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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File No. 0-7152
DEVCON INTERNATIONAL CORP.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-0671992
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1350 E. Newport Center Drive, Suite 201, Deerfield Beach, FL 33442
(Address of Principal Executive Offices) (Zip Code)
(954) 429-1500
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES X NO ______
-----
As of August 8, 2002 the number of shares outstanding of the Registrant's Common
Stock was 3,583,660.
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I. Financial Information:
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 (unaudited) .............. 3-4
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2002 and 2001
(unaudited) .................................................. 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001
(unaudited) .................................................. 6-7
Notes to Condensed Consolidated Financial Statements
(unaudited) .................................................. 8-11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................................... 12-19
Quantitative and Qualitative Disclosures About Market Risk ... 19
Part II. Other Information ............................................ 20-21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
(Unaudited)
June 30, December 31,
2002 2001
------------ ------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 9,250,685 $ 7,994,327
Receivables, net 10,552,865 12,162,049
Costs and estimated earnings
in excess of billings 1,849,780 229,056
Inventories 3,946,740 3,736,759
Prepaid expenses and other assets 1,144,437 645,665
------------ ------------
Total current assets 26,744,507 24,767,856
Property, plant and equipment, net:
Land 1,462,068 1,462,068
Buildings 1,111,954 1,135,954
Leasehold improvements 3,427,400 3,159,536
Equipment 50,069,759 49,567,905
Furniture and fixtures 749,395 684,849
Construction in process 3,078,647 2,793,580
------------ ------------
59,899,223 58,803,892
Less accumulated depreciation (29,570,165) (27,578,652)
------------ ------------
Total property, plant & equipment, net 30,329,058 31,225,240
Investments in unconsolidated
joint ventures and affiliates 322,192 315,858
Receivables, net 10,497,168 10,596,702
Other assets 1,099,577 1,046,091
------------ ------------
Total assets $ 68,992,502 $ 67,951,747
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
(Unaudited)
(Continued)
June 30, December 31,
2002 2001
------------ ------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable, trade and other $ 4,073,617 $ 4,093,229
Accrued expenses and other liabilities 2,321,451 2,214,575
Notes payable to banks 616,000 -
Current installments of long-term debt 414,874 1,143,097
Billings in excess of costs and estimated earnings 55,422 414,837
Income taxes 1,178,851 699,118
------------ ------------
Total current liabilities 8,660,215 8,564,856
Long-term debt, excluding current installments 2,425,542 2,454,809
Deferred income taxes 77,561 205,344
Deferred gain on sale of businesses - 1,142,537
Other liabilities 2,085,995 1,738,930
------------ ------------
Total liabilities 13,249,313 14,106,476
Stockholders' equity:
Common stock 372,176 374,128
Additional paid-in capital 10,064,648 10,133,527
Accumulated other comprehensive loss -
cumulative translation adjustment (1,870,248) (2,516,382)
Retained earnings 48,140,402 46,941,249
Treasury stock at cost (963,789) (1,087,251)
------------ ------------
Total stockholders' equity 55,743,189 53,845,271
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 68,992,502 $ 67,951,747
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
4
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2002 and 2001
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Materials revenue $ 9,494,798 $ 11,147,276 $ 18,452,364 $ 22,315,092
Construction revenue 4,003,445 3,438,751 8,432,102 5,487,424
------------ ------------ ------------ ------------
Total revenue 13,498,243 14,586,027 26,884,466 27,802,516
Cost of materials (7,555,964) (8,874,234) (15,396,502) (18,112,664)
Cost of construction (3,611,058) (2,786,169) (7,133,859) (4,857,840)
------------ ------------ ------------ ------------
Gross profit 2,331,221 2,925,624 4,354,105 4,832,012
Operating expenses:
Selling, general and administrative expenses (2,774,855) (2,708,255) (5,639,528) (4,959,228)
------------ ------------ ------------ ------------
Operating (loss) income (443,634) 217,369 (1,285,423) (127,216)
Other income (deductions):
Joint venture equity gain 5,260 25,312 6,334 25,312
Gain (loss) on sale of equipment and property 23,022 (57,253) 108,470 (19,711)
(Loss) gain on sale of business (7,422) - 1,040,973 -
Interest expense (76,156) (103,806) (152,004) (213,977)
Interest and other income 977,312 828,639 1,992,954 1,311,719
Minority interest - 19,876 - 57,032
------------ ------------ ------------ ------------
922,016 712,768 2,996,727 1,160,375
------------ ------------ ------------ ------------
Income before income taxes 478,382 930,137 1,711,304 1,033,159
Income tax expense (65,949) (60,108) (361,484) (114,171)
------------ ------------ ------------ ------------
Net income $ 412,433 $ 870,029 $ 1,349,820 $ 918,988
============ ============ ============ ============
Earnings per share
Basic $ 0.11 $ 0.24 $ 0.38 $ 0.25
============ ============ ============ ============
Diluted $ 0.11 $ 0.22 $ 0.35 $ 0.23
============ ============ ============ ============
Weighted average number of shares outstanding
Basic 3,588,175 3,651,893 3,588,256 3,661,874
============ ============ ============ ============
Diluted 3,890,624 3,991,468 3,893,168 3,999,264
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
5
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001
(Unaudited)
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 1,349,820 $ 918,988
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,433,752 2,529,641
Deferred income taxes benefit (155,871) (88,042)
Provision for doubtful accounts and notes 168,543 141,345
(Gain) loss on sale of equipment and property (108,470) 19,711
Gain on sale of businesses (1,040,973) -
Joint venture equity gain (6,334) (25,312)
Minority interest income - (57,032)
Changes in operating assets and liabilities:
Decrease (increase) in receivables 821,050 (2,536,607)
(Increase) decrease in costs and estimated
earnings in excess of billings (1,620,724) 1,137,139
Increase in inventories (152,675) (212,319)
Increase in prepaid expenses and other current assets (510,868) (649,352)
Increase in other assets (13,302) (45,075)
Increase (decrease) in accounts payable,
accruals and other liabilities 284,984 (2,537,117)
(Decrease) increase in billings in excess
of costs and estimated earnings (359,415) 1,721,903
Increase (decrease) in income taxes payable 479,733 (30,866)
Increase in deferred gain and other liabilities 245,501 137,755
----------- -----------
Net cash provided by operating activities $ 1,814,751 $ 424,760
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment $(1,307,692) $(2,983,359)
Proceeds from sale of property and equipment 160,530 135,950
Payments received on notes 1,065,135 1,096,109
Investment in unconsolidated joint ventures - (5,306)
Issuance of notes (236,840) (275,000)
----------- -----------
Net cash used in investing activities $ (318,867) $(2,031,606)
----------- -----------
See accompanying notes to unaudited condensed consolidated financial statements.
6
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001
(Unaudited)
(Continued)
2002 2001
----------- -----------
Cash flows from financing activities:
Issuance of stock $ 29,400 $ 26,400
Purchase of treasury stock (127,436) (198,125)
Proceeds from debt - 940,698
Principal payments on debt (757,490) (834,012)
Net borrowings (repayments) of bank
credit line and overdrafts 616,000 (300,000)
----------- -----------
Net cash used in financing activities $ (239,526) $ (365,039)
----------- -----------
Net increase (decrease) in cash and cash equivalents $ 1,256,358 $(1,971,885)
Cash and cash equivalents, beginning of period 7,994,327 8,166,954
----------- -----------
Cash and cash equivalents, end of period $ 9,250,685 $ 6,195,069
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 157,151 $ 218,257
=========== ===========
Income taxes $ 18,168 $ 229,013
=========== ===========
Supplemental disclosures of noncash investing activities:
Receipt of notes in settlement
of receivables $ 1,235,187 $ 1,904,015
=========== ===========
Translation gain (loss) adjustment $ 646,134 $ (402,177)
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
7
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The unaudited condensed consolidated financial statements include the accounts
of Devcon International Corp. and its majority-owned subsidiaries (the
"Company"). The accounting policies followed by the Company are set forth in
Note (l) to the Company's financial statements included in its Annual Report on
Form 10-K for the fiscal year ended December 31, 2001 (the "2001 Form 10-K").
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the Company's financial
position as of June 30, 2002 and the results of its operations and cash flows
for the three and six months ended June 30, 2002 and 2001. The results of
operations for the three and six months ended June 30, 2002 and 2001 are
unaudited and are not necessarily indicative of the results to be expected for
the full year. The unaudited condensed consolidated financial statements
included herein should be read in conjunction with the financial statements and
related footnotes included in the Company's 2001 Form 10-K.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding during the period, increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. The dilutive effect of outstanding options is reflected
in diluted earnings per share by application of the treasury stock method.
Certain options were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
prices of the common shares.
June 30, 2002 June 30, 2001
Option price Options Option price Options
From To outstanding From To outstanding
Dilutive options $1.50 $6.25 580,400 $1.50 $ 6.75 748,500
Not included options $6.63 $9.63 232,795 $7.00 $14.00 66,295
Three Months Ended Six Months Ended
Weighted average number June 30, June 30, June 30, June 30,
of shares outstanding 2002 2001 2002 2001
--------- --------- --------- ---------
Basic 3,588,175 3,651,893 3,588,256 3,661,874
Effect of dilutive securities: Options 302,449 339,575 304,912 337,390
--------- --------- --------- ---------
Diluted 3,890,624 3,991,468 3,893,168 3,999,264
========= ========= ========= =========
For additional disclosures regarding the employee stock options, see the 2001
Form 10-K.
8
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
Comprehensive Income
The Company's total comprehensive income, comprised of net income and foreign
currency translation adjustments, for the three and six months ended June 30,
2002 and 2001 was as follows:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income $ 412,433 $ 870,029 $1,349,820 $ 918,988
Other comprehensive income (loss)
- foreign currency transaction adjustments 714,133 (88,877) 646,134 (491,054)
---------- ---------- ---------- ----------
Total comprehensive income $1,126,566 $ 781,152 $1,995,954 $ 427,934
========== ========== ========== ==========
Segment Reporting
The following sets forth the revenue and income before income taxes for each of
the Company's business segments for the three months ended June 30, 2002 and
2001:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ -----------
Revenue (including inter-segment)
Materials $ 9,528,596 $ 11,229,444 $ 18,886,959 $ 22,520,318
Construction 4,020,385 3,476,019 8,458,293 5,553,239
Elimination of inter-segment (50,738) (119,436) (460,786) (271,041)
------------ ------------ ------------ ------------
Total revenue $ 13,498,243 $ 14,586,027 $ 26,884,466 $ 27,802,516
============ ============ ============ ============
Operating (loss) income
Materials $ (200,000) $ 164,000 $ (1,037,000) $ 566,000
Construction (73,000) 365,000 251,000 (53,000)
Unallocated corporate overhead (170,634) (311,631) (499,423) (640,216)
------------ ------------ ------------ ------------
Total operating (loss) income (443,634) 217,369 (1,285,423) (127,216)
Other income, net 922,016 712,768 2,996,727 1,160,375
------------ ------------ ------------ ------------
Income before income taxes $ 478,382 $ 930,137 $ 1,711,304 $ 1,033,159
============ ============ ============ ============
9
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
New Accounting Standards
SFAS No. 143 requires that entities record as a liability obligations associated
with the retirement of a tangible long-lived asset when such obligations are
incurred, and capitalize the cost by increasing the carrying amount of the
related long-lived asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The Company does not expect a material impact from the
adoption of SFAS No. 143 on its financial position and results of operation.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishments of Debt," SFAS No.
44, "Accounting for Intangible Assets of Motor Carriers" and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and amends
SFAS No. 13, "Accounting for Leases." This statement updates, clarifies and
simplifies existing accounting pronouncements. SFAS 145 is effective for
transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have
an impact on the Company's financial position and results of operation.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 will be effective for the Company for disposal activities
initiated after December 31, 2002. The Company does not expect a material impact
from the adoption of SFAS 146 on its financial position and results of
operation.
Environmental Matters
The Company is involved, on a continuing basis, in monitoring its compliance
with environmental laws and in making capital and operating improvements
necessary to comply with existing and anticipated environmental requirements.
While it is impossible to predict with certainty, management currently does not
foresee such expenses in the future as having a material effect on the Company's
business, results of operations, or financial condition.
Antigua Tax Assessment
During the fourth quarter of 2001, the Company's three subsidiaries in Antigua
were assessed $6.1 million in income and withholding taxes for the years 1995
through 1999. The Company is appealing the assessments in the appropriate
venues. The Company believes that if any tax is accrued in the future, it will
not have an immediate cash flow effect on the Company, but will result in an
offset between tax owed and the approximately $30 million receivable from the
Government of Antigua. It is too early to predict the final outcome of the
appeals process or to estimate the ultimate amount of loss, if any, to the
Company. Based on the advice from local Antiguan tax consultants and local
Antiguan counsel, management believes the Company's defenses to be meritorious
and does not believe that the ultimate outcome will have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
10
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)
Contingent Liabilities
During the second quarter 2002, the Company issued a construction contract
performance guarantee together with one of the Company's customers, Northshore
Partners, Inc., in favor of Estate Plessen Associated L.P. and JPMorgan Chase
Bank, for $5.1 million. The Company issued a letter of credit for $500,000 as
collateral for the transaction. The construction project is estimated to be
finished within two years and the guarantee expires two years after completion.
The Company received an up front fee of $154,000, which will be recognized over
the life of the project and is entitled to an additional $52,000 fee at the end
of the project.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements, as well as the financial
statements and related notes included in the Company's 2001 Form 10-K.
Introduction
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-Q 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 the Company's control, and
actual results may differ materially depending on many factors, including,
without limitation, the financial condition of our customers, changes in
domestic and foreign economic and political conditions, demand for our services,
changes in our competitive environment, changes in infrastructure requirements,
changes in available financing and/or cash flow, fixed price contract risks,
bidding errors, unanticipated increase in costs, penalty clauses, United States
currency fluctuations versus other currencies, foreign nations' exchange
controls, restrictions on withdrawal of foreign investments and terrorist acts
that directly or indirectly could affect our business.
The Company cautions that the factors described above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements of the Company made by or on behalf of the Company. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors or the effect that any such factor may
have on the Company's business.
Critical Accounting Policies and Estimates
The Company has identified significant accounting policies that, as a result of
the judgments, uncertainties, uniqueness and complexities of the underlying
accounting standards and operations involved, could result in material changes
to its financial condition or results of operations under different conditions
or using different assumptions. The Company believes its most significant
accounting policies are related to the following areas: estimations of cost to
complete construction contracts, allowance for credit losses, loss reserves for
inventories, accruals for deferred compensation agreements, Antiguan tax
assessment evaluation, tax on un-repatriated earnings, valuation of the Antigua
and Barbuda Government notes and the valuation allowance of deferred taxes.
Details regarding the Company's use of these policies and the
12
related estimates are described fully in the Company's 2001 Form 10-K. During
2002, there have been no material changes to the Company's significant
accounting policies that impacted the Company's financial condition or results
of operations.
Comparison of Three Months Ended June 30, 2002 With Three Months Ended June 30,
2001
Revenue
The Company's revenue during the second quarter of 2002 was $13.5 million as
compared to $14.6 million during the same period in 2001. This 7.5 percent
decrease was primarily due to a decrease of $1.7 million in materials revenue,
partially offset by an increase in construction revenue of $565,000.
The Company's materials division revenue decreased 14.8 percent to $9.5 million
during the second quarter of 2002 as compared to $11.1 million for the same
period in 2001, due to a decrease in all types of material sold, such as
concrete, aggregates and block. Certain islands suffered a higher decline than
others, such as St. Croix and Puerto Rico. St. Croix's revenue diminished as a
large expansion project on the island for which the Company was providing
material was completed at the end of 2001. Puerto Rico's revenue diminished
partly due to lower demand and partly due to the Company leasing out its
Aguadilla operations. We believe that a downturn on St. Maarten/St. Martin was
the result of a slowdown in the island's economy, due to reduced tourism on the
island in the aftermath of the events of September 11, 2001. The only island
with a positive trend was Antigua. We believe that Antigua and St. Thomas will
improve its volumes the next quarter, while we do not foresee any improvement on
St. Martin.
Revenue from the Company's construction division increased 16.4 percent to 4.0
million during the second quarter of 2002 as compared to $3.4 million for the
same period in 2001. This increase is mainly due to continued work on five
contracts in the Bahamas, four of which are further described below. The
Company's backlog of unfilled portions of land development contracts at June 30,
2002 was $9.0 million, involving nine contracts. The backlog of four contracts
for a project in the Bahamas amounted to $6.5 million. A Company subsidiary, the
President, and a director of the Company are minority partners of the entity
developing this project. The Company expects that most of these contracts will
be completed during 2002. The Company is actively bidding and negotiating
additional projects in other areas of the Caribbean. The Company cannot
currently determine whether demand for this division's services will increase,
decrease or remain the same throughout 2002.
Cost of Materials
Cost of materials as a percentage of materials revenue remained the same at 79.6
percent during the second quarter of 2002 compared to the same period in 2001.
This was the result of a decrease in margin in St. Martin, offset by improved
margin in the US Virgin Islands.
13
Cost of Construction
Cost of construction as a percentage of construction revenue increased to 90.2
percent during the second quarter of 2002 from 81.0 percent during the same
period in 2001. This increase is primarily attributable to decreased margin on a
contract in Antigua, and lower margin on a contract in the Bahamas, and also to
the varying profitability levels of individual contracts and the stage of
completion of such contracts.
Operating Expenses
Selling, general and administrative expense ("SG&A expense") increased by 2.5
percent to $2.8 million for the second quarter of 2002 from $2.7 million for the
same period in 2001. The increase in SG&A expense was primarily due to severance
expense and increases in professional fees and other expenses, offset to a
lesser extent by reduced salary cost. As a percentage of revenue, SG&A expense
increased to 20.6 percent during the second quarter as compared to 18.6 percent
for the same period last year. This increase is due to the fact that the company
has not yet been able to decrease its overhead cost to the same extent as
revenue has decreased.
Operating (Loss) Income
The Company had an operating loss of $444,000 for the second quarter of 2002
compared to operating income of $217,000 for the same period in 2001. The
Company's materials division operating loss was $200,000 during the second
quarter of 2002 compared to income of $164,000 during the same period in 2001.
This increase in operating loss is primarily attributable to decreased gross
margin on St. Martin, offset to a lesser extent by a smaller increase on St.
Thomas, and to increased SG&A expenses in St. Martin and Antigua.
The Company's construction division had an operating loss of $73,000 during the
second quarter of 2002 compared to operating income of $365,000 during the same
period in 2001. This decrease was attributable to decreased margins on contracts
in the Bahamas and Antigua, to marine equipment being idle, to varying
profitability levels of individual contracts, and the stage of completion of
such contracts.
Other Income (Deductions)
Gain on sale of equipment and property was $23,000 compared to a loss of $57,000
for the same period in 2001. Interest and other income increased in the second
quarter of 2002 to $977,000 compared to $829,000 for the same period in 2001,
primarily due to an increase in the interest recognized on the note receivable
from the Government of Antigua, and, to a lesser extent, to interest income from
financed construction projects. Interest expense decreased to $76,000 from
$104,000 for the same period in 2001, primarily due to decreased outstanding
debt.
14
Income Taxes
The company operates in various tax jurisdictions with various tax rates, and
depending on where profits or losses are recognized during the period, the
effective tax rate will vary. In certain jurisdictions certain income is not
taxable, and in certain jurisdictions, the Company enjoys certain tax
exemptions. The effective tax rate for the second quarter of 2002 was 13.8
percent as compared to 6.5 percent for the same period in 2001.
Net Income
The Company had net income of $412,000 during the second quarter of 2002 as
compared to $870,000 during the same period in 2001.
Comparison of Six Months Ended June 30, 2002 With Six Months Ended June 30, 2001
Revenue
The Company's revenue during the first six months of 2002 was $26.9 million as
compared to $27.8 million during the same period in 2001. This 3.3 percent
decrease was primarily due to a decrease in materials revenue of $3.9 million,
partially offset by an increase of $2.9 million in construction revenue.
The Company's materials division revenue decreased 17.3 percent to $18.5 million
during the first six months of 2002 as compared to $22.3 million for the same
period in 2001. This decrease was due primarily to a decrease of $1.1 million in
cement sales as a result of the termination of the Company's cement distribution
agreement with Union Maritima Internacional, S.A. ("UMAR") on March 1, 2001,
along with a decrease in concrete sales of 17.8 percent, in block sales of 15.2
percent and in aggregate sales of 11.5 percent. The Company believes that the
events of September 11, 2001 resulted in reduced tourism and a corresponding
slowdown in the economies on the islands on which the Company operates. These
market conditions have resulted in a decrease in materials sales on the islands
on which the Company operates, except for Antigua.
Revenue from the Company's construction division increased 53.7 percent to $8.4
million during the first six months of 2002 as compared to $5.5 million for the
same period in 2001. This increase is mainly due to continued work on five
contracts in the Bahamas, four of which are further described below. The
Company's backlog of unfilled portions of land development contracts at June 30,
2002 was $9.0 million, involving 9 contracts. The backlog of four contracts for
a project in the Bahamas amounted to $6.5 million. A Company subsidiary, the
President, and a director of the Company are minority partners of the entity
developing this project. The Company expects that most of these contracts will
be completed during 2002. The Company is actively bidding and negotiating
additional projects in the Caribbean. The Company cannot currently determine
whether demand for this division's services will increase, decrease or remain
the same throughout 2002.
15
Cost of Materials
Cost of materials as a percentage of materials revenue increased to 83.4 percent
during the first six months of 2002 from 81.2 percent for the same period in
2001. This increase was primarily the result of a decrease in revenue, which
resulted in fixed costs of sales weighing heavier on the margins for the
division, and reduced margins in St. Martin. This was partially offset by
elimination of low margin sales of cement.
Cost of Construction
Cost of construction as a percentage of construction revenue decreased to 84.6
percent during the first six months of 2002 from 88.5 percent during the same
period in 2001. This decrease is primarily attributable to increased volumes and
improved margins on some contracts in the Bahamas and Antigua, and also to the
varying profitability levels of individual contracts and the stage of completion
of such contracts.
Operating Expenses
Selling, general and administrative expense ("SG&A expense") increased by 13.7
percent to $5.6 million for the first six months of 2002 compared to $5.0
million for the same period in 2001. The increase in SG&A expense was primarily
due to severance expense, losses on foreign exchange, increases in professional
fees and other expenses. As a percentage of revenue, SG&A expense increased to
21.0 percent during the first six months as compared to 17.8 percent for the
same period last year.
Operating Loss
The Company had an operating loss of $1.3 million for the first six months of
2002 compared to $127,000 for the same period in 2001. The Company's materials
division operating loss was $1.0 million during the first six months of 2002
compared to income of $566,000 during the same period in 2001. This increase in
operating loss is primarily attributable to decreased volumes on all islands,
except Antigua, and to increased SG&A expenses. In particular the company has
had a deteriorating result in St. Martin. The company is currently reviewing its
options to reverse the negative trend on St. Martin, and has laid off personnel
in that operation.
The Company's construction division had operating income of $251,000 during the
first six months of 2002 compared to a loss of $53,000 during the same period in
2001. This increase was attributable to increased volumes in the Bahamas and
Antigua, offset to a lesser extent of losses incurred as a result of idle marine
equipment. This increase was also attributed to increased profitability levels
of individual contracts.
Other Income (Deductions)
At the time of the sale of the operations in Dominica, the Company entered into
a profit and loss participation agreement until March 31, 2002. During this time
the gain on the sale of the operations were deferred. At March 31, 2002, the
Company recognized a gain on sale of business
16
of $1.0 million. Gain on sale of equipment and property was $108,000 compared to
a loss of $20,000 for the same period last year. Interest and other income
increased in the first six months of 2002 to $2.0 million compared to $1.3
million for the same period in 2001, primarily due to an increase in the
interest recognized on the note receivable from the Government of Antigua, and,
to a lesser extent, to interest income from financed construction projects.
Interest expense decreased to $152,000 from $214,000 for the same period in
2001, primarily due to decreased outstanding debt.
Income Taxes
The company operates in various tax jurisdictions with various tax rates, and
depending on where profits or losses are recognized during the period, the
effective tax rate will vary. In certain jurisdictions certain income is not
taxable, and in certain jurisdictions, the Company enjoys certain tax
exemptions. The effective tax rate for the second quarter of 2002 was 21.1
percent as compared to 11.1 percent for the same period in 2001.
Net Income
The Company had net income of $1.3 million for the first six months of 2002 as
compared to $919,000 for the same period in 2001.
Liquidity and Capital Resources
The Company generally funds its working capital needs from operations and bank
borrowings. In the land development construction business, the Company must
expend considerable funds for equipment, labor and supplies to meet the needs of
particular projects. The Company's capital needs are greatest at the start of
any new contract, since the Company generally must complete 45 to 60 days of
work before receiving the first progress payment. As a project continues, a
portion of the progress billing is usually withheld as retainage until all work
is complete, further increasing the need for capital. During the second quarter
of 2002, the Company provided long-term financing in the amount of $1.2 million
to certain customers who utilized its land development construction services.
The Company has also provided financing for other business ventures from time to
time. With respect to the Company's materials division, accounts receivable are
typically outstanding for a minimum of 60 days and in some cases much longer.
The nature of the Company's business requires a continuing investment in plant
and equipment, along with the related maintenance and upkeep costs of such
equipment. These purchases of equipment should result in cash expenditures of
approximately $3.0 million during 2002. The Company has, since the beginning of
2000, funded most of these expenditures out of its current working capital.
Management believes the cash flow from operations, existing working capital, and
funds available from lines of credit will be adequate to meet the company's
needs during the next 12 months. Historically, the Company has used a number of
lenders to finance a portion of our machinery and equipment purchases, however,
since 2001 there are no outstanding amounts owed to these lenders. Management
believes it has significant collateral and financial stability to be able to
obtain significant financing, should it be required.
17
As of June 30, 2002, the Company's liquidity and capital resources included cash
and cash equivalents of $9.3 million and working capital of $18.1 million. As of
June 30, 2002, total outstanding liabilities were $13.2 million. As of June 30,
2002, the Company had available lines of credit totaling $534,000.
Cash flows provided by operating activities for the six months ended June 30,
2002 were $1.8 million compared with $425,000 for the same period in 2001. The
primary use of cash for operating activities during the six months ended June
30, 2002 was an increase in costs and estimated earnings in excess of billings
of $1.6 million, and an increase in other current assets of $511,000, offset to
a lesser extent by a decrease in receivables and an increase in income taxes
payable.
Net cash used in investing activities was $319,000 in the first six months of
2002. Purchases of property, plant and equipment were $1.3 million. The Company
issued new notes receivable for $237,000 and receipts on notes receivable were
$1.1 million. Net cash used in financing activities was $240,000 for the first
six months of 2002, consisting primarily of principal payments of debt, offset
to a lesser extent by proceeds from notes payable to banks.
The Company's accounts receivable has an average of 56 days of sales outstanding
as of June 30, 2002. This is an improvement from 78 days at the end of December
2001. The Company's materials segment has remained substantially the same at 61
days at the end of this quarter as compared to 60 days at the end of last year.
The construction segment has improved substantially to 45 days as compared to
113 days at the end of last year. The improvement was due to large cash receipts
from the venture in the Bahamas in the beginning of this quarter. The Company
does not consider notes receivable in this calculation.
The Company entered into a new unsecured credit line of $1.0 million in May 2001
with a bank in Florida. The bank can demand repayment of the loan and
cancellation of the overdraft facility, if certain financial or other covenants
are in default. The Company is in compliance with the covenants as of June 30,
2002. There was an outstanding balance of $616,000 as of June 30, 2002. The
interest rate on indebtedness outstanding under the credit line is at a rate
variable with Libor.
The Company has borrowed approximately $2.1 million from the Company President.
The note is unsecured and bears interest at the prime rate. Three hundred fifty
five thousand is due on demand, and $1.8 million is due on July 1, 2003. The
President has the option of making the note due on demand should a "Change of
Control" occur. A Change of Control has occurred if a person or group acquires
15.0 percent or more of the common stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15.0
percent or more of the common stock.
The Company entered into an agreement with the Company President in June 2000,
whereby Mr. Smith shall receive a retirement benefit. The accrued liability as
of June 30, 2002 was $943,000, and the Company estimates to accrue an additional
$369,000 through March 2003. The Company estimates that the total accrual will
then be sufficient to cover its obligations under the aforementioned agreement.
18
Receivables at June 30, 2002 include a net balance of $7.2 million, consisting
of promissory notes due from the Government of Antigua and Barbuda,
substantially all of which is classified as a long-term receivable. The gross
balance of the notes is $30.7 million. The notes were restructured on April 28,
2000 and call for both quarterly and monthly principal and interest payments
until maturity in 2015. The notes are paid from agreed upon sources, which
consist of lease proceeds from the rental of a United States military base, fuel
tax revenue, proceeds from a real estate venture and other sources. Receipts
recorded for the six months ended June 30, 2002 were $1.9 million.
During the second quarter 2002, the Company issued a construction contract
performance guarantee together with one of the Company's customers for $5.1
million. The Company issued a letter of credit for $500,000 as collateral for
the transaction. The construction project is estimated to be finished within
two years and the guarantee expires two years after completion.
Repurchase of Company Shares
On August 9, 2002 the Board of Directors ("Board") approved a plan for the
Company to purchase Company shares in the open market for up to $3.0 million.
The timing of share repurchases, the actual number of shares purchased and the
price to be paid will depend upon the availability of shares, the prevailing
market prices and other considerations which may in the opinion of the Board or
management affect the advisability of purchasing Devcon shares. The Company has
repurchased 19,525 shares so far during 2002 at an average price of $6.53.
Related Party Transactions
The Company has certain transactions with some of the Directors or employees.
Details regarding the Company's transaction with related parties are described
fully in the Company's 2001 Form 10-K. During the second quarter of 2002, there
have been no material changes to the Company's related party transactions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to financial market risks due primarily to changes in
interest rates, which it manages primarily by managing the maturities of its
financial instruments. The Company does not use derivatives to alter the
interest characteristics of its financial instruments. Management does not
believe a change in interest rate will materially affect the Company's financial
position or results of operations.
The Company has significant operations overseas. Generally, all significant
activities of the overseas affiliates are recorded in their functional currency,
which is generally the currency of the country of domicile of the affiliate. The
foreign functional currencies that the Company deals with are Netherlands
Antilles Guilders, Eastern Caribbean Units and Euros. The first two are pegged
to the U.S. dollar and have remained fixed for many years. Management does not
believe a change in the Euro exchange rate will materially affect the Company's
financial position or result of operations. The French operations are
approximately 10% of the Company's total operations.
19
PART II. Other Information
Item 1. Legal Proceedings
The Company is from time to time involved in routine litigation
arising in the ordinary course of its business, primarily related
to its construction activities.
The Company is subject to certain Federal, state and local
environmental laws and regulations. Management believes that the
Company is in compliance with all such laws and regulations.
Compliance with environmental protection laws has not had a
material adverse impact on the Company's consolidated financial
condition, results of operations or cash flows in the past and is
not expected to have a material adverse impact in the foreseeable
future.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
The Company held its Annual Shareholders Meeting on June 14, 2002.
The issues submitted to a vote of the security holders and the
results of the voting are as follows:
1) Election of five directors
For Withheld
--------- ---------
Jose A. Bechara, Jr., Esq. 3,483,561 1,246
Richard L. Hornsby 3,480,561 4,246
Robert L. Kester 3,480,261 4,546
W. Douglas Pitts 3,480,561 4,246
Donald L. Smith, Jr. 3,481,261 3,546
Robert A. Steele 3,480,561 4,246
The Board consists of six directors. All nominees were
elected to serve for a one-year period.
2) Proposal to ratify the appointment of KPMG LLP as the
Company's auditor for 2002
For Against Withheld
--------- ------- --------
3,435,968 600 708
20
Item 5. Other Information
None
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits:
Exhibit 99.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None
21
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 12, 2002 S/ JAN A. NORELID
-----------------
Jan A. Norelid
Vice President - Finance
22
EXHIBIT INDEX
Exhibit Description
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002