SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 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
June 30, 1999 and December 31, 1998................... 3-4
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 1999 and 1998..... 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998............... 6-7
Notes to Condensed Consolidated Financial Statements.. 8-9
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations............................................ 10-16
Part II. Other Information..................................... 17-19
2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------------------------------------
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 1,644,983 $ 899,605
Cash equivalents 1,539,479 1,359,253
Receivables, net 12,403,854 12,611,437
Costs in excess of billings
and estimated earnings 326,123 710,557
Inventories 4,386,179 4,468,718
Assets held for sale 2,711,517 2,868,922
Other 873,393 398,592
----------- -----------
Total current assets 23,885,528 23,317,084
Property, plant and equipment
Land 2,168,685 2,167,318
Buildings 3,548,821 3,560,545
Leasehold interests 6,710,008 6,632,206
Equipment 58,198,154 58,340,451
Furniture and fixtures 747,606 642,314
Construction in process 3,197,138 406,344
----------- -----------
74,570,412 71,749,178
Less accumulated depreciation (29,841,377) (28,715,682)
----------- -----------
44,729,035 43,033,496
Investments in unconsolidated
joint ventures and affiliates 236,370 237,370
Receivables, net 10,312,738 13,173,472
Intangible assets, net of
accumulated amortization 1,036,475 1,165,692
Other assets 1,461,141 1,503,005
----------- -----------
Total assets $81,661,287 $82,430,119
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade and other $ 5,483,260 $ 6,917,119
Accrued expenses and other liabilities 2,201,868 3,186,375
Notes payable to banks 700,000 88,108
Current installments of long-term debt 6,772,044 5,539,151
Billings in excess of costs and
estimated earnings 477,304 315,007
Income taxes 322,737 361,071
----------- -----------
Total current liabilities 15,957,213 16,406,831
Long-term debt, excluding current
installments and notes payable to banks 18,092,303 18,153,451
Minority interest in consolidated
subsidiaries 1,286,460 1,762,809
Deferred income taxes 399,056 399,056
Other liabilities 2,358,738 2,067,413
----------- -----------
Total liabilities 38,093,770 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 (1,444,745) (859,376)
Retained earnings 32,576,367 31,985,908
----------- -----------
Total stockholders' equity 43,567,517 43,640,559
----------- -----------
Total liabilities and stockholders' equity $81,661,287 $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 Six Months Ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Concrete and related
products revenue $14,965,896 $13,271,683 $28,921,738 $25,759,433
Contracting revenue 3,458,907 3,400,954 7,738,320 5,150,529
Other revenue - - - 371,386
----------- ----------- ----------- -----------
Total revenue 18,424,803 16,672,637 36,660,058 31,281,348
Cost of concrete and
related products revenue (11,825,083) (10,622,531) (23,129,253) (20,469,456)
Cost of contracting revenue (2,809,097) (2,503,822) (6,520,585) (4,602,744)
Cost of other revenue - (1,825) - (247,562)
----------- ----------- ----------- -----------
Gross profit 3,790,623 3,544,459 7,010,220 5,961,586
Selling, general and
administrative expenses (3,004,033) (2,902,166) (6,323,749) (5,440,523)
Credit for litigation - - 419,000 -
----------- ----------- ----------- -----------
Operating income 786,590 642,293 1,105,471 521,063
Other income (deductions)
Joint venture
equipment loss (30,000) - (30,000) -
Gain (loss) on sale of
property and equipment 38,104 (20,573) 108,512 45,997
Interest expense (581,794) (578,819) (1,254,165) (1,099,093)
Interest and other income 175,895 668,598 371,059 817,245
Minority interest 177,534 (9,575) 476,349 (9,575)
----------- ----------- ------------ -----------
(220,261) 59,631 (328,245) (245,426)
Income before
income taxes 566,329 701,924 777,226 275,637
Income tax expense (102,967) (250,374) (186,767) (170,179)
----------- ----------- ------------ -----------
Net income $ 463,362 $ 451,550 $ 590,459 $ 105,458
=========== =========== ============ ===========
Basic earnings per share $ 0.10 $ 0.10 $ 0.13 $ 0.02
=========== =========== ============ ===========
Diluted earnings per share $ 0.10 $ 0.10 $ 0.13 $ 0.02
=========== =========== ============ ===========
Weighted average number of
shares outstanding-basic 4,495,213 4,498,935 4,497,074 4,498,935
=========== =========== ============ ===========
Weighted average number of
shares-diluted 4,579,947 4,524,722 4,540,517 4,533,768
=========== =========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months June 30, 1999 and 1998
(Unaudited)
1999 1998
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 590,459 $ 105,458
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Depreciation and amortization 3,129,467 2,918,395
Provision for doubtful accounts and notes 195,779 (217,162)
Gain on sale of equipment (108,512) (45,997)
Credit for litigation (419,000) -
Joint venture equity loss 30,000 -
Minority interest (income) loss (476,349) 9,575
Changes in operating assets and liabilities:
(Increase) decrease in receivables, net (92,290) 293,718
Decrease (increase) in costs in excess
of billings and estimated earnings 384,433 (858,388)
Decrease in inventories 65,703 254,178
Increase in other current assets (474,800) (102,793)
Increase in other assets (30,576) (2,932)
Decrease in accounts payable, trade
and other (1,813,989) (1,059,290)
Increase in billings in
excess of costs and estimated earnings 162,297 371,392
(Decrease) increase in income taxes
payable (38,334) 44,135
Increase (decrease)in other liabilities 291,326 (316,171)
------------ -----------
Net cash provided by operating activities 1,395,614 1,394,118
------------ -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (5,512,946) (4,313,764)
Proceeds from disposition of property,
plant and equipment 500,426 3,473,105
Payments received on notes 2,882,005 1,165,236
Investment in affiliates (29,000) (112,020)
Advances from affiliates - 5,561
Issuance of notes (16,000) (479,135)
Purchase of treasury stock (78,132) -
------------ -----------
Net cash used in investing activities $ (2,253,647) $ (261,017)
------------ -----------
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998
(Unaudited)
1999 1998
------------ ------------
Cash flows from financing activities:
Proceeds from debt $ 5,134,086 $ 5,029,879
Principal payments on debt (3,962,341) (7,008,558)
Net borrowings from bank credit
line/overdrafts 611,892 306,795
----------- -----------
Net cash provided by (used in)
financing activities 1,783,637 (1,671,884)
----------- -----------
Net increase (decrease)in cash
and cash equivalents 925,604 (538,783)
Cash and cash equivalents,
beginning of period 2,258,858 1,001,368
----------- -----------
Cash and cash equivalents,
end of period $ 3,184,462 $ 462,585
=========== ===========
Supplemental disclosures of
cash flow information
Cash paid for:
Interest $ 1,286,376 $ 1,163,717
=========== ===========
Income taxes $ 83,333 $ 124,140
=========== ===========
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
DEVCON INTERNATIONAL CORP.
AND SUBSIDIARIES
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 necessary to present fairly the
Company's financial position as of June 30, 1999 and the results of its
operations and cash flows for the three and six months ended June 30, 1999 and
1998.
The results of operations for the six months ended June 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 486,300 and 171,300 shares of common stock, at prices
ranging from $1.50 to $3.00 per share, were outstanding for the quarters ended
June 30, 1999 and 1998, respectively. Options to purchase 350,475 and 342,475
shares of common stock, at prices ranging from $2.94 to $14.00 per share, were
outstanding for the quarters ended June 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 is displayed with the same prominence as other annual
financial statements. The Company's total comprehensive income, comprised of
translation adjustments, for the six month period ended June 30, 1999 and 1998
were as follows:
8
<PAGE>
1999 1998
-------- --------
Net income $590,459 $451,550
Other comprehensive loss (585,369) -
-------- --------
Total comprehensive income $ 5,090 $451,550
======== ========
SEGMENT REPORTING
The following sets forth the revenue and income before income taxes for each of
the Company's business segments for the six months ended June 30, 1999 and 1998.
1999 1998
---------- ----------
Revenue (including intersegment)
Concrete and related products $29,487,186 $25,845,850
Contracting 7,937,220 5,150,529
Other - 371,386
Elimination of intersegment revenue (764,348) (86,417)
----------- -----------
Total revenue $36,660,058 $31,281,348
=========== ===========
Operating income (loss):
Concrete and related products $ 603,000 $ 1,098,000
Contracting 478,000 (353,000)
Other - 118,000
Credit for litigation 419,000 -
Unallocated corporate overhead (394,529) (341,937)
----------- -----------
Total operating income 1,105,471 521,063
----------- -----------
Other deductions (328,245) (245,426)
----------- -----------
Income before income taxes $ 777,226 $ 275,637
=========== ===========
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.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30
1998
REVENUE
The Company's revenue during the second quarter of 1999 was $18.4 million as
compared to $16.7 million during the same period in 1998. This 10.5 percent
increase was primarily due to an increase in concrete and related products
revenue and to a lesser extent to an increase in contracting revenue.
The Company's concrete and related products division revenue increased 12.8
percent to $15.0 million during the second quarter of 1999 as compared to $13.3
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 increased by
1.7 percent to $3.5 million during the second quarter of 1999 as compared to
$3.4 million for the same period in 1998. The Company's backlog of unfilled
portions of land development contracts at June 30, 1999 was $10.5 million,
involving 10 projects. The backlog of one project in the Bahamas amounts to $8.5
million. A Company subsidiary and two of the Company's directors are minority
partners of the entity developing this project. The project has not yet received
its total financing thus the timing and amount of the contract could vary. The
Company expects that part of the backlog outstanding at June 30, 1999 will be
completed
10
<PAGE>
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 decreased to 79.0 percent during the second quarter of 1999
from 80.0 percent for the same period in 1998. This decrease was primarily
attributable to higher sales volumes on some islands and to changes in the mix
of products sold in the second quarter of 1999 compared to 1998.
COST OF CONTRACTING
Cost of contracting as a percentage of land development contracting revenue
increased to 81.2 percent during the second quarter of 1999 from 73.6 percent
during the same period in 1998. 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") increased by 3.5
percent to $3.0 million for the second quarter of 1999 from $2.9 million for the
same period in 1998. As a percentage of revenue, SG&A expense decreased to 16.3
percent during the second quarter compared to 17.4 percent for the same period
last year. This decrease is primarily attributable to an increase in sales
combined with a smaller increase in SG&A expense.
DIVISIONAL OPERATING INCOME
The Company had an operating income of $787,000 for the second quarter of 1999,
as compared to $642,000 for the same period in 1998. The Company's concrete and
related products division operating income was $677,000 during the second
quarter of 1999 compared to $279,000 during the same period in 1998. This
increase is primarily attributable to increased gross profit of $492,000 offset
to a lesser extent by an increase in SG&A expense. The increased gross profit is
mainly due to improved volumes in Antigua and St. Martin, offset partially by
increased production costs in Puerto Rico.
The Company's land development contracting division had an operating income of
$300,000 during the second quarter of 1999 compared to $544,000 during the same
period in 1998. This decrease was primarily attributable to the varying
profitability levels of individual contracts and the stage of completion of such
contracts.
OTHER INCOME
Minority interest income amounted to $178,000 due to losses in a consolidated
joint venture. Interest income decreased in the second 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 income of $463,000 during the second quarter of 1999 as
compared to $452,000 during the same period in 1998.
11
<PAGE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
REVENUE
The Company's revenue during the first six months of 1999 was $36.7 million as
compared to $31.3 million during the same period in 1998. This 17.2 percent
increase was due to increases in contracting revenue and in concrete and related
products revenue.
The Company's concrete and related products division revenue increased 12.3
percent to $28.9 million during the first six months of 1999 as compared to
$25.8 million for the same period in 1998, primarily as a result of an increase
in demand for this division's products on St. Martin, Antigua 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
50.2 percent to $7.7 million during the first six months of 1999 as compared to
$5.2 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 June 30, 1999 was $10.5 million,
involving 10 projects. The backlog of the project in the Bahamas amounts to $8.5
million. A Company subsidiary and two of the Company's directors are minority
partners of the entity developing this project. The project has not yet received
its total financing thus the timing and amount of the contract could vary. The
Company expects that part of the backlog outstanding at June 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 80.0 percent during the first six months of 1999
from 79.5 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 second quarter of 1999 compared to 1998.
COST OF CONTRACTING
Cost of contracting as a percentage of land development contracting revenue
decreased to 84.3 percent during the first six months of 1999 from 89.4 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, and to the expense taken on a large contract in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense ("SG&A expense") increased by 16.2
percent to $6.3 million for the first six months of 1999 from $5.4 million for
the same period in 1998. As a percentage of revenue, SG&A expense decreased to
17.2 percent during the second quarter compared to 17.4 percent for the same
period last year. This decrease is primarily attributable to an increase in
sales, offset to a lesser extent by an increase in SG&A expense, primarily bad
debt expense.
12
<PAGE>
CREDIT FOR LITIGATION
In the first quarter of 1999 the Company recognized a credit for litigation of
$419,000. This was a result of an order from a Florida circuit court requiring
another party to pay the Company prejudgment interest. See also Item 1, Legal
Proceedings.
DIVISIONAL OPERATING INCOME
The Company had an operating income of $1.1 million for the first six months of
1999, as compared to $521,000 for the same period in 1998. The Company's
concrete and related products division operating income was $603,000 during the
first six months of 1999 compared to $1.1 million during the same period in
1998. This decrease is primarily attributable to a one time worker's
compensation expense reduction 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
$478,000 during the first six months of 1999 compared to a loss of $353,000
during the same period in 1998. This improvement was primarily attributable to
the increased revenue and the type of contracts the Company has been able to
obtain, combined with a reduction in SG&A expenses. There was also an expense
taken on a large contract in 1998.
OTHER INCOME
Minority interest income increased due to losses in a consolidated joint
venture. Net interest expense increased to $883,000 in 1999 from $282,000 in
1998, primarily due to the Company recognizing less interest income on the
receivable due from the Government of Antigua and Barbuda.
NET INCOME
The Company had a net income of $590,000 during the first six months of 1999 as
compared to $105,000 during the same period in 1998.
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.
13
<PAGE>
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 June 30, 1999, the Company's liquidity and capital resources included cash
and cash equivalents of $3.2 million and working capital of $7.9 million.
Included in working capital is approximately $2.7 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 June 30,
1999, total outstanding liabilities were $38.1 million. As of June 30, 1999, the
Company had available lines of credit totaling $800,000. In April 1999 the
Company received $1.1 million in payment on a note receivable from the sale of a
leasehold in St. Maarten in 1997.
Cash flows provided by operating activities for the six months ended June 30,
1999 was $1.4 million, approximately the same as in 1998. The primary use of
cash for operating activities during the three months ended June 30, 1999 was a
decrease in accounts payable and accruals of $1.8 million.
Net cash used in investing activities was $2.3 million in the first six months
of 1999. Purchases of property, plant, and equipment were $5.5 million. The
purchases were partially financed through equipment financing. Proceeds from
sale of property, plant and equipment were $500,000 and repayment of debt was
$4.0 million. Receipts on notes receivables were $2.9 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 $3.3 million of the borrowings outstanding on this loan at
June 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 $700,000 outstanding under this line of credit at June 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. Although the Company had previously been in violation
of certain loan covenants, it no longer is. One of the financial covenants was
renegotiated during the quarter and an amendment to the loan agreement was
executed in early August.
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 June 30, 1999, the Company had no borrowings outstanding
under this line.
The Company has borrowed approximately $5.0 million from the Company President.
The note is unsecured and bears interest at a rate variable with the prime
interest rate. Three hundred fifty thousand is due on demand and $4.7 million is
due on July 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 $1.8
million from one of its directors and his family. The notes are secured by
14
<PAGE>
equipment and bear interest of 10.0 percent. The notes have equal monthly
payments over 5 years.
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 $2.7 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 June 30, 1999, amounts outstanding to
these lenders totaled $14.8 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.
Receivables at June 30, 1999 include $9.6 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 $34.8 million.
The notes called for both quarterly and monthly principal and interest payments
until maturity in 1997. The notes were not satisfied at maturity but the
Antiguan government has advised the Company that payments from agreed upon
sources will continue until the obligation is satisfied. The agreed upon sources
are lease proceeds from a rental of a United States military base, fuel tax
revenues and proceeds from a real estate venture. Cash receipts during 1998 from
agreed upon sources was $2.3 million.
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 is currently implementing a new information system for
its financial reporting, and the Company is evaluating proposals from various
vendors
15
<PAGE>
in respect to distribution systems for the island subsidiaries. The Company
believes that all conversion efforts will be completed 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 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. These 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.
The Company estimates to spend around $350,000 on the Year 2000 project. This
consists of PCs, software and other related costs.
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. 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.
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 $3.125 each. The Company has not made any further
purchases.
16
<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.
However, because the judgment amount was less then
seventy-five (75%) of an offer of judgment ($790,000)
previously made by GOAA in July 1998, the Company was
subject to pay GOAA's attorneys' fees from the date
the offer of judgment was made. The Company accrued
for GOAA's estimated legal expenses in 1998. On May 7,
1999, the Florida circuit court awarded prejudgment
interest on the judgment amount of $542,688 at 10% per
annum from August 8, 1995 until paid. Through June 30,
1999, this prejudgment interest amounts to
approximately $203,000, for a total award of
approximately $750,000, or 95% of the offer of
judgment. Consequently, subject to GOAA's possible
appeal, there is not currently an obligation to pay
GOAA's legal fees, and the accrual for such expenses
was reversed in the first quarter of 1999.
Furthermore, the Company has 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.
In 1992, Fore Golf, Inc. sued the Company in the Ninth
Judicial Circuit, Orange County, Florida, Case No.
CI-92-5289. The Company was sued by Fore Golf, Inc.
for work which this subcontractor allegedly performed
in 1990 and 1991 during construction of two golf
courses at Disney World in Orlando, Florida, the
alleged unpaid contract balance in connection with
this project, and inefficiency costs. In June 1997,
the court issued an order establishing liability and
damages against the Company. The Court entered a final
judgment in favor of the plaintiff for damages and
prejudgment interest. Subsequently, the trial court
also awarded the plaintiff attorneys' fees. The
Company accrued a total of $4.5 million, included in
other liabilities, in 1997 to reflect the total
estimated costs to be incurred should it not be
successful in our post trial and appeal efforts. The
Company has posted a bond for the damages, prejudgment
interest and plaintiff's attorneys' fees. This bond is
personally guaranteed by the Company's President. The
Company settled its lawsuit with Fore Golf, Inc. and
its creditors in March 1999. The settlement calls for
a cash payment of approximately $300,000 and payments
of $460,000 over a period of 4 years. The Company has
not yet settled with the lawyers of Fore Golf
regarding the judgment on attorney' fees. The trial
court fee award has been contested by Fore Golf's
attorneys.
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.
17
<PAGE>
The Company is subject to certain Federal, state and
local environmental laws and regulations. Management
believes that the Company is in compliance with all
such laws and regulations. Compliance with
environmental protection laws has not had a material
adverse impact on the Company's consolidated financial
condition, results of operations or cash flows in the
past and is not expected to have a material adverse
impact in the foreseeable future.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Shareholders Meeting on
June 10, 1999. The issues submitted to a vote of the
security holders and the results of the voting are as
follows:
1) Election of five directors
FOR WITHHELD
--- --------
Richard L. Hornsby 3,373,880 175,600
Robert L. Kester 3,339,380 210,100
W. Douglas Pitts 3,373,880 175,600
Donald L. Smith, Jr. 3,373,880 175,600
Robert A. Steele 3,339,380 210,100
The Board consists of five directors. All
nominees were elected to serve for a one year
period.
2) Proposal to approve and ratify the Company's
1999 Stock Option Plan:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD NON-VOTE
--- ------- -------- --------
<S> <C> <C> <C>
2,182,324 576,537 66,895 723,724
</TABLE>
3) Proposal to ratify the appointment of KPMG LLP
as the Company's auditor for 1999.
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD
--- ------- --------
<S> <C> <C>
3,544,885 900 3,695
</TABLE>
ITEM 5. OTHER INFORMATION
None
18
<PAGE>
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 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: August 10, 1999 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,184,462
<SECURITIES> 0
<RECEIVABLES> 17,007,993
<ALLOWANCES> (4,604,139)
<INVENTORY> 4,386,179
<CURRENT-ASSETS> 23,885,528
<PP&E> 74,570,412
<DEPRECIATION> (29,841,377)
<TOTAL-ASSETS> 81,661,287
<CURRENT-LIABILITIES> 15,957,213
<BONDS> 0
0
0
<COMMON> 449,894
<OTHER-SE> 43,117,623
<TOTAL-LIABILITY-AND-EQUITY> 81,661,287
<SALES> 36,660,058
<TOTAL-REVENUES> 36,660,058
<CGS> 29,649,838
<TOTAL-COSTS> 29,649,838
<OTHER-EXPENSES> 4,978,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,254,165
<INCOME-PRETAX> 777,226
<INCOME-TAX> 186,767
<INCOME-CONTINUING> 590,459
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 590,459
<EPS-BASIC> .13
<EPS-DILUTED> .13
</TABLE>
