................................................. 714 (3,502) (1,093)
Charge for litigation........................................ 461 (4,500) -
Other........................................................ 116 434 416
Unallocated corporate overhead............................... (1,038) (688) (716)
------- -------- -------
Total.....................................................$ 946 $(12,578) $ 3,471
====== ======== =======
2
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
We expanded our operations in the Caribbean by opening a second quarry in Puerto
Rico in December 1998. Minority investors own 49.9 percent of this separate
company. From time to time, we investigate opportunities to expand our
operations to areas of the Caribbean where we presently have no business. Such
expansion may take place through joint ventures, acquisitions or other business
arrangements.
RISKS OF FOREIGN OPERATIONS
Portions of our operation are conducted in Caribbean foreign countries,
primarily Antigua, St. Maarten, St. Martin, Dominica, Saba, St. Kitts, and
Tortola. In 1998, 52.0 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
revenues and earnings from foreign operations, see Note 11 of Notes to
Consolidated Financial Statements. The risks of doing business in foreign areas
include potential adverse changes in U.S. diplomatic relations with foreign
countries, changes in the relative purchasing power of the U.S. dollar,
hostility from local populations, adverse effects of exchange controls,
restrictions on the withdrawal of foreign investment and earnings, government
policies against businesses owned by non-nationals, expropriations of property,
the instability of foreign governments, and any insurrection that could result
in uninsured losses. We are not subject to these risks in Puerto Rico or the
U.S. Virgin Islands since these territories use the U.S. dollar as currency. The
Company is also subject to U.S. federal income tax upon the distribution of
certain offshore earnings. See Note 9 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.
CONCRETE AND RELATED PRODUCTS
GENERAL We manufacture and distribute ready-mix concrete, block and crushed
aggregate. We also distribute 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. X X X X
St. Croix, U.S.V.I. X X X
Tortola, British V.I. X X
Saba X X X
St. Maarten X X X X
St. Martin X X X
Antigua X X X X
Dominica X X
3
Our concrete and related products business employs assets such as:
/bullet/ Quarries /bullet/ Concrete Batch Plants
/bullet/ Rock Crushing Plants /bullet/ Fleet of Concrete Mixer Trucks
/bullet/ Bulk Cement Terminals /bullet/ Concrete Block Plants
/bullet/ Cement Bagging Facilities /bullet/ Asphalt Plants
We also lease a bulk cement ship to give us access to reliable, economical
sources of cement. We have become the largest supplier of concrete and related
products in the U.S. Virgin Islands, Antigua, St. Maarten, St. Martin, Dominica,
Saba and Tortola.
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 six Caribbean islands. It is often less expensive to manufacture
crushed rock at our quarries than to import aggregate from off-island sources.
BULK AND BAGGED CEMENT We lease a bulk cement ship with a 6,000 metric-ton
capacity. The ship delivers cement in bulk to our cement terminals. From silos
at these terminals, the cement is transferred for use in our concrete batch
plants, sold in bulk or bagged and then sold. Bulk cement is readily available
from a number of manufacturers located throughout the Caribbean basin. The ship
assures us of reliable and relatively economical sources of cement.
SUPPLIES We presently obtain all of the crushed rock and a majority of the sand
necessary for our production of ready-mix concrete from our own quarries. Our
ability to produce our own sand gives us a competitive advantage because of the
substantial investment required to produce sand, the difficulty in obtaining the
necessary environmental permits to establish quarries and the moratorium on
mining beach sand imposed by most Caribbean countries. The sand that we produce
is sometimes blended with sand obtained from offshore sources unaffiliated with
the Company. The bulk cement ship allows us to satisfy our cement requirements.
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 concrete and related products
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 concrete and related products market share,
resources, facilities, local presence and cost structure give us a competitive
advantage in the eastern Caribbean markets where we operate.
4
LAND DEVELOPMENT CONTRACTING
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 contracting division is
generated on a contract-by-contract basis. The majority of our contracts are
completed in less than one year, although we obtain multi-year contracts from
time to time. These contracts are bid or negotiated at a fixed price except for
changes in the scope of the work requested by the owner during the term of the
contract. The majority of our work is performed by our own labor and equipment
and is not subcontracted. We also enter into unit-price contracts where our fee
is based upon the quantity of work performed. This is often measured in yards,
meters or tons, rather than time.
OPERATIONS We obtain leads for new projects from customers and engineering firms
with whom we have established relationships. First, we decide whether to submit
a bid or negotiate to undertake a particular project. We prepare and submit
timely proposals detailing what we believe will best meet a 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 land development contracts at
December 31, 1998 was $16.3 million involving 10 projects. One project's backlog
amounts to $11.9 million. 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, therefore the amount of the backlog could
substantially diminish and the timing of completion could vary. This compares to
$4.4 million involving 12 projects at December 31, 1997. Since December 31, 1998
we have entered into new land development contracts in the Caribbean amounting
to $470,000. We expect most of the current backlog will be completed during
1999.
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 contracting 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.
5
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. The
Antigua and Barbuda tax exemption expired in 1996.
U.S. tax laws provide that our offshore earnings are not taxable for U.S.
federal income tax purposes and most post-April 1988 concrete and related
products 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, St. Maarten, Dominica, Saba,
St. Kitts, and Tortola operations, would subject us to U.S. federal income tax
on the amounts distributed, less applicable taxes paid in those jurisdictions.
At December 31, 1998, $39.0 million of accumulated earnings had not been
distributed to our U.S. operations. We have not provided for federal income tax
on the undistributed earnings of foreign subsidiaries because we intend to
permanently reinvest those earnings offshore.
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
reduces our income tax expense. For further information on our tax exemptions
and income taxes, see Note 9 of Notes to Consolidated Financial Statements.
EQUIPMENT
Both of our businesses require us to lease or purchase and maintain equipment.
As of December 31, 1998, our equipment included cranes, bulldozers, road
graders, rollers, backhoes, earthmovers, hydraulic dredges, 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 8 and 12 of
Notes to Consolidated Financial Statements.
MISCELLANEOUS INVESTMENTS AND JOINT VENTURES
We have invested or participated in several joint ventures in connection with
our land development contracting and concrete and related products division.
During 1997 and 1998 we invested $154,000 for a 2 percent interest in a real
estate joint venture in the Bahamas. The upscale resort project awaits final
financing to finish its development. We started the land development for the
site in 1998. Two of our directors have an interest in the joint venture. See
Note 14 of Notes to Consolidated Financial Statements.
During 1998 we invested $122,000 for a 33 percent interest in a real estate
company in Puerto Rico that owns the land where the Aguadilla quarry operates.
During 1998 we recognized an expense of $39,000 using the equity method of
accounting.
6
For several years, we held ownership interests in two development projects in
Antigua. We initially received these interests as partial payment for
construction work done for the Government of Antigua. During 1998 we sold our
remaining interest in one of these projects, the Corbkinnon Property, for
$625,000 and recorded a $278,000 gain on this sale. For additional information,
see Notes 5 and 11 of Notes to Consolidated Financial Statements.
The Company owns 43 percent of a corporation formed to construct condominium
housing units in Antigua. We invested $200,000 in the corporation and recorded
losses of $150,000 and $50,000 in 1997 and 1996, respectively. For additional
information, see Note 5 of Notes to Consolidated Financial Statements.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
Donald L. Smith, Jr., 77, a cofounder of the Company, has served as its Chairman
of the Board, President and Chief Executive Officer since its formation in 1951.
Richard L. Hornsby, 63, 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, 69, 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 21 years.
Jan A. Norelid, 45, 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, 45, 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, 1998, we employed 74 persons in the contracting business in the
Caribbean, of whom 29 are members of a union. We employed 368 persons in our
concrete and related products division, of whom 142 are members of a union. We
utilize personnel in the division where our needs warrant. We also employ 41
managerial, supervisory and administrative personnel in the overall
administration and management of the Company. Employee relations are considered
satisfactory.
7
ITEM 2. PROPERTY
GENERAL
Nearly all of the real property that the Company owns or leases is utilized by
its concrete and related products division.
OTHER PROPERTY
We own undeveloped parcels of land in the U.S. Virgin Islands and Antigua. We
sold a parcel of land in Collier County, Florida in 1997 for a $165,000 gain.
The following table shows information on the property and facilities that the
Company owns or leases for its operations:
LEASE EXPIRATION
DESCRIPTION LOCATION WITH ALL OPTIONS AREA
----------- -------- ---------------- ----
Principal executive offices (1) Deerfield Beach 5/07 8,410 sq.ft.
Maintenance shop for heavy equipment (1)(2) Deerfield Beach Month-to-Month 4.40 acres
Concrete block plant and St. Thomas 6/04 11.00 acres (1)
equipment maintenance facility
Quarry and office building St. Thomas - 8.50 acres
Quarry and concrete batch plant St. Thomas 2/08 44.00 acres (1)
Barge terminal St. Thomas Month to Month 1.50 acres (1)
Bulk cement terminal and bagging facility St. Thomas 5/12 .50 acres (1)
Quarry St. Thomas 8/06 7.49 acres (1)
Bulk cement terminal, bagging facility St. Croix - 7.00 acres
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 Antigua 9/16 22.61 acres (1)
block plant, rock crushing plant,
asphalt plant, quarry and office
Bulk cement terminal and bagging facility Antigua - 8.00 acres
Concrete batch plant, cement bagging Dominica 6/12 1.14 acres (1)
plant, undeveloped land, silo and office Dominica - .77 acres
Concrete batch plant and block plant St. Maarten 8/00 3.00 acres (1)
Cement terminal and barge unloading facility St. Maarten 6/05 .30 acres (1)
Bagging facility St. Maarten 4/06 .30 acres (1)
Office building St. Maarten 8/00 1.39 acres
Quarry, rock crushing plant, concrete Tortola - 30.00 acres
batch plant, equipment maintenance
facility and office building
Quarry, rock crushing plant and Saba 12/02 6.00 acres (1)(3)
concrete batch plant
Concrete batch plant St. Kitts Month-to-Month 1.00 acre (1)(3)
Quarry, rock crushing plant, concrete St. Martin 7/10 123.50 acres (1)
batch plant and office building
Quarry, rock crushing plant and Guaynabo,
office building (1)(3) Puerto Rico 3/06 40.00 acres
Quarry, rock crushing plant Aguadilla 94.00 acres (1)
Puerto Rico 6/01 (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.
8
ITEM 3. LEGAL PROCEEDINGS
We are sometimes involved in routine litigation arising in the ordinary course
of our business, primarily contracting.
The Company believed it was entitled to additional compensation on a Florida
construction project and we pursued a claim legally. In February 1999 a verdict
was issued, giving us no additional compensation except for the retainage. Due
to this judgment we took a charge for litigation of $1.5 million in 1998. We may
decide to appeal the judgment.
In 1992, Fore Golf, Inc. sued us in the Ninth Judicial Circuit, Orange County,
Florida, Case No. CI-92-5289. We were sued by Fore Golf, Inc. for work which
this subcontractor allegedly performed in 1990 and 1991 during construction of
two golf courses at Disney World in Orlando, Florida, the alleged unpaid
contract balance in connection with this project, and inefficiency costs. In
June 1997, the court issued an order establishing liability and damages against
us. The Court entered a final judgment in favor of the plaintiff for damages and
prejudgment interest. Subsequently, the trial court also awarded the plaintiff
attorneys' fees. The Company accrued a total of $4.5 million, included in other
liabilities, in 1997 to reflect the total estimated costs to be incurred should
we not be successful in our post trial and appeal efforts. We have posted a bond
for the damages, prejudgment interest and plaintiff's attorneys' fees. This bond
is personally guaranteed by the Company's President. We settled our lawsuit with
Fore Golf, Inc. and its creditors in March 1999. The settlement calls for a cash
payment of approximately $300,000 and payments of $460,000 over a period of 4
years. We have not yet settled with the lawyers of Fore Golf regarding the
judgment on attorney' fees. The trial court fee award has been contested by Fore
Golf's attorneys. As the result of this settlement, we decreased the provision
for litigation by $2.0 million. For further information, see Note 18 of Notes to
Consolidated Financial Statements.
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 1990's 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 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. 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.
Management believes that we are 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 1998.
9
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.
1998 HIGH LOW
---- ---- ---
First Quarter $4.88 $3.50
Second Quarter 4.13 2.13
Third Quarter 3.63 2.13
Fourth Quarter 2.88 1.75
1997 HIGH LOW
---- ---- ---
First Quarter $6.50 $4.75
Second Quarter 5.50 4.25
Third Quarter 5.50 3.88
Fourth Quarter 5.50 4.50
As of March 11, 1999, there were 199 holders of record of the 4,498,935
outstanding shares of Common Stock plus more than 900 beneficial owners holding
our Common Stock in their brokers' name. The closing sales price for the Common
Stock on March 19, 1999, was $2.13. We paid no dividends in 1998 or 1997. 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 1998, 1997 or 1996.
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, 1998 and 1997 and for each of the three
years ended December 31, 1998 and the independent auditors' report appears
elsewhere in this document.
10
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
EARNINGS STATEMENT DATA:
Concrete and related
products revenues $ 50,448 $ 51,461 $ 52,987 $ 37,716 $ 39,342
Contracting revenues 15,359 9,852 13,982 16,068 22,942
Other revenues 371 2,931 2,509 2,367 2,965
-------- -------- -------- -------- --------
Total revenues $ 66,178 64,244 69,478 56,151 65,249
-------- -------- -------- -------- --------
Cost of concrete and
related products $ 41,281 41,659 39,277 29,069 29,200
Cost of contracting 12,900 9,709 12,458 14,103 19,250
Cost of other 246 2,311 1,913 1,721 2,388
-------- -------- -------- -------- --------
Gross profit 11,751 10,565 15,830 11,258 14,411
Operating expenses 10,806 23,143 12,359 10,984 9,926
-------- -------- -------- -------- --------
Operating income
(loss) 945 (12,578) 3,471 274 4,485
Other deductions (122) (2,651) (2,287) (1,961) (1,854)
-------- -------- -------- -------- --------
Income (loss) from
continuing
operations before
income taxes 823 (15,229) 1,184 (1,687) 2,631
Income taxes 339 307 383 145 50
-------- -------- -------- -------- --------
Income (loss) from
continuing
operations 484 (15,536) 801 (1,832) 2,581
Loss from
discontinued
operations, net - - (488) (915) (470)
Net earnings (loss) $ 484 $(15,536) $ 313 $ (2,747) $ 2,111
======== ======== ======== ======== ========
Basic earnings (loss) per share:
From continuing
operations $ 0.11 $ (3.45) $ .18 $ (.41) $ .59
From discontinued
operations - - (.11) (.21) (.11)
-------- ------- -------- --------- --------
$ 0.11 $ (3.45) $ .07 $ (.62) $ .48
======== ======= ======== ========= ========
Weighted average number
of shares outstanding 4,499 4,499 4,490 4,431 4,431
======== ======= ======== ========= ========
BALANCE SHEET DATA:
Working capital $ 6,910 $ 8,713 $12,063 $ 4,848 $ 10,845
Total assets 82,430 86,433 94,926 97,313 99,541
Long-term debt,
excl current portion 18,153 16,982 19,251 15,548 17,454
Stockholders' equity 43,641 42,816 59,552 59,159 61,655
11
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, 1998 WITH YEAR ENDED DECEMBER 31, 1997
REVENUE
Our revenue was $66.2 million in 1998 and $64.2 million in 1997. This 3.0
percent increase reflects an increase in contracting revenue, partially offset
by sales decreases in other and in our concrete and related products revenue.
Our concrete and related products revenue decreased 2.0 percent to $50.4 million
in 1998 from $51.5 million in 1997. This decrease was primarily due to decreased
demand for this division's products on certain Caribbean islands, partially
offset by increased demand on other Caribbean islands. At this time, we cannot
predict concrete and related products revenue levels in 1999.
Revenue from our contracting division increased 55.9 percent to $15.4 million in
1998 from $9.9 million in 1997. This increase resulted from starting and
finishing some medium sized contracts and starting a $15.3 million contract in
Exuma, Bahamas. Our backlog of unfilled portions of land development contracts
at December 31, 1998 was $16.3 million involving 10 projects, as compared to
$4.4 million involving 12 projects at December 31, 1997. Since December 31, 1998
we have entered into new contracts in the Caribbean amounting to $470,000. We
expect that most of the current backlog will be completed during 1999.
COST OF CONCRETE AND RELATED PRODUCTS
Cost of concrete and related products rose slightly to 81.8 percent of division
revenue in 1998 from 80.9 percent in 1997. The cost increase was due to lower
sales, higher production costs, and a less-favorable mix of products.
12
COST OF CONTRACTING
Cost of contracting decreased to 84.0 percent of contracting revenue in 1998
from 98.6 percent in 1997. Lower costs as a percent of revenue were due to
improved profitability on 1998 contracts and on losses we took on a contract in
1997. 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 15.0
percent to $11.3 million in 1998 from $13.3 million in 1997. This decrease is
primarily due to cost reductions in the St. Martin companies and reduced legal
expense. Also, by not operating the marina, SG&A expenses were reduced by
$176,000. SG&A expense as a percentage of revenue decreased to 17.1 percent in
1998 from 20.8 percent in 1997.
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 the second quarter of 1997, we accrued a $4.5 million charge
for the estimated costs related to a Florida State court judgment. See item 3.
Legal Proceedings.
Due to lower volumes, the management upon its review in 1997 of long-lived
assets, determined that impairment had occurred on some of our assets. An
impairment expense was recognized of $2.4 million in 1997, compared to no
expense in 1998.
Through improved collections and more stringent credit review, the allowance for
doubtful accounts and notes was decreased during the year. The expense for
doubtful accounts in 1998 was a benefit of $65,000 compared to an expense of
$2.9 million in 1997.
DIVISIONAL OPERATING INCOME
The operating income was $946,000 in 1998 compared to a loss of $12.6 million in
1997. Our concrete and related products division had an operating income of
$693,000 in 1998, representing an increase of $5.0 million compared to an
operating loss of $4.3 million in 1997. This increase in profitability is
primarily attributable to the decrease in expense for doubtful accounts and
notes of $2.3 million, to impairment of long-lived assets of $1.9 million taken
in 1997 and to a reduction in expense in St. Martin. Our land development
contracting division had operating income of $715,000 in 1998 compared to a loss
of $3.5 million in 1997, an improvement of $4.2 million. This improvement is
mainly attributable to increased activity at much better margins. In 1997, we
took losses on a contract in the Caribbean. Our expense for doubtful accounts
was a benefit of $59,000 in 1998, compared to an expense of $659,000 in 1997.
Also, legal expenses were reduced.
OTHER INCOME
We had gains on sale of property and equipment of $507,000 in 1998 compared to a
loss of $372,000 in 1997. We recognized $278,000 in profit on the sale of our
share of the CorbKinnon joint venture. Our interest expense was reduced to $2.1
million in 1998 from $2.7 million in 1997. This decrease is due to decreased
loan balances and an improved cash position in 1998. Our interest income has
increased to $1.4 million in 1998 compared to $538,000 in 1997. This is due to
our recognizing as income, cash receipts in excess of anticipated amounts from
agreed upon sources from the notes receivable due from the Government of Antigua
and Barbuda.
13
INCOME TAXES
Income taxes increased to $339,000 in 1998 from $307,000 in 1997. 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 9 of Notes to Consolidated Financial Statements and
"Business - Tax Exemptions and Benefits."
NET EARNINGS (LOSS)
Our net income was $484,000 in 1998 compared to a loss of $15.5 million in 1997.
This change in profitability was primarily attributable to increased gross
profit of $2.5 million in the contracting division, a reduced charge for
litigation expense of $5.0 million, a reduction in impairment losses of $2.4
million, a reduced expense for doubtful accounts and notes of $3.0 million, a
decrease in SG&A expense of $2.0 million, and a decrease in net interest of $1.4
million.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 WITH YEAR ENDED DECEMBER 31, 1996
REVENUE
The Company's 1997 revenue of $64.2 million compares to $69.5 million in 1996.
This 7.5 percent decrease was due to lower contracting revenue and a smaller
decrease in concrete and related products revenue.
Concrete and related products revenue decreased 2.9 percent to $51.5 million in
1997 from $53.0 million in 1996. This decrease was due to lower demand for the
division's products.
Revenue from contracting decreased 29.5 percent to $9.9 million in 1997 from
$14.0 million in 1996. This decrease was due to the completion in mid 1996 of
several hurricane-related repair contracts which were not replaced by new
contract backlog. Our backlog of unfulfilled portions of contracts at December
31, 1997 was $4.4 million compared to $3.4 million at December 31, 1996.
COST OF CONCRETE AND RELATED PRODUCTS
Cost of concrete and related products increased to 80.9 percent of division
revenue in 1997 from 74.1 percent in 1996. The higher costs were due to lower
sales, higher production costs, and less favorable mix of products.
COST OF CONTRACTING
Cost of contracting increased to 98.6 percent of division revenue in 1997 from
89.1 percent in 1996. The higher costs were due to losses taken on a Caribbean
contract and lower revenues.
OPERATING EXPENSES
Selling, general and administrative expenses ("SG&A expense") increased 10.6
percent to $13.3 million in 1997 from $12.1 million in 1996. This increase was
due to higher non-income taxes of $460,000 and to higher retirement benefits of
$275,000. SG&A expense increased to 20.8 percent of 1997 revenue from 17.4
percent in 1996.
14
In the second quarter of 1997, we accrued a $4.5 million charge for the
estimated costs of a Florida state court judgment which we are contesting
through the appellate court. See item 3. Legal Proceedings.
Management reviewed long-lived assets and determined that, due to lower volumes,
a $2.4 million impairment expense should be recognized in 1997. We had no
impairment expense in 1996.
In our allowance for doubtful accounts and notes, the 1997 expense was $2.9
million compared to $302,000 in 1996.
DIVISIONAL OPERATING INCOME
A 1997 operating loss of $12.6 million compares to 1996 operating income of $3.5
million. Our concrete and related products had a 1997 operating loss of $4.3
million compared to operating income of $4.9 million in 1996. This decrease in
profitability is due to the higher cost of sales, the $2.2 million increase in
allowance for doubtful accounts and notes, the $1.9 million impairment of
long-lived assets, the $460,000 increase in taxes, and the $275,000 increase in
retirement benefits.
Our 1997 contracting operating loss of $3.5 million compares to a 1996 loss of
$1.1 million. This increase was due to losses taken on a Carribean contract, the
increase in the allowance for doubtful accounts and notes, and the impairment of
long-lived assets.
FOURTH QUARTER ADJUSTMENTS
The fourth quarter of 1997 included a $1.6 million adjustment to inventories, a
$2.4 million impairment loss, and a $2.6 million increase in the allowance for
doubtful accounts and notes.
INCOME TAXES
Income taxes decreased to $307,000 in 1997 from $383,000 in 1996. Our tax rate
varies depending on earnings, jurisdictions, loss carry-forwards and tax
exemptions. See Note 9 of Notes to Consolidated Financial Statements and
"Business - Tax Exemptions and Benefits."
NET (LOSS) EARNINGS
The Company's 1997 net loss of $15.5 million compares to 1996 net income of
$313,000. This decrease in profitability was due to lower gross profit in both
divisions, litigation expense, an impairment loss, a higher provision for
doubtful accounts and notes, and an increase in SG&A expense.
LIQUIDITY AND CAPITAL RESOURCES
We generally fund our working capital needs from operations and bank borrowings.
In the contracting business, we expend considerable funds for equipment, labor
and supplies. Our capital needs are greatest at the start of a new contract,
since we generally must complete 45 to 60 days of work before receiving the
first progress payment. As a project continues, a portion of the progress
billing is usually withheld as retainage until the work is complete. We
sometimes provide long-term financing to customers who have previously utilized
our contracting services. Accounts receivable for concrete and related products
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.
15
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, 1998, our liquidity and capital resources included cash and
cash equivalents of $2.3 million and working capital of $6.9 million. Included
in working capital is $2.9 million of equipment and real estate held for sale.
Although management intends to sell these assets during 1999, there can be no
assurance that they will be sold. As of December 31, 1998, total outstanding
liabilities of $38.8 million compares to $43.6 million as of December 31, 1997.
As of December 31, 1998, available lines of credit totaled $1.4 million.
Cash flow provided by operating activities for the year ended December 31, 1998
was $5.3 million compared with $1.8 million for the year ended December 31,
1997. The primary use of cash for operating activities during the year ended
December 31, 1998 was a decrease in accounts payable and accrued expenses of
$554,000. The primary sources of cash for the period were a $539,000 reduction
in other current assets and a $633,000 reduction in accounts receivable.
Net cash used in investing activities was $1.6 million in 1998. Purchases of
property, plant, and equipment were $7.6 million. The purchases were almost
completely financed through equipment financing.
We turned our fiscal year-end accounts receivable, excluding notes and employee
receivables, approximately 7.2 times in 1998 compared to 5.3 times in 1997. The
improvement resulted from increased contracting activity which normally has a
higher turnover ratio. However, the concrete division decreased its ratio
slightly.
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 repayable in monthly installments through November
2002. We had $3.9 million of borrowings outstanding on this loan at December 31,
1998. 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 no borrowings outstanding under this line of credit at December 31, 1998.
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, 1998, the Company had borrowings of $88,000 outstanding
under this line.
At December 31, 1998 we had borrowed approximately $5.6 million from the Company
President. The note is unsecured and bears interest at a rate variable with the
prime rate. One hundred sixty-three thousand is due on demand and $5.4 million
is due on January 1, 2000.
We purchase equipment as needed for our ongoing business operations. We are
currently replacing or upgrading some equipment used by the concrete and related
products division, principally concrete trucks and quarry equipment. This should
result in a net cash expenditure, after financing part of the equipment
purchases, of approximately $3.0 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
16
duration, require us to make significant investments in heavy construction
equipment. During 1998, we sold equipment and a marina with an original cost
basis of approximately $7.6 million and a net book value of $4.1 million. The
net proceeds were approximately $3.9 million. We believe we have available or
can obtain sufficient financing for most of 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,
1998, amounts outstanding to these lenders totaled $13.2 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 and accrued interest at December 31, 1998 include $10.9
million in promissory notes from the Government of Antigua with $2.0 million
classified as a current receivable.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. If not addressed, such
computer systems, software products and embedded technology may be unable to
properly interpret dates beyond the year 1999, which could cause system failures
or miscalculations and lead to disruptions in our activities and operations.
During 1998 we have assessed our computer information systems. The majority of
our systems are purchased from outside vendors. Those installed systems, which
are not currently able to fully function in the Year 2000, either have new
versions which are Year 2000 compliant or the vendor has committed to a Year
2000 compliant release in sufficient time to allow installation and testing
prior to critical cut-over dates.
We have identified three major areas determined to be critical for successful
Year 2000 compliance:
/bullet/ Information systems such as PCs, networks, batch-plant computers
/bullet/ Third party relationships, including customers, suppliers, and
government agencies
/bullet/ Equipment which may contain microprocessors with embedded
technology
We have taken an inventory of all computers and software and we are planning the
changes needed for these systems to become Year 2000 compliant. We are currently
implementing a new information system for our financial reporting, and we are
evaluating proposals from various vendors in respect to distribution systems for
the island subsidiaries. We believe that all conversion efforts will be
completed before the end of 1999.
We have started the process of contacting suppliers and customers regarding
their Year 2000 compliance status. Our contact includes questioning them about
imbedded micro-processors.
We have initiated a Year 2000 contingency plan development process to mitigate
potential disruptions in our activities and operations that may be created by
failures of critical business partners, equipment and internal systems. These
17
contingency plans are expected to be developed by the third quarter of 1999.
However, we can provide no assurance that it will correctly anticipate the
level, impact or duration of non-compliance by critical business partners,
equipment or internal systems, or that contingency plans will be sufficient to
mitigate the impact of non-compliance.
We estimate to spend around $300,000 on our Year 2000 project. This consists of
PC's, software and other related costs.
We cannot assure that our systems or the computer systems of other companies
with whom we conduct business will be Year 2000 compliant prior to December 31,
1999. Management has determined that making the required system changes will
have no material impact on our consolidated financial position, results of
operations or cash flows.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
18
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 20
Financial Statements:
Consolidated Balance Sheets 21-22
December 31, 1998 and 1997
Consolidated Statements of Operations
For Each of the Years in the Three-Year Period 23-24
Ended December 31, 1998
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for Each of the Years
in the Three-Year Period Ended December 31, 1998 25
Consolidated Statements of Cash Flows
For Each of the Years in the Three-Year Period
Ended December 31, 1998 26-27
Notes to Consolidated Financial Statements 28-49
Schedule II - Valuation and Qualifying Accounts 55
19
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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles. 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, 1999
20
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
- ------ ---- ----
Current assets:
Cash $ 899,605 $ 876,368
Cash equivalents 1,359,253 125,000
Receivables, net 12,611,437 13,928,997
Costs in excess of billings and
estimated earnings 710,557 329,707
Inventories 4,468,718 4,779,121
Assets held for sale 2,868,922 6,919,511
Other 398,592 937,290
----------- -----------
Total current assets 23,317,084 27,895,994
Property, plant and equipment, net
Land 2,167,318 2,148,825
Buildings 3,560,545 3,365,775
Leasehold interests 6,632,206 6,302,592
Equipment 58,340,451 53,382,393
Furniture and fixtures 642,314 560,402
Construction in process 406,344 1,007,879
----------- -----------
71,749,178 66,767,866
Less accumulated depreciation (28,715,682) (27,119,417)
----------- -----------
43,033,496 39,648,449
Investments in unconsolidated joint
ventures and affiliates, net 237,370 132,130
Advances to unconsolidated joint
ventures and affiliates, net - 568,861
Receivables, net 13,173,472 15,137,701
Intangible assets, net of accumulated
amortization 1,165,692 1,429,921
Other assets 1,503,005 1,620,204
----------- -----------
Total assets $82,430,119 $86,433,260
=========== ===========
See accompanying notes to consolidated financial statements.
21
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ---- ----
Current liabilities:
Accounts payable, trade and other $ 6,917,119 $ 6,390,461
Accrued expenses and other liabilities 3,186,375 2,702,517
Notes payable to banks 88,108 384,473
Current installments of long-term debt 5,539,151 8,990,968
Billings in excess of costs and
estimated earnings 315,007 137,408
Income taxes 361,071 577,478
----------- -----------
Total current liabilities 16,406,831 19,183,305
Long-term debt, excluding current
installments and notes payable
to banks 18,153,451 16,981,738
Minority interest in consolidated
subsidiaries 1,762,809 1,923,629
Deferred income taxes 399,056 399,791
Other liabilities 2,067,413 5,129,135
----------- -----------
Total liabilities 38,789,560 43,617,598
Stockholders' equity
Common stock, $0.10 par value.
Authorized 15,000,000 shares,
issued and outstanding, 4,498,935
shares in 1998 and 1997 449,894 449,894
Additional paid-in capital 12,064,133 12,064,133
Accumulated other comprehensive income -
cumulative translation adjustment (859,376) (1,200,000)
Retained earnings 31,985,908 31,501,635
----------- -----------
Total stockholders' equity 43,640,559 42,815,662
----------- -----------
Commitments and contingencies
Total liabilities and
stockholders' equity $82,430,119 $86,433,260
=========== ===========
See accompanying notes to consolidated financial statements.
22
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
For Each of the Years in the Three-Year Period Ended December 31, 1998
1998 1997 1996
---- ---- ----
Concrete and related products
revenues $ 50,448,275 $ 51,460,633 $52,987,242
Contracting revenues 15,358,591 9,851,775 13,981,732
Other revenues 371,386 2,931,343 2,509,395
------------ ------------ ------------
Total revenues 66,178,252 64,243,751 69,478,369
Cost of concrete and related
products 41,281,263 41,659,401 39,276,983
Cost of contracting 12,899,491 9,708,684 12,457,949
Cost of other 245,880 2,310,628 1,913,286
------------ ------------ ------------
Gross profit 11,751,618 10,565,038 15,830,151
Operating expenses:
Selling, general and
administrative 11,331,398 13,337,564 12,056,001
Provision for doubtful accounts
and notes (64,692) 2,932,245 302,863
Impairment of long-lived assets - 2,373,288 -
(Credit) Charge for litigation (460,794) 4,500,000 -
------------ ------------ ------------
Operating income (loss) 945,706 (12,578,059) 3,471,287
------------ ------------ ------------
Other income (deductions):
Joint venture equity loss (39,000) (150,000) (50,000)
Gain (loss) on sale of property
and equipment 507,256 (372,104) (2,147)
Interest expense (2,113,224) (2,668,277) (2,609,580)
Interest and other income 1,362,156 537,651 392,355
Minority interest 160,820 1,776 (17,819)
------------ ------------ -----------
(121,992) (2,650,954) (2,287,191)
------------ ------------ -----------
Income (loss)from
continuing operations
before income taxes 823,714 (15,229,013) 1,184,096
Income taxes 339,441 307,010 383,089
Income (loss)from
continuing operations 484,273 (15,536,023) 801,007
Discontinued operation
Loss on sale of discontinued
operation - - (488,119)
------------ ------------ ------------
Loss from discontinued operation - - (488,119)
------------ ------------ ------------
Net earnings (loss) $ 484,273 $(15,536,023) $ 312,888
============ ============ ============
See accompanying notes to consolidated financial statements.
23
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations (Continued)
1998 1997 1996
---- ---- ----
Basic earnings (loss) per share:
From continuing operations $ 0.11 $ (3.45) $ .18
From discontinued operation - - (.11)
---------- ---------- ----------
Net basic earnings (loss) $ 0.11 $ (3.45) $ .07
========== ========== ==========
Diluted earnings (loss) per share:
From continuing operations $ 0.11 $ (3.45) $ .17
From discontinued operation - - (.10)
---------- ---------- -----------
Net diluted earnings (loss) $ 0.11 $ (3.45) $ .07
========== ========== ===========
Weighted average number of common
shares outstanding - basic 4,498,935 4,498,935 4,490,329
========== ========== ===========
Weighted average number of common
shares outstanding - diluted 4,520,460 4,498,935 4,596,536
========== ========== ===========
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, 1998
ACCUM-
ULATED
OTHER
COMPRE- COMPRE-
COMMON PAID-IN HENSIVE HENSIVE RETAINED
STOCK CAPITAL INCOME INCOME EARNINGS TOTAL
----- ------- ------ ------ -------- -----
Balances at
December 31, 1995 446,451 11,987,365 - 46,724,770 59,158,586
Stock issued in connection
with exercise of stock
options 3,443 76,768 80,211
Comprehensive income
Net earnngs 312,888 312,888 312,888
-----------
Other comprehensive
income, net of tax -
----------
Comprehensive income 312,888
-------- ---------- ========== ---------- ----------- ----------
Balances at
December 31, 1996 449,894 12,064,133 - 47,037,658 59,551,685
Comprehensive income
Net loss (15,536,023) (15,536,023) (15,536,023)
-----------
Other comprehensive
income, net of tax
Foreign currency
translation adjustment (1,200,000) (1,200,000) (1,200,000)
-----------
Other comprehensive income (1,200,000)
-----------
Comprehensive income (16,736,023)
-------- ---------- =========== ---------- ----------- ----------
Balances at
December 31, 1997 449,894 12,064,133 (1,200,000) 31,501,635 42,815,662
Comprehensive income
Net earnings 484,273 484,273 484,273
------------
Other comprehensive
income, net of tax
Foreign currency
translation adjustment 340,624 340,624 340,624
------------
Other comprehensive income 340,624
------------
Comprehensive income 824,897
-------- ---------- ============ ---------- ----------- ----------
Balances at
December 31, 1998 449,894 12,064,133 (859,376) 31,985,908 43,640,559
======== ========== =========== =========== ===========
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, 1998
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $ 484,273 $(15,536,023) $ 312,888
Adjustments to reconcile net earnings
(loss)to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,864,659 6,143,726 5,421,183
Deferred income tax benefit (735) (95,609) (156,579)
Joint venture equity loss 39,000 150,000 50,000
Joint venture advance write-off 50,000 - -
Provision for doubtful accounts
and notes (66,892) 2,932,245 302,863
Impairment on long-lived assets - 2,373,288 -
(Gain) loss on sale of property
and equipment (507,256) 372,104 2,147
(Credit) charge for litigation (460,794) 4,500,000 -
Loss from discontinued operation - - 488,119
(Decrease)increase in minority
interest in consolidated
subsidiaries (160,820) (1,776) 17,819
Changes in operating assets and liabilities:
Decrease (increase) in receivables 632,885 (3,103,435) (2,314,992)
(Increase) decrease in costs
in excess of billings and
estimated earnings (380,850) 2,795,153 337,124
Decrease (increase) in inventories 310,403 388,218 (606,400)
Decrease (increase) in other
current assets 538,697 (111,438) 136,804
Decrease (increase) in other assets 5,975 (13,220) -
(Decrease) increase in accounts
payable and accrued expenses (553,814) 1,473,637 (1,527,284)
Increase (decrease) in billings in
excess of costs and estimated
earnings 177,599 24,756 (653,747)
(Decrease) increase in income
taxes payable (216,407) (148,532) 336,360
Decrease in other non-
current liabilities (486,724) (295,070) (502,838)
------------ ------------ ----------
Net cash provided by continuing
operations 5,269,199 1,848,024 1,643,467
Net cash used in
discontinued operation - - (102,005)
------------ ------------ ----------
Net cash provided by operating
activities $ 5,269,199 $ 1,848,024 $1,541,462
============ ============ ==========
See accompanying notes to consolidated financial statements.
26
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years in the Three-Year Period Ended December 31, 1998
1998 1997 1996
---- ---- ----
Cash flows from investing activities:
Purchases of property, plant and
equipment $(7,589,323) $(8,534,518) $(6,643,817)
Proceeds from disposition of
property, plant and equipment 3,861,128 572,724 5,876,197
Payment to acquire subsidiary company - (71,803) (171,711)
Issuance of notes (514,135) - (245,477)
Payments on notes 2,751,379 2,822,968 2,478,790
Advances to affiliates (153,020) (123,350) -
Advances from affiliates 89,067 452,592 -
----------- ----------- -----------
Net cash (used in) provided by
investing activities (1,554,904) (4,881,387) 1,293,982
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from debt 7,956,147 6,795,917 10,823,916
Principal payments on debt (10,116,587) (4,514,833) (13,452,545)
Payments for debt issuance costs - - (200,485)
Net (repayments) borrowings from bank
overdrafts (296,365) (150,347) 481,526
----------- ----------- -----------
Net cash (used in) provided by
financing activities (2,456,805) 2,130,737 (2,347,588)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 1,257,490 (902,626) 487,856
Cash and cash equivalents at
beginning of year 1,001,368 1,903,994 1,416,138
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 2,258,858 $ 1,001,368 $ 1,903,994
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 2,241,507 $ 2,641,531 $ 2,648,250
=========== =========== ===========
Income taxes $ 264,986 $ 249,523 $ 203,308
=========== =========== ===========
Supplemental non-cash items:
During 1996, the minority interest shareholders in the new subsidiary operating
in Puerto Rico exchanged equipment, leaseholds and notes receivable totaling
$1,231,774 for their 49.98 percent ownership.
During 1998 and 1997, the Company recorded a translation adjustment of $340,624
and ($1,200,000) 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) DESCRIPTION OF BUSINESS
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 and builds golf
courses, roads, 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 by the equity method. 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 are accounted for by using the cost method.
(c) REVENUE RECOGNITION
CONCRETE AND RELATED PRODUCTS
Revenue is recognized when the products are delivered.
CONTRACTING
The Company uses the percentage-of-completion method of
accounting for both financial statements and tax reports.
Revenues and related costs are recorded based on the Company's
estimates of the completion percentage of each project.
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 a 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 is recognized when products or
services are delivered.
28
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(d) CASH AND CASH EQUIVALENTS
The Company considers financial instruments which mature
within three months at the time of purchase to be cash
equivalents.
(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. Cash receipts
for anticipated amounts from agreed upon sources on impaired
notes receivable are applied to reduce the principal amount of
such notes and any excess is recognized as interest income.
(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 interests 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.
Such assets include real estate, earth-moving machinery, and
other construction equipment.
29
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(h) FOREIGN CURRENCY TRANSLATION
All balances in foreign currencies are remeasured at year-end
rates to the respective functional currency of each
consolidating company.
For those subsidiaries which function in Eastern Caribbean
dollars and French francs, their assets and liabilities have
been translated into U.S. dollars at year-end exchange rates.
Income statement accounts are translated into U.S. dollars at
average exchange rates during the period. The translation
adjustment increased equity by $340,624 in 1998 and decreased
equity by $1.2 million in 1997. The adjustment for 1996 was
not significant.
(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. Based on the Company's policy, management
believes that there is no impairment of value related to the
intangible assets as of December 31, 1998.
Accumulated amortization on intangible assets amounted to
$746,379 in 1998, $550,795 in 1997, and $371,187 in 1996.
(j) EARNINGS (LOSS) PER SHARE
In December 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128")
which establishes new standards for computing and presenting
earnings per share. Earnings per share for prior periods have
been restated to reflect the provisions of this statement.
Basic earnings per share are computed by dividing net income
(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 1998, 52.0 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.
30
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(l) INCOME TAXES
The Company and certain of our domestic subsidiaries file
consolidated federal and state income tax returns.
Subsidiaries located in U.S. possessions and foreign countries
file individual income tax returns. Deferred income taxes are
recognized for income and expense items that are reported in
different years for financial statement and income tax
purposes.
U.S. income taxes are not provided on undistributed earnings
which are expected to be permanently reinvested by foreign
subsidiaries.
The Company adopted the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." This uses an
asset and liability approach to financial reporting for income
taxes. Under this method, deferred tax assets and liabilities
are recognized based on differences between financial
statement and tax bases of assets and liabilities using
current tax rates. Deferred income taxes result from temporary
differences between income reported in the financial
statements and taxable income.
(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 $2.4 million for the impairment of long-lived
assets during 1997.
31
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(o) STOCK OPTION PLANS
Prior to 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related interpretations. Compensation
expense was recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise
price. In 1996 the Company adopted SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, which permits entities to
recognize as expense over the vesting period the fair value of
stock-based awards on the date of grant. SFAS No. 123 also
allows entities and the Company has elected, to continue to
apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No. 123 had
been applied.
(p) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes
standards for reporting and presentation of comprehensive
income and its components in a full set of financial
statements. Comprehensive income consists of net income and
cumulative foreign currency translation and is presented in
the consolidated statements of stockholders equity and
comprehensive income. The statement requires only additional
disclosures in the consolidated financial statements; it does
not affect the Company's financial position or results of
operations. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
(q) SEGMENT REPORTING
Effective December 31, 1998, the Company adopted SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. This statement establishes standards for
reporting information about a company's operating segments
and related disclosures about its products, services,
geographic areas of operations and major customers. Adoption
of this statement did not impact the Company's results of
operations or financial position. The "Segment Reporting"
note provides further information.
(r) RECLASSIFICATION
Certain prior year amounts have been reclassified to conform
with the current year presentation.
32
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share data:
1998 1997 1996
---- ---- ----
Weighted average shares outstanding 4,498,935 4,498,935 4,490,329
Effect of dilutive securities:
Options 21,525 - 106,207
--------- --------- ---------
Diluted shares 4,520,460 4,498,935 4,596,536
========= ========= =========
Options to purchase 148,300 shares of common stock at $2.33 per share,
were outstanding for the year ended December 31, 1997, 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.
(3) RECEIVABLES
Receivables consist of the following:
DECEMBER 31,
--------------------------
1998 1997
---- ----
Concrete and related products
division trade accounts receivable $11,672,685 $11,343,234
Land development contracting
division trade accounts
receivable, including retainages 2,917,563 4,652,164
Other division trade accounts receivable - 81,749
Accrued interest and other receivables 99,001 114,986
Notes and other receivables due from the
Government of Antigua and Barbuda, net 10,854,407 13,028,885
Trade notes receivable - other 5,294,250 5,132,985
Due from employees and officers 334,563 510,760
----------- -----------
31,172,469 34,864,763
Allowance for doubtful accounts
and notes (5,387,560) (5,798,065)
----------- ----------
$25,784,909 $29,066,698
=========== ===========
Receivables are classified in the consolidated balance sheets as
follows:
DECEMBER 31,
---------------------------
1998 1997
---- ----
Current assets $12,611,437 $13,928,997
Noncurrent assets 13,173,472 15,137,701
----------- -----------
$25,784,909 $29,066,698
=========== ===========
Included in notes and other receivables are unsecured notes due from
the Government of Antigua and Barbuda totaling a net amount of
$9,745,542 and $11,932,433 in 1998 and 1997, respectively, $2.0 million
of which is
33
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
classified as a current receivable. The gross balance of the notes is
$33.5 million. The notes called for both quarterly and monthly
principal and interest payments until maturity in 1997. The notes were
not satisfied at maturity but the Antiguan government has advised the
Company that payments from agreed upon sources will continue until the
obligation is satisfied. 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. Cash receipts during 1998 from
agreed upon sources was $2.3 million. Interest income recognized for
amounts received in excess of amounts from agreed upon sources in 1998
and 1997 was $746,120 and $202,420 respectively.
Notes receivable from an Antiguan government agency, amounting to
$855,803 in 1998 and 1997, are included in the total due from the
government of Antigua, along with Antigua-Barbuda Government
Development Bonds 1994-1997 series amounting to $253,062 and $240,649
in 1998 and 1997, respectively.
The Company also has net trade receivables from various Antiguan
government agencies of $77,185 and $5,866 in 1998 and 1997,
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,
------------------------------
1998 1997
---- ----
Unsecured promissory notes receivable with
varying terms and maturity dates $ 906,167 $ 558,117
Secured promissory notes receivable with
varying terms and maturity dates 1,046,138 928,248
8.0 percent note receivable, due on demand,
secured by first mortgage on real
property 817,788 826,231
Notes receivable bearing interest at 2.0
percent over prime interest rate, secured
by real estate 549,402 549,402
8.0 percent note receivable, due in
installments through June 2005, balloon
payment July 1, 2005 secured
by land and building 600,000 600,000
12.5 percent note receivable, due in
installments through June 30, 2001
and secured by pledge of stock of
subsidiary company (see note 5) 516,080 559,187
8.0 percent note receivable, due in
installments through January 5, 2008,
secured by real estate 858,675 1,111,800
---------- ----------
$5,294,250 $5,132,985
========== ==========
34
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) INVENTORIES
DECEMBER 31,
------------------------------
1998 1997
---- ----
Inventories consist of the following:
Sand, stone, cement and concrete block $3,093,790 $3,036,605
Maintenance parts 934,027 1,229,380
Other 440,901 513,136
---------- ----------
$4,468,718 $4,779,121
========== ==========
(5) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES AND
AFFILIATES
At December 31, 1998, the Company had equity interests in two real
estate ventures, a 2.1 percent equity interest in a real estate project
in the Bahamas (see Note 14) and a 33.3 percent interest in a real
estate company in Puerto Rico. Losses of $150,000 and $50,000 were
recognized in 1997, and 1996, respectively, related to the Company's
investment in the foreign construction company. Equity losses of
$39,000 were recognized in 1998 on other ventures combined.
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
UNCONSOLIDATED JOINT UNCONSOLIDATED JOINT
VENTURES AND AFFILIATES VENTURES AND AFFILIATES
----------------------- -----------------------
ADVANCES INVESTMENTS ADVANCES INVESTMENTS
TO IN TO IN
-------- ----------- -------- -----------
Commercial property $ - $ - $ 11,323 $ -
Real estate - 237,370 507,538 132,130
Construction - - 50,000 -
--------- -------- -------- --------
$ - $237,370 $568,861 $132,130
========== ======== ======== ========
(6) ACQUISITIONS
In May 1996, the Company contributed approximately $1.2 million in
capital to a new subsidiary company in return for a 50.02 percent
ownership interest. The new subsidiary leases and operates a quarry in
Guaynabo, Puerto Rico. Capital contributions of the Company's minority
ownership partners, amounting to approximately $1.2 million, are
classified as part of minority interest in consolidated subsidiaries.
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash, cash
equivalents, 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, 1998 because of the short maturity of these
instruments. The carrying value of debt and notes receivable
approximated fair value at December 31, 1998 based upon the present
value of estimated future cash flows.
35
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
----------------------------
1998 1997
---- ----
Installment notes payable in monthly
installments through 2002, bearing
interest at a weighted average
rate of 8.7 percent and secured by
equipment with a carrying value
of about $16,910,000 $13,153,577 $9,560,625
Notes and mortgages payable in
installments through 2003, bearing
interest at 7.75 to 8.25 percent
and secured by real property with
a carrying value of about $834,000 230,330 3,452,557
Obligation arising from an acquisition,
payable in monthly installments
through 1998, discounted at 10.0 percent - 200,683
Unsecured notes payable due through 2002,
bearing interest at a weighted average
rate of 7.9 percent 784,313 1,547,201
Unsecured note payable to the Company's
President, $162,750 due on demand and
balance due January 1, 2000 and bearing
interest at 2 percent over the prime
interest rate 5,607,732 6,294,982
Note payable to a bank under a $500,000
unsecured overdraft facility due on demand,
bearing interest at 14.0 percent 88,108 384,473
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 with a net carrying value of
about $6,930,000 3,916,650 4,916,658
----------- -----------
Total debt outstanding $23,780,710 $26,357,179
=========== ===========
The effective interest on all debt outstanding was 9.1 percent at
December 31, 1998 and 9.8 percent at December 31, 1997.
36
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Shown in the consolidated balance sheets under the following captions:
DECEMBER 31,
-----------------------------
1998 1997
---- ----
Current installments of long-term debt $ 5,539,151 $ 8,990,968
Notes payable to banks 88,108 384,473
Long-term debt 18,153,451 16,981,738
----------- -----------
$23,780,710 $26,357,179
=========== ===========
The total maturities of all outstanding debt subsequent to December 31,
1998 are as follows:
1999 $5,627,259
2000 10,422,059
2001 3,589,915
2002 2,452,264
2003 980,499
Thereafter 708,714
-----------
$23,780,710
===========
In 1998, the Company sold a marina in the U.S. Virgin Islands and
repaid its associated $3.0 million debt. The Company is in violation of
certain loan covenants for the bank term loan as of December 31, 1998.
The bank has agreed to waive the violations of the loan covenants, as
long as the Company is current with its loan payments. The Company is
current in its debt payments to the bank and foresees that it will have
sufficient funds in the future to service the debt.
(9) INCOME TAXES
Income tax expense (benefit) consists of:
CURRENT DEFERRED TOTAL
------- -------- -----
1998:
Federal $ - $ (735) $ (735)
State - - -
Foreign 340,176 - 340,176
-------- --------- --------
$340,176 $ (735) $339,441
======== ========= ========
1997:
Federal $ - $ (35,081) $(35,081)
State - - -
Foreign 402,619 (60,528) 342,091
-------- --------- --------
$402,619 $ (95,609) $307,010
======== ========= ========
1996:
Federal $ - $ - $ -
State - - -
Foreign 539,668 (156,579) 383,089
-------- --------- --------
$539,668 $(156,579) $383,089
======== ========= ========
37
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The significant components of deferred income tax benefit attributable
to income or loss from continuing operations for the years ended
December 31, 1998, 1997 and 1996 are as follows:
DECEMBER 31,
---------------------------------------------------
1998 1997 1996
---- ---- ----
Deferred income tax
(benefit)expense $(1,691,364) $ (2,354,695) $ 364,000
Increase (decrease) in
valuation allowance for
deferred tax assets 1,690,629 2,259,086 (520,579)
----------- ------------ ---------
$ (735) $ ( 95,609) $(156,579)
=========== ============ =========
The actual expense differs from the "expected" tax expense computed by
applying the U.S. federal corporate income tax rate to earnings before
income taxes as follows:
1998 1997 1996
---- ---- ----
Computed "expected"
tax (benefit) expense $ 280,063 $(5,177,864) $402,600
Increase (reduction)
in income taxes resulting from:
State taxes net of federal
tax (benefit)expense 36,928 33,537 (6,861)
Repatriated earnings of
foreign subsidiary 561,000 3,252,100 595,000
Intercompany interest income
untaxed by foreign
jurisdiction (451,008) (543,764) -
Tax incentives granted to
foreign subsidiaries (496,580) (629,000) (1,097,000)
Tax incentives granted to
U.S. possession - - (94,000)
Reversal of foreign
subsidiary dividend
declared (1,496,000) - -
Net operating loss not
utilized 41,012 1,308,226 1,060,840
Change in deferred tax
valuation allowance 1,690,629 2,259,086 (520,579)
Differences in effective
rate in foreign
jurisdiction and other 173,397 (195,311) 43,089
----------- ----------- -----------
$ 339,441 $ 307,010 $ 383,089
=========== =========== ===========
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.
38
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Significant portions of the deferred tax assets and liabilities
results from the tax effects of temporary difference:
DECEMBER 31,
------------------------
1998 1997
---- ----
Deferred tax assets:
Allowance for bad debts $ 225,757 $ 259,426
Net operating loss carryforwards 6,794,322 6,011,551
Reserves and other 1,193,300 2,292,718
----------- -----------
Total gross deferred tax assets 8,213,379 8,563,695
Less valuation allowance (7,564,115) (5,873,486)
----------- -----------
Net deferred tax assets 649,264 2,690,209
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally due
to differences in depreciation and
capitalized interest (1,048,320) (2,690,000)
Investments in joint ventures,
principally due to differences in
recording the investment between
book and tax - (400,000)
------------ -----------
Total gross deferred tax liabilities (1,048,320) (3,090,000)
------------ -----------
Net deferred tax liabilities $ (399,056) $ (399,791)
============ ===========
The valuation allowance for deferred tax assets as of December 31, 1998
was $7.6 million or about 92 percent of the potential deferred tax
benefit. The Company's believes partial repatriation of foreign
earnings can utilize net operating losses.
In April 1988, the U.S. Virgin Islands Industrial Development
Commission (IDC) granted one of our subsidiaries a 10-year tax
exemption expiring in April 1998. With some conditions and exceptions,
our (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 January 1994, we were granted a five-year extension,
through April 2003, of the previous benefits.
In partial payment of a major contract, the Government of Antigua
granted two subsidiaries of the Company a 10-year tax holiday effective
January 1, 1987 through December 31, 1996 from all taxes due (1) on
that construction contract, (2) on a joint venture to develop vacant
land and a commercial property; and (3) on our sale of concrete and
related products in Antigua. The tax holiday also exempted the Company
from certain accrued tax liabilities. In 1989, the Government of
Antigua, in payment for additional work done, exempted the Company from
taxes that would have been due on a construction contract at Jolly
Harbour, Antigua.
39
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1998, approximately $39.0 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, 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, 1998 the Company had accumulated net operating loss
carryforwards available to offset future taxable income in our
Caribbean and U.S. operations of about $21 million, which expire at
various times through the year 2008.
(10) DISCONTINUED OPERATIONS
In 1989, a Devcon subsidiary obtained a minority interest in a
partnership which manufactured, sold and distributed acoustical ceiling
tiles. The subsidiary invested $1.2 million and received a 29 percent
partnership interest. Two of the Company's directors paid $450,000 for
an 11 percent interest. In 1994, an Antiguan subsidiary of the Company
became the new general partner and the Company's ownership in the
partnership was increased to 64.5 percent. In November 1995, the
Company disposed of this operation. At December 31, 1995, the intended
disposal was accounted for as a discontinued operation, and prior
financial statements were restated to reflect this discontinued
operation. The Company's investment in the partnership was written down
$800,000, to its estimated net realizable value of approximately
$749,000. The Company sold its interest in this business in September
1996 for a $600,000 secured promissory note and a $385,000 unsecured
promissory note, resulting in an additional disposal loss of $488,000.
As of December 31, 1998, the outstanding amounts of these two notes
were $600,000 and $128,000, respectively.
(11) 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,
--------------------------
1998 1997
---- ----
Current assets $10,335,419 $12,208,735
Advances to the Company 1,085,169 (7,380,516)
Property, plant and equipment, net 18,850,273 19,160,861
Investment in joint ventures and
affiliates, net 154,369 654,126
Notes receivable, net 10,359,620 13,556,730
Other assets 1,228,052 1,502,820
----------- -----------
Total assets $42,012.902 $39,702,756
=========== ===========
Current liabilities $ 4,464,755 $ 5,271,958
Long-term debt 1,778,006 2,944,665
Equity 35,770,141 31,486,133
----------- -----------
Total liabilities and equity $42,012,902 $39,702,756
=========== ===========
40
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1998 1997 1996
---- ---- ----
Revenue $34,361,166 $39,979,868 $36,474,931
Expenses (34,472,551) 43,140,338 34,283,074
----------- ----------- -----------
Net (loss) earnings $ (111,385) $(3,160,470) $ 2,191,857
=========== =========== ===========
(12) 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, 1998 are as follows:
OPERATING
LEASES
Years ending December 31,
1999 $ 3,883,069
2000 3,647,797
2001 1,445,392
2002 1,334,311
2003 1,174,998
Thereafter 9,907,294
-----------
Total minimum lease payments $21,392,861
===========
Total operating lease expense was $3,985,965 million in 1998,
$4,083,000 in 1997 and $1,843,719 in 1996. Some operating leases
provide for contingent rentals or royalties based on related sales and
production; contingent expense amounted to $130,370 in 1998, $261,138
in 1997 and $160,433 in 1996. Included in the above minimum lease
commitments are royalty payments due to the owners of the Societe des
Carrieres de Grand Case (SCGC) quarry. See Note 18.
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 or about 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.
41
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) SEGMENT REPORTING
The Company is organized based on the products and services it
provides. Under this organizational structure the Company has two
reportable segments: concrete and related products and contracting.
Concrete and related products includes manufacturing and distribution
of ready-mix concrete, block, crushed aggregate and cement. Contracting
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,
------------------------------------------------------
1998 1997 1996
---- ---- ----
Revenue (incl.intersegment):
Concrete and related
products $50,923,706 $ 51,742,720 $53,686,792
Contracting 15,358,591 9,851,776 13,981,732
Other 371,386 2,931,343 2,509,395
Elimination of
intersegment revenue (475,431) (282,088) (699,550)
----------- ------------ -----------
Total $66,178,252 $ 64,243,751 $69,478,369
=========== ============ ===========
Operating income (loss):
Concrete and related
products $ 693,331 $ (4,322,497) $ 4,864,592
Contracting 713,689 (3,501,538) (1,093,272)
Other 115,686 433,976 415,967
Unallocated corporate
overhead (577,000) (5,188,000) (716,000)
----------- ------------- -----------
Total $ 945,706 $(12,578,059) $ 3,471,287
=========== ============ ===========
Total assets:
Concrete and related
products $55,369,245 $ 54,648,778 $59,977,843
Contracting 12,906,969 12,652,785 12,729,631
Other 14,153,905 19,131,697 22,218,666
----------- ------------ -----------
Total $82,430,119 $ 86,433,260 $94,926,140
=========== ============ ===========
Depreciation and
amortization:
Concrete and related
products $ 4,285,242 $ 4,446,488 $ 3,889,666
Contracting 1,556,891 1,426,563 1,261,863
Other 22,526 270,675 269,654
----------- ------------ -----------
Total $ 5,864,659 $ 6,143,726 $ 5,421,183
=========== ============ ===========
42
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
DECEMBER 31,
-------------------------------------------------------
1998 1997 1996
---- ---- ----
Capital expenditures:
Concrete and related
products $ 4,565,167 $ 6,883,182 $ 5,539,134
Contracting 3,024,156 1,619,025 1,072,683
Other - 32,311 32,000
----------- ------------ -----------
Total $ 7,589,323 $ 8,534,518 $ 6,643,817
=========== ============ ===========
Operating income (loss) is revenue less operating expenses. In
computing operating income (loss), 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
is considered foreign revenue for the purpose of the following table:
DECEMBER 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
Revenue by geographic areas:
U.S. and its territories $24,374,409 $22,663,090 $23,591,157
Netherlands Antilles 8,646,509 11,195,673 18,532,665
Antigua and Barbuda 10,785,627 11,782,953 12,748,622
French West Indies 6,324,012 5,011,572 5,023,500
Other foreign areas 16,047,695 13,590,464 9,582,425
----------- ----------- -----------
Total $66,178,252 $64,243,752 $69,478,369
=========== =========== ===========
Long-lived assets by geographic areas:
U.S. and its territories $25,860,450 $21,288,281
Netherlands Antilles 2,218,336 3,203,551
Antigua and Barbuda 6,105,165 6,556,778
French West Indies 5,749,216 5,417,540
Other foreign areas 6,006,396 6,364,554
----------- -----------
Total $45,939,563 $42,830,704
=========== ===========
(14) RELATED PARTY TRANSACTIONS
The Company leases a 4.4 acre parcel of real property from the
Company's President. He received $49,303 in annual rent in 1998, 1997,
and 1996. respectively.
43
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1998, the Company had borrowed approximately $5.6
million from the Company's President. The note is unsecured and bears
interest at a rate variable with the prime rate. One hundred
sixty-three thousand is due on demand and $5.4 million is due on
January 1, 2000. 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 which, if successful, would result in
ownership by a person or group of 15 percent or more of the common
stock.
At December 31, 1998, the Company has borrowed approximately $987,000
from a Board member of the Company. The two notes are secured by
various pieces of equipment and bear interest at a rate of 10 percent
per annum with monthly payments being made through July of 2002.
At December 31, 1998 the Company had an investment of $154,000 for a
2.1 percent interest in a real estate joint venture in which the
President and one Board member also participate with equity of 14.8
percent and 1.7 percent, respectively. No income or loss has been
recorded from this investment. The Company has a $15.2 million contract
with the venture to perform land preparation services. The Company
recognized contracting revenue of $3.3 million during 1998. The backlog
on the contract as of December 31, 1998 was $11.9 million. The venture
has not yet received its total financing, thus the amount and timing of
the backlog could vary.
Other assets include amounts due from officers and employees as a
result of payments made by the Company pursuant to a split-dollar life
insurance plan. The Company's advances to pay premiums are secured by a
pledge of the cash value of the issued policies. Amounts due to the
Company under the split-dollar life insurance plan was $673,379 in 1998
and $583,264 in 1997, respectively.
(15) STOCK OPTION PLANS
The Company adopted stock option plans for officers and employees in
1986 and 1992. While each plan terminates 10 years after the adoption
date, issued options have their own schedule of termination. Until 1996
and 2002, options to acquire up to 300,000 and 350,000 shares,
respectively, of common stock may be granted at no less than fair
market value on the date of grant.
All stock options granted pursuant to the 1986 Plan not already
exercisable vest and become fully exercisable (1) on the date the
Optionee reaches 65 years of age and for the six-month period
thereafter or as otherwise modified by the Company's Board of
Directors, (2) on the date of permanent disability of the Optionee and
for the six-month period thereafter, (3) on the date of a change of
control and for the six-month period thereafter, and (4) on the date of
termination of the Optionee from employment by the Company without
cause and for the six-month period after termination.
Stock options granted under the 1992 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 Plan expire after 10
years.
44
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company adopted a stock-option plan for directors in 1992 and
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 that 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:
1986 PLAN 1992 PLAN DIRECTORS PLAN
------------------ ---------------- -----------------
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
(All exercise prices rounded to the nearest dollar)
Balance at
12/31/95 203,380 $2 to $7 250,000 $7 to $10 33,000 $6 to $14
Granted - - 30,000 $8 10,000 $9
Exercised (34,425) $2 - - - -
Expired - - - - (11,000) $6 to $14
------ ------- -------
Balance at
12/31/96 168,955 $2 to $7 280,000 $7 to $10 32,000 $6 to $14
Granted - - 30,000 $5 3,000 $5
Exercised - - - - - -
Expired (9,180) - (74,000) - - -
------- ------- -------
Balance at
12/31/97 159,775 $2 to $7 236,000 $5 to $10 35,000 $5 to $14
Granted - - 110,000 - 3,000 -
Exercised - - - - - -
Expired - - (4,000) - - -
------- ------- -------
Balance at
12/31/98 159,775 $2 to 7 342,000 $2 to $10 38,000 $ 3 to $14
======== ======= =======
Exercisable 118,725 162,000 38,000
======= ======= =======
Available for
future grant - 8,000 12,000
======= ======= =======
The per-share weighted-average fair value of stock options granted
during 1998, 1997 and 1996 was $1.89, $2.46 and $4.30 respectively, on
the grant date using the Black Scholes option-pricing model with the
following assumptions:
1998 1997 1996
---- ---- ----
Expected dividend yield - - -
Expected price volatility 38.5% 21.4% 18.1%
Risk-free interest rate 5.6% 5.7% 7.0%
Expected life of options 10 years 10 years 10 years
45
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 No. 123, the Company's consolidated net income or
loss would have been the pro forma amounts below:
1998 1997 1996
---- ---- ----
Net income (loss),
as reported $ 484,273 $(15,536,023) $312,888
Net income (loss),
pro forma $ 335,277 $(15,651,524) $189,164
Basic earnings (loss)
per share from
continuing operations,
as reported $ 0.11 $ (3.45) $ .18
============ =========== ========
Basic earnings (loss)
per share from
continuing operations,
pro forma $ 0.07 $ (3.48) $ .15
============ =========== ========
Pro forma net (loss) income reflects only options granted since 1994.
The full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net (loss) income
amounts above because compensation cost is reflected over the options'
five years vesting period and compensation cost for options granted
prior to 1994 is not considered.
(16) 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.
Employee contributions are matched by us up to 3.0 percent of an
employee's salary. Our contributions totaled $160,446 in 1998, $148,183
in 1997, and $148,758 in 1996.
(17) COSTS AND ESTIMATED EARNINGS ON CONTRACTS
DECEMBER, 31
-----------------------
1998 1997
---- ----
Costs incurred on uncompleted
contracts $ 7,046,412 $ 6,561,759
Costs incurred on completed
contracts 12,331,066 79,576,661
Estimated earnings 4,188,262 17,499,392
----------- ------------
23,565,740 103,637,812
Less: Billings to date (23,170,190) (103,445,513)
----------- ------------
$ 395,550 $ 192,299
=========== ============
46
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Included in the accompanying consolidated balance sheets under the
following captions:
DECEMBER 31
-------------------------
1998 1997
---- ----
Costs in excess of billings
and estimated earnings $ 710,557 $ 329,707
Billings in excess of costs
and estimated earnings (315,007) (137,408)
----------- ------------
$ 395,550 $ 192,299
=========== ============
(18) 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 2000. The agreement may be
renewed, at the Company's option, for two successive five-year periods
and 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 1989, the Company entered into a new Life Insurance and Salary
Continuation Agreement with the Company President. Should the Company
cease to employ the President because of his disability or death, the
Company agreed to pay the President or his designated beneficiary an
amount equal to his salary and bonus for a period of five years. The
Company has not accrued for this salary continuation over the expected
remaining period of the President's active employment as the agreement
does not provide for payment upon retirement. Based on present facts
and circumstances, future payments cannot be determined at this time.
The Company believed it was entitled to additional compensation on a
Florida construction project and we pursued a claim legally. In
February 1999 a verdict was issued, giving us no additional
compensation except for the retainage. Due to this judgment the Company
took a charge for litigation of $1.5 million in 1998 and it may decide
to appeal the judgment.
In 1992, Fore Golf, Inc. sued the Company in the Ninth Judicial
Circuit, Orange County, Florida, Case No. CI-92-5289. The Company was
sued by Fore Golf, Inc. for work which this subcontractor allegedly
performed in 1990 and 1991 during construction of two golf courses at
Disney World in Orlando, Florida, the alleged unpaid contract balance
in connection with this project, and inefficiency costs. In June 1997,
the court issued an order establishing liability and damages against
the Company. The Court entered a final judgment in favor of the
plaintiff for damages and prejudgment interest. Subsequently, the trial
court also awarded the plaintiff attorneys' fees. The Company accrued a
total of $4.5 million, included in other liabilities, in 1997 to
reflect the total estimated
47
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
costs to be incurred should it not be successful in our post trial and
appeal efforts. The Company has posted a bond for the damages,
prejudgment interest and plaintiff's attorneys' fees. This bond is
personally guaranteed by the Company's President. The Company settled
its lawsuit with Fore Golf, Inc. and its creditors in March 1999. The
settlement calls for a cash payment of approximately $300,000 and
payments of $460,000 over a period of 4 years. The Company has not yet
settled with the lawyers of Fore Golf regarding the judgment on
attorney' fees. The trial court fee award has been contested by Fore
Golf's attorneys. As the result of this settlement, the Company
decreased the provision for litigation by $2.0 million.
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 1990's 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 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. 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.
In December 1995 the Virgin Islands Water and Power Authority ("WAPA")
notified the Company that a fuel oil leak was being investigated at
WAPA's St. Croix generating facility adjacent to a property owned by
the Company's Virgin Islands subsidiary. This notification further
stated that WAPA had notified all required federal and local agencies
and that WAPA would properly mitigate any damage to the Company's
property. WAPA is in the process of performing mitigation activities on
the Company's property and has submitted copies of its reports to
government agencies to the Company. The Company has not incurred any
cost related to the mitigation activities. The Company is in the
process of hiring a professional firm to independently evaluate the
condition of the property and to advise the Company regarding any
actions which should be taken to recover any permanent damages to the
property.
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.
48
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 sale or disposal by the venture of its real estate.
There are no current plans to sell or dispose of any of the venture's
property.
(19) 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 a significant amount of our sales in 1998, 1997
or 1996 and there are no significant receivables from a single customer
as of December 31, 1998 or 1997, other than the notes receivable from
the Government of Antigua and Barbuda. 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 $11.9 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 receivable on this contract has been maintained current
by the partnership.
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.
49
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.
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, 1996 appears on pages 23 and 56.
(2) Financial Statement Schedule.
The following financial statement schedule for each of the years in the
three-year period ended December 31, 1998 is submitted herewith:
FORM 10-K
(PAGE NUMBER(S)
ITEM ---------------
----
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts.............. 55
All other financial schedules are omitted because they are not
required, inapplicable, or the information is otherwise shown in the
consolidated financial statements or notes thereto.
(3) Exhibits.
50
EXHIBIT DESCRIPTION
- ------- -----------
3.1 Registrant's Restated Articles of Incorporation (1)(3.1)
3.2 Registrant's Amended and Restated Bylaws (15) (3.2)
10.1 Registrant's 1986 Non-Qualified Stock Option Plan (2)(10.1)
10.2 Registrant's 1992 Stock Option Plan (9)(A)
10.3 Registrant's 1992 Directors' Stock Option Plan (9)(B)
10.4 V. I. Cement and Building Products Inc. 401(k) Retirement and Savings Plan (13)(10.4)
10.5 Life Insurance and Salary Continuation Agreement dated as of March 29, 1989,
between the Registrant and Donald L. Smith, Jr.(4)(10.13)
10.6 Form of Indemnification Agreement between the Registrant, and its directors
and certain of its officers(5)(A)
10.7 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") (5)(10.1)
10.8 Amendment No. 1 to the St. John's Agreement dated June 15, 1988(6)(10.2)
10.9 Amendment No. 2 to the St. John's Agreement dated December 7, 1988 (8) (10.34)
10.10 Amendment No. 3 to the St. John's Agreement dated January 23, 1989 (8) (10.35)
10.11 Amendment No. 4 to the St. John's Agreement dated April 5, 1989 (8) (10.36)
10.12 Amendment No. 5 to the St. John's Agreement dated January 29, 1991 (8) (10.37)
10.13 Amendment No. 6 to the St. Johns Agreement dated November 30, 1993 (11)(10.39)
10.14 Amendment No. 7 to the St. John's Agreement, dated December 21, 1994 (13) (10.14)
10.15 Amendment No. 8 to the St. John's Agreement, dated October 23, 1996 (13) (10.15)
10.16 Guarantee dated June 12, 1989, from the Registrant to Banco Popular de Puerto Rico(6)(10.6)
10.17 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)
10.18 Lease dated April 13, 1981, between Mariano Lima and Genevieve Lima, as
lessors, and the Registrant, as lessee(1)(10.28)
10.19 Lease dated May 23, 1983, between the Government of the Virgin Islands,
as lessor, and Controlled Concrete Products, Inc. as lessee(1)(10.29)
10.20 Lease dated February 24, 1989, between Felix Pitterson, as lessor, and V.I. Cement
and Building Products, Inc., as lessee(1)(10.30)
10.21 Lease dated September 1, 1989, between Donald L. Smith, Jr., as lessor,
and the Registrant, as lessee(1)(10.31) 10.22 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)
10.23 Notes receivable from Red Pond Estates, N.V. in the principal sums of $242,516,
$139,478 and $167,740, respectively (10)(10.41)
10.24 Material Purchase Agreement, dated August 17, 1995, between Bouwbedrijf Boven Winden, N.V.
and Hubert Petit, Francois Petit and Michel Petit (12) (10.41)
51
10.25 Stock Purchase Agreement, dated August 17, 1995, between the
Registrant and Hubert Petit, Francois Petit and Michel Petit (12)(10.42)
10.26 Loan Agreement dated November 12, 1996 between V. I. Cement and
Building Products, Inc. and Banco Popular de Puerto Rico (13) (10.31)
10.27 $6,000,000 Installment Note dated November 12, 1996 between V. I. Cement and
Building Products, Inc. and Banco Popular de Puerto Rico (13) (10.32)
10.28 $1,000,000 Promissory Note dated November 12, 1996 between V. I. Cement and
Building Products, Inc. and Banco Popular de Puerto Rico (13) (10.33)
10.29 Time Charter Agreement, dated October 28, 1996, between Caribbean Cement
Carriers, Ltd. and Kristian Gerhard Jebsen Skibsrederi A/S (13) (10.34)
10.30 Purchase and Sale Agreement by and between Devcon Crown Bay Corp. and
Crown Bay Marina Joint Venture I and Koben Capital Partners, Inc. (14)(10.37)
10.31 Form of Note between Devcon International Corp. and Donald L. Smith, Jr. (15)
10.32 Form of Note between Devcon International Corp. and Robert A. Steele (15)
21.1 Registrant's Subsidiaries (15)
23.1 Consent of KPMG LLP (15)
27.1 Financial Data Schedule
- ----------------------------------------------------------------------------------------------
(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 Form 8 dated July 14, 1988 to the 1987 10-K.
(4) 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").
(5) Incorporated by reference to the exhibit shown in parenthesis and
filed with the Registrant's Proxy Statement dated May 30, 1989.
(6) 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.
(7) Incorporated by reference to the exhibit shown in parenthesis and
filed with Registrant's Current Report on Form 8-K dated May 2, 1990.
(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, 1991.
(9) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Proxy Statement dated May 6, 1992.
(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, 1992.
(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, 1993.
(12) 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.
(13) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.
52
(14) Incorporated by reference to the exhibit showing in parenthesis and
filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
(15) 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 (9)(A)
10.3 Registrant's 1992 Directors' Stock Option Plan (9) (B)
10.4 V. I. Cement and Building Products, Inc. 401(k) Retirement and
Savings Plan (13) (10.4)
10.5 Life Insurance and Salary Continuation Agreement dated as of
March 29, 1989, between the Registrant and Donald L. Smith,
Jr.(4)(10.13)
(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.
53
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 30, 1999 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.
DEVCON INTERNATIONAL CORP.
March 30, 1999 By:/S/ DONALD L. SMITH, JR.
------------------------
Donald L. Smith, Jr.
Chairman, President and
Chief Executive Officer
March 30, 1999 By:/S/ RICHARD L. HORNSBY
------------------------
Richard L. Hornsby
Executive Vice President
and Director
March 30, 1999 By:/S/ JAN A. NORELID
------------------------
Jan A. Norelid
Vice President of Finance,
Chief Financial Officer and
Treasurer
March 30, 1999 By:/S/ ROBERT A. STEELE
------------------------
Robert A. Steele
Director
March 30, 1999 By:/S/ ROBERT L. KESTER
------------------------
Robert L. Kester
Director
March 30, 1999 By:/S/ W. DOUGLAS PITTS
------------------------
W. Douglas Pitts
Director
54
Schedule II
Valuation and Qualifying Accounts
ALLOWANCE FOR DOUBTFUL BALANCE AT ADDITIONS BALANCE
ACCOUNTS FOR THE YEAR BEGINNING CHARGED TO AT END
ENDED DECEMBER 31, OF YEAR EXPENSE DEDUCTIONS OF YEAR
- ------------------ ------- ------- ---------- -------
1996 $2,456,401 $ 302,863 $ 212,327 $2,971,591
========== ========== =========== ==========
1997 $2,971,591 $2,336,089 $ (322,841) $4,984,839
========== ========== =========== ==========
1998 $4,984,839 $ (36,191) $ (243,613) $4,705,035
========== ========== =========== ==========
ALLOWANCE FOR DOUBTFUL
NOTES RECEIVABLE BALANCE AT ADDITIONS BALANCE
ACCOUNTS FOR THE YEAR BEGINNING CHARGED TO AT END
ENDED DECEMBER 31, OF YEAR EXPENSE DEDUCTIONS OF YEAR
- ------------------ ------- ------- ---------- -------
1996 $ 837,339 $ - $ (724,806) $ 112,533
=========== ========== ============ ===========
1997 $ 112,533 $ 596,156 $ 104,537 $ 813,226
=========== ========== ============ ===========
1998 $ 813,226 $ (30,701) $ (100,000) $ 682,525
=========== ========== ============ ===========
55
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.31 Form of Note between Devcon International Corp. and Donald L. Smith, Jr.
10.32 Form of Note between Devcon International Corp. and Robert A. Steele
21.1 Registrant's Subsidiaries
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule