SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File No. 0-7152
DEVCON INTERNATIONAL CORP.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-0671992
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
1350 E. NEWPORT CENTER DRIVE, SUITE 201, DEERFIELD BEACH, FL 33442
(Address of Principal Executive Offices) (Zip Code)
(954) 429-1500
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES X NO ______
As of November 9, 1998, the number of shares outstanding of the Registrant's
Common Stock was 4,498,935.
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DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
INDEX
PAGE NUMBER
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Part I. Financial Information:
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997.............................................. 3-4
Consolidated Statements of Operations and
Retained Earnings - Three and Nine Months
Ended September 30, 1998 and 1997.................................. 5-6
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997...................... 7-8
Notes to Consolidated Financial Statements......................... 9
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations......................................................... 10-18
Part II. Other Information.................................................. 19
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2
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PART I. FINANCIAL INFORMATION
- ------------------------------------------------------------
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<CAPTION>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 566,950 $ 876,368
Cash equivalents 488,347 125,000
Receivables, net 12,939,662 13,928,997
Costs in excess of billings
and estimated earnings 2,067,455 329,707
Inventories 4,956,043 4,779,121
Assets held for sale 2,943,894 6,919,511
Other 634,920 937,290
---------- ----------
Total current assets 24,597,271 27,895,994
Property, plant and equipment
Land 2,148,825 2,148,825
Buildings 3,453,382 3,365,775
Leasehold interests 6,558,595 6,302,592
Equipment 56,283,911 53,382,393
Furniture and fixtures 587,013 560,402
Construction in process 1,848,050 1,007,879
----------- -----------
70,879,776 66,767,866
Less accumulated depreciation (29,080,376) (27,119,417)
----------- -----------
41,799,400 39,648,449
Investments in unconsolidated
joint ventures and affiliates 244,150 132,130
Advances to unconsolidated joint
ventures and affiliates 550,695 568,861
Receivables, net 13,875,147 15,137,701
Intangible assets, net of
accumulated amortization 1,184,988 1,429,921
Other assets 1,450,325 1,620,204
----------- -----------
Total assets $83,701,976 $86,433,260
=========== ===========
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See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade and other $ 5,039,359 $ 6,390,461
Accrued expenses and other liabilities 2,430,357 2,702,517
Notes payable to banks 1,212,627 384,473
Current installments of long-term debt 6,000,475 8,990,968
Billings in excess of costs and
estimated earnings 1,007,750 137,408
Income taxes 465,839 577,478
---------- ----------
Total current liabilities 16,156,407 19,183,305
Long-term debt, excluding current
installments and notes payable to banks 17,244,808 16,981,738
Minority interest in consolidated
subsidiaries 1,925,989 1,923,629
Deferred income taxes 399,056 399,791
Other liabilities 4,800,950 5,129,135
----------- ----------
Total liabilities 40,527,210 43,617,598
Stockholders' equity:
Common stock 449,894 449,894
Additional paid-in capital 12,064,133 12,064,133
Cumulative translation adjustment (1,268,617) (1,200,000)
Retained earnings 31,929,356 31,501,635
----------- ----------
Total stockholders' equity 43,174,766 42,815,662
----------- ----------
Total liabilities and stockholders' equity $83,701,976 $86,433,260
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<CAPTION>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations and Retained Earnings
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited)
THREE THREE NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1998 1997 1998 1997
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Concrete and related
products revenue $12,240,876 $13,054,280 $38,000,309 $39,090,390
Contracting revenue 4,908,014 3,524,022 10,058,542 8,369,900
Other revenue - 443,717 371,386 2,165,481
----------- ----------- ----------- -----------
Total revenue 17,148,890 17,022,019 48,430,237 49,625,771
Cost of concrete and
related products revenue 10,015,008 9,968,429 30,484,462 30,615,933
Cost of contracting revenue 3,921,682 2,764,110 8,524,426 7,549,146
Cost of other revenue (1,474) 402,645 246,088 1,700,625
----------- ----------- ----------- -----------
Gross profit 3,213,674 3,886,835 9,175,261 9,760,067
Selling, general and
administrative expenses 2,778,852 3,275,124 8,219,376 9,699,298
Charge for litigation - - - 4,500,000
----------- ----------- ----------- -----------
Operating income (loss) 434,822 611,711 955,885 (4,439,231)
Other income (deductions)
Joint venture equity loss - (25,000) - (75,000)
Interest expense (525,629) (751,608) (1,624,722) (1,960,484)
Gain (loss) on sale
of equipment 73,138 145,399 119,134 86,483
Interest and other income 290,409 265,879 1,107,655 551,936
Minority interest 7,215 (20,307) (2,360) (8,950)
----------- ----------- ----------- -----------
(154,867) (385,637) (400,293) (1,406,015)
----------- ----------- ----------- -----------
Profit (loss) before
income taxes 279,955 226,074 555,592 (5,845,246)
Income tax 42,309 (120,355) (127,871) (120,355)
----------- ----------- ----------- -----------
Net income (loss) 322,264 105,719 427,721 (5,965,601)
Retained earnings,
beginning of period 31,607,092 40,966,338 31,501,635 47,037,658
----------- ----------- ----------- -----------
Retained earnings,
end of period $31,929,356 $41,072,057 $31,929,356 $41,072,057
=========== =========== =========== ===========
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See accompanying notes to consolidated financial statements.
5
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<CAPTION>
THREE THREE NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Basic income (loss)
per share from
continuing operations $ 0.07 $ 0.02 $ 0.10 $ (1.33)
========== ========== ========== ==========
Weighted average number of
shares outstanding-Basic 4,498,935 4,498,935 4,498,935 4,498,935
========== ========== ========== ==========
Diluted income (loss) $ 0.07 $ 0.02 $ 0.09 $ (1.33)
========== ========== ========== ==========
Weighted average number of
shares diluted 4,515,277 4,548,187 4,527,604 4,498,935
========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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<CAPTION>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 427,721 $(5,965,601)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Depreciation and amortization 4,408,761 4,620,858
Joint venture equity loss - 75,000
Provision for doubtful accounts
and notes (163,937) 400,000
Gain on sale of equipment (119,134) (86,483)
Minority interest expense 2,360 8,910
Charge for litigation - 4,500,000
Changes in operating assets and liabilities:
Decrease (increase) in receivables, net 992,781 (4,880,377)
(Increase) decrease in costs in excess
of billings and estimated earnings (1,737,748) 2,128,237
Increase in inventories (176,922) (648,552)
Decrease (increase) in other current assets 302,370 (163,442)
Decrease (increase)in other assets 90,822 (86,752)
(Decrease) increase in accounts payable,
trade and other (1,532,333) 1,397,523
Increase in billings in excess of
costs and estimated earnings 870,342 90,240
Decrease in income taxes payable (112,374) (49,575)
Decrease in other liabilities (328,185) (178,505)
------------ -----------
Net cash provided by
operating activities 2,924,524 1,161,481
------------ -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (6,308,764) (7,334,420)
Proceeds from disposition of property,
plant and equipment 3,698,785 309,538
Payments received on notes 2,126,979 1,469,577
Investment in affiliates (112,020) -
Advances from affiliates 18,166 452,592
Issuance of notes (514,135) -
------------ -----------
Net cash used in
investing activities $ (1,090,989) $(5,102,713)
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
7
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<CAPTION>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
Cash flows from financing activities:
Proceeds from debt $ 6,180,803 $10,388,491
Principal payments on debt (8,788,563) (7,778,140)
Net borrowings from bank credit
line/overdrafts 828,154 295,931
----------- -----------
Net cash (used in) provided by
financing activities (1,779,606) 2,906,282
----------- -----------
Net increase (decrease) in
cash and cash equivalents 53,929 (1,034,950)
Cash and cash equivalents,
beginning of period 1,001,368 1,903,994
----------- -----------
Cash and cash equivalents,
end of period $ 1,055,297 $ 869,044
=========== ===========
Supplemental disclosures of
cash flow information
Cash paid for:
Interest $ 1,722,397 $ 2,014,725
=========== ===========
Income taxes $ 124,875 $ 169,929
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
8
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DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries.
The accounting policies followed by the Company are set forth in Note (l) to the
Company's financial statements included in its Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the Company's
financial position as of September 30, 1998 and the results of its operations
and cash flows for the three and nine months ended September 30, 1998 and 1997.
The results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
In December 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE. In accordance with
SFAS No. 128, primary earnings per share have been replaced with basic earnings
per share, and fully diluted earnings per share have been replaced with diluted
earnings per share, which includes potentially dilutive securities such as
outstanding options. Prior periods have been presented to conform to SFAS No.
128, however, as the Company had a net loss in the prior periods, basic and
diluted loss per share are the same.
Basic earnings per share are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share are computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding during the period increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. The dilutive effect of outstanding options is reflected
in diluted earnings per share by application of the treasury stock method. For
loss periods, weighted average common share equivalents are excluded from the
calculation as their effect would be antidilutive.
Options to purchase 148,300 and 148,300 shares of common stock, at a price of
$2.33 per share, were outstanding for the quarters ended September 30, 1998 and
1997, respectively. For the nine months ended September 30, 1997, the options
were not included in the computation of diluted earnings per share because the
inclusion of the options would be antidilutive. Options to purchase 365,000 and
339,000 shares of common stock, at prices ranging from $2.94 to $14.00 per
share, were outstanding for the quarters ended September 30, 1998 and 1997,
respectively, but were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
prices of the common shares. For additional disclosures regarding the
outstanding employee stock options, see the 1997 Form 10-K.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires that all items recognized under
accounting standards as components of comprehensive income be reported in annual
financial statements that is displayed with the same prominence as other annual
financial statements. The Company's total comprehensive income, comprised of
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translation adjustments, for the three and nine month periods ended September
30, 1998 and 1997 were as follows:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (loss) $322,264 $105,719 $427,721 $(5,965,601)
Other comprehensive income,
net of taxes (68,617) - (68,617) -
-------- -------- -------- -----------
Total comprehensive
income (loss) $253,647 $105,179 $359,104 $(5,965,601)
======== ======== ======== ===========
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10
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
All dollar amounts of $1.0 million or more are rounded to the nearest one tenth
of a million; all other dollar amounts are rounded to the nearest one thousand
and all percentages are stated to the nearest one tenth of one percent.
This Form 10-Q contains certain "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which represent the Company's expectations and beliefs. These statements
by their nature involve substantial risks and uncertainties, certain of which
are beyond the Company's control, and actual results may differ materially
depending on a variety of important factors, including the financial condition
of the Company's customers, changes in domestic and foreign economic and
political conditions, demand for the Company's services and products, risk and
uncertainties related to large foreign construction projects and changes in the
Company's competitive environment.
The Company cautions that the factors described above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements of the Company made by or on behalf of the Company. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors or the effect that any such factor may
have on the Company's business.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 VS. THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUE
The Company's revenue during the third quarter of 1998 was $17.1 million as
compared to $17.0 million during the same period in 1997. This 0.7 percent
increase was primarily due to an increase in contracting revenue and to a lesser
extent offset by a reduction of concrete and related products and in other sales
as a result of the sale of Crown Bay Marina in January 1998.
The Company's concrete and related products division revenue decreased 6.2
percent to $12.2 million during the third quarter of 1998 as compared to $13.1
million for the same period in 1997, primarily as a result of a decrease in
demand for this division's products on certain Caribbean islands partially due
to the effect of Hurricane Georges, offset to a lesser extent by increased
demand on other islands. The Company cannot currently determine whether demand
for this division's products will increase, decrease or remain the same
throughout 1998.
Revenue from the Company's land development contracting division increased by
39.3 percent to $4.9 million during the third quarter of 1998 as compared to
$3.5 million for the same period in 1997. This increase is primarily due to the
Company continuing various contracts that were started during the second
quarter. The Company's backlog of unfilled portions of land development
contracts at September 30, 1998 was $17.9 million, involving 11 projects. One
project's
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backlog amounts to $14.2 million. A Company subsidiary and two of the Company's
directors are minority partners of the entity developing this project. The
Company expects that part of the backlog outstanding at September 30, 1998 will
be completed by the end of 1998. The Company expects to achieve in 1998 contract
revenue levels higher than those achieved in 1997.
COST OF CONCRETE AND RELATED PRODUCTS
Cost of concrete and related products as a percentage of concrete and related
products revenue increased to 81.8 percent during the third quarter of 1998 from
76.4 percent for the same period in 1997. This increase was primarily
attributable to the decrease in revenue and changes in the mix of products sold
in the third quarter of 1998 compared to 1997, and to a lesser extent offset by
a reduction in depreciation.
COST OF CONTRACTING
Cost of contracting as a percentage of land development contracting revenue
increased to 79.9 percent during the third quarter of 1998 from 78.4 percent
during the same period in 1997. This increase is primarily attributable to the
varying profitability levels of individual contracts and the stage of completion
of such contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense ("SG&A expense") decreased by 15.2
percent to $2.8 million for the third quarter of 1998 from $3.3 million for the
same period in 1997. As a percentage of revenue, SG&A expense decreased to 16.2
percent during the third quarter compared to 19.2 percent for the same period
last year. This decrease is primarily attributable to reduction of expense for
bad debt, foreign exchange loss and various other expenses. The expense for the
allowance for doubtful accounts and notes was approximately $35,000 during the
quarter.
DIVISIONAL OPERATING INCOME
The Company had an operating income of $435,000 for the third quarter of 1998,
as compared to $612,000 for the same period in 1997. The Company's concrete and
related products division operating loss was $24,000 during the third quarter of
1998 compared to a profit of $708,000 during the same period in 1997. This
decrease is primarily attributable to lower gross profit on some islands and the
effect of Hurricane Georges, offset to a lesser extent by improvement in other
operations. The SG&A expense for the concrete and related products decreased by
5.4 percent, which is in line with the decrease of sales.
The Company's land development contracting division had an operating income of
$598,000 during the third quarter of 1998 compared to $83,000 during the same
period in 1997. This improvement was primarily attributable to the type of
contracts the Company has been able to obtain, combined with a reduction of
$288,000 in SG&A expenses, primarily bad debt expense.
OTHER INCOME
Interest income has increased due to that the Company is recognizing as income a
portion of the receipts, in excess of agreed upon amounts, from the notes
receivable due from the Government of Antigua and Barbuda. There was also a
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reduction of interest expense for the third quarter in 1998 compared to the same
period in 1997 due to a reduction of debt.
NET INCOME (LOSS)
The Company had a net income of $322,000 during the third quarter of 1998 as
compared to $106,000 during the same period in 1997. Tax expense decreased due
to a refund of taxes on one of the islands.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUE
The Company's revenue during the first nine months of 1998 was $48.4 million as
compared to $49.6 million during the same period in 1997. This 2.4 percent
decrease was primarily due to a decrease in other sales of $1.8 million as a
result of the sale of Crown Bay Marina in January 1998.
The Company's concrete and related products division revenue decreased 2.8
percent to $38.0 million during the first nine months of 1998 as compared to
$39.1 million for the same period in 1997, primarily as a result of a decrease
in demand for this division's products on certain Caribbean islands partially
due to the effect of Hurricane Georges, offset to a lesser extent by increased
demand on other islands. The Company cannot currently determine whether demand
for this division's products will increase, decrease or remain the same
throughout 1998.
Revenue from the Company's land development contracting division increased by
20.2 percent to $10.1 million during the first nine months of 1998 as compared
to $8.4 million for the same period in 1997. This increase is primarily due to
the Company starting various contracts during the year. The Company's backlog of
unfilled portions of land development contracts at September 30, 1998 was $17.9
million, involving 11 projects. One of these project's backlog amounts to $14.2
million, the Company and two of the Company's directors are minority partners of
the entity developing this project. The Company expects that part of the backlog
outstanding at September 1998 will be completed by the end of 1998. The Company
expects to achieve in 1998 contract revenue levels higher than those achieved in
1997.
COST OF CONCRETE AND RELATED PRODUCTS
Cost of concrete and related products as a percentage of concrete and related
products revenue increased to 80.2 percent during the first nine months of 1998
from 78.3 percent for the same period in 1997. This increase was primarily
attributable to the decrease in revenue and changes in the mix of products sold
in the first nine months of 1998 compared to 1997, and to a lesser extent offset
by a reduction in depreciation.
COST OF CONTRACTING
Cost of contracting as a percentage of land development contracting revenue
decreased to 84.7 percent during the first nine months of 1998 from 90.2 percent
during the same period in 1997. This decrease is primarily attributable to the
type of contracts the Company has been able to obtain, which has led the Company
to utilize its dredge at higher efficiency. In addition, the Company's gross
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margins are affected by the varying profitability levels of individual contracts
and the stage of completion of such contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense ("SG&A expense") decreased by 15.3
percent to $8.2 million for the first nine months of 1998 from $9.7 million for
the same period in 1997. The expense for doubtful accounts and note receivable
was reduced by approximately $578,000, legal expenses decreased approximately
$370,000 and expenses on one of the islands was reduced by $340,000 after cost
reduction measures occurred in the first nine months of 1998. As a percentage of
revenue, SG&A expense decreased to 17.0 percent for the first nine months of
1998 from 19.5 percent for the same period of 1997. This percentage decrease was
primarily attributable to the decrease in SG&A expense in 1998 versus 1997 and
not to a change in sales volume.
DIVISIONAL OPERATING INCOME
The Company had an operating income of $956,000 for the first nine months of
1998, as compared to an operating loss of $4.4 million for the same period in
1997, which was affected by a charge for litigation of $4.5 million. The
Company's concrete and related products division operating income decreased to
$1.1 million during the first nine months of 1998 from $1.4 million during the
same period in 1997. This decrease was primarily attributable to the decreased
gross profit in 1998 due to higher cost of sales coupled with decreased sales
volume, and to the negative effect of Hurricane Georges.
The Company's land development contracting division had an operating income of
$245,000 during the first nine months of 1998 compared to a loss of $1.2 million
during the same period in 1997. This improvement was primarily attributable to
the type of contracts the Company has been able to obtain, combined with reduced
SG&A expense, primarily legal expenses.
OTHER INCOME
Interest income has increased due to that the Company is recognizing as income a
portion of the receipts, in excess of agreed upon amounts, from the notes
receivable due from the Government of Antigua and Barbuda. Interest expense
during the first nine months of 1998 decreased $336,000 compared to the same
period in 1997 due to a decreased loan balance and improved cash position for
part of 1998.
NET INCOME (LOSS)
The Company had a net income of $428,000 during the first nine months of 1998 as
compared to a loss of $6.0 million during the same period in 1997. The result
from 1997 was largely affected by a charge for litigation of $4.5 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally funds its working capital needs from operations and bank
borrowings. In the land development contracting business, the Company must
expend considerable funds for equipment, labor and supplies to meet the needs of
particular projects. The Company's capital needs are greatest at the start of
any new contract, since the Company generally must complete 45 to 60 days of
work before receiving the first progress payment. In addition, as a project
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continues, a portion of the progress billing is usually withheld as retainage
until all work is complete, further increasing the need for capital. On occasion
the Company has provided long-term financing to certain customers who have
utilized its land development contracting services. The Company has also
provided financing for other business ventures from time to time. With respect
to the Company's concrete and related products division, accounts receivable are
typically outstanding for a minimum of 60 days and in some cases much longer.
The nature of the Company's business requires a continuing investment in plant
and equipment, along with the related maintenance and upkeep costs of such
equipment.
The Company has funded many of these expenditures out of its current working
capital. However, notwithstanding the foregoing and after factoring in the
Company's obligations as set forth below, management believes that the Company's
cash flow from operations, existing working capital and funds available from
lines of credit will be adequate to meet the Company's anticipated needs for
operations during the next twelve months.
As of September 30, 1998, the Company's liquidity and capital resources included
cash and cash equivalents of $1.1 million and working capital of $8.4 million.
Included in working capital is approximately $2.9 million of assets held for
sale. Although management's intention is to sell these assets within the next 12
months, there can be no assurance that all assets will be sold. As of September
30, 1998, total outstanding liabilities were $40.5 million as compared to $43.6
million as of December 31, 1997. As of September 30, 1998, the Company had
available lines of credit totaling $287,000.
Cash flows provided by operating activities for the nine months ended September
30, 1998 was $2.9 million compared with $1.2 million for the same period in
1997. The primary use of cash for operating activities during the nine months
ended September 30, 1998 was a decrease in accounts payable and accruals of $1.5
million, and an increase of $1.7 million in costs in excess of billings and
estimated earnings.
Net cash used in investing activities was $1.1 million in the first nine months
of 1998. Purchases of property, plant, and equipment were $6.3 million. The
purchases were almost completely financed through equipment financing. Some of
this financing included refinancing of equipment acquired in December 1997.
Proceeds from sale of property, plant and equipment were $3.7 million and
repayment of debt was $8.8 million.
The Company turned its third quarter ending accounts receivable approximately
6.7 times, compared to 5.3 times for both of the fiscal years 1997 and 1996. The
improvement in the accounts receivable turnover ratio is a result of increased
collection efforts and more stringent credit control.
The Company entered into a credit agreement with a Caribbean bank in November
1996 for a total credit of $7.0 million. One part of the credit agreement is a
term loan for $6.0 million repayable in monthly installments through November
2002. The Company had $4.2 million of the borrowings outstanding on this loan at
September 30, 1998. The second part is a revolving line of credit of $1.0
million. The credit line has been re-approved and extended until February 1999.
The Company had $800,000 outstanding under this line of credit at September 30,
1998. The interest rate on indebtedness outstanding under both loans is at a
rate variable with the prime rate. The credit agreement is collateralized by
various parcels of real property and other assets located in the United States
Virgin Islands and certain other areas. The Company was in violation of certain
loan covenants as of September 30, 1998. The bank has agreed not to accelerate
the repayment of the loan as long as the Company is current in its loan
15
<PAGE>
payments. The Company anticipates to be current in its loan payments during the
term of the loan.
The Company has a $500,000 unsecured overdraft facility from a commercial bank
in the Caribbean. The facility is due on demand and bears interest at 14.0
percent per annum. At September 30, 1998, the Company had borrowings of $413,000
outstanding under this line.
The Company has borrowed approximately $5.8 million from the Company President.
The note is unsecured and bears interest at the prime interest rate. Three
hundred thousand is due on demand and $5.5 million is due on October 1, 1999.
The President has the option of making the note due on demand should a "Change
of Control" occur. A Change of Control has occurred if a person or group
acquires 15.0 percent or more of the common stock or announces a tender offer,
the consummation of which would result in ownership by a person or group of 15.0
percent or more of the common stock.
The Company purchases equipment from time to time as needed for its ongoing
business operations. The Company is currently replacing or upgrading some
equipment used by the concrete and related products division, principally
concrete trucks and quarry equipment. The Company is also presently acquiring
heavy construction equipment for one of its current projects. This should result
in a net cash expenditure, after financing part of the equipment purchases, of
approximately $2.0 million during 1998. The Company has identified some
equipment and real property not needed for its ongoing operations and it plans
to sell those assets. The net carrying cost of these assets is $2.9 million. Any
proceeds from these sales would be used to reduce debt and provide working
capital. The Company believes it has available or can obtain sufficient
financing for most of its contemplated equipment replacements and additions.
Historically, the Company has used a number of lenders to finance a portion of
its machinery and equipment purchases on an individual asset basis. At September
30, 1998, amounts outstanding to these lenders totaled $11.8 million. These
loans are typically repaid over a three to five-year term in monthly principal
and interest installments.
A significant portion of the Company's outstanding debt bears interest at
variable rates. The Company could be negatively impacted by a substantial
increase in interest rates.
The Company has contingent obligations and has made certain guarantees in
connection with acquisitions, its participation in certain joint ventures,
certain employee and construction bonding matters and its receipt of a tax
exemption. As part of the 1995 acquisition of Societe des Carrieres de Grand
Case (SCGC), a French company operating a ready-mix concrete plant and quarry in
St. Martin, the Company agreed to pay the quarry owners (who were also the
owners of SCGC), a royalty payment of $550,000 per year through August 2000,
which at the Company's option, may be renewed for two successive five-year
periods and requires annual payments of $550,000 per year. At the end of the
fifteen-year royalty period, the Company has the option of purchasing a
fifty-hectare parcel of property for $4.4 million.
Notes receivable and accrued interest at September 30, 1998 include $10.6
million, net due the Company pursuant to certain promissory notes delivered to
the Company in connection with two construction contracts with the Government of
Antigua, $2.0 million of which is classified as a current receivable. The notes
call for both quarterly and monthly principal and interest payments until
maturity in 1997. The notes were not satisfied at maturity but the Antiguan
government has advised the Company that payments will continue until the
obligation is satisfied. The Government of Antigua has routinely made the
required quarterly payments aggregating $1.3 million per year but has made only
16
<PAGE>
some of the required monthly payments. The Company does not presently anticipate
any material decreases of payments by the Government of Antigua.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. If not addressed, such
computer systems, software products and embedded technology may be unable to
properly interpret dates beyond the year 1999, which could cause system failures
or miscalculations and lead to disruptions in the Company's activities and
operations.
During 1998 the Company has assessed its computer information system. The
majority of the Company's systems are purchased from outside vendors. Those
installed systems, which are not currently able to fully function in the Year
2000, have either new versions which are Year 2000 compliant, or the vendor has
committed to a Year 2000 compliant release in sufficient time to allow
installation and testing prior to critical cut over dates.
The Company has identified three major areas determined to be critical for
successful Year 2000 compliance: i) information systems such as PC's, networks,
batch-plant computers; ii) third party relationships, including customers,
suppliers, and government agencies; and iii) equipment which may contain
microprocessors with embedded technology.
The Company has taken an inventory of all computers and software and is planning
the changes needed for these systems to become Year 2000 compliant. The Company
is currently evaluating proposals from various vendors in respect to all of its
information system needs. The Company believes that all conversion efforts will
be completed before the end of year 1999.
The Company has initiated a Year 2000 contingency plan development process to
mitigate potential disruptions in the Company's activities and operations that
may be created by failures of critical business partners, equipment and internal
systems. Such contingency plans are expected to be developed by the third
quarter of 1999. However, the Company can provide no assurance that it will
correctly anticipate the level, impact or duration of non-compliance by critical
business partners, equipment or internal systems, or that contingency plans will
be sufficient to mitigate the impact of non-compliance.
There can be no assurance that neither the Company's systems nor the computer
systems of other companies with whom the Company conducts business will be Year
2000 compliant prior to December 31, 1999. Management has determined that there
will be no material impact of making these required system changes to the
Company's consolidated financial position, results of operations or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Management does not anticipate a
significant impact of the adoption of SFAS No. 130 on the Company's consolidated
financial position, results of operations or cash flows.
17
<PAGE>
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that these enterprises report
selected information about operating segments in interim financial reports to
shareholders. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. Management does not anticipate a significant
impact of the adoption of SFAS No. 131 on the Company's consolidated financial
position, results of operations or cash flows.
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS. SFAS No. 132 standardizes the
disclosure requirements of SFAS No. 87 and SFAS No. 106 to the extent
practicable and recommends a parallel format for presenting information about
pensions and other postretirement benefits. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997. Management does not anticipate a
significant impact of the adoption of SFAS No. 132 on the Company's consolidated
financial position, results of operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133 requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains and losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 is effective for fiscal
years beginning after June 15, 1999, with earlier adoption encouraged.
Management does not anticipate a significant impact of the adoption of SFAS 133
on the Company's consolidated financial position, results of operations or cash
flows.
18
<PAGE>
II. OTHER INFORMATION
- ---------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in routine
litigation arising in the ordinary course of its business,
primarily related to its contracting activities.
The Company is subject to certain Federal, state and local
environmental laws and regulations. Management believes
that the Company is in compliance with all such laws and
regulations. Compliance with environmental protection laws
has not had a material adverse impact on the Company's
consolidated financial condition, results of operations or
cash flows in the past and is not expected to have a
material adverse impact in the foreseeable future.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company was as of September 30, 1998 in violation of
certain loan covenants on debt to a bank. The bank has
agreed not to accelerate the repayment of the loans as long
as the Company is current in its loan payments. The Company
is current in its payments as of September 30, 1998.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the
Company during the first three months of fiscal
1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: NOVEMBER 13, 1998 By: /S/ JAN A. NORELID
----------------- ------------------------
Jan A. Norelid
Vice President
20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,055,297
<SECURITIES> 0
<RECEIVABLES> 17,719,186
<ALLOWANCES> (4,779,524)
<INVENTORY> 4,956,043
<CURRENT-ASSETS> 24,597,271
<PP&E> 70,879,776
<DEPRECIATION> (29,080,376)
<TOTAL-ASSETS> 83,701,976
<CURRENT-LIABILITIES> 16,156,407
<BONDS> 0
0
0
<COMMON> 449,894
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 83,701,976
<SALES> 48,430,237
<TOTAL-REVENUES> 48,430,237
<CGS> 39,254,976
<TOTAL-COSTS> 39,254,976
<OTHER-EXPENSES> 6,994,947
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,624,722
<INCOME-PRETAX> 555,592
<INCOME-TAX> 127,871
<INCOME-CONTINUING> 427,721
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 427,721
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
</TABLE>
