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, 1999
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 10, 1999 the number of shares outstanding of the Registrant's
Common Stock was 4,498,935.
<PAGE>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
INDEX
PAGE NUMBER
-----------
Part I. Financial Information:
Condensed Consolidated Balance Sheets
September 30, 1999 (unaudited) and
December 31, 1998...................................... 3-4
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999
and 1998 (unaudited)................................... 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(unaudited)............................................ 6-7
Notes to Condensed Consolidated Financial Statements... 8-9
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations............................................. 10-17
Part II. Other Information...................................... 18-19
2
<PAGE>
PART I. FINANCIAL INFORMATION
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 861,226 $ 899,605
Cash equivalents 1,064,479 1,359,253
Receivables, net 11,986,801 12,611,437
Costs in excess of billings
and estimated earnings 580,064 710,557
Inventories 4,841,378 4,468,718
Assets held for sale 8,722,458 2,868,922
Other 487,429 398,592
------------ ------------
Total current assets 28,543,835 23,317,084
Property, plant and equipment
Land 1,920,538 2,167,318
Buildings 2,372,240 3,560,545
Leasehold interests 3,670,339 6,632,206
Equipment 52,428,534 58,340,451
Furniture and fixtures 772,616 642,314
Construction in process 2,013,306 406,344
------------ ------------
63,177,573 71,749,178
Less accumulated depreciation (24,668,599) (28,715,682)
------------ ------------
38,508,974 43,033,496
Investments in unconsolidated
joint ventures and affiliates 269,181 237,370
Receivables, net 9,466,276 13,173,472
Intangible assets, net of
accumulated amortization 1,047,444 1,165,692
Other assets 1,272,605 1,503,005
------------ ------------
Total assets $ 79,108,315 $ 82,430,119
============ ============
(Continued)
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(Continued)
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade and other $ 4,943,620 $ 6,917,119
Accrued expenses and other liabilities 1,798,971 3,186,375
Notes payable to banks 1,150,000 88,108
Current installments of long-term debt 6,686,404 5,539,151
Billings in excess of costs and
estimated earnings 197,797 315,007
Income taxes 376,203 361,071
------------ ------------
Total current liabilities 15,152,995 16,406,831
Long-term debt, excluding current
installments and notes payable to banks 17,170,904 18,153,451
Minority interest in consolidated
subsidiaries 1,081,448 1,762,809
Deferred income taxes 387,654 399,056
Other liabilities 1,648,570 2,067,413
------------ ------------
Total liabilities 35,441,571 38,789,560
------------ ------------
Stockholders' equity:
Common stock 449,894 449,894
Treasury stock (78,132) --
Additional paid-in capital 12,064,133 12,064,133
Accumulated other comprehensive income-
cumulative translation adjustment (1,275,112) (859,376)
Retained earnings 32,505,961 31,985,908
------------ ------------
Total stockholders' equity 43,666,744 43,640,559
------------ ------------
Total liabilities and stockholders' equity $ 79,108,315 $ 82,430,119
============ ============
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Concrete and related products revenue $ 13,976,050 $ 12,240,876 $ 42,897,787 $ 38,000,309
Contracting revenue 2,866,006 4,908,014 10,604,325 10,058,542
Other revenue -- -- -- 371,386
------------ ------------ ------------ ------------
Total revenue 16,842,056 17,148,890 53,502,112 48,430,237
Cost of concrete and related products revenue 11,930,686 10,015,008 35,059,938 30,484,462
Cost of contracting revenue 2,444,278 3,921,682 8,964,862 8,524,426
Cost of other revenue -- (1,474) -- 246,088
------------ ------------ ------------ ------------
Gross profit 2,467,092 3,213,674 9,477,312 9,175,261
Selling, general and administrative expenses 2,736,587 2,778,852 9,060,334 8,219,376
Credit for litigation (635,603) -- (1,054,602) --
------------ ------------ ------------ ------------
Operating income 366,108 434,822 1,471,580 955,885
Other income (deductions)
Joint venture equity income (loss) 16,400 -- (13,600) --
Gain (loss) on sale of property and equipment (241,743) 73,138 (133,231) 119,134
Interest expense (568,473) (525,629) (1,822,637) (1,624,722)
Interest and other income 283,438 290,409 654,497 1,107,655
Minority interest 205,012 7,215 681,361 (2,360)
------------ ------------ ------------ ------------
(305,366) (154,867) (633,610) (400,293)
------------ ------------ ------------ ------------
Income before income taxes 60,742 279,955 837,970 555,592
Income tax (expense) benefit (131,149) 42,309 (317,917) (127,871)
------------ ------------ ------------ ------------
Net income (loss) (70,407) 322,264 520,053 427,721
============ ============ ============ ============
Basic (loss) earnings per share $ (0.02) $ 0.07 $ 0.12 $ 0.10
============ ============ ============ ============
Diluted (loss) earnings per share $ (0.02) $ 0.07 $ 0.11 $ 0.09
============ ============ ============ ============
Weighted average number of shares outstanding-basic 4,473,935 4,498,935 4,489,361 4,498,935
============ ============ ============ ============
Weighted average number of shares-diluted 4,473,935 4,515,277 4,560,290 4,527,604
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 520,053 $ 427,721
Adjustments to reconcile net income
to net cash provided
by operating activities:
Depreciation and amortization 4,788,656 4,408,761
Provision for doubtful accounts and notes 169,194 (163,937)
Loss (gain) on sale of equipment 133,231 (119,134)
Credit for litigation (1,054,602) --
Joint venture equity loss 13,600 --
Minority interest (income) loss (681,361) 2,360
Changes in operating assets and liabilities:
Decrease in receivables, net 262,870 992,781
Decrease (increase) in costs in excess
of billings and estimated earnings 130,493 (1,737,748)
Increase in inventories (375,480) (176,922)
(Increase) decrease in other current assets (88,835) 302,370
(Increase) decrease in other assets (95,571) 90,822
Decrease in accounts payable, trade
and other (2,247,137) (1,532,333)
(Decrease) increase in billings in
excess of costs and estimated earnings (117,210) 870,342
Increase (decrease) in income taxes
payable 162,280 (112,374)
Increase (decrease)in other liabilities 115,880 (328,185)
----------- -----------
Net cash provided by operating activities 1,636,061 2,924,524
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (6,937,355) (6,308,764)
Proceeds from disposition of property,
plant and equipment 493,387 3,698,785
Payments received on notes 3,387,699 2,126,979
Investment in affiliates (45,411) (112,020)
Advances from affiliates -- 18,166
Issuance of notes (16,000) (514,135)
Purchase of treasury stock (78,132) --
----------- -----------
Net cash used in investing activities $(3,195,812) $(1,090,989)
----------- -----------
</TABLE>
(Continued)
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from debt $ 6,841,300 $ 6,180,803
Principal payments on debt (6,676,594) (8,788,563)
Net borrowings from bank credit line/overdrafts 1,061,892 828,154
----------- -----------
Net cash provided by (used in) financing activities 1,226,598 (1,779,606)
----------- -----------
Net (decrease) increase in cash and cash equivalents (333,153) 53,929
Cash and cash equivalents, beginning of period 2,258,858 1,001,368
----------- -----------
Cash and cash equivalents, end of period $ 1,925,705 $ 1,055,297
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 1,808,423 $ 1,722,397
=========== ===========
Income taxes $ 155,636 $ 124,875
=========== ===========
Supplemental disclosures of non-cash investing and financing activities:
Property, plant and equipment transferred to assets held for sale $ 6,035,102 $ 197,584
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The condensed 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, 1998.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the Company's financial
position as of September 30, 1999 and the results of its operations for the
three and nine months ended September 30, 1999 and 1998 and the cash flows for
the nine months ended September 30, 1999 and 1998.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year.
EARNINGS PER SHARE
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 524,300 and 146,300 shares of common stock, at prices
ranging from $1.50 to $2.94 per share, were outstanding for the quarters ended
September 30, 1999 and 1998, respectively. For the quarter ended September 30,
1999 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 320,475 and 365,000 shares of common stock, at prices ranging from
$3.00 to $14.00 per share, were outstanding for the quarters ended September 30,
1999 and 1998, 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 1998 Form 10-K.
COMPREHENSIVE INCOME
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 are displayed with the same prominence as other annual
8
<PAGE>
financial statements. The Company's total comprehensive income, comprised of
translation adjustments, for the nine month period ended September 30, 1999 and
1998 were as follows:
1999 1998
--------- ---------
Net income $ 520,053 $ 427,721
Other comprehensive loss (415,736) (68,617)
--------- ---------
Total comprehensive income $ 104,317 $ 359,104
========= =========
SEGMENT REPORTING
The following sets forth the revenue and income before income taxes for each of
the Company's business segments for the nine months ended September 30, 1999 and
1998.
1999 1998
------------ ------------
Revenue (including intersegment)
Concrete and related products $ 43,239,243 $ 38,195,158
Contracting 11,139,980 10,058,542
Other -- 371,386
Elimination of intersegment revenue (877,111) (194,849)
------------ ------------
Total revenue 53,502,112 48,430,237
============ ============
Operating income (loss):
Concrete and related products 400,000 1,075,000
Contracting 609,000 245,000
Other -- 117,000
Credit for litigation 1,055,000 --
Unallocated corporate overhead (592,420) (481,115)
------------ ------------
1,471,580 955,885
Total operating income
Other deductions (633,610) (400,293)
------------ ------------
Income before income taxes 837,970 555,592
============ ============
9
<PAGE>
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.
PROPOSED DISPOSITION OF CERTAIN ASSETS
The Company gave an international leading cement producer a 30-day option to
purchase all of the Company's bulk cement terminals and cement bagging
facilities for $22.0 million, with a net book value of $4.4 million. The option
holder paid the Company a non-refundable fee of $1.0 million on October 1, 1999
for this option. At the expiration of the option, the two parties agreed to
extend the option period for an additional, refundable payment of $6.0 million,
leaving a balance to be paid of $15.0 million. The two parties are currently
working diligently to receive all required government and other consents to the
transaction. The Company believes that the final agreement will be signed by the
end of November and that a closing of the transaction will take place within 90
days subsequent to the signing of the agreement. However, there can be no
assurances that the agreement will be signed or that the transaction will be
closed.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE
The Company's revenue during the third quarter of 1999 was $16.8 million as
compared to $17.1 million during the same period in 1998. This 1.8 percent
decrease was primarily due to a decrease in contracting revenue offset to a
lesser extent by an increase in concrete and related products revenue.
10
<PAGE>
The Company's concrete and related products division revenue increased 14.2
percent to $14.0 million during the third quarter of 1999 as compared to $12.2
million for the same period in 1998, primarily as a result of an increase in
demand for this division's products on certain Caribbean islands, offset to a
lesser extent by decreased demand on other islands. The Company cannot currently
determine whether demand for this division's products will increase, decrease or
remain the same throughout 1999.
Revenue from the Company's land development contracting division decreased by
41.6 percent to $2.9 million during the third quarter of 1999 as compared to
$4.9 million for the same period in 1998. The Company's backlog of unfilled
portions of land development contracts at September 30, 1999 was $12.0 million,
involving 6 projects. The backlog of one project in the Bahamas amounts to $7.4
million. A Company subsidiary, the President, and a director of the Company are
minority partners of the entity developing this project. The project has not yet
received its total financing and completion of the project is pending on
additional financing, however, there can be no assurances that financing can be
obtained. The Company is negotiating a change order to the contract of $9.0
million that the Company believes will be signed in the fourth quarter. Upon
approval, the Company would have a significant increase in the revenue and gross
margin associated with this contract, which could have a significant impact on
the results of the fourth quarter. The Company expects that part of the backlog
outstanding at September 30, 1999 will be completed by the end of 1999.
COST OF CONCRETE AND RELATED PRODUCTS
Cost of concrete and related products as a percentage of concrete and related
products revenue increased to 85.4 percent during the third quarter of 1999 from
81.8 percent for the same period in 1998. This increase was primarily
attributable to increased cost on two of the islands and to changes in the mix
of products sold in the third quarter of 1999 compared to 1998.
COST OF CONTRACTING
Cost of contracting as a percentage of land development contracting revenue
increased to 85.3 percent during the third quarter of 1999 from 79.9 percent
during the same period in 1998. This increase is primarily attributable to the
decrease in contract volume and 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 1.5
percent to $2.7 million for the third quarter of 1999 from $2.8 million for the
same period in 1998. As a percentage of revenue, SG&A expense remained the same
at 16.2 percent during the third quarter as compared to the same period last
year.
CREDIT FOR LITIGATION
In the third quarter the Company recognized a reduction in the accrual for
litigation, due to the claimants were denied the multiplier effect on the legal
fee award in the Fore Golf lawsuit. The Company also recognized income due to
the settlement of the lawsuit with GOAA. The credit for litigation for the
quarter was $636,000. See also Item 1, Legal Proceedings.
11
<PAGE>
DIVISIONAL OPERATING INCOME
The Company had an operating income of $366,000 for the third quarter of 1999,
as compared to $435,000 for the same period in 1998. The Company's concrete and
related products division operating loss was $203,000 during the third quarter
of 1999 compared to $24,000 during the same period in 1998. This increase is
primarily attributable to decreased gross profit of $179,000, mainly due to
increased production costs in Puerto Rico.
The Company's land development contracting division had an operating income of
$131,000 during the third quarter of 1999 compared to $598,000 during the same
period in 1998. This decrease was primarily attributable to the reduction in
sales volume and to varying profitability levels of individual contracts and the
stage of completion of such contracts.
OTHER INCOME
Minority interest income amounted to $205,000 due to losses in a consolidated
joint venture. Interest income decreased in the third quarter of 1999 compared
to the same period in 1998, primarily due to the Company recognizing less
interest income on the notes receivable due from the Government of Antigua and
Barbuda.
NET INCOME (LOSS)
The Company had a net loss of $70,000 during the third quarter of 1999 as
compared to an income of $322,000 during the same period in 1998. The Company
recognized income from a credit for litigation in the third quarter of 1999 of
$636,000.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE
The Company's revenue during the first nine months of 1999 was $53.5 million as
compared to $48.4 million during the same period in 1998. This 10.5 percent
increase was due to increases in concrete and related products revenue.
The Company's concrete and related products division revenue increased 12.9
percent to $42.9 million during the first nine months of 1999 as compared to
$38.0 million for the same period in 1998, primarily as a result of an increase
in demand for this division's products on Antigua, St. Martin, and Tortola,
offset to a lesser extent by decreased demand on other islands. The Company
cannot currently determine whether demand for this division's products will
increase, decrease or remain the same throughout 1999.
Revenue from the Company's land development contracting division increased by
5.4 percent to $10.6 million during the first nine months of 1999 as compared to
$10.1 million for the same period in 1998. This increase is primarily due to the
Company continuing various contracts that were started during the prior quarters
and to revenue on a contract in the Bahamas. The Company's backlog of unfilled
portions of land development contracts at September 30, 1999 was $12.0 million,
involving 6 projects. The backlog of the project in the Bahamas amounts to $7.4
million. A Company subsidiary, the President, and a director of the Company are
minority partners of the entity developing this project. The project has not yet
12
<PAGE>
received its total financing and completion of the project is pending on
additional financing, however, there can be no assurances that financing can be
obtained. The Company is negotiating a change order to the contract of $9.0
million that the Company believes will be signed in the fourth quarter. Upon
approval, the Company would have a significant increase in the revenue and gross
margin associated with this contract, which could have a significant impact on
the results of the fourth quarter. The Company expects that part of the backlog
outstanding at September 30, 1999 will be completed by the end of 1999. The
Company cannot currently determine whether the contract revenue will increase,
decrease or remain the same throughout 1999.
COST OF CONCRETE AND RELATED PRODUCTS
Cost of concrete and related products as a percentage of concrete and related
products revenue increased to 81.7 percent during the first nine months of 1999
from 80.2 percent for the same period in 1998. This increase was primarily
attributable to higher production cost on some islands and to changes in the mix
of products sold in the third quarter of 1999 compared to 1998.
COST OF CONTRACTING
Cost of contracting as a percentage of land development contracting revenue
decreased to 84.5 percent during the first nine months of 1999 from 84.7 percent
during the same period in 1998. This decrease 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") increased by 10.2
percent to $9.1 million for the first nine months of 1999 from $8.2 million for
the same period in 1998. As a percentage of revenue, SG&A expense decreased to
16.9 percent for the first nine months in 1999 compared to 17.0 percent during
the third quarter compared to the same period last year.
CREDIT FOR LITIGATION
The Company recognized during the first nine months of 1999 a credit for
litigation totaling $1.1 million. This was a result of an order from a Florida
circuit court requiring another party to pay the Company prejudgment interest
and subsequent settlement of that case and a reduction of the accrual for the
Fore Golf litigation. See also Item 1, Legal Proceedings.
DIVISIONAL OPERATING INCOME
The Company had an operating income of $1.5 million for the first nine months of
1999, as compared to $956,000 for the same period in 1998. The Company's
concrete and related products division operating income was $400,000 during the
first nine months of 1999 compared to $1.1 million during the same period in
1998. This decrease is primarily attributable to lower worker's compensation
expense in 1998 and increased cost in 1999 for doubtful accounts for the
concrete and related products division, offset to a lesser extent by an increase
in gross profit in 1999.
The Company's land development contracting division had an operating income of
$609,000 during the first nine months of 1999 compared to $245,000 during the
same period in 1998. This improvement was primarily attributable to a reduction
in SG&A expenses. There was also an expense taken on a large contract in 1998.
13
<PAGE>
OTHER INCOME
Minority interest income increased due to losses in a consolidated joint
venture. Net interest income/expense increased to an expense of $1.2 million in
1999 from $517,000 in 1998, primarily due to the Company recognizing less
interest income on the receivable due from the Government of Antigua and Barbuda
and to a lesser extent to an increase of interest expense due to increased
borrowings and higher interest rates.
NET INCOME
The Company had a net income of $520,000 during the first nine months of 1999 as
compared to $428,000 during the same period in 1998. The Company recognized
income from a credit for litigation during 1999 of $1.1 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
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, 1999, the Company's liquidity and capital resources included
cash and cash equivalents of $1.9 million and working capital of $13.4 million.
Included in working capital is approximately $8.7 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, 1999, total outstanding liabilities were $35.4 million. As of September 30,
1999, the Company had available lines of credit totaling $550,000.
Cash flows provided by operating activities for the nine months ended September
30, 1999 was $1.6 million compared with $2.9 million in 1998. The primary use of
cash for operating activities during the nine months ended September 30, 1999
was a decrease in accounts payable and accruals of $2.2 million.
Net cash used in investing activities was $3.2 million in the first nine months
of 1999. Purchases of property, plant, and equipment were $6.9 million. The
purchases were almost completely financed. Proceeds from sale of property, plant
14
<PAGE>
and equipment were $493,000 and repayment of debt was $6.7 million. Receipts on
notes receivables were $3.4 million.
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 $3.2 million of the borrowings outstanding on this loan at
September 30, 1999. The second part is a revolving line of credit of $1.0
million. The credit line has been re-approved and extended until February 2000.
The Company had $950,000 outstanding under this line of credit at September 30,
1999. 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 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, 1999, the Company had no borrowings
outstanding under this line.
The Company has borrowed approximately $3.9 million from the Company President.
The note is unsecured and bears interest at 10.0 percent. Three hundred thousand
is due on demand and $3.6 million is due on October 1, 2000. 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 has borrowed $1.7 million from one of its directors
and his family. The notes are secured by equipment and bear interest at 10.0
percent. The notes have equal monthly payments over 5 years.
The Company issued a loan in November 1999 for $1.0 million to the project in
the Bahamas, in which the President and one of the Company's directors are
minority partners. The loan is secured by equipment.
The Company purchases equipment from time to time as needed for its ongoing
business operations. The Company is currently replacing or upgrading some
equipment (principally concrete trucks and quarry equipment) used by the
concrete and related products division. This should result in a net cash
expenditure, after financing part of the equipment purchases, of approximately
$2.5 million during 1999. 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 $8.7 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 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, 1999, amounts
outstanding to these lenders totaled $17.5 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 is negotiating a sale of the Company's bulk cement terminal assets
for a total of $22.0 million. If this sale is completed, the Company will reduce
its outstanding debt substantially and thus will reduce its interest expense. At
15
<PAGE>
the same time, the Company will be paying a higher cost for the cement the
Company uses in its ready-mix and block production facilities. The net effect on
the Company's earnings of this transaction cannot, at this point, be determined.
Receivables at September 30, 1999 include $9.1 million, net, of promissory notes
and bonds due from the Government of Antigua, $2.0 million of which is
classified as a current receivable. The gross balance of the notes and bonds is
$34.9 million. The notes called for both quarterly and monthly principal and
interest payments until maturity in 1997. The notes were not satisfied at
maturity but the Antiguan government has advised the Company that payments from
agreed upon sources will continue until the obligation is satisfied. The agreed
upon sources are lease proceeds from a rental of a United States military base,
fuel tax revenues and proceeds from a real estate venture. Cash receipts, for
the nine months in 1999 from agreed upon sources, were $1.8 million.
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.
The Company has identified three major areas determined to be critical for
successful Year 2000 compliance:
o Information systems such as PCs, networks, batch-plant
computers
o Third party relationships, including customers, suppliers, and
government agencies
o Equipment which may contain microprocessors with embedded
technology
The Company has taken an inventory of all computers and software and the Company
has started planning the changes needed for these systems to become Year 2000
compliant. The Company has implemented a new information system for its
financial reporting. The Company has selected a new distribution system for the
island subsidiaries. The current systems on the islands are being modified and
the Company anticipates to be compliant before the end of 1999.
The Company is in the process of contacting suppliers and customers regarding
their Year 2000 compliance status. The Company's contact includes questioning
them about imbedded micro-processors. The Company has received responses from
the majority of its vendors. The responses vary from being compliant to
estimated time frames when they are going to be compliant.
The Company has initiated a Year 2000 contingency plan development process to
mitigate potential disruptions in its activities and operations that may be
created by failures of critical business partners, equipment and internal
systems. 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.
The Company estimates to spend around $350,000 on the Year 2000 project. This
consists of PCs, software and other related costs.
16
<PAGE>
The Company cannot assure that its systems or 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 making the required
system changes will have no material impact on the Company's consolidated
financial position, results of operations or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
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. The effective date of SFAS No. 133
was delayed by SFAS No. 137 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF SFAS No. 133, to fiscal years
beginning after June 15, 2000. 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.
REPURCHASE OF COMPANY SHARES
On May 14, 1999 the Company announced its plan to purchase Company shares in the
open market for up to $500,000. The timing of share repurchases, the actual
number of shares purchased and the price to be paid will depend upon the
availability of shares, the prevailing market prices and other considerations
which may in the opinion of the Board of Directors or management affect the
advisability of purchasing Devcon shares. In June the Company purchased 25,000
shares for a cost of $3.13 each, and additional 16,800 shares in October for an
average cost of $4.72.
17
<PAGE>
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 8, 1999, a final judgment was entered in favor of the Company
and against the Greater Orlando Aviation Authority ("GOAA") in the
amount of $542,688. On May 7, 1999, the Florida circuit court awarded
prejudgment interest on the judgment amount from August 8, 1995 until
paid. The Company filed an appeal on the underlying merits of the case
to seek reimbursement of additional costs and profit in connection with
the construction project, which was performed between 1992 and 1995. On
August 20, 1999, the Company settled this litigation with GOAA and was
paid of total of $850,000.
In 1992, Fore Golf, Inc. sued the Company in the Ninth Judicial
Circuit, Orange County, Florida, Case No. CI-92-5289. The Company was
sued by Fore Golf, Inc. for work which this subcontractor allegedly
performed in 1990 and 1991 during construction of two golf courses at
Disney World in Orlando, Florida, the alleged unpaid contract balance
in connection with this project, and inefficiency costs. In June 1997,
the court issued an order establishing liability and damages against
the Company. The Court entered a final judgment in favor of the
plaintiff for damages and prejudgment interest. Subsequently, the trial
court also awarded the plaintiff attorneys' fees. The Company accrued a
total of $4.5 million in 1997. The Company posted a bond for the
damages, prejudgment interest and plaintiff's attorneys' fees. This
bond is personally guaranteed by the Company's President. The Company
settled its lawsuit with Fore Golf, Inc. and its creditors in March
1999. The settlement called for a cash payment of approximately
$300,000 and aggregate payments of $460,000 over a period of 4 years.
The Company settled on payment terms with the lawyers of Fore Golf
during the third quarter of 1999 and their request for hearing to
receive a multiplier on the lawyer's fee award in the Florida Supreme
Court was denied in October of 1999.
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
18
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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
third quarter of fiscal 1999.
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 15, 1999 By: /S/ JAN A. NORELID
------------------------
Jan A. Norelid
Vice President
20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 1,925,705
<SECURITIES> 0
<RECEIVABLES> 16,570,442
<ALLOWANCES> (4,583,641)
<INVENTORY> 4,841,378
<CURRENT-ASSETS> 28,543,835
<PP&E> 63,177,573
<DEPRECIATION> (24,668,599)
<TOTAL-ASSETS> 78,841,315
<CURRENT-LIABILITIES> 15,152,995
<BONDS> 0
0
0
<COMMON> 449,894
<OTHER-SE> 10,710,889
<TOTAL-LIABILITY-AND-EQUITY> 78,841,315
<SALES> 53,502,112
<TOTAL-REVENUES> 53,502,112
<CGS> 44,024,800
<TOTAL-COSTS> 44,024,800
<OTHER-EXPENSES> 6,816,705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,822,637
<INCOME-PRETAX> 837,970
<INCOME-TAX> 317,917
<INCOME-CONTINUING> 520,053
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 520,053
<EPS-BASIC> .12
<EPS-DILUTED> .11
</TABLE>
