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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, 2004

Commission file number 0-7152

DEVCON INTERNATIONAL CORP.

(Exact name of registrant as specified in its charter)

1350 East Newport Center Drive

Suite 201

Deerfield Beach, FL 33442

(Address of Principal Executive Offices)

(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

Registered on the NASDAQ National Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

As of April 14, 2005, Devcon International Corp. had 5,852,501 shares outstanding. The aggregate market value of the Common Stock held by non-affiliates of Devcon International Corp. as of June 30, 2004 was approximately $11.2 million, based on the closing price on that date of $12.10. In this calculation, all executive officers, directors and 5% beneficial owners of Devcon International Corp. and the affiliates of such persons are considered to be affiliates. This is not an admission that such executive officers, directors, 5% beneficial owners or other persons are, in fact, affiliates of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference from Devcon’s definitive proxy statement (to be filed pursuant to Regulation 14A)

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PART I

Item 1. Business

General

Devcon International Corp. (“Devcon” or the “Company”) was incorporated in Florida in 1951 as Zinke-Smith, Inc. and adopted its present name in October 1971. The stock of the Company has been publicly traded since March 1972. Today, Devcon is a holding company that has three major operating divisions: Construction, Materials and Electronic Security Services.

Our Construction division performs earthmoving, excavating, and filling operations, builds golf courses, roads, and utility infrastructures, dredges waterways and constructs deep-water piers and marinas, primarily in the Caribbean. We have historically provided these land development services to both private enterprises and government agencies. Our project managers have substantial experience in land and marine development. We believe that our relationships with customers in the Caribbean give us a competitive advantage. Our equipment is strategically situated within the Caribbean which allows us to mobilize quickly and cost-effectively. While these characteristics allow us to bid competitively, our ability to mobilize quickly can sometimes cause us to incur higher expenses during periods of down time.

Our Materials division produces and distributes ready-mix concrete, crushed stone, concrete block, and asphalt and distributes bagged cement in the Caribbean.

We are a large producer and distributor of ready-mix concrete and aggregates in these Caribbean islands:

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On July 30, 2004, the Company completed a transaction with Coconut Palm Capital Investors I Ltd. (“Coconut Palm”) whereby Coconut Palm invested $18 million into the Company for purposes of the Company entering into the electronic security services industry. Also on July 30, 2004, the Company entered the electronic security services business through the acquisition of Security Equipment Company, Inc., which has since changed its name to Devcon Security Services Corp. (“DSSC”). On February 28, 2005, the Company, through DSSC, completed the acquisition of certain net assets of the electronic security services operation of Adelphia Communications Corporation (“Adelphia Acquisition”). The Company’s electronic security services division engages in the electronic monitoring of its installed base of security systems, as well as the installation of new monitored security systems added to its installed base, both in residential and commercial buildings. The Company, through DSSC’s immediate parent, Devcon Security Holdings, Inc. (“DSH”), provides electronic security services to commercial and residential customers in Florida, as well as in Buffalo, New York. These assets include a modern, full service monitoring center in Naples, Florida, from which more than 56,700 subscribers’ homes and businesses are monitored. The Company also has approximately 5,300 accounts monitored by a third party.

The following table sets forth financial highlights of our Construction, Materials and Electronic Security Services divisions. Total assets by segment and other information are further described in Note 15 of the notes to the consolidated financial statements.

The following table sets forth the Company’s revenue by geographic area. Revenue by geographic area includes sales to unaffiliated customers based on customer location, not the selling entity’s location. The Company moves its equipment from country to country; therefore,

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to make this disclosure meaningful, the geographic area separation for assets is based upon the location of the legal entity owning the assets.

Business Address

Our executive offices are located at 1350 East Newport Center Drive, Suite 201, Deerfield Beach, Florida 33442, our telephone number is (954) 429-1500 and our web address is www.devc.com. In this document, the terms “Company” and “Devcon” refer to Devcon International Corp. and its subsidiaries.

Construction

General. Historically, we have completed land development construction projects, including interstate highways, airport sites and runways, deep-water piers and marinas, waterway dredging, golf courses, and industrial, residential and commercial site development.

The revenue related to the work performed by our Construction division is recognized on a percentage of completion basis. Currently, the majority of our contracts are completed in less than one year. The work is bid or negotiated at a fixed price or at a unit price where our fee is based upon the quantity of work performed and is often measured in yards, meters or tons rather than time or a time and materials basis. Changes in the scope of the work that are requested by the customer are included in the contract value when duly authorized and agreed upon. We perform the majority of our work utilizing our internal labor and equipment resources.

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Operations. We obtain leads for new projects from customers, engineering firms, architectural firms and commissioned sales people or agents with whom we have established relationships. First, we decide whether to submit a bid or negotiate to undertake a particular project. We prepare and submit timely proposals detailing what we believe will best meet the customers’ objectives. We have also provided long-term or short-term financing from time-to-time to certain customers to obtain construction contracts. During 2004, we financed $531,815 of construction projects and, as of the end of 2004, there were outstanding balances totaling $3.2 million, including principal and interest. The amount of customer financing is projected to increase over the next year. Our President and Vice President of Construction Operations review project proposals and bids. After a customer accepts our proposal, a formal contract is prepared and negotiated between the parties. We assign one of our project managers to maintain close contact with the customer and their project engineers. Other staff is assigned to supervise personnel and the relocation, purchase, lease and maintenance of equipment. Construction management is responsible for the scheduling and monitoring of our operations.

Backlog. Our backlog of unfulfilled portions of construction contracts at December 31, 2004 was approximately $18.6 million involving 15 projects. This compares to $5.6 million involving 12 projects at December 31, 2003. Two of the contracts represent 68% of the total backlog. One US Virgin island contract represents $6.8 million and a Bahamian project represents $5.8 million of the balance. The Bahamian project is a related party transaction as noted in Note 16 of the Company’s consolidated financial statements. Between December 31, 2004 and March 31, 2005, we entered into nine new construction contracts in the Caribbean. We presently expect the operation to have increased revenue in 2005 and anticipate, although there is no assurance that this will occur, that most of the $18.6 million backlog will be completed in 2005.

Bonding. We must obtain a performance bond to bid on certain construction contracts. We have, in the past, been able to provide performance and/or payment bonds, when required.

Customers. Our primary customers are principally large private and government entities located throughout the Caribbean. During 2004, we provided services to 42 customers which generated contract revenue of $24.9 million in the year. Two customers represent a concentration of more than 10% of Construction revenue. Emerald Bay Resorts represents the highest concentration at 42% of Construction revenue. Our Chairman, another director of the Company and the Company are minority shareholders of Emerald Bay Resorts. Related party transactions are further described in Note 16 of the notes to the Company’s consolidated financial statements. Yacht Haven USVI LLC represents the second highest concentration at 13% of Construction revenue.

Competition. Land development construction is extremely competitive. We compete with smaller local contractors as well as larger U.S. and European-based contractors in all our markets. Primary competitive factors include: price, prior experience, and relationships, the equipment available to complete the job, innovation, the available engineering staff to assist an owner in minimizing costs, how quickly a company can complete a contract, and the ability to obtain bonding which guarantees contract completion.

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Business Development. The Construction division is experiencing growth attributable to the development of a tourism-based economy and certain infrastructure redevelopment projects throughout the Caribbean.

Materials

General. In 2004, we manufactured and distributed ready-mix concrete, block and crushed aggregate. We also distributed bagged cement. Our sales can be segregated into the following groups:

The different activities on the islands are shown below:

Our Materials division employed assets in 2004 such as:

See additional information under Item 1 – Business-General.

Ready-Mix Concrete and Concrete Block. Our concrete batch plants mix cement, sand, crushed stone, water and chemical additives to produce ready-mix concrete for use in local construction. On most islands, concrete mixer trucks owned and operated by various third parties deliver the concrete to the customer’s job site. At our concrete block plants, a low-moisture

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concrete mixture is machine-formed, then dried and stored for later sale. Our ready-mix concrete operations and concrete block plants are among the largest in the Caribbean islands on which we trade. We also sell a product we refer to as soil-cement, which utilizes similar ingredients as our concrete, as well as some by-products from our aggregates production.

Quarry Operations, Crushed Stone and Aggregate Production. We own or lease quarry sites at which we blast rock from exposed mineral formations. This rock is sold as boulders or crushed to sizes ranging from 3 ¹/2-inch stones down to manufactured sand. The resulting aggregate is then sorted, cleaned and stored. The aggregate is sold to customers and used in our operations to make concrete products. Our quarries, except for Puerto Rico, are the largest on the Caribbean islands in which we trade. We believe that it is less expensive to manufacture aggregate at our quarries than to import from off-island sources.

Bagged Cement. The Company purchases cement from local cement terminals on the islands for use in its concrete batch plants, block plants and on some islands for resale in the form of bagged cement.

Supplies. We presently obtain all of the crushed rock and a majority of the sand necessary for our production of ready-mix concrete from our own quarries. We believe our ability to produce our own sand and stone gives us a competitive advantage because of the substantial investment required to produce aggregates, the difficulty in obtaining the necessary environmental permits to establish quarries and the moratorium on mining beach sand imposed by most Caribbean countries. We purchase cement from cement terminals located on the islands where our operations are established and bulk cement is readily available from a number of manufacturers located throughout the Caribbean basin.

Customers. Our primary customers are building contractors, governments, asphalt pavers and individual homeowners. Customers generally pick up quarry products, concrete block and bagged cement at our facilities, and we generally deliver ready-mix concrete to the customers’ job sites. No customer was responsible for more than 10% of Materials revenue at December 31, 2004.

Competition. We have competitors in the Materials business in the locations where we conduct business. The competition includes local ready-mix concrete and concrete block plants, and importers of aggregates and concrete blocks. We also encounter competition from the producers of asphalt, which is an alternative material to concrete for road construction. Most competitors, such as ready-mix and concrete block producers, have a disadvantage compared to our material costs, but have an advantage over us in respect to lower overhead costs. The competition has put pressure on prices in certain markets and as a result we have not been able to increase the prices in some markets to the extent of our cost increases.

Business Development. We obtain our leads and proposed project information from architects, engineers, customers, local Departments of Transportation, local Ministries of Works, commissioned sales people and agents with whom we have established relationships.

Other Investments relating to Materials

Belvedere. In February 2003, the Company entered into an agreement (the “Development Agreement”) with the Island Territory of St. Maarten (“Island Territory”) to market and develop 197 single-family homes in the Belvedere subdivision of St. Maarten (the

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“Belvedere Project”). Through December 31, 2004, six houses had been sold. The Development Agreement contemplated completion of the Belvedere Project by February 2007. Due to delays in the Island Territory establishing a Mortgage Guarantee Fund and slower than anticipated sales, the Company, through the Steering Committee being established by the Development Agreement, is currently seeking adjustments to the Belvedere Project. Under a separate agreement with Pream Consultants N.V. (“Pream Agreement”), the Company subcontracted substantially all of its obligations, other than funding, under the Development Agreement. The Company intends to either restructure the monthly fee advance provisions of the Pream Agreement or exercise its right of termination. The Company’s investment in the Belvedere Project was $287,259 and $317,610 as of December 31, 2004 and December 31, 2003, respectively.

The Company recognizes revenue on the Belvedere project at the closing of each single-family house. The Company closed on six houses in 2004. From the closing proceeds, the Company recognized gross profit of $44,474 on revenues of $581,917.

Aguadilla Equipment Lease. The Company decided in 2001 to stop its operations in Aguadilla, Puerto Rico and leased all its equipment on the site to a company affiliated with one of the joint venture owners of the subsidiary in Puerto Rico. In March 2005, the lease was extended through February 2007, on substantially similar terms.

Electronic Security Services

General. Concurrent with the Company receiving its investment from Coconut Palm it entered the electronic security services business through the acquisition of Security Equipment Company, Inc. on July 30, 2004. Our revenue from this operation in 2004 was derived from contractual recurring revenue, service revenue and installation revenue as set forth below:

Commercial. DSH through its subsidiaries provides electronic security services and products to financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of government departments and health care and educational facilities. DSH sells, installs, monitors and maintains electronic security systems and products located at its customers’ premises. These systems and products are tailored to customers’ specific needs and include electronic monitoring services that provide intrusion and fire detection, as well as access control systems and closed circuit television systems.

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As of December 31, 2004, DSH had 2,149 commercial customers under contract, some of which have multiple locations. In 2004, approximately 60% of DSH’s total revenues was derived from commercial customers. DSH is not dependent upon any single customer, as no customer was responsible for more than 10% of the division’s total net revenues in 2004.

Residential. Residential electronic security services generally consist of the sale, installation, monitoring and maintenance of electronically monitored security systems to detect intrusion and fire. Residential customer service and monitoring are performed from the same facilities as those used for servicing and monitoring commercial accounts.

As of December 31, 2004, DSH had 3,224 residential customers under contract for monitoring services. In 2004, approximately 40% of DSH’s total electronic security services revenues were derived from residential customers.

See also “Business Development” for a discussion on the impact of the Adelphia Acquisition on the Company’s Electronic Security Services operations.

Installation, Service and Maintenance. As part of its effort to provide high quality service to its commercial and residential customers, DSH maintains a trained installation, service and maintenance force. These employees are trained to install and service the various types of commercial and residential security systems marketed by DSH. Subcontracted personnel are utilized where appropriate.

Product Sourcing. DSH does not manufacture any of the components used in its electronic security services businesses. Due to the general availability of the components used in its electronic security services business, DSH is able to obtain the components of its systems from a number of different sources and to supply its customers with the latest technology generally available in the industry. DSH is not dependent on any single source for its supplies and components and has not experienced any material shortages of components.

Monitored Electronic Security Systems. DSH’s electronically monitored security systems involve the use, on a customer’s premise, of devices designed to detect or react to various occurrences or conditions, such as intrusions, movement, fire, smoke, flooding, environmental conditions (including temperature or humidity variations), industrial operations (such as water, gas or steam pressure and process flow controls) and other hazards. In most systems, these detection devices are connected to a microprocessor-based control panel which communicates through telephone lines to a monitoring center where alarm and supervisory signals are received and recorded. Systems may also incorporate an emergency “panic button”, which when pushed causes the control panel to transmit an alarm signal that takes priority over other alarm signals. In most systems, control panels can identify the nature of the alarm and the areas within a building where the sensor was activated and transmit the information to a monitoring center. Depending upon the type of service for which the subscriber has contracted, monitoring center personnel respond to alarms by relaying appropriate information to the local fire or police departments, notifying the customer or taking other appropriate action, such as dispatching employees to the customer’s premises.

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Security systems utilize a digital communicator which responds to an event by dialing the monitoring center through the customer’s regular telephone line. If a control panel or the telephone line is not functioning properly, the monitoring center may not be alerted. In most markets, systems transmission capabilities can be backed up through radio frequency transmission or the local cellular telephone network.

Regulation. DHS’s operations are subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements. Many local authorities require DSH to obtain licenses or permits to conduct its security services business. Certain governmental entities also require persons engaged in the alarm business to be licensed and to meet certain standards in the selection and training of employees and in the conduct of business. DSH believes that it is in substantial compliance with all such licensing and regulatory requirements in each jurisdiction in which it operates. In addition, municipalities and other localities are attempting to reduce the level of false alarms through various measures, such as the licensing of individual alarm systems and the imposition of fines for false alarms, revocation of licenses and refusing to respond to alarms after a certain number of false alarms. While such laws, regulations and licensing requirements have not had a material adverse effect on DSH’s business to date, the Company is unable to predict whether such statutes or ordinances, or any similar statutes or ordinances enacted by other jurisdictions, will adversely affect future business and operations.

The alarm industry is also subject to the oversight and requirements of various insurance, approval, listing and standards organizations. Adherence to the standards and requirements of such organizations may be mandatory or voluntary depending upon the type of customer served, the nature of the security service provided and the requirements of the local governmental jurisdiction. DSH has not had any material difficulties in complying with such standards and requirements in the past.

DSH’s electronic security business relies upon the use of telephone lines to transmit signals, and the cost of such lines and the type of equipment which may be utilized are currently regulated by both the federal and state governments.

Competition. The electronic security services business is highly competitive. Competition is based primarily on price in relation to the quality of service provided. Sources of competition in the security services business are other providers of central monitoring services, systems directly connected to police and fire departments, local alarm systems and other methods of protection.

The central monitoring sector of the electronic security services business is characterized by high fixed costs, but has low marginal costs associated with monitoring additional customers. Despite the opportunity for economies of scale by consolidation of monitoring and administrative functions, the industry is highly fragmented.

Our electronic security services division competes with other major firms which have substantial resources, including ADT Security Services, Inc. (a subsidiary of Tyco International Limited), Brinks Home Security, Protection One, and Honeywell Security Monitoring, as well as many smaller regional and local companies. Many of these competitors are larger and have significantly greater resources than DSH does and also may possess greater local market knowledge.

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Business Development. We entered the electronic security services business in 2004 and, since the end of the year, we have significantly expanded this business with the Adelphia Acquisition in February 2005. In the Adelphia Acquisition, DSH acquired, among other assets, a modern, full service monitoring center in Naples, Florida, from which more than 56,700 subscribers’ homes and businesses are monitored, as well as approximately 5,300 accounts monitored by a third party. We are continuing to search for opportunities to expand this business through both acquisition and organic growth. DSH’s goal is to expand its customer base in both the commercial and residential sectors. The Company’s strategy is to retain a high percentage of its existing commercial and residential customers by providing high quality service.

Tax Exemptions and Benefits

Some of our offshore earnings are not taxed or are taxed at rates lower than U.S. statutory federal income tax rates due to tax exemptions and tax incentives. The U.S. Virgin Islands Economic Development Commission (“EDC”) granted us tax exemptions on most of our U.S. Virgin Islands earnings through March 2003. We have applied for an extension of this tax exemption, however, there is no guarantee that it will be granted. If the application is denied, the Company’s income, gross receipts, and property taxes would increase significantly. These increases would be partially offset by decreases in the Company’s compliance expenses and losses incurred in order to satisfy certain conditions of the EDC tax exemptions. The EDC completed a compliance review on our subsidiary in the US Virgin Islands on February 6, 2004. The compliance review covered the period from April 1998 through March 31, 2003 and resulted from the Company’s application to request an extension of tax exemptions from the EDC. The Company received a notice of failure to make gross receipts tax payments of $505,000 and income tax payments of $2.2 million, not including interest and penalties. This is the first time that a position contrary to the Company’s or any position on this specific issue has been raised by the EDC. In light of these events, and based on discussions with legal counsel, the Company established a tax accrual at December 31, 2003 for such exposure which approximated the amounts set forth in the EDC notice. In September 2004, the statute of limitations with respect to the income tax return filed by the Company for the year ended December 31, 2000, expired. Accordingly, in the third quarter of 2004, the Company reversed $2.3 million of the tax accrual established at December 31, 2003. The Company continues to work with the EDC regarding this matter and if challenged by the U.S. Virgin Islands taxing authority would vigorously contest their position.

The Company has been accruing, but on the advice of Virgin Islands counsel, not remitting, gross receipts taxes, which would be due should the Company’s application for an extension of benefit be withdrawn or denied. The Company has been further advised by Virgin Islands counsel that, should the application of benefits be denied, the U.S. Virgin Islands Internal Revenue Bureau would, most likely, waive any penalties for late payment of gross receipts taxes through the date of denial, although no assurance can be given that such waiver would be granted.

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U.S. tax laws provide that certain of our offshore earnings are not taxable for U.S. federal income tax purposes, and most post-April 1988 earnings from our Materials business in the U.S. Virgin Islands can be distributed to us free of U.S. income tax. Any distribution to Devcon International Corp, the parent company, of: (1) earnings from our U.S. Virgin Islands operations accumulated prior to April 1, 1988; or (2) earnings from our other non-U.S. incorporated operations, would subject us to U.S. federal income tax on the amounts distributed, less applicable taxes paid in those jurisdictions according to specific rules concerning foreign tax credits. In December 2004, the Company distributed $4.7 million of its earnings from one of its subsidiaries in Antigua. The distribution was prior to the expiration of a deemed payment provision of the settlement agreement with the government of Antigua and Barbuda. At December 31, 2004, $44.4 million of accumulated earnings had not been distributed to the parent company. However, in February 2005, $16.0 million was distributed to the parent company under a Dividend Reinvestment Plan approved by the Company and in compliance with the American Jobs Creation Act. The Company anticipates that the dividend will qualify for the 85% dividend exclusion in accordance with the American Job Creation Act. The Company used the $12.0 million net dividend to fund a portion of the acquisition of certain net assets of Adelphia Communications’ electronic security services operations, see Note 22 of the Notes to Consolidated Financial Statements. In 2004, the Company has provided $4.1 million of deferred tax expense with respect to this net dividend. However, due to the Company’s adoption of the aforementioned DRP it is anticipated that in accordance with the AJCA the Company will be entitled to an estimated tax benefit of $2.9 million in the first quarter of 2005.

For further information on our tax exemptions and income taxes, see Note 12 of the notes to the Company’s consolidated financial statements.

Equipment

Our businesses require us to lease or purchase and maintain equipment. As of December 31, 2004, our equipment included cranes, bulldozers, road graders, rollers, backhoes, earthmovers, a hydraulic dredge, barges, rock crushers, concrete batch and block plants, concrete mixer trucks and other items. At certain times, a part of this equipment will be idle in between construction jobs until suitable construction contracts are found.

Investments, Joint Ventures and Other Assets

We have invested or participated in several joint ventures in connection with our Construction and Materials divisions.

Antigua Note. On December 3, 2004, Antigua Masonry Products, Limited and Antigua Heavy Constructors, Limited (collectively “AMP”), direct and indirect subsidiaries of the Company, entered into an Agreement for Satisfaction of Indebtedness and Amendment No. 10 to St. John’s Dredging and Deep Water Pier Construction (the “Satisfaction Agreement”) with the government of Antigua and Barbuda (“Antigua”). Pursuant to the terms of the Satisfaction Agreement, AMP and Antigua agreed to a settlement in which approximately $29 million in debt owed by Antigua to AMP was deemed satisfied in exchange for certain cash payments made to AMP by Antigua as well as remittance of all outstanding tax assessments and other relief from current and future taxes and duties. Accordingly, the two notes which evidenced this debt were surrendered by AMP to Antigua and cancelled. AMP incurred no penalties in connection with the cancellation of the notes.

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As a result of this Satisfaction Agreement and in exchange for the cancellation of the outstanding debt owed to AMP by Antigua, AMP received $11.5 million in cash, a commitment for an additional $937,500 cash, which was received in the first quarter of 2005, a $7.5 million credit toward future withholding and income taxes incurred by AMP or the Company, plus remittance of all taxes and duties incurred through December 31, 2004. The company recognized $4.3 million of the future withholding tax benefit based on the current plans for repatriation of foreign-earnings. The Satisfaction Agreement also settled the litigation over a $6 million assessment issued with respect to the Company’s subsidiaries in Antigua, resulting in an income tax benefit of $684,104 related to the reversal of accruals for uncertain tax positions.

Other than in respect of this transaction and the agreements being terminated, there was no material relationship between Antigua and the Company, any of the Company’s affiliates or any of the Company’s officers and directors.

DevconMatrix Utility Resources, LLC (“DevMat”). In June 2003, we formed a joint venture in the water desalination and sewage treatment industry. The Company owns 80% of the joint venture. Matrix Desalination, Inc owns the remaining 20%. The water desalination and sewage treatment business is investment intensive, with the emphasis on generating long term recurring revenue. Our customer base consists of resorts, industrial plants and residential communities. In 2004, DevMat leased and operated three water desalination plants situated on various islands of the Bahamas. The Company had $183,939 in revenue and incurred $156,099 of operating expenses during 2004. The marketing efforts for the water and sewage system contracts have proven to be successful on many fronts. The customer base for the utilities business complements and is often the same as for the construction business. We are reviewing and bidding on a number of possible water and sewage system contracts, but there is no assurance that any of them will result in firm contracts.

Construction Technologies Limited. During 2004, the Company made advances of $1.9 million to Construction Technologies Limited (“CTC”), a limited liability company incorporated in St. Christopher and Nevis. The advances were made pursuant to a project funding agreement. Under the project funding agreement, the Company has agreed to advance $2.3 million to fund CTC’s cash requirements in fulfilling its obligation to construct approximately 6.5 miles of road for the National Housing Corporation, a statutory agency of the government of St. Christopher and Nevis. The advances are to be repaid, with contingent interest, from the proceeds of a $3.7 million promissory note given to CTC by the National Housing Corporation, which has been guaranteed by the Government of St. Christopher and Nevis. CTC has assigned the promissory note to the Company. The principal of the promissory note is repayable in fourteen equal semi-annual installments, beginning April 30, 2005, and bears interest at 7%. The Company’s contingent interest will be equal to one-half the excess-promissory note proceeds over the Company’s previous advances. The Company’s present intention is to sell, at a discount to par, the promissory note to a third-party financial institution upon CTC’s achieving substantial completion of the project, currently anticipated in May 2005. There is no assurance that the Company will be successful in selling the promissory note or, if it does not sell the note, that the Company will be repaid in full on the promissory note.

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Additionally, the Company has trade receivables from and made other secured loans to CTC in conjunction with other transactions entered into in the ordinary course of business. CTC is a leading producer of concrete on the island of St. Kitts.

Leasing of Concrete Trucks and Other Equipment. In St. Martin, Sint Maarten, and Antigua, substantially all of our concrete trucks and concrete pump trucks have been sold or are leased to former employees that are now in the concrete delivery and pumping business. In some of our quarries we have outsourced the drilling for blasting holes and some of the loading and movement of rock material. Also, we have in some instances sold or leased equipment to former employees or third parties for them to perform work for the Company. The overall effect of these decisions has been a reduction of fixed costs, resulting in a larger percentage of costs being variable with revenue.

Emerald Bay. During the period 1998 through 2001, we invested a total of $186,000 for a 1.2% interest in a real estate joint venture in the Bahamas. The upscale resort project partially opened in December 2003 and the hotel construction was completed in 2004. Our Chairman and another director of the Company have an interest in the joint venture. See Note 16 of the notes to the consolidated financial statements.

Government Expropriation of Land in Aguadilla, Puerto Rico. During the period 1998 through 2004, we invested a total of $195,000 for a 33.3% interest in a real estate joint venture in Puerto Rico that owns the land where the Aguadilla aggregate processing plant was operating. During 2004, we recorded income of $85,000 from this joint venture under the equity method of accounting, as the joint venture received $385,070 from the Secretaria Tribunal Superior de San Juan during the year. In January 2004, the local government advised us that it intended to expropriate a portion of the real estate in Aguadilla. We responded to the expropriation proceeding by filing a complaint in February 2004. In the fourth quarter of 2004, the joint venture received the uncontested expropriation proceeds and paid off its bank loan, which had been guaranteed by the Company. The joint venture is still seeking additional proceeds under its February 2004 complaint.

Vacant Land in South Florida. The Company has owned a 50% interest in ZSC South since the early 1970s. This is a joint venture that currently owns one parcel of vacant land in South Florida. Mr. W. Douglas Pitts, a director of the Company, owns a five percent interest in the joint venture. Courtelis Company manages the joint venture’s operations; Mr. Pitts is the President of Courtelis Company. During 2003, one lot was sold and we recognized earnings of $116,000 from that transaction. There was no activity in 2004.

Executive Officers

The executive officers of the Company are as follows:

Donald L. Smith, Jr., 83, a co-founder of the Company, has served as its Chairman of the Board and Chief Executive Officer since its formation in 1951. Effective April 18, 2005 Mr. Smith will retire from his Chief Executive Officer position. He also served as the Company’s President from 1951 until October 2004.

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Stephen J. Ruzika, 49, has been the President and Principal Financial and Accounting Officer of the Company since October 2004 and will be the Chief Executive Officer of the Company effective April 18, 2005. Mr. Ruzika has also been President of Devcon Security Holdings, Inc. since October 2004 and was the Executive Vice President of the Company from July 2004 to October 2004. Prior to that, from August 1998 to July 2004, Mr. Ruzika served as Chairman and Chief Executive Officer of Congress Security Services Inc. Congress, through its subsidiaries, including Security Equipment Company, Inc., which was acquired by the Company on July 30, 2004, provides employment screening and paperless workflow services to major corporate clients in North America. Prior to that, from November 1997 to August 1998, Mr. Ruzika served as Chief Executive Officer of Carlisle Holdings Limited (formerly known as BHI Incorporated), a Nasdaq-listed company. Mr. Ruzika is the former Chief Financial Officer (1989-1997) of ADT Limited and President of ADT Security Services, Inc., and has over 20 years of experience in the security services industry.

David R. Rulien, 52, has been President of Construction and Materials since October 2004. Prior to being named to his current position, from March 1, 2004 to October 2004, he served as an assistant to Donald L. Smith, Jr., the Company’s Chairman. From February 2003 to March 2004, Mr. Rulien served the Company in a consulting capacity as President of DRR Advisors LLC, advising the Company with respect to its utility/desalination business. From August 2001 to December 2003, Mr. Rulien served as Chief Executive Officer of FishingLife, Inc. (“FishingLife”), an online retailer. From January 1999 to July 2001, he served as Vice President – Business Development of FishingLife. Prior to his tenure with FishingLife, from November 1996 to December 1999, Mr. Rulien served as Chief Executive Officer of Wave Communications, a company which sold prepaid wireless services.

Ron G. Lakey, 50, has been Vice President – Business Development of the Company since April 13, 2005. Prior to that from February 2005 to April 2005 he served as Chief Financial Officer of the Company. From February 2004 until January 2005, Mr. Lakey served on the board of directors and as chief financial officer of Alice Ink, Inc., a privately held consumer products company. From July 1987 to August 1997 he served in various financial and operational positions for various ADT Limited subsidiaries, including chief operating officer for its operations in Canada and eleven European countries. Mr. Lakey has over 15 years of experience in the electronic security services industry. Prior to joining Alice Ink, Inc. and following his time at ADT, Mr. Lakey was retired.

Robert C. Farenhem, 34, will become the Interim Chief Financial Officer effective April 18, 2005. Mr. Farenhem is also a Principal and Chief Financial Officer of Royal Palm Capital Partners. He joined Royal Palm Capital Partners in April 2003. Prior to that, he was Executive Vice President of Strategic Planning and Corporate Development for Bancshares of Florida and Chief Financial Officer for Bank of Florida from February 2002 through April 2003. Previously, Mr. Farenhem was an Investment Banker with Bank of America Securities from October 1998 through February 2002.

Donald L. Smith, III, 52, son of the Chairman, was appointed Vice President-Construction Operations for the Company in December 1992. Mr. Smith joined the Company in 1976 and has served in supervisory and managerial positions within the Company since that time.

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Kevin M. Smith, 47, son of the Chairman, was appointed Vice President-Materials in June 2002. Mr. Smith joined the Company in 1989 and has served in management positions within the Company since that time.

Intellectual Property

We possess trade names used in the islands, of which none are registered. We believe that trade names, which are normally derivatives of the corporate names of our local subsidiaries, have name recognition and are valuable to the Company. However, our trade names have no book value on our consolidated balance sheet.

Employees

At December 31, 2004, the Company employed 407 persons. We employed 210 persons in the Construction division, of whom five are members of a union. As of the same date, we employed 178 persons in our Materials division, of whom 69 are members of a union. As of December 31, 2004, the Company employed 19 persons in its Electronic Security Services division, of whom none are members of a union. Most employees are employed on a full-time basis. Employee relations are considered satisfactory.

Environmental Matters

We are involved, on a continuing basis, in monitoring our compliance with environmental laws and in making capital and operating improvements necessary to comply with existing and anticipated environmental requirements. While it is impossible to predict with certainty, management currently does not foresee such expenses in the near future as having a material effect on our business, results of operations or financial condition. See Item 3 and Note 19 of the notes to the consolidated financial statements.

Subsequent Events

Petit Litigation On July 25, 1995, a Company subsidiary, Société des Carriéres de Grande Case (“SCGC”), entered into an agreement with Mr. Fernand Hubert Petit, Mr. Francois Laurent Petit and Mr. Michel Andre Lucien Petit, (collectively, “Petit”) to lease a quarry located in the French side of St. Martin. Another lease was entered into by SCGC on October 27, 1999 for the same and additional property. Another Company subsidiary, Bouwbedrijf Boven Winden, N.A. (“BBW”), entered into a material supply agreement with Petit on July 31, 1995. This agreement was amended on October 27, 1999. Pursuant to the amendment, the Company became a party to the materials supply agreement.

In May 2004, the Company advised Petit that it would possibly be removing its equipment within the timeframes provided in its agreements and made a partial quarterly payment under the materials supply agreement. On June 3, 2004, Petit advised the Company in writing that Petit was terminating the materials supply agreement immediately because Petit had not received the full quarterly payment and also advised that it would not renew the 1999 lease when it expired on October 27, 2004. Petit has refused to accept the remainder of the quarterly payment from the Company in the amount of $45,000.

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Without prior notice to BBW, Petit obtained orders to impound BBW assets on St. Martin (the French side) and Sint Maarten (the Dutch side). The assets sought to be impounded include bank accounts and receivables. BBW has no assets on St. Martin, but approximately $341,000 of its assets has been impounded on Sint Maarten. In obtaining the orders, Petit claimed that $7.6 million is due on the supply agreement (the full payment that would be due by the Company if the contract continued for the entire potential term and the Company continued to mine the quarry), $2.7 million is due for quarry restoration and $3.7 million is due for pain and suffering. The materials supply agreement provided that it could be terminated by the Company on July 31, 2004.

In February 2005, SCGC, BBW and the Company entered into agreements with Petit, which provided for the following:

After conferring with its French counsel and upon review by management, the Company believes that it has valid defenses and offsets to Petit’s claims, including, among others, those relating to its termination rights and the benefit to Petit from the Company not mining the property. Based on the foregoing agreements and its review, management does not believe that the ultimate outcome of this matter will have a material adverse effect on the consolidated financial position or results of operations of the Company.

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The Company will obtain independent appraisals to determine the fair value of any non-cash consideration, including the exercise of the options listed above, used in settlement of a judgment received by Petit, if any.

Acquisition of Adelphia Security On February 28, 2005, the Company, through DSSC, completed the acquisition of certain net assets of the electronic security services operation of Adelphia Communications Corporation, a Delaware corporation (“Adelphia”), for approximately $40.2 million in cash based substantially upon contractually recurring monthly revenue of approximately $1.15 million. The transaction was completed pursuant to the terms of that certain Asset Purchase Agreement, dated as of January 21, 2005 (the “Asset Purchase Agreement”), as amended. Other than the Asset Purchase Agreement, there is no material relationship between the parties. The transaction received approval by the United States Bankruptcy Court for the Southern District of New York in an order issued on January 28, 2005.

Credit Facility with CIT. DSSC and its direct parent, DSH (together, the “Borrowers”), financed the Adelphia Acquisition through available cash and a senior secured revolving credit facility (the “Senior Loan”) provided by certain lenders and CIT Financial USA, Inc., serving as agent (“CIT”). The Senior Loan is governed by the terms of that certain Credit Agreement (the “Credit Agreement”), dated as of February 28, 2005, by and among Borrowers, the Lenders signatory thereto from time to time, as Lenders (the “Lenders”), and CIT, as Agent and Lender. The maximum amount available under the Senior Loan is thirty-five million dollars ($35 million), but this amount may be increased up to fifty million dollars ($50 million) at the request of Borrowers if no Event of Default has occurred, the Lenders’ prior written consent is obtained and certain other customary conditions are satisfied. Borrowers may draw amounts under the Senior Loan until March 30, 2007, and all amounts outstanding under the Senior Loan will be due on February 28, 2011. The Senior Loan is secured by, among other things, a security interest in substantially all of the assets of Borrowers, including a first mortgage on certain real property owned by DSSC. The interest rate charged under the Senior Loan varies depending on the types of advances or loans Borrowers select under the Senior Loan. Borrowings under the Senior Loan may bear interest at the higher of (i) the prime rate as announced in the Wall Street Journal or (ii) the Federal Funds Rate plus 50 basis points, plus a spread which ranges from 125 to 300 basis points. Alternatively, borrowings under the Senior Loan may bear interest at LIBOR-based rates plus a spread which ranges from 250 to 425 basis points (LIBOR plus 425 basis points as of the date hereof). The spread depends upon DSH’s ratio of total debt to recurring monthly revenues. Borrowers pay a variable commitment fee each quarter on the unused portion of the commitment equal to 37.5 basis points. Borrowers are subject to certain covenants and restrictions specified in the Senior Loan, including covenants that restrict their ability to pay dividends, make certain distributions, pledge certain assets or repay certain indebtedness.

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Beginning March 30, 2007, the day on which Borrowers are prevented from drawing additional amounts under the Senior Loan, Borrowers are required to make certain scheduled principal payments on the Senior Loan in amounts equal to the percentage of the outstanding principal amount set forth below:

The foregoing summary of the Asset Purchase Agreement and the Senior Loan is not complete and is qualified in its entirety by reference to the Asset Purchase Agreement, as amended by Amendment No. 1, and the Credit Agreement, which are incorporated by reference herein.

Puerto Rico Lease Extension. The Company decided, in 2001, to cease its operation in Aguadilla, Puerto Rico and leased, effective October 1, 2001, all its equipment on the site to a company affiliated with one of the joint venture owners of the Company’s subsidiary in Puerto Rico. In March 2005, the lease was extended through February 2007, on substantially similar terms.

Dividend Reinvestment Plan. In accordance with Section 965 of the U.S. Internal Revenue Code (enacted as part of the American Jobs Creation Act of 2004), in January 2005 the Company adopted a Domestic Reinvestment Plan in order to qualify for an 85% dividend exclusion on all qualifying cash dividends received during the 2005 tax year. The plan outlines the Company’s intention to utilize qualifying cash dividends received from its foreign subsidiaries to either invest in the Company’s electronic security services and utility services businesses or to repay outstanding third party indebtedness. In February 2005, AMP declared a $16.0 million dividend, of which $4.0 million was withheld for Antiguan withholding taxes, which were deemed paid by utilization of a portion of the $7.5 million tax credit received as part of the Satisfaction Agreement. The Company used the $12.0 million net dividend to fund a portion of the acquisition of certain net assets of Adephia Communications’ electronic security services operations.

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Item 2. Property

General

The Materials division utilizes nearly all of the real property that we own or lease. We also own undeveloped parcels of land in the U.S. Virgin Islands and Antigua. The following table shows information on the properties and facilities that we owned or leased for our operations at December 31, 2004:

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We consider the properties and facilities used in our operations suitable for our industry, and they are currently adequate for our use. The aggregate reserves are adequate to support our anticipated extraction requirements on all quarries, except the quarry located in Guaynabo, P.R. With respect to the Guaynabo quarry, the current lease expires in March 2006. We are currently attempting to extend the lease, through 2011, at which time, the Company anticipates the reserves will be depleted to a point where extraction will not be economically feasible. If the Company is unsuccessful in extending the quarry lease, the Company would seek to relocate the equipment on the existing quarry. There can be no assurances that an alternate site can be located and extraction permits obtained.

Quarry Information

as of December 31, 2004

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Item 3. Legal Proceedings

We are involved in routine litigation arising in the ordinary course of our business, primarily in connection with our Construction division.

In the fall of 2000, Virgin Islands Cement and Building Products, Inc. (“VICBP”), a subsidiary of the Company, was under contract with the Virgin Islands Port Authority (“VIPA”) for the construction of the expansion of the St. Croix Airport. During the project, homeowners and residents of the Yellow Cedar Housing Community, located next to the end of the expansion project, claimed to have experienced several days of excessive dust in their area as a result of the ongoing construction work. The homeowners of Yellow Cedar have filed two separate lawsuits for unspecified damages against VIPA and VICBP as co-defendants. One suit, filed in the U.S. District Court for the District of the Virgin Islands by Mariepaul Antoine, Benjamin Ashe, et. al, vs. VIPA et. al, case #2001,63 R/F, seeks equitable relief from nuisance, specific performance and damages. The second suit, Louisa Williams et. al vs. VIPA et. al filed in the Territorial Court of the U.S.V.I. case #548/2000 seeks equitable relief from nuisance, specific performance and damages. In both cases, VICBP, as defendant, has agreed to indemnify VIPA for any civil action as a result of the construction work. Reliance Insurance Company (“Reliance”), the general liability carrier for VICBP during that period, has taken the legal position that “dust” is a pollutant and, therefore, the pollution exclusion clause applies and as a result denies liability insurance coverage to VICBP. Corporate counsel in Florida, as well as in the U.S. Virgin Islands, have advised the Company that laws now in place should enable the Company to enforce the duty-to-defend clause contained in the liability policy, thus affording the Company a defense for both legal actions. The Pennsylvania Insurance Commissioner placed Reliance in rehabilitation in October 2001, and subsequently into liquidation. We have also presented claims under the policy to the Florida Insurance Guaranty Association, the V.I. Insurance Guaranty Association, the Pennsylvania Insurance Commissioner, and to our excess liability insurance carrier, Zurich Insurance Company. It is too early to predict the final outcome of this matter or to estimate the potential risk of loss, if any, to the Company.

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In the late 1980s, Bouwbedrijf Boven Winden, N.V., (“BBW”), currently a Devcon subsidiary in the Netherlands Antilles, supplied concrete to a large apartment complex on the French side of Sint Maarten. In the early 1990s, the buildings began to develop exterior cracking and “pop outs.” In November 1993, BBW was named one of several defendants, including the building’s insurer, in a suit filed by Syndicat des Copropriétaires la Résidence Le Flamboyant (condominium owners association of Le Flamboyant) in the French court “Tribunal de Grande Instance de Paris”, case No. 510082/93. A French court assigned an expert to examine the cause of the cracking and pop outs and to determine if the cracking/pop outs are caused by a phenomenon known as alkali reaction (“ARS”). The expert found, in his report dated December 3, 1998, that BBW was responsible for the ARS. The plaintiff is seeking unspecified damages, including demolition and replacement of the 272 apartments. Based on the advice of legal counsel, a judgment assessed in a French court would not be enforceable against a Netherlands Antilles company. Thus, in order to obtain an enforceable judgment, the plaintiff would have to file a successful claim in an Antillean court. It is too early to predict the final outcome of this matter or to estimate the potential risk of loss, if any, to the Company. Due to the lack of enforceability, the Company decided not to continue the defense in the French court. Therefore, the Company may not be aware of recent developments in the proceedings. Management believes our defenses to be meritorious and does not believe that the outcome will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

On July 25, 1995, a Company subsidiary, Société des Carriéres de Grande Case (“SCGC”), entered into an agreement with Mr. Fernand Hubert Petit, Mr. Francois Laurent Petit and Mr. Michel Andre Lucien Petit, (collectively, “Petit”) to lease a quarry located in the French side of St. Martin. Another lease was entered into by SCGC on October 27, 1999 for the same and additional property. Another Company subsidiary, Bouwbedrijf Boven Winden, N.A. (“BBW”), entered into a material supply agreement with Petit on July 31, 1995. This agreement was amended on October 27, 1999. Pursuant to the amendment, the Company became a party to the materials supply agreement. In May 2004, the Company advised Petit that it would possibly be removing its equipment within the timeframes provided in its agreements and made a partial quarterly payment under the materials supply agreement. On June 3, 2004, Petit advised the Company in writing that Petit was terminating the materials supply agreement immediately because Petit had not received the full quarterly payment and also advised that it would not renew the 1999 lease when it expired on October 27, 2004. Petit refused to accept the remainder of the quarterly payment from the Company in the amount of $45,000. Without prior notice to BBW, Petit obtained orders to impound BBW assets on St. Martin (the French side) and Sint Maarten (the Dutch side). The assets sought to be impounded include bank accounts and receivables. BBW has no assets on St. Martin, but approximately $341,000 of its assets were impounded on Sint Maarten. In obtaining the orders, Petit claimed that $7.6 million is due on the supply agreement (the full payment that would be due by the Company if the contract continued for the entire potential term and the Company continued to mine the quarry), $2.7 million is due for quarry restoration and $3.7 million is due for pain and suffering. The materials supply agreement provided that it could be terminated by the Company on July 31, 2004.

In February 2005, SCGC, BBW and the Company entered into agreements with Petit, which provided for the following:

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The Company will obtain independent appraisals to determine the fair value of any non-cash consideration, including the exercise of the options listed above, used in settlement of a judgment received by Petit, if any.

After conferring with its French counsel and upon review by management, the Company believes that it has valid defenses and offsets to Petit’s claims, including, among others, those relating to its termination rights and the benefit to Petit from the Company not mining the property. Based on the foregoing agreements and its review, management does not believe that the ultimate outcome of this matter will have a material adverse effect on the consolidated financial position or results of operations of the Company

In the ordinary course of conducting our business, we become involved in various legal actions and other claims, some of which are currently pending. Litigation is subject to many uncertainties and we may be unable to accurately predict the outcome of individual litigated matters. Some of these matters possibly may be decided unfavorably to us. It is the opinion of management that the ultimate liability, if any, with respect to these matters will not be material.

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We are involved, on a continuing basis, in monitoring our compliance with environmental laws and in making capital and operating improvements necessary to comply with existing and anticipated environmental requirements. While it is impossible to predict with certainty, management currently does not foresee such expenses in the future as having a material effect on our business, results of operations, or financial condition.

We are subject to federal, state and local environmental laws and regulations. We believe that the Company is in compliance with all such laws and regulations. Compliance with environmental protection laws has not had a material adverse impact on our consolidated financial condition, results of operations or cash flows in the past and is not expected to have a material adverse impact in the foreseeable future.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our security holders during the fourth quarter of 2004.

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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.

As of April 11, 2005 there were 124 holders of record of the outstanding shares of Common Stock. The closing sales price for the common stock on April 11, 2005, was $11.26. We paid no dividends in 2004 or 2003. The payment of cash dividends will depend upon the earnings, consolidated financial position and cash requirements of the Company, its compliance with loan agreements, and other relevant factors. We do not presently intend to pay cash dividends. No unregistered securities were sold or issued in 2004, 2003 or 2002, except as disclosed in Item 2 of the Quarterly Report on Form 10-Q of the Company for the Quarter Ended September 30, 2004.

Equity Compensation Plans

The table below provides information relating to our equity compensation plans as of December 31, 2004.

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There are no other shares of capital stock issued other than common stock. No employment or other agreements provide for the issuance of any shares of capital stock. There are no other options, warrants, or other rights to purchase securities of the Company issued to employees and directors, other than options to purchase common stock issued under the 1986 Non-Qualified Stock Option Plan, the 1992 Directors Stock Option Plan, the 1992 Stock Option Plan, as amended, the 1999 Stock Option Plan, as amended, and the Warrants issued in connection with the investment by Coconut Palm Capital Investors I, Ltd.. Options to purchase 50,000 shares were issued to Matrix Desalination Inc at an exercise price of $6.38 in May 2003. The vesting of the options issued to Matrix was dependent on the consummation of certain investments for DevMat Utility Resources, LLC. For more information regarding the Company’s equity compensation plans, see Note 10 to the Company’s consolidated financial statements.

Repurchases of Company Shares

The Company terminated its share repurchase plan on November 8, 2004. On November 17, 2004, the Company did acquire 8,247 shares of its common stock from Mr. Jan Norelid, who was the Company’s Chief Financial Officer at the time. The purchase was related to the exercise of stock options in accordance with the Company’s stock option plans.

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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 audited consolidated financial statements.

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The Company has not made any material accounting changes in the past five years, except for the change of recording receipts on notes receivable from the Antigua Government using the cost-recovery method to the accrual method. The note was settled in 2004. We disposed of several businesses in fiscal year 2000, as more precisely described in Note 21 of the notes to the consolidated financial statements of our Form 10-K dated December 31, 2002 and our Reports on form 8-K dated January 7, 2000 and February 22, 2000, respectively, which materially affect the comparability of the selected financial data shown above. As we continued to distribute cement on most islands after the sale of our cement terminals, and as after the sale of our concrete business on St. Thomas, the buyer became our largest customer on the island for aggregates, it is not practical to demonstrate the net sales, gross profit or net income of the operations without the sold businesses.

The following is our selected quarterly financial data which should be read in conjunction with our consolidated financial statements and accompanying Notes and with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Factors Affecting Our Operating Results, Financial Condition, Business Prospects and Market Price of Stock

Risks of Foreign Operations. The majority of our operations in 2004 were conducted in foreign countries located in the Caribbean, primarily Antigua and Barbuda, Sint Maarten, St. Martin and the Bahamas. In 2004, 59% of our revenue was derived from foreign geographic areas. For a summary of our revenue and earnings from foreign operations, see Notes 13 and 15 of the notes to the Company’s 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, changes in import and export tariffs, restrictions on the withdrawal of foreign investment and earnings, government policies against businesses owned by non-nationals, expropriations of property, the instability of foreign governments, and any insurrection that could result in uninsured losses. We are not subject to these risks in Puerto Rico or the U.S. Virgin Islands since these are United States territories. The

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Company is also subject to U.S. federal income tax upon the distribution of certain offshore earnings. See Note 12 of the notes to the 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.

Quarry Leases. The Company does not own most of the land from which it mines aggregate. Accordingly, the Company’s continued operations are dependent upon its ability to renew leases, prior to their expiration. The Company would incur substantial costs in relocating some of its fixed assets in conjunction with the non-renewal of its quarry leases.

Raw Materials. The Company’s operations are highly dependent upon its ability to acquire adequate supplies of cement and Barbuda sand. The Company has experienced, in the past, short term shortages of both cement and Barbuda sand which, temporarily, adversely affected the Company’s operations.

Import / Export Tariffs. The Company conducts a majority of its business on foreign islands and, accordingly, its operations could be adversely affected by changes in either import or export tariffs.

Credit Risk. The Company operates on several islands in the Caribbean. The governmental agencies of these islands are significant customers of the Company. Many of the island governments, with which the Company conducts business, have high levels of public debt relative to their revenue base. Accordingly, the Company may experience difficulty in collecting amounts due from these governmental agencies.

Substantial Debt and Debt Service. In 2005, DSH and its subsidiaries incurred additional indebtedness of approximately $24.6 million and, as a result, beginning on March 1, 2005, we are now incurring significant interest expense. The degree to which we are leveraged could have important consequences, including the following:

A default could result in acceleration of the CIT indebtedness and permit our senior lenders to foreclose on our electronic security services assets. As of March 31, 2005, we had $24.6 million of borrowings outstanding under the revolving credit facility.

Covenant Restrictions. The CIT credit facility contains numerous covenants imposing restrictions on our electronic security services division’s ability to, among other things:

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The CIT credit facility also contains financial covenants that require DSH and its subsidiaries to meet a number of financial ratios and tests. Failure to comply with the obligations in the credit facility and indenture could result in events of default under the credit facility or the indenture, which, if not cured or waived, could permit acceleration of the indebtedness or of other indebtedness, allowing our senior lenders to foreclose on our electronic security services assets.

Affiliate Stock Ownership. Our officers and directors beneficially own, directly or indirectly and, in the aggregate, a significant percentage of the outstanding shares of our common stock and have the ability to significantly influence the outcome of any matters submitted to a vote of our shareholders.

Material Weaknesses. In connection with the completion of its audit of, and the issuance of an unqualified report on, our consolidated financial statements for the fiscal year ended December 31, 2004, our independent registered public accounting firm, KPMG, LLP, communicated to our management and Audit Committee that certain matters involving the Company’s internal controls were considered to be “significant deficiencies”, as defined under the standards established by the Public Company Accounting Oversight Board. See “Item 9A – Controls and Procedures”. Our independent registered public accounting firm informed our management and our Audit Committee that the combination of these significant deficiencies indicated that we did not have sufficient controls pertaining to the review and oversight of subsidiary financial results originating in our Construction and Materials Divisions constituting material weaknesses in our internal controls over financial reporting.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and assess on an on-going basis the design and operating effectiveness of our internal control structure and procedures for financial reporting. The Company is committed to continuously improving its internal controls and financial reporting. Since July 2004, the Company has been working with

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consultants with experience in internal controls to assist management and the Audit Committee in reviewing the Company’s current internal controls structure with a view towards meeting the formalized requirements of Section 404 of the Sarbanes-Oxley Act.

However, to the extent our independent registered public accounting firm is required to provide an opinion as to the effectiveness of our internal controls, even if we are able to take remedial actions to correct the identified material weaknesses described above and any other material weaknesses identified as the evaluation and testing process is completed, there may be insufficient time for the remediated controls to be in operation to permit our independent registered public accounting firm to conclude that the remediated controls are effective. Thus, our independent registered public accounting firm would possibly provide an adverse opinion to the effect that our internal controls are ineffective as of the date of such evaluation, or may decline to issue an opinion as to the effectiveness of our internal controls.

If we are unable to conclude that our internal controls over financial reporting are effective at such time that we will be required to attest to them, or if our independent registered public accounting firm concludes that our internal controls are ineffective at such time, or is unable to conclude that our assessment is fairly stated or is unable to express an opinion on the effectiveness of our internal controls, our ability to obtain additional financing on favorable terms could be materially and adversely affected, which, in turn, could materially and adversely affect our business, our financial condition and the market value of our securities. In addition, if we are unable to conclude our internal controls or disclosure controls are effective at such time that we will be required to attest to them, current and potential stockholders could lose confidence in our financial reporting and our stock price could be negatively impacted.

Dividends. We have not paid any dividends on our common stock in the last 13 years. We anticipate that for the foreseeable future we will continue to retain any earnings for use in the operation of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend on our earnings, capital requirements, financial condition and other factors deemed relevant by our board of directors.

Labor Unions. We are a party to collective bargaining agreements with various labor unions. One of these agreements has expired and is being renegotiated. The other agreements expire in 2006. Under those agreements we currently employ approximately 74 full-time employees. Our inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers. If the unionized workers were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized or the terms and conditions in future labor agreements were renegotiated, we could experience a significant disruption of our operations and higher ongoing labor costs.

Liquidity. While our stock trades on the Nasdaq National Market, our stock is thinly traded and you may have difficulty in reselling your shares quickly. The low trading volume of our common stock is outside of our control, and we cannot guarantee that the trading volume will increase in the near future or that, even if it does increase in the future, it will be maintained. Without a large float, our common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile.

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In addition, in the absence of an active public trading market, an investor may be unable to liquidate his investment in us. Trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock than would be the case if our public float were larger. We cannot predict the prices at which our common stock will trade in the future.

Related Party Transactions. We have entered into a number of transactions with our affiliates, most of which consist of joint ventures in the Caribbean with companies in which certain of our officers and directors have an interest. Material transactions are disclosed in our audited consolidated financial statements and periodic reports we file with the Securities and Exchange Commission. These transactions may result in conflicts of interests. Our audit committee reviews and approves transactions between us and our affiliates, including our officers and directors. Our policy is that all of these transactions be reviewed and approved by the audit committee prior to completion. In addition, our Articles of Incorporation provide that no contract or other transaction between us and any other corporation shall in any way be invalidated by the fact that any of our directors are interested in or are directors or officers of the other party to the transaction. We anticipate that, to the extent our Board of Directors determines these transactions are in our best interests and our Audit Committee determines there is no reason to prohibit them, we will continue to engage in similar transactions with our affiliates.

Current Dispute in St. Martin. On July 25, 1995, a Company subsidiary, SCGC, entered into an agreement with Petit to lease a quarry located in the French side of St. Martin. Another lease was entered into by SCGC on October 27, 1999 for the same and additional property. Another Company subsidiary, BBW, entered into a material supply agreement with Petit on July 31, 1995. This agreement was amended on October 27, 1999. Pursuant to the amendment, the Company became a party to the materials supply agreement.

In May 2004, the Company advised Petit that it would possibly be removing its equipment within the timeframes provided in its agreements and made a partial quarterly payment under the materials supply agreement. On June 3, 2004, Petit advised the Company in writing that Petit was terminating the materials supply agreement immediately because Petit had not received the full quarterly payment and also advised that it would not renew the 1999 lease when it expired on October 27, 2004. Petit refused to accept the remainder of the quarterly payment from the Company in the amount of $45,000.

Without prior notice to BBW, Petit obtained orders to impound BBW assets on St. Martin (the French side) and Sint Maarten (the Dutch side). The assets sought to be impounded include bank accounts and receivables. BBW has no assets on St. Martin, but approximately $341,000 of its assets were impounded on Sint Maarten. In obtaining the orders, Petit claimed that $7.6 million is due on the supply agreement (the full payment that would be due by the Company if the contract continued for the entire potential term and the Company continued to mine the quarry), $2.7 million is due for quarry restoration and $3.7 million is due for pain and suffering. The materials supply agreement provided that it could be terminated by the Company on July 31, 2004.

In February 2005, SCGC, BBW and the Company entered into agreements with Petit, which provided for the following:

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After conferring with its French counsel and upon review by management, the Company believes that it has valid defenses and offsets to Petit’s claims, including, among others, those relating to its termination rights and the benefit to Petit from the Company not mining the property. Based on the foregoing agreements and its review, management does not believe that the ultimate outcome of this matter will have a material adverse effect on the consolidated financial position or results of operations of the Company.

The Company will obtain independent appraisals to determine the fair value of any non-cash consideration, including the exercise of the options listed above, used in settlement of a judgment received by Petit, if any.

Acquisition and Integration in our Electronic Security Services Business. We intend to experience significant growth through acquisitions. Acquisitions result in greater administrative burdens and operating costs and, to the extent financed with debt, additional interest costs. We cannot assure you that we will be able to manage or integrate acquired companies or businesses successfully. The process of integrating our acquired businesses may be disruptive to our business and may cause an interruption of, or a loss of momentum in, our business as a result of the following factors, among others:

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These disruptions and difficulties, if they occur, may cause us to fail to realize the cost savings, revenue enhancements and other benefits that we currently expect to result from that integration and may cause material adverse short and long-term effects on our operating results and financial condition.

Even if we are able to integrate the operations of acquired businesses into our operations, we may not realize the full benefits of the cost savings, revenue enhancements or other benefits that we anticipate. The potential cost savings associated with an acquisition are based on analyses completed by our employees and advisers. These analyses involve assumptions as to future events, including general business and industry conditions, costs to operate our business and competitive factors, many of which are beyond our control and may not materialize. While we believe these analyses and their underlying assumptions to be reasonable, they are estimates which are difficult to predict and speculative in nature. If we achieve the expected benefits, they may not be achieved within the anticipated time frame. Also, the cost savings and other synergies from these acquisitions may be offset by costs incurred in integrating the companies, increases in other expenses, operating losses or problems in the business unrelated to these acquisitions.

In addition to the electronic security services companies we have already acquired, we plan to continue to acquire additional security services companies. The success of our acquisition program will depend on, among other things:

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Financing for the acquisitions may come from several sources, including our existing cash on hand, previous investment, as well as the proceeds from the exercise of outstanding warrants purchased, the incurrence of indebtedness or the issuance of additional common stock, preferred stock, debt (whether convertible or not) or other securities. The issuance of any additional securities could, among other things:

Dependence on Management. We are dependent upon the services of a small group of executive officers. The loss of the services of any one of these executive officers could have a material adverse effect on us as we would no longer be able to benefit from their knowledge, experience and guidance.

We may encounter difficulties with our new management team and new operating focus.

We expect that we will encounter challenges and difficulties similar to those frequently experienced by companies operating under a new or revised business plan with a new management team. These challenges and difficulties relate to our ability to:

If the actions taken to integrate our new electronic security services division into our general corporate structure encounter greater difficulties than anticipated, we may implement further efforts which could divert management’s attention and strain operational and financial resources. We may not successfully address any or all of these challenges, and our failure to do so would adversely affect our business plan and results of operations, our ability to raise additional capital and our ability to achieve enhanced profitability.

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Competition. Land development construction is extremely competitive. We compete with smaller local contractors as well as larger U.S. and European based contractors in all our markets. Primary competitive factors include price, prior experience and relationships, the equipment available to complete the job, innovation, the available engineering staff to assist an owner in minimizing costs, how quickly a company can complete a contract, and the ability to obtain bonding which guarantees contract completion.

Our ability to maintain mutually beneficial relationships with key customers as well as the nature of their purchasing patterns may have an impact on our operations.

We have competitors in the materials business in the locations where we conduct business. The competition includes local ready-mix concrete and local concrete block plants, and importers of aggregates and concrete blocks. We also encounter competition from the producers of asphalt, which is an alternative material to concrete for road construction. Most competitors, such as ready-mix and local concrete block producers, have a disadvantage compared to our material costs, but have an advantage over us in respect to lower overhead costs. The competition has put pressure on prices in the market, and we have not been able to increase our prices in some markets to the extent of our cost increases. Competition from certain of these manufacturers has intensified in recent years and is expected to continue.

The electronic security services business in the United States is highly competitive. New competitors are continually entering the field. Competition is based primarily on price in relation to quality of service. We believe that the quality of our service is higher than many of our competitors. Sources of competition in the security services business are other providers of central monitoring services, local alarm systems and other methods of protection, such as manned guarding.

Our electronic security services division competes with other major firms which have substantial resources, including ADT Security Services, Inc. (a subsidiary of Tyco International Limited), Brinks Home Security, Protection One, and Honeywell Security Monitoring, as well as many smaller regional and local companies. Many of these competitors are larger and have significantly greater resources than DSH does and also may possess greater local market knowledge as well. We cannot assure you that we will be able to continue to compete effectively for existing or potential customers.

Government Regulation of the Electronic Security Services Business. Our electronic security services division is subject to significant government regulation and the failure to substantially comply with one or more of these regulations could adversely affect our electronic security services’ business and operations.

Our electronic security services’ operations are subject to a variety of federal, state, county, and municipal laws, regulations and licensing requirements. The states in which we operate, as well as some local authorities, require us to obtain licenses or permits to conduct our security service business. We believe that we are in substantial compliance with all of the licensing and regulatory requirements in each jurisdiction in which we operate. In addition, there has been a recent trend on the part of municipalities and other localities to attempt to reduce the level of false alarms through various measures such as licensing of individual alarm systems and

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the imposition of fines upon customers, revocation of licenses or non-response to alarms after a certain number of false alarms. While these statutes and ordinances have not had a material effect on our business operations to date, we are not able to predict whether these statutes or ordinances, or similar statutes or ordinances enacted by other jurisdictions, will adversely affect our business in the future. The alarm industry is also subject to the oversight and requirements of various insurance, approval, listing and standards organizations. Adherence to the standards and requirements of these organizations may be mandatory or voluntary depending upon the type of customer served, the nature of security services provided and the requirements of governmental jurisdiction.

The nature of the services provided by our electronic security services business potentially exposes us to greater risks of liability for employee act or omissions or product liability than may be inherent in many other service businesses. To attempt to reduce this risk, our service contracts contain provisions limiting our liability to our customers. We also carry insurance of various types, including general liability and errors and omissions insurance, to protect us from product defects and negligent acts of our employee.

Cyclical industry and economic conditions have affected and may continue to adversely affect our electronic security services’ financial condition and results of operations.

Our electronic security services’ operating results are affected adversely by the general cyclical pattern of the security services industry. Demand for security services is significantly affected by levels of commercial construction and consumer and business discretionary spending.

Subscriber Account Attrition. Our electronic security services division experiences attrition of subscriber accounts as a result of, among other factors, relocation of subscribers, adverse financial and economic conditions, and competition from other alarm service companies. In addition, our electronic security services division experiences attrition of newly acquired accounts to the extent we do not integrate these accounts or do not adequately service these accounts. An increase in attrition rates could have a material adverse effect on our revenues and earnings.

When acquiring accounts, the Company seeks to withhold a portion of the purchase price as a partial reserve against subscriber attrition. If the actual attrition rate for the accounts acquired is greater than the rate assumed by the Company at the time of the acquisition, and the Company is unable to recoup its damages from the portion of the purchase price held back from the seller, such attrition could have a material adverse effect on the Company’s financial condition or results of operations.

We cannot assure you that we will be able to obtain purchase price holdbacks in future acquisitions, particularly acquisitions of large portfolios. We also cannot assure you that actual account attrition for acquired accounts will not be greater than the attrition rate assumed or historically incurred by our electronic security services business.

The effects of gross subscriber attrition has historically been offset by adding new accounts from subscribers who move into premises previously occupied by prior subscribers and

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in which security alarm systems are installed, conversions of accounts that were previously monitored by other alarm companies to our monitoring services and accounts for which we obtain a guarantee from the seller that provides for us to “put” back to the seller canceled accounts. The resulting figure is used as a guideline to determine the estimated life of subscriber revenues. Our policy is to periodically review actual account attrition and, when necessary, adjust the remaining estimated lives of DSSC’s purchased accounts to reflect assumed future attrition. If actual account attrition significantly exceeds assumed attrition and we have to shorten the period over which it amortizes the cost of purchased subscriber accounts, it could have a material adverse effect on our results of operations and financial condition.

Construction Contracts. Some of the contracts involved in our land development contracting business have fixed price terms which do not take into account unanticipated changes in production costs.

We generally enter into either fixed-price contracts that provide for an established price that does not vary during the term of the contract or unit-price contracts under which our fee is based on the quantity of work performed. Fixed-price contracts and, to a lesser extent, unit-price contracts, involve inherent risks, such as unanticipated increases in the cost of labor and/or materials, subcontracts that were unexpected at the time of bidding, bidding errors, unexpected field conditions, adverse weather conditions, the inability of subcontractors to perform, work stoppages and other events beyond our control. Although our attempts to minimize the risks inherent in our contracts by, among other things, obtaining subcontracts from reliable subcontractors, anticipating labor and material cost increases, anticipating contingencies, utilizing our cost control system and obtaining certain cost escalation clauses, we cannot assure you that we will be able to complete our current or future contracts at a profit. In addition, the longer the term of contracts, the greater the risks associated with that contract.

Some of our contracts call for project completion by a specified date and may contain a penalty clause for our failure to complete a project by this date. In addition, pursuant to some of our contracts, we make warranties that extend for a period of time beyond the completion of these contracts.

Our failure to enter into new contracts to replace completed contracts could have an adverse impact upon our operations.

We endeavor to ensure that our land development contracting resources are effectively utilized and to that end pursue new contracts as the completion time for existing contracts approaches. To the extent we have entered into large land development contracts to which a significant part of our resources are committed, the failure to obtain new contracts upon the completion of these contracts could adversely affect our results of operations.

Economic Conditions. Our land development contracting and concrete and related products businesses and our materials operations are materially dependent upon economic conditions in general, including recession, inflation, deflation, general weakness in construction and housing markets, changes in infrastructure requirements and, in particular, upon the level of development and construction activities in the Caribbean. A general downturn in the economy in this region would adversely affect the housing and construction industry and, therefore, would adversely affect our contracting and concrete and related products businesses.

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Significant Customers. The loss of significant customers, the financial condition of our customers or an adverse change to the financial condition of our significant customers could have a material adverse effect on our business or the collectibility of our receivables. In addition, unforeseen inventory adjustments or significant changes in purchasing patterns by our customers and the resultant impact on manufacturing volumes and inventory levels may negatively impact our operations.

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Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to stockholders. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. All statements addressing operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to sales growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act.

The forward-looking statements are and will be based upon our management’s then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

By their nature, all forward-looking statements involve risks and uncertainties. Actual results, including the Company’s revenues from its Construction, Materials and Electronic Security Services operations, expenses, gross margins, cash flows, financial condition, and net income, as well as factors such as our competitive position, inventory levels, backlog, the demand for our products and services, customer base and the liquidity and needs of customers, may differ materially from those contemplated by the forward-looking statements or those currently being experienced by the Company for a number of reasons, including but not limited to those set forth under “Factors Affecting Our Operating Results, Financial Condition, Business Prospects and Market Price of Stock” and the following:.

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The foregoing list is not exhaustive. There can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact us. Should any risks and uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition and results of operations. For these reasons, you are cautioned not to place undue reliance on our forward-looking statements.

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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. See also Note 1(p) to our Notes to Consolidated Financial Statement for certain revisions and reclassifications which are reflected in this item.

Summary

The Company is a large producer and distributor of ready-mix concrete and quarry products in the Caribbean region. The Company produces and distributes ready-mix concrete, crushed stone, concrete block, and asphalt and distributes bagged cement. The Company also performs the site preparation work as a land development contractor. The Company has established a significant market share in most locations where we have facilities. The Company’s Construction division performs earth moving, excavating, and filling operations, builds golf courses, roads and utility infrastructures, dredges waterways and constructs deep-water piers and marinas in the Caribbean. The Company has historically provided these land development services to both private enterprises and governments in the Caribbean.

On July 30, 2004, the Company completed a transaction with Coconut Palm Capital Investors Ltd. whereby Coconut Palm invested $18 million into the Company for purposes of the Company entering into the electronic security services industry. Also on July 30, 2004, the Company entered the electronic security services business through the acquisition of Security Equipment Company, Inc., which has since changed its name to Devcon Security Services Corp. (“DSSC”). On February 28, 2005, the Company, through DSSC, completed the acquisition of certain net assets of the electronic security services operation of Adelphia Communications Corporation (“Adelphia Acquisition”). The Company’s electronic security services business engages in the electronic monitoring of its installed base of security systems, as well as the installation of new monitored security systems added to its installed base, both in residential and commercial buildings. The Company, through DSSC’s immediate parent, Devcon Security Holdings, Inc. (“DSH”), provides electronic security services to commercial and residential customers in Florida as well as in Buffalo, New York. These assets include a modern, full service monitoring center in Naples, Florida, from which more than 56,700 subscribers’ homes and businesses are monitored. The Company also has approximately  5,300 accounts monitored by a third party.

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Critical Accounting Policies and Estimates

Our discussion of our financial condition and results of operations is an analysis of the consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), consistently applied. Although our significant accounting policies are described in Note 1 of the notes to the consolidated financial statements, the following discussion is intended to describe those accounting policies and estimates most critical to the preparation of our consolidated financial statements. The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowance for credit losses, inventories and loss reserve for inventories, cost to complete construction contracts, assets held for sale, intangible assets, income taxes, taxes on un-repatriated earnings, warranty obligations, impairment charges, restructuring, business divestitures, pensions, deferral compensation and other employee benefit plans or arrangements, environmental matters, and contingencies and litigation. We base our estimates on historical experience and on various other factors that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue and earnings on construction contracts, including construction joint ventures, are recognized on the percentage-of-completion-method based upon the ratio of costs incurred to estimated final costs, for which collectibility is reasonably assured. The Company recognizes revenue relating to claims only when there exists a legal basis supported by objective and verifiable evidence and additional identifiable costs are incurred due to unforeseen circumstances beyond the Company’s control. Change-orders for additional contract revenue are recognized if it is probable that they will result in additional revenue and the amount can be reliably estimated.

Notes receivable are recorded at cost, less a 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.

Provisions are recognized in the statement of income for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue. Contract cost is recorded as incurred and revisions in contract revenue and cost estimates are reflected in the accounting period when known. Change-orders for additional contract revenue are recognized if it is probable that they will result in additional revenue and the amount can be reliably estimated. We estimate costs to complete

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our construction contracts based on experience from similar work in the past. If the conditions of the work to be performed change or if the estimated costs are not accurately projected, the gross profit from construction contracts may vary significantly in the future. The foregoing, as well as weather, stage of completion and mix of contracts at different margins may cause fluctuations in gross profit between periods and these fluctuations may be significant.

We maintain allowances for doubtful accounts for estimated losses resulting from management’s review and assessment of our customers’ ability to make required payments. We consider the age of specific accounts, a customer’s payment history and specific collateral given by the customer to secure the receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. If the customers pay a previously impaired receivable, income is then recognized.

We write down inventory for estimated obsolescence or lack of marketability arising from the difference between the cost of inventory and the estimated market value based upon assessments about current and future demand and market conditions. If actual market conditions were to be less favorable than those projected by management, additional inventory reserves could be required. If the actual market demand surpasses the projected levels, inventory write downs are not reserved.

We maintain an accrual for retirement agreements with Company executives and certain other employees. This accrual is based on the life expectancy of these persons and an assumed weighted average discount rate of 5.7%. Should the actual longevity vary significantly from the United States insurance norms, or should the discount rate used to establish the present value of the obligation vary, the accrual may have to be significantly increased or diminished at that time.

Based on a written legal opinion from Antiguan counsel, we did not record a contingent liability of $6.1 million, excluding any interest or penalties, for taxes assessed by the Government of Antigua and Barbuda for the years 1995 through 1999. In December 2004, the Company entered into an agreement with Antigua settling certain obligations. Pursuant to this agreement, these assessments were deemed paid. See Note 13 of the notes to the consolidated financial statements.

The EDC completed a compliance review on one of our subsidiaries in the US Virgin Islands on February 6, 2004. The compliance review covered the period from April 1, 1998 through March 31, 2003 and resulted from the Company’s application to request an extension of tax exemptions from the EDC. The Company is working with the EDC to resolve the issues raised. One of those issues is whether certain items of income qualified for exemption benefits under the Company’s then-existing tax exemption, including notice of failure to make gross receipts tax payments of $505,000 and income taxes of $2.2 million, not including interest and penalties. This is the first time that a position contrary to the Company’s or any position on this specific issue has been raised by the EDC. In light of these recent events, and based on discussions with legal counsel, the Company established a tax accrual at December 31, 2003 for such exposure which approximates the amounts set forth in the EDC notice. In September 2004, the statute of limitations with respect to the income tax return filed by the Company for the year ended December 31, 2000, expired. Accordingly, in the third quarter of 2004, the Company

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reversed $2.3 million of the tax accrual established at December 31, 2003. The Company continues to work with the EDC regarding this matter and if challenged by the U.S. Virgin Islands taxing authority, would vigorously contest its position.

We were accounting for the notes receivable from the Government of Antigua and Barbuda under the cost-recovery method until April 2000. Subsequent to a restructuring of the notes, we started to account for the notes using the accrual method. We recorded payments received, first to the projected principal reductions for the period, then to accrued interest, and lastly to additional reduction of principal. Interest income was recognized on the notes only to the extent payments were received for accrued interest. See Note 3 of the notes to the consolidated financial statements. In December 2004, the debt owed by Antigua under the notes receivable was satisfied pursuant to an agreement settling these obligations.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such a determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such a determination was made.

We determine our fixed assets recoverability on a subsidiary level or group of asset level. If we, as a result of our valuation in the future, assess the assets not to be recoverable, a negative adjustment to the book value of those assets may occur. On the other hand, if we impair an asset, and the asset continues to produce income, we may record earnings higher than they should have been if no impairment had been recorded.

We determine goodwill and other intangible assets acquired in a purchase business combination. Some of these assets we determine to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB 142. This testing is based on subjective analysis and may change from time to time. The Company will test goodwill and other intangible assets for impairment as of June 30, 2005 and annually thereafter. Other identifiable intangible assets with estimatable useful lives are amortized over their respective estimated useful lives. The review of impairment and estimation of useful life is subjective and may change from time to time.

We are not presently considering changes to any of our critical accounting policies and we do not presently believe that any of our critical accounting policies are reasonably likely to change in the near future. There have not been any material changes to the methodology used in calculating our estimates during the last three years. The CEO, CFO and the Audit Committee have reviewed all of the foregoing critical accounting policies and estimates.

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New Accounting Standards

In December 2003, the FASB issued Interpretation No. 46 (“FIN 46R”) (revised December 2003), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (“ARB 51”), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity though means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46, which was issued in January 2003. Before concluding that it is appropriate to apply ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity (VIE). As of the effective date of FIN 46R, an enterprise must evaluate its involvement with all entities or legal structures created before February 1, 2003, to determine whether consolidation requirements of FIN 46R apply to those entities. There is no grandfathering of existing entities. Public companies must apply either FIN 46 or FIN 46R immediately to entities created after January 31, 2003 and no later than the end of the first reporting period that ends after March 15, 2004. The adoption of FIN 46 did not have a material impact on the Company’s consolidated financial position and results of operations.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 123R, “Share-Based Payment,” a revision of SFAS 123. The standard requires companies to expense the grant date fair value of stock options and other equity-based compensation issued to employees and is effective for interim or annual periods beginning after June 15, 2005. In accordance with the revised statement, we will be required to recognize the expense attributable to stock options granted or vested subsequent to June 30, 2005. We are evaluating the requirements of SFAS 123R. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123 in Note 1 of the Notes to Consolidated Financial Statements.

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Comparison of Year Ended December 31, 2004 with Year Ended December 31, 2003

Summary

In 2004, our consolidated revenue amounted to $69.2 million, an increase of $13.9 million or approximately a 25% increase compared to 2003’s revenue of $55.3 million. This revenue increase was principally due an increase in revenue recorded by our Construction and Materials divisions. The Company’s operating loss decreased $6.4 million to $2.7 million when compared to 2003’s operating loss of $9.1 million. This significant improvement was principally a result of our Construction and Materials divisions achieving a combined increase in gross margin of $7.6 million in addition to a reduction of $0.4 million in depreciation expense. These improvements were reduced by an increase in operating expenses totaling $1.6 million. Other income increased $11.0 million, principally due to the settlement of an outstanding note receivable and various pending claims with the Government of Antigua and Barbuda. Net income for 2004 increased by $19.3 million to $10.6 million when compared to 2003’s net loss of $8.6 million. This increase is mainly due to the items set out above in addition to a $1.9 million decrease in income tax expense in 2004, as compared to the $2.3 million income tax expense we recorded in 2003. The income tax expense reduction is principally due to a reversal of a prior year’s accrual relating to tax matters with respect to our U.S. Virgin Islands operations, as well as an increase in our deferred tax assets.

Total Revenue

In 2004 our consolidated revenue amounted to $69.2 million, an increase of $13.9 million, or, approximately, a 25% increase when compared to 2003’s revenue of $55.3 million. This revenue increase was principally due to an increase in revenue recorded by our Construction and Materials divisions.

Our Construction business revenues increased by $7.9 million to $25.1 million when compared to $17.1 million in 2003. This increase resulted primarily from increased activity in the Bahamas and the U.S. Virgin Islands. Our backlog of unfilled portions of land development contracts at December 31, 2004 was approximately $18.6 million, involving 16 projects, as compared to approximately $5.6 million involving 12 projects at December 31, 2003. Our backlog on Exuma, in the Bahamas, at December 31, 2004, was approximately $5.8 million. From December 31, 2004 through March 31, 2005, we entered into nine new construction contracts in the Caribbean, which revenue when recognized will amount to approximately $3.0 million.

Our Materials business revenue increased by $4.8 million to $43.0 million in 2004 from $38.2 million in 2003. This increase was primarily due to an increase in sand and aggregate sales of $3.0 million. Concrete and block revenue increased 5.4% and 7.6%, respectively, mainly due to increased demand in St. Croix. Aggregates revenue increased by 19.6%, mainly due to an increase in demand in all locations except Antigua.

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Cost of Construction

Cost of construction decreased to 70.0% of Construction revenue in 2004 from 89.2% in 2003. This decrease is primarily attributable to the increased volume in the Bahamas construction subsidiary and also to the varying profitability levels of individual contracts and the stage of completion of such contracts.

Cost of Materials

Cost of materials decreased to 83.9% of Materials revenue from 87.1% in 2003. This decrease was primarily the result of improved margins in St. Croix. Notwithstanding increased revenues in all our Materials operations except Antigua, margins were impacted during 2004 due to tight supplies of cement throughout our operations. This supply condition resulted in higher than expected raw materials cost at all our ready-mix operations. In addition, severe weather conditions brought on by several hurricanes which moved through the Caribbean during September 2004 resulted in supply delays and other inefficiencies in our Materials business during the fourth quarter of 2004. Margins were also affected by unfavorable inventory variances recorded in the fourth quarter of 2004.

Operating expenses

Total operating expenses, including unallocated corporate charges, increased by 10.0% to $17.4 million in 2004 from $15.9 million in 2003. Operating expenses reported in 2003 included a $2.9 million impairment expense with respect to certain long–lived assets in our Materials division compared to an expense amounting to $0.6 million in 2004. The comparable increase in operating expense amounts to approximately $3.8 million.

Our Construction division’s operating expense increased $0.5 million to $2.9 million compared to $2.4 million in 2003. This increase is due to additional overhead necessary as a result of the $7.9 million revenue increase reported by our Construction division during 2004.

Our Materials division operating expense decreased $1.2 million to $9.6 million compared to $10.8 million in 2003. The Materials division’s operating expense in 2003 included a $2.9 million impairment expense with respect to certain long–lived assets, which expense compared to $0.6 million in 2004; therefore, the comparable increase in operating expense amounts to $2.6 million. The increase in operating expense is principally the result of approximately $0.9 million of bad debt expense and $0.6 million of retirement and severance expense incurred by our Sint Marteen and Antigua operations.

Our corporate and unallocated operating expense increased $1.7 million to $4.4 million in 2004 compared to $2.7 million in 2003. This increase is attributable to an $0.5 million non-cash expense associated with the issuance of certain common stock warrants, and an $0.9 million increase in salaries and related benefits associated with adding the personnel necessary to execute our entry into the Electronic Security Services sector, as well as to address the expected growth in our Construction division. In addition, we incurred an increase of $0.2 million in legal and audit fees in 2004.

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Operating (Loss) Income

The Company’s operating loss decreased $6.4 million to $2.7 million when compared to 2003’s operating loss of $9.1 million. This significant improvement was principally a result of our Construction and Materials divisions achieving a combined increase in gross margin of $7.3 million, in addition to a reduction of $0.4 million in depreciation expense. These improvements were reduced by an increase in total operating expenses totaling $1.6 million.

Our Construction division’s operating income increased $4.1 million to $4.6 million from $0.5 million in 2003. This increase was a result of revenues increasing by $7.9 million to $25.1 million when compared to $17.1 million during 2003. This increase resulted primarily from increased activity in the Bahamas and the U.S. Virgin Islands. We currently expect to experience continued revenue growth accompanied by a corresponding increase in aggregate gross margin dollars; however, due to the mix of projects currently being worked accompanied by pending bids outstanding, we anticipate that our gross margin as a percentage of revenue may experience a minor decline in 2005.

The Materials operating losses decreased during the year, from $5.9 million in 2003 to $2.7 million in 2004; however, this division did record an operating loss of $2.6 million in the fourth quarter of 2004, compared to an operating loss of $0.9 million during the comparable quarter of 2003. Operating results during the fourth quarter of 2004 were significantly affected by negative inventory variations, a $0.6 million asset impairment and a $1.0 million increase in bad debt expense relating to certain trade and notes receivable, and $0.6 million of retirement and severance expense. These expenses are principally attributable to our Sint Marteen and Anitgua operations. We have begun the process of implementing additional review procedures and financial controls in an attempt to prevent these type of write downs from being required in the future. In addition, we are in the process of reviewing each of our material operations in detail and, based upon our findings, we will implement the necessary changes to improve profitability which we anticipate will be achieved through a combination of price increases, where appropriate, and operating expense reductions. In addition, based upon the final outcome of our review, we may choose to pursue an orderly divestment of all of or certain segments of our Materials operations.

Other Income

Other income increased $10.8 million to $13.8 million when compared to $2.9 million in 2003. This increase was principally due to the settlement of an outstanding note receivable and various pending claims with the Government of Antigua and Barbuda, which resulted in a gain of $11.0 million.

During 2003 and 2004, the Government of Antigua did not meet all of its payment obligations to the Company. However, on December 3, 2004, Antigua Masonry Products, Limited and Antigua Heavy Constructors, Limited (collectively “AMP”), direct and indirect subsidiaries of the Company, entered into an Agreement for Satisfaction of Indebtedness and Amendment No. 10 to St. John’s Dredging and Deep Water Pier Construction (the “Satisfaction Agreement”) with the government of Antigua and Barbuda (“Antigua”). Pursuant to the terms of the Satisfaction Agreement, AMP and Antigua agreed to a settlement in which approximately

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$29.0 million in debt owed by Antigua to those companies was deemed satisfied in exchange for certain cash payments made to those companies by Antigua, as well as the remittance of all outstanding tax assessments and other relief from current and future taxes and duties. The Company at the time of settlement had a recorded book value of approximately $6.4 million for the notes. As a result of this Satisfaction Agreement and in exchange for the cancellation of the outstanding debt owed to AMP by Antigua, AMP received $11.5 million in cash, a commitment for an additional $937,000 cash which has been received during the first quarter of 2005, a $7.5 million credit toward future withholding taxes incurred by AMP or the Company, plus remittance of all taxes and duties incurred through December 31, 2004. The Company has only recognized $4.3 million of the future withholding and income tax benefit based on the current plans for repatriation of foreign earnings. The Satisfaction Agreement also settles the litigation over a $6 million assessment issued with respect to the Company’s subsidiaries in Antigua.

Income Tax Expense

Income tax expense decreased by $2.0 million in 2004 to $0.4 million when compared to $2.4 million in 2003. The income tax expense reduction is principally due to a reversal of a prior year’s accrual of $2.3 million relating to tax matters with respect to our U.S. Virgin Islands operations, an increase of $1.2 million in our deferred tax assets and favorable rate differentials enjoyed by certain of our offshore operations. These increases were offset by a $4.1 million increase in deferred tax liability as a result of receiving a dividend from a foreign subsidiary in January 2005. Based upon the Company electing a Dividend Reinvestment Plan in accordance with the American Jobs Creation Act we expect that the Company will receive a tax benefit of approximately $2.8 million in January 2005.

The U.S. Virgin Islands Economic Development Commission (“EDC”) granted us tax exemptions on most of our U.S. Virgin Islands earnings through March 2003. We have applied for an extension of this tax exemption, however, there is no guarantee that it will be granted. If the application is denied, the Company’s income, gross receipts, and property taxes would increase significantly. These increases would be partially offset by decreases in the Company’s compliance expenses and losses incurred in order to satisfy certain conditions of the EDC tax exemptions. The EDC completed a compliance review on our subsidiary in the US Virgin Islands on February 6, 2004. The compliance review covered the period from April 1998 through March 31, 2003 and resulted from the Company’s application to request an extension of tax exemptions from the EDC. The Company received a notice of failure to make gross receipts tax payments of $505,000 and income tax payments of $2.2 million, not including interest and penalties. This is the first time that a position contrary to the Company’s or any position on this specific issue has been raised by the EDC. In light of these events, and based on discussions with legal counsel, the Company established a tax accrual at December 31, 2003 for such exposure which approximated the amounts set forth in the EDC notice. In September 2004, the statute of limitations with respect to the income tax return filed by the Company for the year ended December 31, 2000, expired. Accordingly, in the third quarter of 2004, the Company reversed $2.3 million of the tax accrual established at December 31, 2003. The Company continues to work with the EDC regarding this matter and, if challenged by the U.S. Virgin Islands taxing authority, will vigorously contest this interpretation.

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The Company has been accruing, based on the advice of counsel, not remitting, gross receipts taxes, which would be due should the Company’s application for extension of benefit be withdrawn or denied. The Company has been further advised by counsel that, should the application of benefits be denied, the Internal Revenue Bureau would, most likely, waive any penalties for late payment of gross receipts taxes through the date of denial, although no assurance can be given that such waiver would be granted.

Comparison of Year Ended December 31, 2003 with Year Ended December 31, 2002

Total Revenue

Our revenue was $55.3 million in 2003 and $53.4 million in 2002. This 3.7% increase reflects an increase in Construction revenue and a smaller increase in Materials revenue.

Revenue from our Construction operation increased 9.5% to $17.1 million in 2003 from $15.6 million in 2002. This increase resulted primarily from increased activity on Antigua and Aruba. Our backlog of unfilled portions of land development contracts at December 31, 2003 was approximately $5.6 million involving 12 projects, as compared to approximately $5.6 million involving six projects at December 31, 2002. From December 31, 2003 through February 20, 2004, we entered into some additional construction contracts. We are currently in final negotiations for several contracts and we expect the division to increase its volume in 2004. We expect the current backlog to be completed during 2004.

Our Materials revenue increased 1.3% to $38.2 million in 2003 from $37.7 million in 2002. This increase was primarily due to an increase in the sale of concrete, block and cement, offset to a lesser extent by a reduced sale of aggregates. Concrete and block revenue increased 12.2% and 7.0%, respectively, mainly due to increased volumes on St. Martin, primarily due to a significant project on the island. Aggregates sales decreased in St. Croix by 40.4% and on Puerto Rico by 17.0%. This reduction was due to reduced activity, as well as heavy rains in the 4^th quarter of 2003. We are not sure that the concrete volume increases on St. Martin will be sustainable; however, we believe that aggregates volumes will increase during the next two quarters. We also anticipate that aggregates volumes on St. Croix and Puerto Rico will increase during 2004. At this time we cannot predict total Materials revenue in 2004.

Cost of Construction

Cost of construction decreased to 89.2% of Construction revenue in 2003 from 94.7% in 2002. This decrease is primarily attributable to the marine equipment unit having profitable work at the end of 2003 and being able to obtain more profitable construction contracts during 2003, and also to the varying profitability levels of individual contracts and the stage of completion of such contracts.

Cost of Materials