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, 2000
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 9, 2000 the number of shares outstanding of the Registrant's Common
Stock was 3,758,785.
<PAGE>
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
Part I. Financial Information:
Condensed Consolidated Balance Sheets
June 30, 2000 (unaudited) and
December 31, 1999............................................. 3-4
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2000 and 1999 (unaudited). 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
(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
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 2,162,200 $ 1,406,941
Cash equivalents 8,340,539 4,737,311
Receivables, net 13,704,828 12,878,643
Costs in excess of billings
and estimated earnings 1,242,903 258,780
Inventories 2,457,628 3,829,450
Assets held for sale 286,212 7,559,066
Prepaid expenses and other assets 765,066 535,146
------------ ------------
Total current assets 28,959,376 31,205,337
Property, plant and equipment, net
Land 1,455,045 1,920,539
Buildings 1,217,707 2,372,240
Leasehold interests 3,193,556 3,516,202
Equipment 50,531,421 52,380,167
Furniture and fixtures 752,926 785,359
Construction in process 378,938 3,091,160
------------ ------------
57,529,593 64,065,667
Less accumulated depreciation (23,713,690) (25,722,376)
------------ ------------
33,815,903 38,343,291
Investments in unconsolidated
joint ventures and affiliates 287,010 277,081
Receivables, net 11,236,639 9,556,539
Intangible assets, net of
accumulated amortization 2,254 936,829
Other assets 1,009,152 1,326,917
------------ ------------
Total assets $ 75,310,334 $ 81,645,994
============ ============
3
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DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
(Continued)
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade and other $ 6,913,076 $ 4,926,700
Accrued expenses and other liabilities 3,596,240 3,103,083
Deposit on sale of assets -- 8,000,000
Notes payable to banks -- 625,000
Current installments of long-term debt 2,187,454 6,956,246
Billings in excess of costs and
estimated earnings 1,226,920 1,026,316
Income taxes 705,561 287,423
------------ ------------
Total current liabilities 14,629,251 24,924,768
Long-term debt, excluding current
installments 4,155,606 14,349,708
Minority interest in consolidated
subsidiaries 807,639 932,325
Deferred income taxes 379,652 379,652
Other liabilities 3,438,235 1,623,331
------------ ------------
Total liabilities 23,410,383 42,209,784
Stockholders' equity:
Common stock 400,257 449,894
Additional paid-in capital 10,733,103 12,064,133
Accumulated other comprehensive income-
cumulative translation adjustment (1,927,937) (1,594,577)
Retained earnings 43,716,088 28,674,264
Treasury stock (1,021,560) (157,504)
------------ ------------
Total stockholders' equity 51,899,951 39,436,210
------------ ------------
Commitments and contingencies
Total liabilities and
stockholders' equity $ 75,310,334 $ 81,645,994
============ ============
4
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DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Concrete and related products revenue $ 12,750,073 $ 14,965,896 $ 26,084,147 $ 28,921,738
Contracting revenue 3,743,953 3,458,907 6,146,881 7,738,320
------------ ------------ ------------ ------------
Total revenue 16,494,026 18,424,803 32,231,028 36,660,058
Cost of concrete and related products (10,579,470) (11,825,083) (22,248,821) (23,129,253)
Cost of contracting (2,908,987) (2,809,097) (4,965,192) (6,520,585
------------ ------------ ------------ ------------
Gross profit 3,005,569 3,790,623 5,017,015 7,010,220
Operating expenses:
Selling, general and
administrative expenses (2,885,825) (3,004,033) (6,221,251) (6,323,749)
Impairment of long-lived assets -- -- (627,536) --
Credit for litigation -- -- -- 419,000
------------ ------------ ------------ ------------
Operating income (loss) 119,744 786,590 (1,831,772) 1,105,471
Other income (deductions):
Joint venture equity gain (loss) 6,534 (30,000) (8,366) (30,000)
(Loss) gain on sale of property & equipment (66,365) 38,104 1,193 108,512
(Loss) gain on sale of businesses (53,512) -- 18,312,345 --
Interest expense (189,169) (581,794) (654,480) (1,254,165)
Interest and other income 788,421 175,895 1,091,650 371,059
Minority interest 37,391 177,534 124,686 476,349
------------ ------------ ------------ ------------
523,300 (220,261) 18,867,028 (328,245)
Income before income taxes 643,044 566,329 17,035,256 777,226
Income tax benefit (expense) 27,843 (102,967) (573,179) (186,767)
------------ ------------ ------------ ------------
Net income $ 670,887 $ 463,362 $ 16,462,077 $ 590,459
============ ============ ============ ============
Earnings per common share-basic $ 0.17 $ 0.10 $ 4.16 $ 0.13
============ ============ ============ ============
Earnings per common share-diluted $ 0.16 $ 0.10 $ 3.81 $ 0.13
============ ============ ============ ============
Weighted average number of
shares outstanding-basic 3,904,926 4,495,213 3,958,961 4,497,074
============ ============ ============ ============
Weighted average number of
shares-diluted 4,252,450 4,579,947 4,322,686 4,540,517
============ ============ ============ ============
</TABLE>
5
<PAGE>
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,462,077 $ 590,459
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,653,903 3,129,467
Provision for doubtful accounts and notes 152,025 195,779
Impairment of long-lived assets 627,536 --
Credit for litigation -- (419,000)
Gain on sale of equipment (1,193) (108,512)
Gain on sale of business (18,312,345) --
Joint venture equity loss 8,366 30,000
Minority interest income (124,686) (476,349)
Changes in operating assets and liabilities:
Increase in receivables, net (4,314,181) (92,290)
(Increase) decrease in costs in excess
of billings and estimated earnings (984,123) 384,433
Decrease in inventories 486,216 65,703
Increase in other current assets (276,360) (474,800)
Increase in other assets (2,386) (30,576)
Increase (decrease) in accounts
payable, trade and other 2,677,893 (1,813,989)
Increase in billings in
excess of costs and estimated earnings 200,604 162,297
Increase (decrease) in income taxes payable 521,791 (38,334)
(Decrease) increase in other liabilities (42,063) 291,326
------------ ------------
Net cash (used in) provided by operating activities $ (266,926) $ 1,395,614
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (3,034,508) (5,512,946)
Proceeds from disposition of property,
plant and equipment 506,558 500,426
Proceeds from disposition of businesses 23,196,405 --
Payments received on notes 1,297,982 2,882,005
Investment in affiliates (18,295) (29,000)
Issuance of notes -- (16,000)
Purchase of treasury stock (1,275,448) (78,132)
------------ ------------
Net cash provided by (used in)
investing activities $ 20,672,694 $ (2,253,647)
------------ ------------
</TABLE>
6
<PAGE>
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from debt $ 810,388 $ 5,134,086
Principal payments on debt (16,232,669) (3,962,341)
Net (repayments) borrowings from bank
credit line and overdrafts (625,000) 611,892
------------ ------------
Net cash (used in) provided by financing activities $(16,047,281) $ 1,783,637
------------ ------------
Net increase in cash and cash equivalents 4,358,487 925,604
Cash and cash equivalents, beginning of period 6,144,252 2,258,858
------------ ------------
Cash and cash equivalents, end of period $ 10,502,739 $ 3,184,462
============ ============
Supplemental disclosures of
cash flow information
Cash paid for:
Interest $ 750,084 $ 1,286,376
============ ============
Income taxes $ 47,666 $ 83,333
============ ============
</TABLE>
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, 1999.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the Company's financial
position as of June 30, 2000 and the results of its operations and cash flows
for the three and six months ended June 30, 2000 and 1999.
The results of operations for the three and six months ended June 30, 2000 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 776,300 and 486,300 shares of common stock, at prices
ranging from $1.50 to $6.75 per share, were outstanding for the quarters ended
June 30, 2000 and 1999, respectively. Options to purchase 71,475 and 350,475
shares of common stock were outstanding for the quarters ended June 30, 2000 and
1999, respectively, at prices ranging from $7.00 to $14.00 per share, but these
options were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market prices
of the common shares. For additional disclosures regarding the outstanding
employee stock options, see the 1999 Form 10-K.
8
<PAGE>
The Company's total comprehensive income, comprised of translation adjustments,
for the six month period ended June 30, 2000 and 1999 were as follows:
2000 1999
------------ ------------
Net income $ 16,462,077 $ 590,459
Other comprehensive loss (333,361) (585,369)
------------ ------------
Total comprehensive income $ 16,128,716 $ 5,090
============ ============
Segment Reporting
The following sets forth the revenue and income before income taxes for each of
the Company's business segments for the three and six months ended June 30, 2000
and 1999.
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30 June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue (including intersegment)
Concrete and related products $ 13,105,746 $ 15,132,062 $ 26,441,440 $ 29,487,186
Contracting 3,660,943 3,657,807 6,218,033 7,937,220
Elimination of inter-segment revenue (272,663) (365,066) (428,445) (764,348)
------------ ------------ ------------ ------------
Total revenue $ 16,494,026 $ 18,424,803 $ 32,231,028 $ 36,660,058
Operating (loss) income:
Concrete and related products $ (87,000) $ 677,000 $ (1,719,000) $ 603,000
Contracting 467,000 300,000 414,000 478,000
Credit for litigation -- -- -- 419,000
Unallocated corporate overhead (260,256) (190,410) (526,772) (394,529)
------------ ------------ ------------ ------------
Total operating (loss) income 119,744 786,590 (1,831,772) 1,105,471
Other income (deductions) 523,300 (220,261) 18,867,028 (328,245)
------------ ------------ ------------ ------------
Income before income taxes $ 643,044 $ 566,329 $ 17,035,256 $ 777,226
============ ============ ============ ============
</TABLE>
Recognition of Antigua and Barbuda Note Receivable
The Company entered into a restructured agreement in April 2000 with the
Government of Antigua and Barbuda, subject to confirmation by the Antigua and
Barbuda cabinet. The interest rate on the notes receivable was reduced from 10%
to 6%. In October an additional monthly payment of $61,000 will commence,
bringing the total expected annual receipts on the notes to $3.1 million. The
notes will, based on the schedule of payments, be fully paid in 2015. The
Company will use some of the gross receivables to prepay duties, income taxes
and other taxes. The book value of the notes at June 30, 2000 was $7.9 million
and the gross balance was $30.8 million after deducting prepayment of taxes,
offset of duties owed and other restructuring items. From time to time in the
future the Company will use part of the gross balance to pay taxes and duties;
therefore the notes may be paid off earlier than estimated. From April 28, 2000
the Company started to recognize interest income on the notes receivable. The
Company recognized $526,000 in income during the second quarter 2000. The
expected interest income during 2000 will be approximately $2.1 million.
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.
Recognition retirement expense
The Company entered into an agreement on June 30, 2000 with its CEO, Mr. Donald
L. Smith, Jr., whereby Mr. Smith shall receive a retirement benefit upon the
sooner of Mr. Smith's retirement from his position after March 31, 2003, or a
change in control of the Company. Benefits to be received shall equal 75% of Mr.
Smith's base salary, and shall continue for the remainder of his life. In the
event that Mr. Smith is survived by a spouse, then the surviving spouse shall
receive a benefit equal to 100% of Mr. Smith's base salary for the shorter of
five years or the remainder of the surviving spouse's life. The Company will
recognize the expense of the retirement agreement over Mr. Smith's expected
remaining period of active employment with the Company. The expense is expected
to be approximately $100,000 to $125,000 per quarter.
Comparison of three months ended June 30, 2000 vs.
three months ended June 30, 1999
Revenue
The Company's revenue during the second quarter of 2000 was $16.5 million as
compared to $18.4 million during the same period in 1999. This 10.5 percent
decrease was primarily due to a
10
<PAGE>
decrease in concrete and related products revenue of $2.2 million partially
offset by an increase in contracting revenue of $285,000.
The Company's concrete and related products division revenue decreased 14.8
percent to $12.8 million during the second quarter of 2000 as compared to $15.0
million for the same period in 1999, due primarily to the sale of concrete
business in St. Thomas, Tortola and Dominica, which reduced revenue by $3.8
million. The remaining concrete and related products business units showed an
increase of 13.9%, primarily in St Martin and Puerto Rico. The Company cannot
currently determine whether demand for this division's products will increase,
decrease or remain the same throughout 2000.
Revenue from the Company's land development contracting division increased by
8.2 percent to $3.7 million during the second quarter of 2000 as compared to
$3.5 million for the same period in 1999. The Company's backlog of unfilled
portions of land development contracts at June 30, 2000 was $20.2 million,
involving 9 projects. The backlog of one project in the Bahamas amounts to $14.2
million. A Company subsidiary, the President, and a director of the Company are
minority partners of the entity developing this project. The Company expects
that most of this contract will not be completed during 2000. The Company has
been advised by this entity that it has received a loan commitment letter from a
bank, has entered into a contract with a reputable hotel chain for management of
the hotel being built, and has received further financial commitments from other
sources. All commitments are subject to significant conditions that the entity
is currently working on fulfilling. Until the financing transaction is
consummated there is significant uncertainty whether or not the project will
receive its final financing. The Company is monitoring the situation closely and
cannot predict how long it will continue to operate in the current manner.
Cost of Concrete and Related Products
Cost of concrete and related products as a percentage of concrete and related
products revenue increased to 83.0 percent during the second quarter of 2000
from 79.0 percent for the same period in 1999. This increase was primarily
attributable to increased cost in Antigua, to the increased cost of cement, and
to the sale of concrete operations in St. Thomas and Tortola that had higher
margins than the average of the Company.
Cost of Contracting
Cost of contracting as a percentage of contracting revenue decreased to 77.7
percent during the second quarter of 2000 from 81.2 percent during the same
period in 1999. 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") decreased by 3.9
percent to $2.9 million for the first quarter of 2000. As a percentage of
revenue, SG&A expense increased to 17.5 percent during the second quarter as
compared to 16.3 percent for the same period last year.
11
<PAGE>
The percentage increase was due to the Company not decreasing its central
expenses to compensate for the reduction in sales resulting from the sale of the
businesses in St Thomas, Tortola and Dominica. The Company is currently
reviewing its cost structure.
Divisional Operating Income (Loss)
The Company had operating income of $120,000 for the second quarter of 2000, as
compared to $787,000 for the same period in 1999. The Company's concrete and
related products division operating loss was $87,000 during the second quarter
of 2000 compared to operating income of $677,000 during the same period in 1999.
This decrease is primarily attributable to increased production costs in
Antigua, increased cost of cement, the sale of the higher margin concrete
operations in St. Thomas and Tortola, and offset to a lesser extent by improved
margins in Puerto Rico.
The Company's land development contracting division had operating income of
$467,000 during the second quarter of 2000 compared to $300,000 during the same
period in 1999. This increase was primarily attributable to an increase in sales
volume, varying profitability levels of individual contracts, and the stage of
completion of such contracts.
Other Income (Deductions)
Loss on sales of equipment and property was $120,000 compared to a gain of
$38,000 for the same quarter last year. Minority interest income amounted to
$37,000 due to losses in a consolidated joint venture. Interest income increased
in the second quarter of 2000 to $788,000 compared to $176,000 for the same
period in 1999 primarily due to interest recognized on the note receivable from
the Government of Antigua and Barbuda. Interest expense decreased to $189,000
from $582,000 for the same quarter in 1999 due to repayments of debt during
2000.
Net Income
The Company had net income of $671,000 during the second quarter of 2000 as
compared to $463,000 during the same period in 1999.
Comparison of six months ended June 30, 2000 vs. six months ended June 30, 1999
Revenue
The Company's revenue during the first six months of 2000 was $32.2 million as
compared to $36.7 million during the same period in 1999. This 12.1 percent
decrease was primarily due to a decrease in concrete and related products
revenue of $2.8 million and to a lesser extent due to a decrease in contracting
revenue of $1.6 million.
The Company's concrete and related products division revenue decreased 9.8
percent to $26.1 million during the first six months of 2000 as compared to
$28.9 million for the same period in 1999. This decrease was due primarily to
the sale of the concrete business in St. Thomas, Tortola and Dominica, which
reduced revenue by $7.3 million. The remaining concrete and related
12
<PAGE>
products business units showed an increase of 16.5%, primarily in St Martin and
Puerto Rico. The Company cannot currently determine whether demand for this
division's products will increase, decrease or remain the same throughout 2000.
Revenue from the Company's land development contracting division decreased by
20.6 percent to $6.1 million during the first six months of 2000 as compared to
$7.7 million for the same period in 1999. The Company's backlog of unfilled
portions of land development contracts at June 30, 2000 was $20.2 million,
involving 9 projects. The backlog of one project in the Bahamas amounts to $14.2
million. A Company subsidiary, the President, and a director of the Company are
minority partners of the entity developing this project. The Company expects
that most of this contract will not be completed during 2000. The Company has
been advised by this entity that it has received a loan commitment letter from a
bank, has entered into a contract with a reputable hotel chain for management of
the hotel being built, and has received further financial commitments from other
sources. All commitments are subject to significant conditions that the entity
is currently working on fulfilling. Until the financing transaction is
consummated there is significant uncertainty whether or not the project will
receive its final financing. The Company is monitoring the situation closely and
cannot predict how long it will continue to operate in the current manner.
Cost of Concrete and Related Products
Cost of concrete and related products as a percentage of concrete and related
products revenue increased to 85.3 percent during the first six months of 2000
from 80.0 percent for the same period in 1999. This increase was primarily
attributable to increased costs in Antigua and St. Martin, increased cost of
cement, and the sale of concrete operations in St. Thomas and Tortola that had
higher margins than the average of the Company.
Cost of Contracting
Cost of contracting as a percentage of contracting revenue decreased to 80.8
percent during the first six months of 2000 from 84.3 percent during the same
period in 1999. 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") decreased by 1.6
percent to $6.2 million for the first six months of 2000 as compared to $6.3
million for the same period in 1999. As a percentage of revenue, SG&A expense
increased to 19.3 percent for the first six months of 2000 as compared to 17.2
percent for the same period last year. The percentage increase was due to the
Company not decreasing its central expenses to compensate for the reduction in
sales due to the sale of the businesses in St Thomas, Tortola and Dominica. The
Company is currently reviewing its cost structure.
13
<PAGE>
Impairment of Long-Lived Assets
The Company recognized in 2000 an impairment of $628,000 to assets in St. Martin
and Saba. The Company re-evaluated its operations in St. Martin and wrote down
goodwill of $378,000 that was recognized in connection with the purchase of the
subsidiary. Furthermore, the Company decided to close its operation in Saba.
Credit for Litigation
In the second quarter of 1999 the Company recognized a $419,000 reduction of the
accrual for litigation as the claimants were denied the multiplier effect on the
legal fee award in the Fore Golf lawsuit.
Divisional Operating Income (Loss)
The Company had an operating loss of $1.8 million for the first six months of
2000, as compared to operating income of $1.1 million for the same period in
1999. The Company's concrete and related products division operating loss was
$1.7 million during the second quarter of 2000 compared to income of $603,000
during the same period in 1999. This loss is primarily attributable to increased
production costs in Antigua, the sale of the concrete operations in St. Thomas
and Tortola, the increased cost of cement, and offset to a lesser extent by
improved margins in Puerto Rico. The operating loss also increased due to the
impairment of assets of $628,000.
The Company's land development contracting division had operating income of
$414,000 during the first six months of 2000 compared to $478,000 during the
same period in 1999. This decrease was primarily attributable to a reduction in
sales volume, varying profitability levels of individual contracts and the stage
of completion of such contracts.
Other Income
Gain on sales of businesses and property were $18.3 million, primarily due to
the sale of 4 cement terminals and the ready-mix business in St. Thomas and
Tortola. Minority interest income recognized was $125,000, due to losses
incurred by a consolidated joint venture. Interest income increased in the first
six months of 2000 to $1.1 million compared to $371,000 for the same period in
1999, primarily due to interest recognized on the note receivable from the
Government of Antigua and Barbuda. Interest expense decreased to $654,000 from
$1.3 million for the same period in 1999 due to repayments of debt during 2000,
offset to a lesser extent by a write-off of loan fees in connection with the
repayment of a term loan.
Net Income
The Company had an effective tax rate of 3.4% for the six-month period of 2000
compared to 24.0% for the same period in 1999. The decrease is due to that
income was realized in different tax jurisdictions with varying tax rates, tax
loss carry-forwards in the United States, a 90% tax
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exemption in the US Virgin Islands and an effective tax rate of 0% in Antigua.
The Company had net income of $16.5 million during the first six months of 2000
as compared to $590,000 during the same period in 1999.
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. 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. 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 June 30, 2000, the Company's liquidity and capital resources included cash
and cash equivalents of $10.5 million and working capital of $14.3 million. It
is management's intention to use a portion of this cash to pay down additional
debt and to repurchase up to $3 million in Company shares, as later discussed in
this document. Included in working capital is approximately $286,000 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, 2000, total outstanding liabilities were $23.4 million. As of June
30, 2000, the Company had available lines of credit totaling $1.5 million.
Cash flows used in operating activities for the six months ended June 30, 2000
was $267,000 compared with cash flow provided by operating activities of $1.4
million for the same period in 1999. The primary use of cash for operating
activities during the six months ended June 30, 2000 was an increase in
receivables of $4.3 million and increased costs in excess of billings and
estimated earnings of $1.0 million, offset to a lesser extent by an increase in
accounts payable and accruals of $2.7 million.
Net cash provided by investing activities was $20.7 million in the first six
months of 2000. The Company closed various transactions of sales of businesses
during the first quarter of 2000 with proceeds of $23.2 million. Proceeds from
sale of property, plant and equipment were $507,000 and repayment of debt and
notes totaled $16.2 million. Receipts on notes receivables were $1.3
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million. Purchases of property, plant, and equipment were $3.0 million, and
repurchase of Company common stock was $1.3 million.
The Company entered into a credit agreement with a Caribbean bank in November
1996 for credit of $7.0 million. One part of the credit agreement was a term
loan for $6.0 million payable in monthly installments through November 2002. The
Company repaid this loan in January 2000. The second part is a revolving line of
credit of $1.0 million. The Company had no outstanding balance under this line
of credit at June 30, 2000. The interest rate on indebtedness outstanding under
the credit line is at a variable rate based on the prime rate. Various parcels
of real property and other assets located in the United States Virgin Islands
collateralize the credit agreement.
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, 2000, the Company had no borrowings outstanding
under this line.
The Company has borrowed approximately $3.2 million from the Company President.
The note is unsecured and bears interest at 11.0 percent. One million is due on
demand, and was paid to the President in July 2000, and $2.2 million is due on
October 1, 2001. 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 issued a loan in November 1999 for $1.0 million to a project in the
Bahamas, in which the President and one of the Company's directors are minority
partners. The outstanding amount as of June 30, 2000 was $909,000. The loan is
secured by equipment and personal guarantees by some of the project's owners.
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
$3.0 million during 2000. 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, 2000, amounts outstanding to these lenders totaled $2.0
million. These loans are typically repaid over a three to five-year term in
monthly principal and interest installments. The Company prepaid $1.4 million of
equipment loans in the second quarter of 2000. The Company believes it has
available or can obtain sufficient financing for its contemplated equipment
replacements and additions. The Company has identified some real property not
needed for its ongoing operations, which it plans to sell. The net carrying cost
is $286,000 at June 30, 2000.
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.
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Receivables at June 30, 2000 include a net balance of $7.9 million consisting of
promissory notes due from the Government of Antigua and Barbuda, of which
$36,000 is classified as a current receivable. The gross balance of the notes is
$30.8 million. The notes were restructured on April 28, 2000 and call for both
quarterly and monthly principal and interest payments until maturity in 2015.
The notes will be paid from agreed upon sources, which consist of lease proceeds
from a rental of a United States military base, fuel tax revenue, proceeds from
a real estate venture and revenue from a gross receipts tax that is currently
being implemented in Antigua and Barbuda. Cash receipts for the three months
ended June 30, 2000 from agreed upon sources were $851,000.
Repurchase of Company Shares
On February 23, 2000 the Company announced its plan to purchase Company shares
in the open market for up to $3.0 million. The timing of share repurchases, the
actual number of shares purchased and the price to be paid will depend upon the
availability of shares, the prevailing market prices and other considerations
which may in the opinion of the Board of Directors or management affect the
advisability of purchasing Devcon shares. In the second quarter the Company
purchased 162,200 shares at an average cost of $7.20 each. Additionally, the
Company received 420,000 shares of common stock of the Company in a transaction
in St. Thomas in exchange for assets sold, and the Company repurchased 24,000
shares at an average cost of $7.24 each during the first quarter of 2000.
Subsequent to the end of the second quarter the Company purchased an additional
92,010 shares at an average cost of $6.63 each.
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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
None
Item 4. Submission of Matter to a Vote of Security Holders
The Company held its Annual Shareholders Meeting on June 9, 2000.
The issues submitted to a vote of the security holders and the
results of the voting are as follows:
1) Election of five directors
For Withheld
--------- --------
Jose A. Bechara, Jr., Esq. 3,625,441 230
Richard L. Hornsby 3,625,441 230
Robert L. Kester 3,624,991 680
W. Douglas Pitts 3,624,991 680
Donald L. Smith, Jr. 3,625,441 230
Robert A. Steele 3,625,441 230
The Board consists of six directors. All nominees were
elected to serve for a one-year period.
2) Proposal to ratify the appointment of KPMG LLP as the
Company's auditor for 2000.
For Against Withheld
--------- ------- --------
3,624,546 625 500
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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:
None
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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 14, 2000 By: /S/ JAN A. NORELID
------------------------
Jan A. Norelid
Vice President - Finance
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EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
21
