-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TV1dhHwST8KH3YXWqHceOotcikY7V5k1W0HP7afG5lzbUTxWj+MxJyoMxepFfq/K YGj/uRYgMrXTrxbB89T3oA== 0000950170-98-000562.txt : 19980401 0000950170-98-000562.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950170-98-000562 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEVCON INTERNATIONAL CORP CENTRAL INDEX KEY: 0000028452 STANDARD INDUSTRIAL CLASSIFICATION: CONCRETE GYPSUM PLASTER PRODUCTS [3270] IRS NUMBER: 590671992 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-07152 FILM NUMBER: 98580181 BUSINESS ADDRESS: STREET 1: 1350 E NEWPORT CENTER DR STREET 2: STE 201 CITY: DEERFIELD BEACH STATE: FL ZIP: 33443 BUSINESS PHONE: 3054291500 MAIL ADDRESS: STREET 1: 1350 E NEWPORT CENTER DR STREET 2: SUITE 201 CITY: DEERFIELD BEACH STATE: FL ZIP: 33442 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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 number 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 DR. 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of March 20, 1998, the number of shares of the registrant's Common Stock outstanding was 4,498,935. The aggregate market value of the Common Stock held by non-affiliates of the registrant as of March 20, 1998 was approximately $7.1 million, based on a closing price of $4.00 for the Common Stock as reported on the NASDAQ National Market System on such date. For purposes of the foregoing computation, all executive officers, directors and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers, directors or 5 percent beneficial owners are, in fact, affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III (Items 10, 11, 12 and 13) is incorporated by reference from the registrant's definitive proxy statement (to be filed pursuant to Regulation 14A). PART I ITEM 1. BUSINESS. GENERAL Devcon International Corp. (the "Company") is the largest producer and distributor of ready-mix concrete and quarry products in St. Thomas and St. Croix, United States Virgin Islands ("St. Thomas" and "St. Croix"), Antigua and Barbuda, West Indies ("Antigua"), St. Maarten, Netherlands Antilles ("St. Maarten"), St. Martin, French West Indies ("St. Martin"), Saba, Netherlands Antilles ("Saba"), Dominica, West Indies ("Dominica"), and Tortola, British Virgin Islands ("Tortola")(although quarry products are not produced or sold in Dominica). The Company also operates a quarry in Guaynabo, Puerto Rico ("Puerto Rico") and is a land development contractor in the Caribbean. The Company owned and operated a marina in the United States Virgin Islands. The marina was sold in February 1998. In the Caribbean, the Company produces and distributes ready-mix concrete, crushed stone, concrete block, and asphalt and distributes bulk and bagged cement. The Company's facilities have enabled the Company to establish a significant market share in most of the locations in which it operates and afford the Company resources, production capacity, a local presence, and a cost structure that the Company believes would be difficult for competitors to duplicate. As a result, the Company has less competition and, therefore, produces a substantial percentage of the concrete and related products used in these islands. The Company performs earthmoving, excavating, and filling operations, builds golf courses, roads, and utility infrastructures, dredges waterways and constructs deep-water piers and marinas in the Caribbean. The Company has historically provided land development contracting services to both private enterprises and governments in Florida and the Caribbean. Since early 1993, the Company has not been seeking new contracts in the United States. The Company's project managers have substantial experience working in the land development contracting business, and the Company has equipment that is well-suited for the Caribbean markets. The Company has equipment and personnel in the Caribbean that the Company believes, in some instances, allow the Company to start work more quickly and less expensively than other contractors and, therefore, to bid competitively for and to complete cost-effectively these land development contracts. However, this capability to mobilize quickly can, under certain circumstances, cause the Company to incur higher expense. The Company believes that its relationships with customers in the Caribbean give it a competitive advantage. 2 The following table sets forth certain financial information concerning the Company's concrete and related products, land development contracting and other business:
1997 1996 1995 ---- ---- ---- (In thousands) Revenues*: Concrete and related products................................$ 51,461 $52,987 $37,716 Contracting.................................................. 9,852 13,982 16,068 Other........................................................ 2,931 2,509 2,367 -------- ------- ------- Total..................................................$ 64,244 $69,478 $56,151 ======== ======= ======= Operating (loss) income*: Concrete and related products................................$ (4,322) 4,864 1,252 Contracting.................................................. (3,502) (1,093) (569) Charge for litigation........................................ (4,500) - - Other........................................................ 434 416 409 Unallocated corporate overhead............................... (688) (716) (818) --------- ------- ------- Total..................................................$(12,578) $ 3,471 $ 274 ======== ======= =======
- ------------------------- * Information is presented net of intersegment sales. See Note 13 of Notes to Consolidated Financial Statements for additional financial information with respect to the Company's business segments. See Summary of Significant Accounting Policies in Notes to Consolidated Financial Statements. The Company's principal executive offices are located at 1350 East Newport Center Drive, Suite 201, Deerfield Beach, Florida 33442 and its telephone number is (954)429-1500. Unless the context otherwise requires, the terms the "Company" and "Devcon" as used herein refer to Devcon International Corp. and its subsidiaries. BUSINESS DEVELOPMENT The Company expanded its operations in the Caribbean by opening a quarry in Puerto Rico in May 1996 and is negotiating the start up of a second quarry in Puerto Rico in 1998. These operations are and will be in a company in which minority investors own approximately 49.9 percent. It acquired a company in St. Martin in August 1995, which sells and distributes ready-mix concrete and operates a quarry. From time to time, the Company investigates the possibility of expanding its operations to other areas of the Caribbean where the Company does not presently do business. Such expansion can take place in the form of joint ventures, acquisitions or other business arrangements. RISKS OF FOREIGN OPERATIONS Various portions of the Company's operations are conducted in foreign areas, primarily Antigua, St. Maarten, St. Martin, Dominica, Saba, St. Kitts, and Tortola, all of which are in the Caribbean. In 1997, 62.2 percent of the Com pany's revenues were derived from foreign operations. Overseas contract work performed by the parent company (a United States corporation) is not considered foreign-source revenue for purposes of the foregoing calculation. For a summary of the Company's revenues and earnings from foreign operations, see Note 11 of Notes to Consolidated Financial Statements. The potential risks of doing 3 business in foreign areas include potential adverse changes in the diplomatic relations of foreign countries with the United States, changes in the relative purchasing power of the United States dollar, hostility from local populations, adverse effects of exchange controls, restrictions on the withdrawal of foreign investment and earnings, government policies against businesses owned by non-nationals, expropriations of property, the instability of foreign governments, and the risk of insurrection that could result in losses against which the Company is not insured. The Company is not subject to these risks in Puerto Rico or the United States Virgin Islands (United States territories that use the United States dollar as their currency). The Company also is subject under certain circumstances to United States Federal income tax upon the distribution of certain offshore earnings. See Note 9 of Notes to Consolidated Financial Statements. Although the Company has not encountered significant difficulties in its foreign operations in the past, there can be no assurance that the Company will not encounter difficulties in the future. CONCRETE AND RELATED PRODUCTS GENERAL The Company manufactures and distributes ready-mix concrete and crushed aggregate (both coarse and fine) in Puerto Rico, the United States Virgin Islands, Antigua, St. Maarten, St. Martin, Dominica, Saba, and Tortola (although crushed aggregate is not manufactured on Dominica, or St. Maarten and the Company does not distribute ready-mix concrete in Puerto Rico). With the exception of Puerto Rico, the Company also distributes bulk and bagged cement to customers on each of the foregoing islands. In addition, the Company manufactures concrete block on St. Thomas, Antigua, and St. Maarten. The activity on St. Kitts is currently very limited. The Company's concrete and related products business employs assets such as quarries, rock crushing plants, bulk cement terminals, concrete block plants, concrete batch plants, a fleet of concrete mixer trucks, cement bagging facilities, and asphalt plants in various locations in the United States Virgin Islands, Antigua, St. Maarten, St. Martin, Dominica, Saba, St. Kitts, Tortola, and Puerto Rico. The Company also leases an oceangoing bulk cement ship that affords the Company ready access to reliable and more economical sources of cement. As a result, the Company has become the largest supplier of concrete and related products in the United States Virgin Islands, Antigua, St. Maarten, St. Martin, Dominica, Saba, and Tortola. The Company is presently investigating the possibility of expanding its cement distribution and concrete and aggregate busi ness to other areas in the Caribbean. See "Business - Business Development." READY-MIX CONCRETE AND CONCRETE BLOCK The Company's concrete batch plants mix cement, sand, crushed stone, water and certain chemical additives to produce ready-mix concrete for use in local construction. The Company's fleet of concrete mixer trucks deliver the concrete to the customer's job site. At the Company's concrete block plants, a low-moisture concrete mixture is machine formed, then dried and stored for later sale. The Company's ready-mix concrete operations are significantly larger than those of any other competitor on Antigua, St. Maarten, St. Martin, Dominica, Tortola, Saba and St. Thomas. The Company has the only concrete block plant on St. Thomas. The Company's block plant is the area's largest on Antigua and St. Maarten. QUARRY OPERATIONS AND CRUSHED STONE The Company owns or leases quarry sites on which it blasts rock from exposed mineral formations. At the quarries, this rock is crushed and screened to varying sizes of aggregate from 3 1/2 inch stones down to manufactured sand, the aggregate is then sorted, cleaned and stored. The resulting aggregate is sold to customers and used in the Company's operations to make concrete products. The Company's quarries are the largest on St. Thomas, 4 St. Croix, Antigua, St. Martin, Saba and Tortola. It is significantly less expensive to manufacture crushed rock at the Company's quarries than to import aggregate from off-island sources. BULK AND BAGGED CEMENT The Company leases an oceangoing bulk cement ship with a 6,000 metric-ton capacity. The ship delivers cement in bulk to the Company's cement terminals on St. Thomas, St. Croix, Antigua, Dominica and St. Maarten. From silos at these terminals, the cement is transferred for use in the Company's concrete batch plants, sold in bulk or bagged and then sold. Bulk cement is readily available from a number of manufacturers located throughout the Caribbean basin. As a result of the bulk cement ship, the Company is able to assure itself of reliable and relatively economical sources of cement. See "Business - Equipment." SUPPLIES The Company presently obtains all of the crushed rock and a majority of the sand necessary for the production of ready-mix concrete in the United States Virgin Islands, Antigua, St. Martin, St. Maarten, Saba and Tortola by quarrying its own rock and crushing it at its own locations. The Company's ability to produce its own sand gives it a competitive advantage because of the substantial investment required to produce sand, the difficulty in obtaining the necessary environmental permits to establish quarries and the moratorium on mining beach sand imposed by most Caribbean countries. The sand that the Company produces is blended with sand obtained from various offshore sources unaffiliated with the Company. The oceangoing bulk cement ship described above allows it to satisfy its bulk cement requirements. CUSTOMERS The Company's primary customers are building contractors, governments, asphalt pavers and individual homeowners. Customers generally pick up quarry products, concrete block and bagged cement at the Company's facilities, and the Company generally delivers ready-mix concrete and bulk cement to the customer's job sites. COMPETITION The Company has few competitors in the concrete and related products business in the locations where it conducts business. The Company encounters competition from the producers of asphalt, which is an alternative material to concrete for road construction. The Company's concrete and related products facilities and the Company's oceangoing bulk cement ship have enabled the Company to establish a significant market share in the United States Virgin Islands, Antigua, St. Maarten, St. Martin, Dominica, Saba and Tortola and afford the Company the resources, a production capacity, a local presence and a cost structure that the Company believes would be difficult for competitors to duplicate. As a result, the Company believes that it presently has a competitive advantage in the United States Virgin Islands, Antigua, St. Maarten, St. Martin, Dominica, Saba and Tortola. LAND DEVELOPMENT CONTRACTING GENERAL The Company has completed a wide variety of land development construction projects since its inception, including interstate highways, airport sites and runways, deep-water piers and marinas, hydraulic dredging projects, golf courses, industrial site development and residential and commercial site development. The Company generally attempts to pursue the most profitable types of land development contracting work available, rather than attempting to maintain a high level of volume. In prior years, the Company has been engaged in residential and commercial site development (including golf courses) for real estate developers and marine construction (dredging of deep-water harbors and construction of deepwater piers and marinas) in the Caribbean. 5 The nature of the work performed by the Company's land development contracting division is such that the work is accomplished and revenue generated on a contract-by-contract basis. The majority of the Company's land development contracts are less than one year in duration, although it does obtain multi-year contracts from time to time. A majority of the Company's contracts are fixed-price contracts. These contracts are bid or negotiated at an established price that does not vary except for changes in the scope of the work requested by the owner during the term of the contract. The majority of the Company's work is performed using its own labor and equipment and is not subcontracted. The Company also enters into unit-price contracts pursuant to which the Company's fee is based upon the quantity of work performed. The Company historically has contracted to provide land development contracting services to both private enterprises and governments. The Company believes that, on occasion, it is able to obtain more desirable margins on some private and public contracts in the United States Virgin Islands and Antigua because the Company has equipment and personnel in those markets that, in some instances, allow the Company to start work more quickly and less expensively than other contractors. As a result, the Company believes that it is able to bid competitively for and to complete cost-effectively these land development contracts in the Company's Caribbean markets. OPERATIONS The Company's first step in any project is deciding whether to submit a bid on, or to negotiate to undertake, a particular project. The Company obtains leads for new projects from a variety of sources, including past or existing customers of the Company and from engineering firms with which the Company has established business relationships. At the appropriate time, a proposal is submitted that the Company believes will best meet a customer's objectives. In some instances in the past, the Company has provided long-term or short-term financing to facilitate early commencement or efficient continuation of a project. The Company believes that providing such financing enhances its ability to obtain more profitable construction contracts. The continuation of such financing is contingent upon the consolidated financial position and operating results of the Company. All project proposals and bids are reviewed by the Company's Vice President of Construction Operations and/or the Company's Pres ident, depending upon the size of the contract. After a proposal has been accepted, a formal contract is negotiated with the customer. The Company is normally the prime contractor on any work it undertakes. The Company assigns a project manager and a field superintendent to maintain close contact with the customer and its engineers, to supervise personnel and the relocation, purchase, lease and maintenance of equipment and to schedule and monitor the Company's operations. The Company currently employs seven field superintendents. BACKLOG The Company's backlog of unfilled portions of land development contracts at December 31, 1997 was $4.4 million involving 12 projects, as compared to $3.4 million involving 19 projects at December 31, 1996. Since December 31, 1997 the Company has entered into new land development contracts in the Caribbean amounting to $2.9 million. The Company reasonably expects that most of the backlog, including the 1998 contracts, will be completed during the year ending December 31, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Revenues." BONDING In order to bid on some private construction contracts and substantially all government contracts, the Company must obtain a bond for the performance of the contract. The Company's bonding capacity has in the past been sufficient to enable the Company to perform some government and major private contracts. 6 COMPETITION The land development contracting business is extremely competitive, regardless of the general level of activity within the construction industry. The Company believes that the primary factors of competition are price, prior experience and relationships, the amount of machinery and heavy equipment available to complete a given job, the speed with which a company can complete a specific contract, the availability of an engineering staff to assist an owner in planning its projects so as to minimize costs, the ability to innovate and, where applicable, the ability to obtain bonding for large contracts in order to guarantee completion. Management believes that the Company competes effectively on the basis of the foregoing factors and that the Company's relative competitive position in its Caribbean markets is favorable. OTHER OPERATIONS MARINA Two subsidiaries of the Company own a Virgin Islands general partnership formed in 1988 to construct and operate a marina on a 4.92 acre parcel of land leased by the partnership from the United States Virgin Islands government. In December 1997, the Company entered into a contract to sell the marina for $3.3 million. The sale closed on February 3, 1998 in accordance with the terms and conditions outlined in the contract. The Company recognized a loss of $108,000 on the transaction in 1997. DISCONTINUED OPERATION In September 1989, a subsidiary of the Company obtained a minority interest in a partnership engaged in the manufacture, sale and distribution of acoustical ceiling tiles. The subsidiary invested approximately $1.2 million in the partnership for a 29 percent interest and two of the Company's directors obtained an 11 percent interest for which they paid $450,000. In January 1994, an Antiguan subsidiary of the Company became the new general partner and the Company's ownership interest in the partnership was increased to 64.5 percent. The directors' ownership interest was reduced to 6.5 percent. In November 1995, the Company elected to dispose of this operation because of its poor operating results and uncertain prospects for improvement. Accordingly, at December 31, 1995, the intended disposal was accounted for as a discontinued operation. The consolidated financial statements for all prior periods presented were restated to reflect the ceiling tile partnership as a discontinued operation. The Company's investment in the partnership was written down $800,000, to its estimated net realizable value of approximately $749,000, which consisted primarily of property, equipment and inventory with a net book value of approximately $1.4 million, along with debt of approximately $621,000. The Company provided no reserve for anticipated losses during the phase-out period and recognized no income tax benefit on the loss from discontinued operations. The Company sold its interest in the ceiling tile business in September 1996 in exchange for one secured promissory note in the amount of $600,000 and one unsecured promissory note in the amount of $385,000 and took an additional loss on disposal of approximately $488,000. The outstanding amounts as of December 31, 1997 on these notes were $600,000 and $216,000, respectively. TAX EXEMPTIONS AND BENEFITS The Company has benefitted for a number of years from having a substantial part of the earnings of its offshore operations taxed at rates lower than United States statutory Federal income tax rates due to tax exemptions and lower prevailing tax rates offshore. The United States Virgin Islands Industrial Development Commission ("IDC") has granted the Company certain tax exemptions that exempt a larger portion of the earnings of the Company's offshore operations from tax in the United States Virgin Islands through 2003, and the Government of Antigua and Barbuda granted a tax exemption on income that expired in 1996. 7 In April 1988, the IDC granted a subsidiary of the Company a 10-year tax exemption expiring in 1998, pursuant to which, and subject to certain conditions and exceptions, the Company's (i) production and sale of ready-mix concrete; (ii) production and sale of concrete block on St. Thomas and St. Johns and outside of the U. S. Virgin Islands; (iii) production and sale of sand and aggregate; and (iv) bagging of cement from imported bulk cement, are 100 percent exempt from all United States Virgin Islands real property, gross receipts (currently set at 4 percent) and excise taxes, 90 percent exempt from United States Virgin Islands income taxes, and approximately 83 percent exempt from United States Virgin Islands custom duties. The IDC granted the Company the tax exemption in return for the Company's commitment to: (i) make capital expenditures of at least $4.6 million for new or replacement equipment over a 10-year period; (ii) employ a minimum of 142 United States Virgin Islands residents as full-time personnel; (iii) spend at least $75,000 annually for a youth-training program; (iv) not increase the price of its concrete and related products except as the result of certain direct cost increases incurred by the Company over which it has no control; and (v) make an annual scholarship fund contribution of $150,000, which the Company has satisfied. In January 1994, the Company received a five-year extension, through April 2003, of its previously granted benefits. This extension was granted in return for the Company agreeing to: (i) continue to employ a minimum of 160 United States Virgin Islands residents as full-time personnel; (ii) make additional capital expenditures of $1.7 million; and (iii) continue to make a combined youth training/scholarship contribution of $225,000 per annum during the extension period. Furthermore, as a result of certain United States tax laws, earnings from the Company's offshore operations are not taxable for United States Federal income tax purposes and most post-April 1988 concrete and related product earnings in the United States Virgin Islands can be distributed to the Company in the United States free of statutory United States Federal income tax. However, the distribu tion to the Company's United States operations of: (i) earnings from the Com pany's United States Virgin Islands operations accumulated prior to April 1, 1988; or (ii) earnings from the Company's Antigua, St. Martin, St. Maarten, Dominica, Saba, St. Kitts, and Tortola operations, would in each case subject the Company to United States Federal income tax on any amounts so distributed, less applicable tax credits for taxes previously paid in such jurisdictions. At December 31, 1997, $33.7 million of such accumulated earnings from the Company's United States Virgin Islands, Antigua, St. Martin, St. Maarten, Dominica, Saba, St. Kitts, and Tortola operations had not been distributed to the Company's United States operations. The Company has not provided for Federal income tax on the undistributed earnings of foreign subsidiaries because the Company intends to permanently reinvest a portion of those earnings in regions offshore of the United States. The aforementioned tax exemption, along with the Company's ability to receive most of the current earnings from its United States Virgin Islands operations without being subjected to United States Federal income taxes thereon, result in a significant reduction in the tax expense (including Federal income taxes) incurred by the Company with respect to its earnings from Caribbean operations. For further information on both tax exemptions and income taxes in general, see Note 9 of Notes to Consolidated Financial Statements. EQUIPMENT The concrete and related products and the land development contracting businesses require the Company to lease or purchase and maintain many items of equipment. As of December 31, 1997, the Company's equipment included cranes, bulldozers, road graders, rollers, backhoes, earthmovers, hydraulic dredges, barges, and rock 8 crushers for use at the Company's rock crushing plants, equipment at the Company's bulk cement terminals and concrete block and batch plants, concrete mixer trucks, asphalt processing and paving equipment and other miscellaneous items. A portion of this equipment is encumbered by chattel mortgages. See Notes 8 and 12 of Notes to Consolidated Financial Statements and "Management Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." MISCELLANEOUS INVESTMENTS AND JOINT VENTURES The Company has invested or participated in several joint ventures in connection with the activities of its land development contracting division and concrete and related products division, which are more specifically described below. During 1997 the Company invested $123,000 for a 7 percent interest in a real estate joint venture in the Bahamas. The project has not yet received its final financing to start its activities. The Company will perform land development for the joint venture. In connection with a land development contract with the Government of Antigua and as partial consideration therefor, the Company obtained a 75 percent interest in a corporation formed to own and develop approximately 230 acres of real property in Antigua (the "Corbkinnon Property"), and a 1 percent interest in another corporation (the "Newport Project") formed to develop approximately 20,000 square feet of commercial property located in downtown St. Johns, Antigua. In 1990, the Company sold a portion of its 75 percent interest in the Corbkinnon Property for $500,000 and the buyer's commitment to provide 50 percent of the financing required to develop the project. The Company agreed to provide the first $500,000 of financing and provide a guarantee for 50 percent of all additional financing required. As a result of the transaction, the Company's remaining interest in the Corbkinnon Property is 34 percent. The Company did not record earnings or losses for the Corbkinnon Property or the Newport Project in 1997 because the amounts are not material. For additional information, see Notes 5 and 11 of Notes to Consolidated Financial Statements. The Company is a 43 percent shareholder in a corporation formed to construct condominium housing units in Antigua. The Company advanced $200,000 in capital contributions to the corporation. The Company recorded losses of $150,000 and $50,000 in 1997 and 1996, respectively. For additional information, see Note 5 of Notes to Consolidated Financial Statements. 9 EXECUTIVE OFFICERS The executive officers of the Company are as follows: Donald L. Smith, Jr., 76, a cofounder of the Company, has served as its Chairman of the Board, President and Chief Executive Officer since its formation in 1951. Richard L. Hornsby, 62, was appointed the Company's Executive Vice President in March 1989. Mr. Hornsby served as Vice President of the Company from August 1986 to February 1989. From September 1981 until July 1986 he was Financial Manager of R.O.L., Inc. and L.O.R., Inc., companies primarily engaged in various private investment activities. He has been a director of the Company since 1975 and served as Vice President-Finance from 1972 to 1977. Henry C. Obenauf, 68, was appointed Vice President-Engineering of the Company in March 1989, after having served as Vice President of the Company since 1977. Mr. Obenauf has been employed by the Company for over 21 years. Jan A. Norelid, 44, was appointed Vice President-Finance and Chief Financial Officer in October 1997. From January 1996 to September 1997, he owned and operated a printing company. Prior to that and from January 1991 he served as Chief Financial Officer for Althin Medical, Inc., a medical device manufacturer in Miami Lakes, Florida. Donald L. Smith, III, 44, was appointed Vice President-Construction Operations for the Company in December 1992. Prior to that and from March 1992, he served as Assistant Vice President of Construction Operations-South Florida and Caribbean of the Company. Mr. Smith joined the Company in 1976 and has served in various supervisory and managerial positions within the Company since that time. EMPLOYEES At December 31, 1997, the Company employed 52 persons in the land development contracting business in the Caribbean, of whom 13 are members of a union. The Company employed 369 persons in its concrete and related products division, of whom 131 are members of a union. The Company will utilize personnel in one division or another as its needs warrant. In addition, the Company employs 38 managerial, supervisory, and administrative personnel in the overall admin istration and management of all divisions of the Company. Employee relations in the Company are considered satisfactory and the Company has never been subjected to a work stoppage. ITEM 2. PROPERTY GENERAL Substantially all of the real property that the Company owns or leases is utilized by its concrete and related products division. The Company has one quarry in Puerto Rico, quarries, rock crushing plants and concrete batch plants on St. Thomas, St. Croix, Antigua, St. Martin, Saba and Tortola, concrete batch plants on Dominica, St. Maarten and St. Kitts, and bulk cement terminals and cement bagging facilities on St. Croix, St. Thomas, St. Maarten, Dominica and Antigua. In addition, the Company has asphalt plants on St. Croix and Antigua and concrete block plants on St. Thomas, Antigua and St. Maarten. 10 OTHER PROPERTY The Company also has a 34 percent interest in 230 acres of real property and a 1 percent interest in a commercial property development, both in Antigua (see "Business - Miscellaneous Investments and Joint Ventures"), and the Company owns undeveloped parcels of land in St. Johns, United States Virgin Islands. The Company sold its parcel of land in Collier County, Florida in 1997 for a gain of $165,000. The following table sets forth certain information concerning the property and facilities that are owned or leased by the Company for use in its operations.
LEASE EXPIRATION DESCRIPTION LOCATION WITH ALL OPTIONS AREA ----------- -------- ---------------- ---- Principal executive offices Deerfield Beach 5/07 8,410 sq. ft. (1) Maintenance shop for heavy equipment Deerfield Beach Month-to-Month 4.40 acres (1)(2) Concrete block plant and St. Thomas 6/04 11.00 acres (1) equipment maintenance facility Quarry and office building St. Thomas - 8.50 acres Quarry and concrete batch plant St. Thomas 2/08 44.00 acres (1) Barge terminal St. Thomas Month to Month 1.50 acres (1) Bulk cement terminal and bagging facility St. Thomas 5/12 .50 acres (1) Marina and adjoining commercial property St. Thomas 6/21 4.92 acres (1) Quarry St. Thomas 8/06 7.49 acres (1) Bulk cement terminal, bagging facility St. Croix - 7.00 acres Concrete batch plant and office St. Croix - 3.20 acres Quarry, rock crushing plant St. Croix - 61.34 acres Maintenance shop St. Croix 7/10 6.00 acres (1) Quarry St. Croix 5/03 10.78 acres (1) Concrete batch plant, concrete Antigua 9/16 22.61 acres (1) block plant, rock crushing plant, asphalt plant, quarry and office Bulk cement terminal and bagging facility Antigua - 8.00 acres Concrete batch plant, cement bagging Dominica 6/12 1.14 acres (1) plant, undeveloped land, silo and office Dominica - .77 acres Concrete batch plant and block plant St. Maarten 8/00 3.00 acres (1) Cement terminal and barge unloading facility St. Maarten 6/05 .30 acres (1) Bagging facility St. Maarten 4/06 .30 acres (1) Undeveloped land - future site of concrete St. Maarten 3/51 3.00 acres (1) batch plant, concrete block plant, equipment maintenance facility and office building Quarry, rock crushing plant, concrete Tortola - 30.00 acres batch plant, equipment maintenance facility and office building Quarry, rock crushing plant and Saba 12/02 6.00 acres (1)(3) concrete batch plant Concrete batch plant St. Kitts Month-to-Month 1.00 acre (1)(3) Quarry, rock crushing plant, concrete St. Martin 7/10 123.5 acres (1) batch plant and office building Quarry, rock crushing plant and Guaynabo, office building Puerto Rico 3/06 40.00 acres (1)(3)
- -------------------------------------------------------------------------------- (1) Underlying land is leased; however, any equipment or machinery on the land is owned by the Company. (2) Leased from Donald L. Smith, Jr., the Company's Chairman, President, and Chief Executive Officer. See Note 12 of Notes to Consolidated Financial Statements. (3) Acreage is estimated. 11 ITEM 3. 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. In 1992, Fore Golf, Inc. filed suit against the Company in the Ninth Judicial Circuit in and for Orange County, Florida, Case No. CI-92-5289. In this case, the Company was sued by a subcontractor, Fore Golf, Inc. for work which Fore Golf, Inc. allegedly performed in connection with the construction of two golf courses at Walt Disney World in Orlando, Florida, from approximately September 1990 through September 1991, the alleged unpaid contract balance in connection with this project and inefficiency costs. In June 1997, an order was issued by the Circuit Court of the Ninth Judicial Circuit 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 the second quarter to reflect the total estimated costs to be incurred should the Company not be successful in its post trial and appeal efforts. The Company has posted a bond for the damages, prejudgement interest and plaintiff's attorneys' fees. This bond is personally guaranteed by the Company's President. Management believes that it has appellate issues of merit and is pursuing remedies through the appellate court system. An appellate brief was submitted in February 1998. For further information, see Note 18 of Notes to Consolidated Financial Statements. In the late 1980's, Bouwbedrijf Boven Winden, N.V., ("BBW") currently a subsidiary of Devcon International Corp., supplied concrete to a large apartment complex on the French side of St. Maarten). At some point in the early 1990's the buildings began to develop exterior cracking and "popouts." In November 1993, BBW was named a defendant, among others, including the building's insurer, in a suit filed by the plaintiff, Syndicat des Coproprietaires la Residence Le Flamboyant (condominium owners association of Le Flamboyant), in the French court "Tribunal de Grande Instance de Paris" with case No. 510082/93. A French court assigned an expert to examine the cause of the cracking and popouts. In particular, the expert is to determine if the cracking/popouts are caused by a phenomenon known as alkali reaction (ARS). The plaintiff is seeking unspecified damages, including demolition and replacement of the 272 apartments. It is too early to predict the final outcome of this matter. Management believes the Company's defenses to be meritorious and does not believe that the outcome will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of 1997. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION The Company's Common Stock is traded in the over-the-counter market and quoted in the NASDAQ National Market System under the symbol DEVC. The following table sets forth the high and low sales prices for the Company's Common Stock for each quarter for the last two fiscal years as quoted in the NASDAQ National Market System. 1997 HIGH LOW ---- ---- --- First Quarter $ 6.50 $4.75 Second Quarter 5.50 4.25 Third Quarter 5.50 3.88 Fourth Quarter 5.50 4.50 1996 HIGH LOW First Quarter $10.63 $8.05 Second Quarter 10.38 8.50 Third Quarter 8.88 6.88 Fourth Quarter 7.00 6.13 As of March 20, 1998, there were 209 holders of record of the 4,498,935 outstanding shares of Common Stock. The closing sales price for the Common Stock on March 20, 1998, was $4.00. The Company paid no dividends in 1997 or 1996. The payment of cash dividends will depend upon the earnings, consolidated financial position and cash requirements of the Company, its compliance with loan agreements and other relevant factors existing from time to time. The Company does not presently intend to pay dividends. No unregistered securities were sold or issued in 1997, 1996 or 1995. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company and its consolidated subsidiaries are qualified in their entirety by, and should be read in conjunction with, the Consolidated Financial Statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The data for each of the five years in the period ended December 31, 1997 are derived from the Consolidated Financial Statements of the Company audited by KPMG Peat Marwick LLP, independent certified public accountants. The Consolidated Financial Statements of the Company as of December 31, 1997 and 1996 and for each of the years in the three year period ended December 31, 1997 and the report thereon appear elsewhere herein. 13
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- EARNINGS STATEMENT DATA: (In thousands, except per share amounts) Concrete and related products revenues $ 51,461 $ 52,987 $ 37,716 $ 39,342 $ 38,300 Contracting revenues 9,852 13,982 16,068 22,942 16,926 Other revenues 2,931 2,509 2,367 2,965 638 -------- -------- -------- -------- -------- Total revenues 64,244 69,478 56,151 65,249 55,864 -------- -------- -------- -------- -------- Cost of concrete and related products 41,659 39,277 29,069 29,200 31,820 Cost of contracting 9,709 12,458 14,103 19,250 19,700 Cost of other 2,311 1,913 1,721 2,388 529 ------- -------- -------- -------- -------- Gross profit 10,565 15,830 11,258 14,411 3,815 Operating expenses 23,143 12,359 10,984 9,926 11,970 ------- -------- -------- -------- -------- Operating (loss) income (12,578) 3,471 274 4,485 (8,155) Other deductions (2,651) (2,287) (1,961) (1,854) (3,338) ------- -------- -------- -------- -------- (Loss) income from continuing operations before income taxes (15,229) 1,184 (1,687) 2,631 (11,493) Income taxes 307 383 145 50 108 ------- -------- -------- -------- -------- (Loss) income from continuing operations (15,536) 801 (1,832) 2,581 (11,601) (Loss) income from discontinued operations, net - (488) (915) (470) 2,027 Cumulative effect of change in accounting principle - - - - 500 -------- -------- -------- -------- -------- Net (loss) earnings $(15,536) $ 313 $ (2,747) $ 2,111 $ (9,074) ======== ======== ======== ======== ======== Basic (loss) earnings per share: From continuing operations $ (3.45) $ .18 $ (.41) $ .59 $ (2.62) From discontinued operations - (.11) (.21) (.11) .46 From change in accounting principle - - - - .11 ------- -------- --------- -------- -------- $ (3.45) $ .07 $ (.62) $ .48 $ (2.05) ======= ======== ========= ======== ======== Weighted average number of shares outstanding 4,499 4,490 4,431 4,431 4,400 ======= ======== ========= ======== -------- BALANCE SHEET DATA: Working capital $ 8,713 $12,063 $ 4,848 $ 10,845 $ 3,312 Total assets 86,433 94,926 97,313 99,541 101,518 Long-term debt, excl current portion 16,982 19,251 15,548 17,454 16,776 Stockholders' equity 42,816 59,552 59,159 61,655 59,544
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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-K 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 changes in the Company's competitive environment. The Company cautions that the factors described above, among others, 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 YEAR ENDED DECEMBER 31, 1997 WITH YEAR ENDED DECEMBER 31, 1996 REVENUES The Company's revenues in 1997 were $64.2 million as compared to $69.5 million in 1996. This 7.5 percent decrease was primarily due to decreases in the land development contracting division revenues, and to a lesser extent, due to decreases in the Company's concrete and related products division revenues. The Company's concrete and related products division revenues decreased 2.9 percent to $51.5 million in 1997 from $53.0 million in 1996. This decrease was primarily due to decreased demand for this division's products on certain Caribbean islands, which was partially offset by an increased demand on other Caribbean islands. At the present time, the Company cannot predict whether concrete and related products revenue levels in 1998 will be less than or greater than revenue levels achieved in 1997. Revenues from the Company's land development contracting division decreased by 29.5 percent to $9.9 million in 1997 from $14.0 million in 1996. This decrease was primarily attributable to the completion in mid 1996 of several hurricane damage-related repair contracts which were not replaced by new contract backlog. The Company's backlog of unfilled portions of land development contracts at December 31, 1997 was $4.4 million involving 12 projects, as compared to $3.4 million involving 19 projects at December 31, 1996. Since December 31, 1997 the Company has entered into new land development contracts in the Caribbean amounting to $2.9 million. The Company reasonably expects that most of the backlog, including the 1998 contracts, will be completed during the year ending December 31, 1998. The Company needs to obtain additional new contracts as 1998 15 progresses or its contract revenue levels in 1998 will be lower than those obtained in 1997. The Company does not presently know whether it will be successful in obtaining such contracts. COST OF CONCRETE AND RELATED PRODUCTS Cost of concrete and related products as a percentage of concrete and related products revenues increased to 80.9 percent in 1997 from 74.1 percent in 1996. This increase was primarily attributable to a decrease in sales, to higher production costs, and to the mix of products sold during 1997. COST OF CONTRACTING Cost of contracting as a percentage of land development contracting revenues increased to 98.6 percent in 1997 from 89.1 percent in 1996. This increase is mainly attributable to losses taken on a contract in the Caribbean, and lower revenues. In addition, the Company's gross margins are also affected by the varying profitability levels of individual contracts and the stage of completion of such contracts. OPERATING EXPENSES Selling, general and administrative expenses ("SG&A expense") increased by 10.6 percent to $13.3 million in 1997 from $12.1 million in 1996. This increase was primarily attributable to an increase in taxes, not including taxes on income, in various islands of $460,000 and to an increase in retirement benefits of $275,000. SG&A expense as a percentage of revenue increased to 20.8 percent in 1997 from 17.4 percent in 1996. In the second quarter of 1997, the Company accrued a $4.5 million charge for the estimated costs related to a Florida State court judgement which the company is contesting through the appellate court. See item 3. Legal Proceedings. Due to lower volumes, the management upon its review of long-lived assets, determined that impairment had occurred on some of the Company's assets. An impairment expense was recognized of $2.4 million in 1997 compared to no expense in 1996. The allowance for doubtful accounts and notes was increased during the year to $5.8 million resulting in an expense for 1997 of $2.9 million compared to $302,000 in 1996. DIVISIONAL OPERATING INCOME An operating loss of $12.6 million is reported for 1997, representing a decrease of $16.1 million compared to operating income of $3.5 million in 1996. The Company's concrete and related products division had an operating loss of $4.3 million, representing a decrease of $9.2 million compared to operating income of $4.9 million in 1996. This decrease in profitability is primarily attributable to the increase in an allowance for doubtful accounts and notes of $2.2 million, to impairment of long-lived assets of $1.9 million, to increases in taxes, (not including income taxes), of $460,000, and to an increase in retirement benefits of $275,000. The decrease in profitability was also affected by increases in cost of sales even though revenue decreased. 16 The Company's land development contracting division's operating loss increased to a loss of $3.5 million in 1997 from a loss of $1.1 million in 1996. This increase is mainly attributable to losses taken on a contract in the Carribean, to the increase of the allowance for doubtful accounts and notes, and to impairment of long-lived assets. INCOME TAXES Income taxes decreased to $307,000 in 1997 from $383,000 in 1996. The Company's tax rate varies depending on the level of the Company's earnings in the various tax jurisdictions in which it operates, the level of operating loss carry-forwards and tax exemptions available to the Company. See Note 9 of Notes to Consolidated Financial Statements and "Business - Tax Exemptions and Benefits." FOURTH QUARTER ADJUSTMENTS The fourth quarter of 1997 included charges related to a $1.6 million adjustment based upon the annual physical inventories, a $2.4 million impairment loss on long-lived assets due to lower volumes in 1997, and a $2.6 million increase in the allowance for doubtful accounts and notes. It is not practical to determine the impact of these adjustments, if any, on previously reported quarters. NET EARNINGS (LOSS) The Company's net loss increased to $15.5 million in 1997 as compared to an income of $313,000 in 1996. This decrease in net earnings was primarily attributable to decreased gross profit of $3.9 million and $1.4 million in the concrete and related products division and the contracting division, respectively, a charge for litigation expense of $4.5 million, an impairment loss of $2.4 million, an increase in the provision for doubtful accounts and notes of $2.6 million, and an increase in SG&A expense of $1.3 million. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 WITH YEAR ENDED DECEMBER 31, 1995 REVENUES The Company's revenues in 1996 were $69.5 million as compared to $56.2 million in 1995. This 23.7 percent increase was primarily due to increases in the Company's concrete and related products division revenues, offset by decreases in the land development contracting division revenues. The Company's concrete and related products division revenues increased 40.5 percent to $53.0 million in 1996 from $37.7 million in 1995. This increase was primarily due to increased demand for this division's products on certain Caribbean islands, which was generated by an increase in the overall level of construction activity in certain locations in which the Company operates its business. The Company believes that this increase was primarily attributable to repair and rebuilding required as a result of Hurricanes Luis and Marilyn, which struck the Caribbean in September 1995. Revenues from the Company's land development contracting division decreased by 13.0 percent to $14.0 million in 1996 from $16.1 million in 1995. This decrease was primarily attributable to the completion in mid 1996 of several hurricane damage-related repair contracts which were not replaced by new contract backlog. The Company's backlog of unfilled portions of land development contracts at December 31, 1996 was $3.4 million involving 19 projects, as compared to $11.4 million involving 22 projects at December 31, 1995. Since December 31, 1996, the Company has entered into new land development contracts in the Caribbean amounting to $7.5 million. 17 COST OF CONCRETE AND RELATED PRODUCTS Cost of concrete and related products as a percentage of concrete and related products revenues decreased to 74.1 percent in 1996 from 77.1 percent in 1995. This decrease was primarily attributable to the mix of products sold, the locations in which sales were made during the year and the increase in revenues actually recognized in 1996. COST OF CONTRACTING Cost of contracting as a percentage of land development contracting revenues increased to 89.1 percent in 1996 from 87.8 percent in 1995. This increase is attributable to losses taken on certain contracts and by the significant levels of cost involved in owning and operating heavy construction equipment. In addition, the Company's gross margins are also affected by the varying profitability levels of individual contracts and the stage of completion of such contracts. OPERATING EXPENSES Selling, general and administrative expenses ("SG&A expense") increased by 12.9 percent to $12.1 million in 1996 from $10.7 million in 1995. This increase was primarily attributable to increases in insurance and to legal fees, primarily related to construction litigation, and by additional SG&A expense of the Company's new operations in St. Martin and Puerto Rico. SG&A expense as a percentage of revenue decreased to 17.4 percent in 1996 from 19.0 percent in 1995. This percentage decrease was primarily attributable to the increase in revenues recognized, offset by the increase in expenses actually incurred. DIVISIONAL OPERATING INCOME Operating income increased to $3.5 million in 1996 from $274,000 in 1995. The Company's concrete and related products division operating income increased to $4.9 million in 1996 from $1.3 million in 1995. This increase is primarily attributable to decreases in cost of sales and an increase in revenues for this division, offset by increases in SG&A expense. The Company's land development contracting division operating loss increased to a loss of $1.1 million in 1996 from a loss of $570,000 in 1995. This increase in loss is primarily attributable to the decline in contract revenues and increases in SG&A expense, principally legal fees associated with litigation regarding two of the Company's completed construction projects. INCOME TAXES Income taxes increased to $383,000 in 1996 from $145,000 in 1995. The Company's tax rate varies depending on the level of the Company's earnings in the various tax jurisdictions in which it operates, the level of operating loss carryforwards and tax exemptions available to the Company. See "Business - Tax Exemptions and Benefits." NET EARNINGS (LOSS) The Company's net earnings increased to income of $313,000 in 1996 from a net loss of $2.7 million in 1995. This increase in net earnings was primarily attributable to improvements in concrete and related products division profits, offset by increases in selling, general and administrative expenses, even though SG&A expense as a percentage of revenue declined. 18 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 (approximately $8.7 million at December 31, 1997) 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 December 31, 1997, the Company's liquidity and capital resources included cash and cash equivalents of $1.0 million and working capital of $8.7 million. Included in working capital is approximately $6.9 million of assets held for sale, of which $3.3 million represents a marina sold, and its related current debt retired, in the first quarter 1998. Although management's intention is to sell these assets during 1998, there can be no assurance that all assets will be sold. As of December 31, 1997, total outstanding liabilities was $43.6 million as compared to $35.4 million as of December 31, 1996. As of December 31, 1997, the Company had available lines of credit totaling $906,000. Cash flows provided by operating activities for the year ended December 31, 1997 was $1.8 million compared with $1.5 million for the year ended December 31, 1996. The primary use of cash for operating activities during the year ended December 31, 1997 was an increase in accounts receivable of $3.1 million. The primary sources of cash for the period were a reduction in costs in excess of billings and estimated earnings of $2.8 million and an increase in accounts payable and accrued expenses of $1.5 million. Net cash used in investing activities was $4.8 million in 1997. Purchases of property, plant, and equipment were $8.5 million, $1.9 million higher than in 1996 mainly due to investments in Puerto Rico. The purchases were partially financed through $5.1 million in equipment financing. The Company turned its fiscal year-end accounts receivable, excluding notes and employee receivables, approximately 5.3 times in each of 1997 and 1996. The Company entered into a credit agreement with a Caribbean bank in November 1996 for a total credit of $7.0 million. One part of the credit agreement is a term loan for $6.0 million repayable in monthly installments through November 2002. The Company had $4.9 million of borrowings outstanding on this loan at December 31, 1997. The second part is a revolving line of credit of $1.0 million. The credit line has a review and re-approval process in July of each year until 2002. The Company had no borrowings outstanding under this line of credit at 19 December 31, 1997. 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 is in violation of certain loan covenants as of December 31, 1997. The bank has agreed to waive the violations of the loan covenants, as long as the Company is current in its loan payments. 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 December 31, 1997, the Company had borrowings of $384,000 outstanding under this line. The Company has borrowed approximately $6.3 million from the Company President. The note is unsecured and bears interest at the prime interest rate. Eight hundred thousand is due on demand and $5.5 million is due on January 1, 1999. The President has the option to make 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 had a $5.0 million term loan with a Caribbean bank, repayable in monthly installments through December 2001. The interest rate on indebtedness outstanding at December 31, 1997 was 10.0 percent and the Company had $3.0 million of borrowings outstanding. The loan was secured by a leasehold mortgage on a marina in the U.S. Virgin Islands. The marina was sold in February 1998, and the loan was paid off in its entirety. The Company purchases equipment from time to time as needed for its ongoing business operations. The Company is currently replacing or upgrading some equipment used by the concrete and related products division, principally concrete trucks and quarry equipment. This should result in a net cash expenditure, after financing part of the equipment purchases, of approximately $2.0 million. At present, management believes that the Company's inventory of construction equipment is adequate for its current contractual commitments and operating activities, however, the acquisition of significant new construction contracts, depending on the nature of the contract, the job location and job duration, may require the Company to make significant investments in heavy construction equipment. 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 this equipment is $6.9 million. The proceeds from these sales will reduce debt and provide working capital. During 1997, the Company sold equipment with an original cost basis of approximately $892,000 and a net book value of $285,000, the net proceeds were approximately $312,000. The Company believes it has available or can obtain sufficient financing for most of its contemplated equipment replacements and additions. Historically, the Company has used a number of lenders to finance a portion of its machinery and equipment purchases on an individual asset basis. At December 31, 1997, amounts outstanding to these lenders totaled $9.6 million. These loans are typically repaid over a three to five-year term in monthly principal and interest installments. A significant portion of the Company's outstanding debt bears interest at variable rates. The Company could be negatively impacted by a substantial increase in interest rates. The Company has contingent obligations and has made certain guarantees in connection with acquisitions, its participation in certain joint ventures, certain employee and construction bonding matters and its receipt of a tax 20 exemption. As part of the 1995 acquisition of Societe des Carrieres de Grand Case (SCGC), a French company operating a ready-mix concrete plant and quarry in St. Martin, the Company agreed to pay the quarry owners (who were also the owners of SCGC), a royalty payment of $550,000 per year through August 2000, which at the Company's option, may be renewed for two successive five-year periods and requires annual payments of $550,000 per year. At the end of the fifteen year royalty period, the Company has the option to purchase a fifty hectare parcel of property for $4.4 million. In connection with a 1990 St. Maarten acquisition, the Company agreed to pay the seller annually an amount per unit of certain concrete and stone products sold by the Company in St. Maarten from April 1, 1990 to March 31, 1998, but in no event less than $500,000 per year. The Company has certain offsets available against this payment which has reduced the minimum annual payment to $350,000 per year. Notes receivable and accrued interest at December 31, 1997 include $11.9 million, net due the Company pursuant to certain promissory notes delivered to the Company in connection with two construction contracts with the Government of Antigua, $2.0 million of which is classified as a current receivable. The notes call for both quarterly and monthly principal and interest payments until maturity in 1997. The notes were not satisfied at maturity but the Antiguan government has advised the Company that payments will continue until the obligation is satisfied. The Government of Antigua has routinely made the required quarterly payments aggregating $1.3 million per year but has made only some of the required monthly payments. A portion of the payment received from Antigua was derived from the lease proceeds the Antiguan government received from the United States Department of Defense for the rental of two military bases. One of the bases was closed at the end of 1995, resulting in a shortfall of $700,000 per year in the required quarterly payments. To partially make up this shortfall, the Antiguan government has entered into a written agreement with the Company requiring Antigua to pay $600,000 per year from its fuel tax revenues. Payments under this agreement commenced in January 1997. The Company does not presently anticipate any other material increases in or accelerations of payments by the Government of Antigua. YEAR 2000 ISSUE The Company has developed plans to address the possible exposures related to the impact on its computer systems to be Year 2000 compliant. The plan provides for the conversion efforts to be completed by the end of 1999. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Management does not expect the financial impact of making the required system changes to be material to the Company's consolidated financial position, results of operations or cash flows which are being funded through operating cash flows. The Company is expensing all costs associated with these systems changes as the costs are incurred. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.130, REPORTING COMPREHENSIVE INCOME. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS 130 on the Company's consolidated financial position, results of operations or cash flows. 21 In June 1997, the FASB issued SFAS No.131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports to shareholders. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS 131 on the Company's consolidated financial position, results of operations or cash flows. In February 1998, the FASB issued SFAS No.132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. SFAS 132 standardizes the disclosure requirements of SFAS 87 and SFAS 106 to the extent practicable and recommends a parallel format for presenting information about pensions and other postretirement benefits. SFAS 132 is effective for fiscal years beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS 132 on the Company's consolidated financial position, results of operations or cash flows. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial information and the supplementary data required in response to this Item are as follows: PAGE NUMBER(S) Independent Auditors' Report 24 Financial Statements: Consolidated Balance Sheets 25-26 December 31, 1997 and 1996 Consolidated Statements of Operations For Each of the Years in the Three-Year Period 27-28 Ended December 31, 1997 Consolidated Statements of Stockholders' Equity For Each of the Years in the Three-Year Period Ended December 31, 1997 29 Consolidated Statements of Cash Flows For Each of the Years in the Three-Year Period Ended December 31, 1997 30-31 Notes to Consolidated Financial Statements 32-55 Schedule II - Valuation and Qualifying Accounts 61 23 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Devcon International Corp.: We have audited the consolidated financial statements of Devcon International Corp. and subsidiaries (the "Company") as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and this financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and this financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Devcon International Corp. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Fort Lauderdale, Florida March 27, 1998 24
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1997 and 1996 ASSETS 1997 1996 ------ ---- ---- Current assets: Cash $ 876,368 $ 303,994 Cash equivalents (note 8) 125,000 1,600,000 Receivables, net (notes 3,8 and 18) 13,928,997 13,310,398 Costs in excess of billings and estimated earnings (note 17) 329,707 3,124,860 Inventories (note 4) 4,779,121 5,976,252 Assets held for sale 6,919,511 - Other 937,290 825,853 ----------- ----------- Total current assets 27,895,994 25,141,357 Property, plant and equipment, net (note 8) Land 2,148,825 5,252,048 Buildings 3,365,775 4,202,324 Leasehold interests 6,302,592 13,276,394 Equipment 53,382,393 62,991,689 Furniture and fixtures 560,402 586,983 Construction in process 1,007,879 585,480 ----------- ----------- 66,767,866 86,894,918 Less accumulated depreciation (27,119,417) (38,820,612) ----------- ----------- 39,648,449 48,074,306 Investments in unconsolidated joint ventures and affiliates, net (note 5) 132,130 158,780 Advances to unconsolidated joint ventures and affiliates, net (note 5) 568,861 1,021,453 Receivables, net (notes 3 and 8) 15,137,701 17,296,278 Intangible assets, net of accumulated amortization 1,429,921 1,537,726 Other assets 1,620,204 1,696,240 ----------- ----------- Total assets $86,433,260 $94,926,140 =========== ===========
See accompanying notes to consolidated financial statements. 25
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Consolidated Balance Sheets (continued) LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ------------------------------------ ---- ---- Current liabilities: Accounts payable, trade and other $ 6,390,461 $ 5,950,704 Accrued expenses and other liabilities 2,702,517 1,163,944 Notes payable to banks (note 8) 384,473 400,000 Current installments of long-term debt (note 8) 8,990,968 4,424,726 Billings in excess of costs and estimated earnings (note 17) 137,408 112,652 Income taxes (note 9) 577,478 1,026,010 ----------- ----------- Total current liabilities 19,183,305 13,078,036 Long-term debt, excluding current installments and notes payable to banks (note 8) 16,981,738 19,251,369 Minority interest in consolidated subsidiaries (note 6) 1,923,629 1,925,446 Deferred income taxes (note 9) 399,791 495,400 Other liabilities (note 18) 5,129,135 624,204 ----------- ----------- Total liabilities 43,617,598 35,374,455 Stockholders' equity (note 15): Common stock, $0.10 par value. Authorized 15,000,000 shares, issued and outstanding, 4,498,935 shares in 1997 and 1996 449,894 449,894 Additional paid-in capital 12,064,133 12,064,133 Cumulative translation adjustment (1,200,000) - Retained earnings (note 9) 31,501,635 47,037,658 ----------- ----------- Total stockholders' equity 42,815,662 59,551,685 ----------- ----------- Total liabilities and stockholders' equity $86,433,260 $94,926,140 =========== ===========
Commitments and contingencies (notes 9, 12 and 18) See accompanying notes to consolidated financial statements. 26
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Consolidated Statements of Operations For Each of the Years in the Three-Year Period Ended December 31, 1997 1997 1996 1995 ---- ---- ---- Concrete and related products revenues $ 51,460,633 $52,987,242 $37,716,253 Contracting revenues 9,851,775 13,981,732 16,068,283 Other revenues 2,931,343 2,509,395 2,366,926 ------------ ----------- ----------- Total revenues 64,243,751 69,478,369 56,151,462 Cost of concrete and related products 41,659,401 39,276,983 29,069,207 Cost of contracting 9,708,684 12,457,949 14,102,977 Cost of other 2,310,628 1,913,286 1,720,911 ------------ ----------- ----------- Gross profit 10,565,038 15,830,151 11,258,367 Operating expenses: Selling, general and administrative 13,337,564 12,056,001 10,682,423 Provision for doubtful accounts and notes 2,932,245 302,863 301,510 Impairment of long-lived assets 2,373,288 - - Charge for litigation 4,500,000 - - ------------ ----------- ----------- Operating (loss) income (12,578,059) 3,471,287 274,434 ------------ ----------- ----------- Other income (deductions): Joint venture equity loss (note 5) (150,000) (50,000) - (Loss) gain on sale of property and equipment (372,104) (2,147) 164,116 Interest expense (2,668,277) (2,609,580) (2,555,848) Interest and other income 537,651 392,355 462,840 Minority interest 1,776 (17,819) (31,693) ------------ ----------- ----------- (2,650,954) (2,287,191) (1,960,585) ------------ ----------- ----------- (Loss) income from continuing operations before income taxes (15,229,013) 1,184,096 (1,686,151) Income taxes (note 9) 307,010 383,089 145,352 ------------ ----------- ----------- (Loss) income from continuing operations (15,536,023) 801,007 (1,831,503) Discontinued operation (note 10) Impairment loss - - (800,000) Loss from discontinued operation - - (115,000) Loss on sale of discontinued operation - (488,119) - ------------ ----------- ----------- Loss from discontinued operation - (488,119) (915,000) ------------ ----------- ----------- Net (loss) earnings $(15,536,023) $ 312,888 $(2,746,503) ============ =========== ===========
See accompanying notes to consolidated financial statements. 27
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Consolidated Statements of Operations (Continued) 1997 1996 1995 ---- ---- ---- Basic (loss) earnings per share: From continuing operations $ (3.45) $ .18 $ (.41) From discontinued operation - (.11) (.21) ---------- ----------- ----------- Net basic (loss) earnings $ (3.45) $ .07 $ (.62) ========== =========== =========== Diluted (loss) earnings per share: From continuing operations $ (3.45) $ .17 (.41) From discontinued operation - (.10) (.21) ---------- ---------- ----------- Net diluted (loss) earnings $ (3.45) $ .07 $ (.62) ========== =========== =========== Weighted average number of common shares outstanding - basic 4,498,935 4,490,329 4,431,360 ========== =========== =========== Weighted average number of common shares outstanding - diluted 4,498,935 4,596,536 4,431,360 ========== =========== ===========
See accompanying notes to consolidated financial statements. 28 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity For Each of the Years in the Three-Year Period Ended December 31, 1997 ADDITIONAL CUMULATIVE COMMON PAID-IN TRANSLATION RETAINED STOCK CAPITAL ADJUSTMENT EARNINGS TOTAL ----- ------- ---------- -------- ----- Balances at December 31, 1994 $443,118 $11,740,700 $ - $49,471,273 $61,655,091 Stock issued in connection with acquisition of additional partnership interest 3,333 246,665 - - 249,998 Net loss - - - (2,746,503) (2,746,503) ---------- ---------- ---------- ---------- ---------- Balances at December 31, 1995 446,451 11,987,365 - 46,724,770 59,158,586 Stock issued in connection with exercise of stock options 3,443 76,768 - - 80,211 Net earnings - - - 312,888 312,888 -------- ------- --------- ---------- ----------- Balances at December 31, 1996 449,894 12,064,133 $47,037,658 $59,551,685 Translation adjustment - - (1,200,000) - (1,200,000) Net loss - - - (15,536,023) (15,536,023) -------- ----------- --------- ----------- ----------- Balances at December 31, 1997 $449,894 $12,064,133 $(1,200,000) $31,501,635 $42,815,662 ======== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 29
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows For Each of the Years in the Three-Year Period Ended December 31, 1997 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net (loss) earnings $(15,536,023) $ 312,888 $(2,746,503) Adustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities: Depreciation and amortization 6,143,726 5,421,183 4,714,254 Deferred income tax benefit (95,609) (156,579) (777,021) Joint venture equity loss 150,000 50,000 - Provision for doubtful accounts and notes 2,932,245 302,863 301,510 Impairment on long-lived assets 2,373,288 - - Loss (gain) on sale of property and equipment 372,104 2,147 (164,116) Charge for litigation 4,500,000 - - Loss from discontinued operation - 488,119 915,000 (Increase) decrease in minority interest in consolidated subsidiaries (1,776) 17,819 31,693 Changes in operating assets and liabilities: (Increase) decrease in receivables (3,103,435) (2,314,992) 347,378 Decrease (increase) in costs in excess of billings and estimated earnings 2,795,153 337,124 (850,490) Decrease (increase) in inventories 388,218 (606,400) 1,222,357 (Increase) decrease in other current assets (111,438) 136,804 17,399 Increase in other assets (13,220) - (65,249) Increase (decrease) in accounts payable and accrued expenses 1,473,635 (1,527,284) 858,170 Increase (decrease) in billings in excess of costs and estimated earnings 24,756 (653,747) 710,121 (Decrease) increase in income taxes payable (148,532) 336,360 641,375 (Decrease) increase in other non- current liabilities (295,070) (502,838) 42,985 ----------- ---------- ----------- Net cash provided by continuing operations 1,848,024 1,643,467 5,198,863 Net cash used in discontinued operation - (102,005) (165,886) ------------ ---------- ----------- Net cash provided by operating activities $ 1,848,024 $1,541,462 $ 5,032,977 ============ ========== ===========
See accompanying notes to consolidated financial statements. 30
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years in the Three-Year Period Ended December 31, 1997 1997 1996 1995 ---- ---- ---- Cash flows from investing activities: Purchases of property, plant and equipment $(8,534,518) $(6,643,817) $(6,249,083) Proceeds from disposition of property, plant and equipment 572,724 5,876,197 697,887 Payment to acquire subsidiary company (71,803) (171,711) (1,000,000) Issuance of notes - (245,477) (227,233) Payments on notes 2,822,968 2,478,790 2,831,286 Advances to affiliates (123,350) - (36,209) Advances from affiliates 452,592 - 340,000 ----------- ----------- ----------- Net cash (used in) provided by investing activities (4,881,387) 1,293,982 (3,643,352) ------------ ----------- ----------- Cash flows from financing activities: Proceeds from debt 6,795,917 10,823,916 5,986,004 Principal payments on debt (4,514,833) (13,452,545) (6,585,891) Payments for debt issuance costs - (200,485) - Net borrowings (repayments) from bank overdrafts (150,347) 481,526 (315,650) ------------ ----------- ----------- Net cash provided by (used in) financing activities 2,130,737 (2,347,588) (915,537) ------------ ----------- ----------- Net (decrease) increase in cash and cash equivalents (902,626) 487,856 474,088 Cash and cash equivalents at beginning of year 1,903,994 1,416,138 942,050 ----------- ----------- ---------- Cash and cash equivalents at end of year $ 1,001,368 $ 1,903,994 $ 1,416,138 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid for: Interest $ 2,641,531 $ 2,648,250 $ 2,579,748 =========== =========== =========== Income taxes $ 249,523 $ 203,308 $ 87,888 =========== =========== ===========
Supplemental non-cash items: During 1995, the Company issued 33,333 shares of common stock to acquire an additional interest in a Mexican manufacturing partnership. During 1996, the minority interest shareholders in the new subsidiary operating in Puerto Rico exchanged equipment, leaseholds and notes receivable totaling $1,231,774 for their 49.98 percent ownership. During 1997, the Company recorded a translation adjustment of $1.2 million related to its subsidiary in St. Martin. See accompanying notes to consolidated financial statements. 31 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS Devcon International Corp. and its subsidiaries (the "Company") produce and distribute ready-mix concrete, crushed stone, concrete block, and asphalt and distribute bulk and bagged cement in the Caribbean. The Company also performs earthmoving, excavating and filling operations and builds golf courses, roads, utility infrastructures, dredges waterways and constructs deep-water piers and marinas in the Caribbean. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Devcon International Corp. and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's investments in unconsolidated joint ventures and affiliates are accounted for by the equity method. Under the equity method, original investments are recorded at cost and adjusted by the Company's share of undistributed earnings or losses of these companies. (c) REVENUE RECOGNITION CONCRETE AND RELATED PRODUCTS Revenue is recognized when the products are delivered. CONTRACTING The Company uses the percentage of completion method of accounting for financial statement preparation and tax reporting purposes. Revenues earned and related costs are recorded based on the Company's estimates of the percentage of completion of each project using the cost-to-cost method. Anticipated losses on contracts are charged to earnings when probable and estimable. Changes in estimated profits on contracts are recorded in the period of change. Selling, general and administrative expenses are not allocated to contract costs. Monthly billings are based on the percentage of work completed in accordance with a specific contract. Contracts are generally completed within one year of the commencement date, although the Company has had contracts that extended past one year. 32 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements OTHER Other revenue consists of revenue from a marina owned by the Company. This marina was sold in 1998. Revenue is recognized when products or services are delivered. (d) CASH AND CASH EQUIVALENTS The Company considers financial instruments with an original maturity or restriction of three months or less at time of purchase to be cash equivalents. (e) INVENTORIES The cost of sand, stone, cement and concrete block inventories is determined using average costs approximating the first-in, first-out (FIFO) method and is not in excess of market. All other inventories are stated at the lower of average cost or market. (f) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation on property, plant and equipment is calculated on the straight-line method over the estimated useful life of the asset. Property, plant and equipment, including leasehold improvements, are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Useful lives and/or lease terms for each asset type are summarized below: Buildings 15 - 40 years Leasehold interests 3 - 55 years Equipment 3 - 20 years Furniture and fixtures 3 - 10 years In 1997, the Company's management segregated a number of assets, which the Company has identified as not being required for its current or future business operations. These assets include real estate, earth-moving machinery, and various other items of construction rolling equipment and are classified as assets held for sale. (g) FOREIGN CURRENCY TRANSLATION The Company owns subsidiaries whose functional currencies are the Eastern Caribbean Dollar and the French Franc. The assets and liabilities of these subsidiaries have been translated into U.S. dollars at year-end exchange rates. Income statement accounts are translated into U.S. dollars at average exchange rates during the period. The translation adjustment for 1997 decreased equity by $1.2 million. The adjustment for 1996 was not significant. 33 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (h) INTANGIBLE ASSETS The excess of cost over the fair value of net assets of subsidiaries acquired and non-compete agreements are amortized over five to fifteen year periods on a straight-line basis. The Company periodically evaluates the recoverability of its intangible assets as well as their amortization periods to determine whether an adjustment to the carrying value or a revision to the estimated useful lives is appropriate. The primary indicators of recoverability are the current and forecasted operating cash flows which pertain to that particular asset. An entity that has a deficit in its cash flow from operations for a full fiscal year, in light of the surrounding economic environment, is viewed by the Company as a situation which could indicate an impairment of value. Taking into account the above factors, the Company determines that an impairment loss has been triggered when the future projected undiscounted cash flows associated with the intangible asset does not exceed its current carrying amount and the amount of the impairment loss to be recorded is the difference between the current carrying amount and the future projected discounted cash flows. Based on the Company's policy, management believes that there is no impairment of value related to the intangible assets as of December 31, 1997. Accumulated amortization on intangible assets amounted to $550,795 in 1997 and $371,187 in 1996. (i) EARNINGS (LOSS) PER SHARE In December of 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128") which establishes new standards for computing and presenting earnings per share. Prior periods have been presented to conform to SFAS 128. Earnings per share for all prior periods have been restated to reflect the provisions of this statement. Basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed assuming the exercise of stock options, as well as their related income tax effects, unless their effect was antidilutive. For loss periods, weighted average common share equivalents are excluded from the calculation as their effect would be antidilutive. See Note 2 of Notes to Consolidated Financial Statements for the computation of basic and diluted earnings per share data. (j) FOREIGN OPERATIONS Various portions of the Company's operations are conducted in foreign areas, primarily Antigua, St. Maarten, St. Martin, Tortola, Dominica, Saba and St. Kitts, all of which are in the Caribbean. In 1997, 62.2 percent of the Company's revenues were derived from 34 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements foreign operations. Overseas contract work performed by the parent company (a United States corporation) is not considered foreign source revenue for purposes of the foregoing calculation. The potential risks of doing business in foreign areas include potential adverse changes in the diplomatic relations of foreign countries with the United States, changes in the relative purchasing power of the United States dollar, hostility from local populations, adverse effects of exchange controls, restrictions on the withdrawal of foreign investment and earnings, government policies against busi nesses owned by non-nationals, expropriations of property, the instability of foreign governments and the risk of insurrection that could result in losses against which the Company is not insured. The Company was not subject to these risks in Florida and is not subject to them in Puerto Rico or the United States Virgin Islands (United States territories that use the United States dollar as their currency). Although the Company has not encountered significant difficulties in its foreign operations in the past, there can be no assurance that the Company will not encounter difficulties in the future. (k) INCOME TAXES The Company and certain of its domestic subsidiaries file consolidated Federal and state income tax returns. Subsidiaries located in U.S. possessions and foreign countries file individual income tax returns. Deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting and income tax purposes. U.S. income taxes are not provided on undistributed earnings which are expected to be permanently reinvested by the foreign subsidiaries located in Antigua, the Netherlands Antilles, the French West Indies, the British Virgin Islands, Dominica, Grand Cayman, the Bahamas and certain subsidiaries located in U.S. possessions. The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income for the period that includes the enactment date. 35 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (l) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. (m) IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of SFAS No. 121 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Due to lower volumes in 1997, the Company recorded a charge of approximately $2.4 million for the impairment of long-lived assets during 1997. (n) STOCK OPTION PLANS Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. 36 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (o) RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME. SFAS 130 establishes standards for reporting and displaying of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS 130 on the Company's consolidated financial position, results of operations or cash flows. In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in the annual consolidated financial statements and requires that these enterprises report selected information about operating segments in interim financial reports to shareholders. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS 131 on the Company's consolidated financial position, results of operations or cash flows. In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. SFAS 132 standardizes the disclosure requirements of SFAS 87 and SFAS 106 to the extent practicable and recommends a parallel format for presenting information about pensions and other postretirement benefits. SFAS 132 is effective for fiscal years beginning after December 15, 1997. Management does not anticipate a significant impact of the adoption of SFAS 132 on the Company's consolidated financial position, results of operations or cash flows. (p) RECLASSIFICATION Certain prior year amounts have been reclassified to conform with the current year presentation. (2) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share data:
1997 1996 1995 ---- ---- ---- Weighted average shares-outstanding 4,498,935 4,490,329 4,431,360 Effect of dilutive securities: Options - 106,207 - --------- --------- ------ Diluted shares 4,498,935 4,596,536 4,431,360 ========= ========= =========
37 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Options to purchase 148,300 shares of common stock at $2.33 per share, were outstanding for the year ended December 31, 1997, but were not included in the computation of diluted earnings per share because the inclusion of the options would be antidilutive. The options expire at varying dates. Options to purchase 416,380 shares of common stock, at prices ranging from $2.33 to $7.00 per share, were outstanding for the year ended December 31, 1995, but were not included in the computation of diluted earnings per share because the inclusion of the options would be antidilutive. The options expire at varying dates. (3) RECEIVABLES Receivables consist of the following:
DECEMBER 31, -------------------------- 1997 1996 ---- ---- Concrete and related products division trade accounts receivable $11,343,234 $10,005,085 Land development contracting division trade accounts receivable, including retainages 4,652,164 2,992,384 Other division trade accounts receivable 81,749 167,093 Accrued interest and other receivables 114,986 71,715 Notes and other receivables due from the Government of Antigua and Barbuda, net 13,028,885 15,642,579 Trade notes receivable - other 5,132,985 4,294,370 Due from employees and officers 510,760 517,574 ----------- ----------- 34,864,763 33,690,800 Allowance for doubtful accounts and notes (5,798,065) (3,084,124) ---------- ----------- $29,066,698 $30,606,676 =========== ===========
Receivables are classified in the consolidated balance sheets as follows:
DECEMBER 31, -------------------------- 1997 1996 ---- ---- Current assets $13,928,997 $13,310,398 Noncurrent assets 15,137,701 17,296,278 ----------- ----------- $29,066,698 $30,606,676 =========== ===========
Retainage will be due upon completion of construction contracts and acceptance by the customer. The Company expects retainage on completed contracts will be collected during 1998. Included in notes and other receivables are unsecured notes due from the Government of Antigua and Barbuda totaling a net amount of $11,932,433 and $14,598,656 in 1997 and 1996, respectively, which were delivered to the 38 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Company in connection with two construction contracts performed by the Company for the Government of Antigua and Barbuda, $2.0 million of which is classified as a current receivable. The notes are accounted for using the cost-recovery method and all payments received are applied against the outstanding principal balance of the notes. The notes call for both quarterly and monthly principal and interest payments until maturity in 1997. The notes will not be satisfied at maturity but the Antiguan government has advised the Company that payments will continue until the obligation is satisfied. The Government of Antigua has routinely made quarterly and monthly payments. A portion of the payment received from Antigua is derived from the lease proceeds that the Antiguan government receives from the United States Department of Defense for the rental of a military base. The Antiguan government has also entered into a written agreement with the Company requiring Antigua to pay $600,000 per year from its fuel tax revenues. Payments under this agreement commenced in January 1997. The Company does not presently anticipate any other material increases in or accelerations of payments by the Government of Antigua. Notes receivable from an Antiguan government agency, amounting to $855,803 in 1997 and 1996, are included in the total due from the government of Antigua, along with Antigua-Barbuda Government Development Bonds 1994-1997 series amounting to $240,649 and $188,120 in 1997 and 1996, respectively. The Company also has trade receivables from various Antiguan government agencies of $472,133 and $476,652 in 1997 and 1996, respectively. Several of the Company's customers perform services for the Antiguan government and depend on payments from the government to satisfy their obligations to the Company. Trade notes receivable - other consist of the following:
DECEMBER 31, -------------------------- 1997 1996 ---- ---- Unsecured promissory notes receivable with varying terms and maturity dates $ 342,990 $ 408,645 Secured promissory notes receivable with varying terms and maturity dates 534,755 544,756 8.0 percent note receivable due in weekly installments from April 1994 through March 2002, secured by first and second mortgages on two parcels of land 393,493 467,816 8.0 percent note receivable, due on demand, secured by first mortgage on real property 826,231 805,341 Notes receivable bearing interest at 2.0 percent over prime interest rate, secured by real estate 549,402 549,402
39 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements
DECEMBER 31, -------------------------- 1997 1996 ---- ---- 8.0 percent note receivable, due in installments through July 2005, secured by land and building 600,000 600,000 12.5 percent note receivable, due in installments through June 30, 2001 and secured by pledge of stock of subsidiary company (see note 5) 559,187 604,760 6.0 percent note receivable, due in monthly installments from August 1997 through July 2000 215,127 313,650 8.0 percent note receivable, due in installments through January 5, 2008, secured by real estate 1,111,800 - ---------- ---------- $5,132,985 $4,294,370 ========== ==========
(4) INVENTORIES
DECEMBER 31, -------------------------- 1997 1996 ---- ---- Inventories consist of the following: Sand, stone, cement and concrete block $3,036,605 $5,262,116 Maintenance parts 1,229,380 1,232,562 Other 513,136 504,000 ---------- ---------- $4,779,121 $6,998,678 ========== ==========
(5) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES AND AFFILIATES At December 31, 1997, the Company has equity interests in three real estate ventures, a 43 percent equity interest in a foreign construction company, a 1 percent equity interest in a commercial property development in Antigua and a 7 percent equity interest in a real estate project in the Bahamas (see Note 14). One real estate joint venture was formed primarily to acquire and develop land for sale in Antigua, West Indies. The other real estate venture was formed to develop property in Florida and has insignificant assets and operations. Losses of $150,000 and $50,000 were recognized in 1997 and 1996, respectively, related to the Company's investment in the foreign construction company. No income or loss was recognized in 1997 and 1996 on any of the other ventures because the amounts were not material. 40 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements
DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- UNCONSOLIDATED JOINT UNCONSOLIDATED JOINT VENTURES AND AFFILIATES VENTURES AND AFFILIATES ----------------------- ----------------------- ADVANCES INVESTMENTS ADVANCES INVESTMENTS TO IN TO IN -------- ----------- -------- ----------- Commercial property $ 11,323 $ - $ 11,323 $ - Real estate 507,538 132,130 960,130 8,780 Construction 50,000 - 50,000 150,000 -------- -------- ---------- ---------- $568,861 $132,130 $1,021,453 $ 158,780 ======== ======== ========== ==========
(6) ACQUISITIONS In May 1996, the Company contributed approximately $1.2 million in capital to a new subsidiary company in return for a 50.02 percent ownership interest. The new subsidiary leases and operates a quarry in Guaynabo, Puerto Rico. Capital contributions of the Company's minority ownership partners, amounting to approximately $1.2 million, are classified as part of minority interest in consolidated subsidiaries. (7) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of financial instruments including cash, cash equivalents, receivables, net, other current assets, accounts payable trade and other, accrued expenses and other liabilities, notes payable to banks, and current installments of long-term debt approximated fair value at December 31, 1997 because of the short maturity of these instruments. The carrying value of debt and notes receivable approximated fair value at December 31, 1997 based upon the present value of estimated future cash flows. (8) LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ---------------------------- 1997 1996 ---- ---- Installment notes payable in monthly installments through 2002, bearing interest at a weighted average rate of 9.2 percent and secured by equipment with a carrying value of approximately $12,416,000 $9,560,625 $6,943,967 Notes and mortgages payable in installments through 2003, bearing interest at 8.0 to 10.8 percent and secured by equipment and real property with a carrying value of approximately $4,201,000 3,452,557 4,027,166
41
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements DECEMBER 31, ---------------------------- 1997 1996 ---- ---- Obligation arising from an acquisition, payable in monthly installments through 1998, discounted at 10.0 percent 200,683 375,895 Unsecured notes payable due through 2002, bearing interest at a weighted average rate of 8.1 percent 1,547,201 1,013,838 Unsecured note payable to the Company's President, $800,000 due on demand and balance due January 1, 1999 and bearing interest at the prime interest rate 6,294,982 5,397,561 Note payable to bank under a $400,000 revolving line of credit, due on demand, secured by a certificate of deposit and bearing interest at the prime interest rate - 400,000 Note payable to a bank under a $1,000,000 revolving line of credit, matured in June 1997, bearing interest at 0.5 percent over the prime interest rate - 1,000 Note payable to a bank under a $500,000 unsecured overdraft facility due on demand, bearing interest at 14.0 percent 384,473 - Bank term loan of $6,000,000 due in monthly installments from December 1996 through November 2002 and bearing interest at 1.0 percent over the prime interest rate. Secured by notes receivable from the Government of Antigua and real property and equipment with a net carrying value of approximately $7,309,000 4,916,658 5,916,668 ----------- ----------- Total debt outstanding $26,357,179 $24,076,095 =========== ===========
The effective interest on all debt outstanding was 10.6 percent at December 31, 1997 and 10.4 percent at December 31, 1996. 42
DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Shown in the consolidated balance sheets under the following captions: DECEMBER 31, ---------------------------- 1997 1996 ---- ---- Current installments of long-term debt $ 8,990,968 $ 4,424,726 Notes payable to banks 384,473 400,000 Long-term debt 16,981,738 19,251,369 ----------- ----------- $26,357,179 $24,076,095 =========== ===========
The total maturities of long-term debt, subsequent to December 31, 1997 are as follows: 1998 $ 9,375,442 1999 9,424,505 2000 3,488,088 2001 2,269,583 2002 1,185,363 Thereafter 614,198 ----------- $26,357,179 In 1998, the Company sold a marina in the United States Virgin Islands and repaid its associated debt of approximately $3.0 million. The Company is in violation of certain loan covenants for the bank term loan as of December 31, 1997. The bank has agreed to waive the violations of the loan covenants, as long as the Company is current in its loan payments. (9) INCOME TAXES Income tax expense (benefit) consists of:
CURRENT DEFERRED TOTAL ------- -------- ----- 1997: Federal $ - $ (35,081) $(35,081) State - - - Foreign 402,619 (60,528) 342,091 -------- --------- -------- $402,619 $ (95,609) $307,010 ======== ========= ======== 1996: Federal $ - $ - $ - State - - - Foreign 539,668 (156,579) 383,089 -------- --------- -------- $539,668 $(156,579) $383,089 ======== ========= ======== 1995: Federal $ 5,000 $ - $ 5,000 State - - - Foreign 917,373 (777,021) 140,352 -------- --------- -------- $922,373 $(777,021) $145,352 ======== ========= ========
43 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements The significant components of deferred income tax benefit attributable to income or loss from continuing operations for the years ended December 31, 1997, 1996 and 1995 are as follows:
DECEMBER 31, ------------------------------------------- 1997 1996 1995 ---- ---- ---- Deferred income tax (benefit)expense $ (2,354,695) 364,000 $2,342,000 Increase (decrease) in valuation allowance for deferred tax assets 2,259,086 (520,579) (3,119,021) ---------- ---------- ---------- $ ( 95,609) $ (156,579) $ (777,021) ============ ---------- ----------
The actual expense differs from the "expected" tax expense computed by applying the U.S. Federal corporate income tax rate to earnings before income taxes as follows:
1997 1996 1995 ---- ---- ---- Computed "expected" tax (benefit) expense $(4,594,000) $402,600 $ (934,000) Increase (reduction) in income taxes resulting from: Tax incentives granted to a subsidiary in U.S. possession - (94,000) - Tax incentives granted to foreign subsidiaries (629,000) (1,097,000) (1,208,000) Change in deferred tax valuation allowance 2,259,086 (520,579) - Net operating losses not utilized 3,466,235 1,648,979 2,294,000 Other (195,311) 43,089 (6,648) ---------- ---------- ---------- $ 307,010 $ 383,089 $ 145,352 =========== ========== ==========
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) net operating loss carryforwards. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 are presented below: 44 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements
DECEMBER 31, ---------------------------- 1997 1996 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 7,861,345 $ 6,024,000 Other 702,350 - ----------- ----------- Total gross deferred tax assets 8,563,695 6,024,000 Less valuation allowances (5,873,486) (3,614,400) ----------- ----------- Net deferred tax assets 2,690,209 2,409,600 Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation and capitalized interest (2,690,000) (2,458,000) Investments in joint ventures, principally due to differences in recording the investment between book and tax (400,000) (447,000) ----------- ----------- Total gross deferred tax liabilities (3,090,000) (2,905,000) Net deferred tax liabilities $ (399,791) $ (495,400) =========== ===========
The valuation allowance for deferred tax assets as of December 31, 1997 was $5.9 million. The valuation allowance was established at approximately 70 percent of the potential deferred tax benefit as the Company believes it can utilize net operating losses via partial repatriation of foreign subsidiary earnings. In April 1988, the U.S. Virgin Islands Industrial Development Commission (IDC) granted a subsidiary of the Company a 10-year tax exemption expiring in April 1998, pursuant to which, and subject to certain conditions and exceptions, the Company's (i) production and sale of ready-mix concrete; (ii) production and sale of concrete block on St. Thomas and St. Johns and outside of the U.S. Virgin Islands; (iii) production and sale of sand and aggregate; and (iv) bagging of cement from imported bulk cement, are 100 percent exempt from all United States Virgin Islands real property, gross receipts (currently set at 4.0 percent) and excise taxes, 90.0 percent exempt from United States Virgin Islands income taxes, and approximately 83 percent exempt from United States Virgin Islands customs duties. The IDC granted the Company the tax exemption in return for the Company's commitment to: (i) make capital expenditures of at least $4.6 million for new or replacement equipment over a 10-year period; (ii) employ a minimum of 142 United States Virgin Islands residents as full-time personnel; (iii) spend at least $75,000 annually for a youth-training program; (iv) not increase the price of its concrete and related products, except as the result of certain direct cost increases incurred by the Company over which it has no control; and (v) make an annual scholarship fund contribution of $150,000. 45 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements In January 1994, the Company received a five-year extension, through April 2003, of its previously granted benefits. This extension was granted in return for the Company agreeing to: (i) continue to employ a minimum of 160 United States Virgin Islands residents as full time personnel; (ii) make additional capital expenditures of $1.7 million; and (iii) continue to make a combined job training/scholarship contribution of $225,000 per annum during the extension period. The Company believes it is in compliance with all the requirements of these programs. In partial consideration for the Company's work on a major contract, the Government of Antigua granted two subsidiaries of the Company a 10-year tax holiday effective January 1, 1987 and expired on December 31, 1996 from all taxes due (i) in connection with the Company's construction contract with Antigua to, among other things, dredge St. John's harbor, (ii) as a result of the Company's participation in a joint venture to develop 230 acres of vacant land as well as 20,000 square feet of commercial property in Antigua; and (iii) in connection with the Company's sale of concrete and related products in Antigua. The tax holiday also exempted the Company from certain accrued tax liabilities. In 1989, in connection with and in consideration for additional work done by the Company with respect to the foregoing contract, the Government of Antigua granted an additional tax exemption to the Company. The tax exemption exempted the Company from taxes that would otherwise result from the Company's income relating to a construction contract in Jolly Harbor, Antigua. At December 31, 1997, approximately $33.7 million of foreign subsidiaries earnings have not been distributed and no U.S. income taxes have been provided thereon as these earnings are considered permanently reinvested in the subsidiaries' operations, and in the year earned, were not of the nature which would require current income tax recognition under United States income tax laws. Should the foreign subsidiaries distribute these earnings to the parent company or provide the parent company access to these earnings through other means, taxes at the U.S. Federal tax rate, net of foreign tax credits, may be incurred. At December 31, 1997, the Company had accumulated net operating loss carryforwards available to offset future taxable income in their Caribbean and United States operations of approximately $20.8 million, which expire in varying periods through the year ended December 31, 2006. (10) DISCONTINUED OPERATIONS In September 1989, a subsidiary of the Company obtained a minority interest in a partnership engaged in the manufacture, sale and distribution of acoustical ceiling tiles. The subsidiary invested approximately $1.2 million in the partnership for a 29.0 percent interest and two of the Company's directors obtained an 11.0 percent interest for which they paid $450,000. In January 1994, an Antiguan subsidiary of the Company became the new general partner and the Company's ownership interest in the partnership was increased to 64.5 percent. The directors' ownership interest was reduced to 6.5 percent. In November 1995 the Company decided to sell this operation because of its poor operating 46 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements results and uncertain prospects for improvement. Accordingly, at December 31, 1995, the intended disposal was accounted for as a discontinued operation. The consolidated financial statements for all prior periods were presented restated to reflect the ceiling tile partnership as a discontinued operation. The Company's investment in the partnership was written down $800,000, to its estimated net realizable value of approximately $749,000, which consists principally of property, equipment and inventory with a net book value of approximately $1.4 million, along with debt of approximately $621,000. The Company provided no reserve for anticipated losses during the phase-out period and recognized no income tax benefit on the loss from discontinued operations. The Company sold its interest in the ceiling tile business in September 1996 in exchange for one secured promissory note in the amount of $600,000 and one unsecured promissory note in the amount of $385,000 and took an additional loss on disposal of approximately $488,000 at December 31, 1996. The outstanding amounts of the two notes as of December 31, 1997, were $600,000 and $216,000, respectively. (11) FOREIGN SUBSIDIARIES Summary combined financial information for the Company's foreign subsidiaries, located in the Caribbean, except for those located in the U.S. Virgin Islands and Puerto Rico are as follows:
DECEMBER 31, -------------------------- 1997 1996 ---- ---- Current assets $12,208,735 $14,707,914 Advances to the Company (7,380,516) (3,821,952) Property, plant and equipment, net 19,160,861 22,144,913 Investment in joint ventures and affiliates, net 654,126 1,158,233 Notes receivable, net 13,556,730 15,923,419 Other assets 1,502,820 1,432,475 ----------- ----------- Total assets $39,702,756 $51,545,002 =========== =========== Current liabilities $ 5,271,958 $ 4,453,492 Long-term debt 2,944,665 1,916,966 Equity 31,486,133 45,174,544 ----------- ----------- Total liabilities and equity $39,702,756 $51,545,002 =========== ===========
1997 1996 1995 ---- ---- ---- Revenue $39,979,868 $36,474,931 $29,858,843 Expenses 43,140,338 34,283,074 27,955,868 ----------- ----------- ----------- Net (loss) earnings $(3,160,470) $ 2,191,857 $ 1,902,975 =========== =========== ===========
47 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (12) LEASE COMMITMENTS The Company leases real property, buildings and equipment under operating leases that expire over one to fifty-five years. Future minimum lease payments under noncancellable operating leases as of December 31, 1997 are as follows:
OPERATING LEASES ------------ Years ending December 31, 1998 $ 3,680,338 1999 3,687,107 2000 3,546,138 2001 1,335,253 2002 1,175,431 Thereafter 10,788,292 ----------- Total minimum lease payments $24,212,559 ===========
Total rent expense for operating leases was $4,083,000 in 1997, $1,843,719 1996 and $1,147,041 in 1995. Some operating leases have provisions for contingent rentals or royalties based on related sales and production; such contingent expense amounted to $261,138 in 1997, $160,433 in 1996 and $63,575 in 1995. Included in the above minimum lease commitments are royalty payments due to the owners of the Societe des Carrieres de Grand Case (SCGC) quarry. See Note 18. During November 1997, the Company sold its leasehold right on a long term land lease with the Dutch government of St. Maarten. In connection with this transaction the Company recorded a loss on disposition of leasehold of approximately $240,000. The operating land lease was revised so that the property will be vacated by mid-1998. On February 3, 1998, the Company sold its property holdings at Crown Bay Marina on St. Thomas, U.S. Virgin Islands for $3.3 million which approximated net book value and related costs of disposition. The proceeds from the sale were utilized to repay debt on the property of approximately $3.0 million. The related long term operating lease was transferred by assignment to the new owner of Crown Bay Marina. (13) LINES OF BUSINESS The Company operates primarily in two principal lines of business. Information about the Company's operations in these different industries are as follows:
DECEMBER 31, ---------------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues: Concrete and related products $ 51,460,632 $52,987,242 $ 37,716,253 Contracting 9,851,776 13,981,732 16,068,283 Other 2,931,343 2,509,395 2,366,926 ------------ ----------- ------------ Total $ 64,243,751 $69,478,369 $ 56,151,462 ============ =========== ============
48 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements
DECEMBER 31, ----------------------------------------------- 1997 1996 1995 ---- ---- ---- Operating (loss) income: Concrete and related products $ (4,322,497) $ 4,864,592 $ 1,252,108 Contracting (3,501,538) (1,093,272) (569,224) Other 433,976 415,967 409,550 Unallocated corporate overhead (5,188,000) (716,000) (818,000) ------------- ----------- ------------ Total $(12,578,059) $ 3,471,287 $ 274,434 ============ =========== ============ Identifiable assets: Concrete and related products $ 54,648,778 $59,977,843 $ 54,870,922 Contracting 12,652,785 12,729,631 17,546,377 Other 19,131,697 22,218,666 24,895,341 ------------ ----------- ------------ Total $ 86,433,260 $94,926,140 $ 97,312,640 ============ =========== ============ Depreciation and amortization: Concrete and related products $ 4,446,488 $ 3,889,666 $ 3,187,278 Contracting 1,426,563 1,261,863 1,257,950 Other 270,675 269,654 269,026 ------------ ----------- ------------ Total $ 6,143,726 $ 5,421,183 $ 4,714,254 ============ =========== ============ Capital expenditures: Concrete and related products $ 6,883,182 $ 5,539,134 $ 3,484,749 Contracting 1,619,025 1,072,683 2,764,334 Other 32,311 32,000 - ----------- ----------- ------------ Total $ 8,534,518 $ 6,643,817 $ 6,249,083 =========== =========== ============
Revenues by line of business include only sales to unaffiliated customers, as reported in the Company's consolidated statements of operations. The note receivable from the Government of Antigua and Barbuda is included in identifiable assets, other. Operating income (loss) is revenues less operating expenses. In computing operating income (loss), the following items have not been added or deducted: interest expense, income tax expense, equity in earnings from unconsolidated joint ventures and affiliates, interest and other income, minority interest and gain or loss on sales of equipment. 49 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (14) RELATED PARTY TRANSACTIONS The Company leases a 4.4 acre parcel of real property from the Company's President, pursuant to which he received approximately $49,000 in annual rent in 1997, 1996, and 1995. At December 31, 1997, the Company has borrowed approximately $6.3 million from the Company's President. The note is unsecured and bears interest at the prime interest rate. Eight hundred thousand is due on demand and $5.5 million is due on January 1, 1999. The President has the option to make the note due on demand should a "Change of Control" occur. A Change of Control has occurred if a person or group acquires 15 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 percent or more of the common stock. The Company repaid $700,000 of the principal to the President in the first quarter of 1998. See Note 8. During 1997 the Company invested $123,000 for a 7 percent interest in a real estate joint venture in which the President and one Board member of the Company also participates with equity of 21 percent and 6 percent, respectively. Other assets include amounts due from certain officers and employees as a result of payments made by the Company pursuant to a split-dollar life insurance plan. The Company's advances to pay premiums are secured by a pledge of the cash value of the issued policies. Amounts due the Company under the split-dollar life insurance plan amounted to $583,000 and $493,000 in 1997 and 1996, respectively. (15) STOCK OPTION PLANS The Company adopted stock option plans for officers and employees in 1986 (the "1986 Plan") and 1992 (the "1992 Plan"). Each plan terminates ten years after the adoption date. Until 1996 and 2002, respectively, options to acquire up to 300,000 and 350,000 shares, respectively, of common stock may be granted to officers and employees of the Company at no less than the fair market value on the date of grant. All stock options granted pursuant to the 1986 Plan not already exercisable vest and become fully exercisable (i) on the date the Optionee reaches the age of 65 years old and for the six-month period thereafter or as otherwise modified by the Company's Board of Directors, (ii) on the date of permanent disability of the Optionee and for the six-month period thereafter, (iii) on the date of a change of control and for the six-month period thereafter, and (iv) on the date of termination of the Optionee by the Company from employment with the Company without cause and for the six-month period after termination. All stock options granted pursuant to the 1992 Plan vest and become exercisable in varying terms and periods which are established by the Compensation Committee of the Board of Directors. All options issued pursuant to the 1992 Plan expire ten years after the date of issue. 50 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company adopted a stock-option plan for directors in 1992 (the "1992 Directors' Plan"). This plan terminates in 2002. Options to acquire up to 50,000 shares of common stock may be granted to directors at no less than the fair-market value on the date of grant. The 1992 Directors' Plan provides that each director shall receive an initial grant of 8,000 shares and be granted an additional 1,000 shares annually immediately subsequent to their reelection as a director of the Company. All stock options have ten-year terms, vest and become fully exercisable six months after the date of issue. Stock option activity for all plans during the periods indicated is as follows:
1986 PLAN 1992 PLAN DIRECTORS PLAN ------------------ ---------------- --------------- EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------ -------- ------ -------- (All exercise prices rounded to the nearest dollar) Balance at 12/31/94 203,380 $2 to $7 40,000 $10 30,000 $6 to $14 Granted - - 210,000 $7 3,000 $8 Exercised - - - - - - Expired - - - - - - ------- ------- ------- Balance at 12/31/95 203,380 $2 to $7 250,000 $7 to $10 33,000 $6 to $14 Granted - - 30,000 $8 10,000 $9 Exercised (34,425) $2 - - - - Expired - - - - (11,000) $6 to $14 ------ ------- ------- Balance at 12/31/96 168,955 $2 to $7 280,000 $7 to $10 32,000 $6 to $14 Granted - - 30,000 $5 3,000 $5 Exercised - - - - - Expired (9,180) - (74,000) - - ------- ------- ---- Balance at 12/31/97 159,775 $2 to $7 236,000 $5 to $10 35,000 $5 to $14 ======= ======= ======= Exercisable 118,725 94,000 35,000 ======= ======= ======= Available for future grant -0- 114,000 15,000 ======= ======= =======
The per-share weighted-average fair value of stock options granted during 1997, 1996 and 1995 was $2.46, $4.30 and $3.39, respectively, on the date of grant using the Black Scholes option-pricing model with the following assumptions: 1997 1996 1995 ---- ---- ---- Expected dividend yield - - - Expected price volatility 21.4% 18.1% 11.7% Risk-free interest rate 5.7% 7.0% 7.0% Expected life of options 10 years 10 years 10 years 51 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company applies APB Opinion No. 25 in accounting for its plan and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation costs based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income or loss would have been the pro forma amounts indicated below: 1997 1996 1995 ---- ---- ---- Net (loss) income, as reported $(15,536,023) $312,888 $(2,746,503) Net (loss) income, pro forma $(15,651,524) $189,164 $(2,754,185) Basic (loss) earnings per share from continuing operations, as reported $ (3.45) $ .18 $ (.41) =========== ======== ========= Basic (loss) earnings per share from continuing operations, pro forma $ (3.48) $ .15 $ (.42) =========== ======== =========
Pro forma net (loss) income reflects only options granted in 1996, 1995 and 1994. The full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net (loss) income amounts presented above because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to January 1, 1994 is not considered. (16) EMPLOYEE BENEFIT PLANS The Company sponsors a 401(k) plan for certain employees over the age of 21 with 1,000 hours of service in the previous 12 months of employment. Employee contributions are matched by the Company up to 3.0 percent of an employee's salary. The Company's contributions totaled $148,183 in 1997, $148,758 in 1996 and $129,518 in 1995. (17) COSTS AND ESTIMATED EARNINGS ON CONTRACTS
DECEMBER, 31 --------------------------- 1997 1996 ---- ---- Costs incurred on uncompleted contracts $ 6,561,759 $ 22,764,409 Costs incurred on completed contracts 79,576,661 65,279,390 Estimated earnings 17,499,392 16,851,270 ------------ ------------ 103,637,812 104,895,069 Less: Billings to date (103,445,513) (101,882,861) ------------ ------------ $ 192,299 $ 3,012,208 ============ ============
52 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Included in the accompanying consolidated balance sheets under the following captions: DECEMBER 31 ------------------------------ 1997 1996 ---- ---- Costs in excess of billings and estimated earnings $ 329,707 $ 3,124,860 Billings in excess of costs and estimated earnings (137,408) (112,652) ------------ ------------ $ 192,299 $ 3,012,208 ============ ============
(18) COMMITMENTS AND CONTINGENCIES The Company believes it is entitled to additional compensation on a Florida construction project and is pursuing a claim of approximately $4.0 million against the owner of the property. Included in this claim, the Company has an account receivable of approximately $1.3 million from the owner of the project. Management does not believe any reserves are required for the account receivable. While the Company believes it has a meritorious claim, there is no assurance that the claim will be settled on a basis favorable to the Company. No income or loss on this contract was recorded in 1997, 1996 or 1995. The Company has contingent obligations and has made certain guarantees in connection with acquisitions, its participation in certain joint ventures, certain employee and construction bonding matters and its receipt of a tax exemption. As part of the 1995 acquisition of Societe des Carrieres de Grand Case ("SCGC"), a French company operating a ready-mix concrete plant and quarry in St. Martin, the Company agreed to pay the quarry owners (who were also the owners of SCGC), a royalty payment of $550,000 per year through August 2000, which at the Company's option, may be renewed for two successive five-year periods and requires annual payments of $550,000 per year. At the end of the fifteen-year royalty period, the Company has the option to purchase a 50-hectare parcel of property for $4.4 million. In 1989, the Company entered into a new Life Insurance and Salary Continuation Agreement with the President of the Company. The agreement provides that should the President cease to be employed by the Company as a result of disablement or death, the Company shall pay an amount equal to his salary and bonus for a period of five years to the President or his designated beneficiary. The Company has not accrued for the salary continuation over the expected remaining period of the President's active employment as the agreement does not provide for payment upon retirement; therefore, based on present facts and circumstances, future payments, if any, are not determinable at this date. In 1992, Fore Golf, Inc. filed suit against the Company in the Ninth Judicial Circuit in and for Orange County, Florida, Case No. CI-92-5289. In this case, the Company was sued by a subcontractor, Fore Golf, Inc. for work which Fore Golf, Inc. allegedly performed in connection with the construction of two golf courses at Walt Disney World in Orlando, Florida, from approximately September 1990 through September 1991, the alleged unpaid contract balance in connection with this project and inefficiency 53 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements costs. In June 1997, an order was issued by the Circuit Court of the Ninth Judicial Circuit 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 the second quarter to reflect the total estimated costs to be incurred should the Company not be successful in its post trial and appeal efforts. The Company has posted a bond for the damages, prejudgement interest and plaintiff's attorneys' fees. This bond is personally guaranteed by the Company's President. Management believes that it has appellate issues of merit and is pursuing remedies through the appellate court system. An appellate brief was submitted in February 1998. In the late 1980's, Bouwbedrijf Boven Winden, N.V. ("BBW") currently a subsidiary of Devcon International Corp., supplied concrete to a large apartment complex on the French side of St. Maarten. At some point in the early 1990's the buildings began to develop exterior cracking and "popouts." In November 1993, BBW was named a defendant, among others, including the building's insurer, in a suit filed by the plaintiff, Syndicat des Coproprietaires la Residence Le Flamboyant (condominium owners association of Le Flamboyant), in the French court "Tribunal de Grande Instance de Paris" with case No. 510082/93. A French court assigned an expert to examine the cause of the cracking and popouts. In particular, the expert is to determine if the cracking/popouts are caused by a phenomenon known as alkali reaction (ARS). The plaintiff is seeking unspecified damages, including demolition and replacement of the 272 apartments. It is too early to predict the outcome of this matter. Management believes the Company's defenses to be meritorious and does not believe that the outcome will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. The Company is involved in other litigation and claims arising in the normal course of business. The Company believes that such litigation and claims will be resolved without a material adverse effect on its consolidated financial position or results of operations. 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 or results of operations in the past and is not expected to have a material adverse impact in the foreseeable future. In connection with a land development contract with the Government of Antigua and as partial consideration therefore, the Company obtained a 75.0 percent interest in a corporation formed to own and develop approx imately 230 acres of real property in Antigua (the "Corbkinnon Property"). In 1990, the Company sold a portion of its 75.0 percent interest in the Corbkinnon Property for $500,000 and the buyer's commitment to provide 50.0 percent of the financing required to develop the project. The 54 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Company agreed to provide the first $500,000 of financing and provide a guarantee for 50.0 percent of all additional financing required, which has not been required. The Company sold substantially all of its interest in a real estate joint venture with the Government of Antigua and Barbuda to a third party in 1990. In connection with this sale, the third-party purchaser assumed the Company's guarantee of payment to the Government of Antigua and Barbuda made upon the formation of the joint venture. This guarantee, which would become an obligation of the Company in the event of a default by the purchaser, provides a guarantee that net profits from the joint venture's operations will equal or exceed $20,000 per month. No liability has been incurred by the Company nor have payments been made by the Company or the purchaser in connection with this guarantee. The guarantee expires upon the sale or disposal by the venture of its real estate. There are no current plans to sell or dispose of any of the venture's property. (19) BUSINESS AND CREDIT CONCENTRATIONS The Company's customers are concentrated in the Caribbean and are primarily involved in the contracting industry. Credit risk may be affected by the economic and political conditions in the various countries in which the Company operates. Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of receivables and costs in excess of billings and estimated earnings. No single customer accounted for a significant amount of the Company's sales in 1997, 1996 or 1995 and there are no significant receivables from a single customer as of December 31, 1997 or 1996, other than the notes receivable due from the Government of Antigua and Barbuda. Although receivables are generally not collateralized, the Company may place liens or their equivalent in certain jurisdictions in the event of nonpayment. The Company estimates an allowance for doubtful accounts based on the creditworthiness of customers as well as the general economic conditions of the countries in which it operates. Consequently, an adverse change in these factors would affect the Company's estimate of its bad debts. The Company's ability to produce its own sand gives it a competitive advantage because of the substantial investment required to produce sand, the difficulty in obtaining the necessary environmental permits to establish quarries and the moratorium on mining beach sand imposed by most Caribbean countries. If the Company is unable to produce its own sand, the Company's consolidated financial position, results of operations, or cash flows could be adversely affected. (20) FOURTH QUARTER ADJUSTMENTS The fourth quarter of 1997 included charges related to a $1.6 million adjustment based upon the annual physical inventories, a $2.4 million impairment loss on long-lived assets due to lower volumes in 1997, and a $2.6 million increase in the allowance for doubtful accounts and notes. It is not practical to determine the impact of these adjustments, if any, on previously reported quarters. 55 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The Company has had no changes in or disagreements with its independent certified public accountants on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information with respect to the directors and executive officers of the Company is incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. Information as to executive officers is included in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION. The information required in response to this item is incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. The information included in the proxy statement pursuant to Rule 402(i), (k) and (l) is not incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required in response to this item is incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required in response to this item is incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements. An index to consolidated financial statements for the year ended December 31, 1996 appears on pages 23 and 56. (2) Financial Statement Schedule. The following financial statement schedule for each of the years in the three-year period ended December 31, 1997 is submitted herewith:
FORM 10-K (PAGE NUMBER(S) --------------- ITEM ---- Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts...................................... 61
56
All other financial schedules are omitted because they are not required, inapplicable, or the information is otherwise shown in the consolidated financial statements or notes thereto. (3) Exhibits. EXHIBIT DESCRIPTION - ------- ----------- 3.1 Registrant's Restated Articles of Incorporation (1)(3.1) 3.2 Registrant's Amended and Restated Bylaws (3.2) (15) 10.1 Registrant's 1986 Non-Qualified Stock Option Plan (3)(10.1) 10.2 Registrant's 1992 Stock Option Plan (10)(A) 10.3 Registrant's 1992 Directors' Stock Option Plan (10)(B) 10.4 V. I. Cement and Building Products Inc. 401(k) Retirement and Savings Plan (14) 10.5 Life Insurance and Salary Continuation Agreement dated as of March 29, 1989, between the Registrant and Donald L. Smith, Jr.(5)(10.13) 10.6 Form of Indemnification Agreement between the Registrant, and its directors and certain of its officers(6)(A) 10.7 St. John's Dredging and Deep Water Pier Construction Agreement dated as of April 3, 1987, by and between Antigua and Barbuda and Antigua Masonry Products, Limited (the "Set. Johns Agreement") (6)(10.1) 10.8 Amendment No. 1 to the St. John's Agreement dated June 15, 1988(7)(10.2) 10.9 Amendment No. 2 to the St. John's Agreement dated December 7, 1988 (9) (10.34) 10.10 Amendment No. 3 to the St. John's Agreement dated January 23, 1989 (9) (10.35) 10.11 Amendment No. 4 to the St. John's Agreement dated April 5, 1989 (9) (10.36) 10.12 Amendment No. 5 to the St. John's Agreement dated January 29, 1991 (9) (10.37) 10.13 Amendment No. 6 to the St. Johns Agreement dated November 30, 1993 (12) (10.39) 10.14 Amendment No. 7 to the St. John's Agreement, dated December 21, 1994 (14) 10.15 Amendment No. 8 to the St. John's Agreement, dated October 23, 1996 (14) 10.16 Dredging, Filling and Other Land Improvements Agreement by and between Jolly Harbour Ltd. (Vaduz, Liechtenstein), Antigua Development and Construction, Limited, and the Registrant(4)(10.1) 10.17 Mortgage Note dated June 12, 1989 of Crown Bay Marina Joint Venture-I to Banco Popular de Puerto Rico for $5,000,000 (7)(10.5) 10.18 Guarantee dated June 12, 1989, from the Registrant to Banco Popular de Puerto Rico(7)(10.6)10.17 10.19 Lease dated October 31, 1989, between William G. Clarenbach and Pricilla E. Clarenbach, as lessors, and Controlled Concrete Products, Inc., as lessee (1)(10.26) 10.20 Lease dated April 13, 1981, between Mariano Lima and Genevieve Lima, as lessors, and the Registrant, as lessee(1)(10.28) 10.21 Lease dated May 23, 1983, between the Government of the Virgin Islands, as lessor, and Controlled Concrete Products, Inc. as lessee(1)(10.29) 10.22 Lease dated February 24, 1989, between Felix Pitterson, as lessor, and V.I. Cement and Building Products, Inc., as lessee(1)(10.30) 10.23 Lease dated September 1, 1989, between Donald L. Smith, Jr., as lessor, and the Registrant, as lessee(1)(10.31)
57
10.24 Lease dated September 12, 1966, between His Honour Hugh Burrowes, a Commander of the British Empire of Government House in the Island of Antigua, as lessor, and The Antigua Sand and Aggregate Limited, as lessee(1)(10.32) 10.25 Stock Purchase Agreement, dated April 18, 1990, by and between B.B.W. Holding Corporation Limited ("BBW Holding") and Proar Construction Materials Company N.V. ("Proar Construction") (8)(2.1) 10.26 Incentive Agreement, dated April 18, 1990, by and among BBW Holding, Proar Construction, Bouwbedrijf Boven Winden N.V., Cramer Construction N.V. and Caribbean Heavy Construction Company Limited (8)(28.1) 10.27 Agreement, dated April 18, 1990, by and between Mr. Richard Lawrence, Sr. and the Registrant (8)(28.2) 10.28 Notes receivable from Red Pond Estates, N.V. in the principal sums of $242,516, $139,478 and $167,740, respectively (11) (10.41) 10.29 Material Purchase Agreement, dated August 17, 1995, between Bouwbedrijf Boven Winden, N.V. and Hubert Petit, Francois Petit and Michel Petit (13) (10.41) 10.30 Stock Purchase Agreement, dated August 17, 1995, between the Registrant and Hubert Petit, Francois Petit and Michel Petit (13)(10.42) 10.31 Loan Agreement dated November 12, 1996 between V. I. Cement and Building Products, Inc. and Banco Popular de Puerto Rico (14) 10.32 $6,000,000 Installment Note dated November 12, 1996 between V. I. Cement and Building Products, Inc. and Banco Popular de Puerto Rico (14) 10.33 $1,000,000 Promissory Note dated November 12, 1996 between V. I. Cement and Building Products, Inc. and Banco Popular de Puerto Rico (14) 10.34 Time Charter Agreement, dated October 28, 1996, between Caribbean Cement Carriers, Ltd. and Kristian Gerhard Jebsen Skibsrederi A/S (14) 10.35 Loan Agreement, dated June 30, 1993, between the Registrant and Barnett Bank of South Florida (12) (10.44) 10.36 Standstill Agreement, dated February 26, 1997, between the Registrant and Barnett Bank, N.A. (14) 10.37 Purchase and Sale Agreement by and between Devcon Crown Bay Corp. and Crown Bay Marina Joint Venture I and Koben Capital Partners, Inc. (15) 21.1 Registrant's Subsidiaries (14) 23.1 Consent of KPMG Peat Marwick, LLP (15) 27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant's Registration statement on Form S-2 (No. 33-31107). (2) Incorporated by reference to the exhibit shown in the parenthesis and filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989. (3) Incorporated by reference to the exhibit shown in the parenthesis and filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987 (the "1987 10-K"). (4) Incorporated by reference to the exhibit shown in the parenthesis and filed with the Registrant's Form 8 dated July 14, 1988 to the 1987 10-K. (5) Incorporated by reference to the exhibit shown in the parenthesis and filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988 (the "1988 10-K"). (6) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant's Proxy Statement dated May 30, 1989. (7) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant's Form 8 dated August 17, 1989 to the 1988 10-K. (8) Incorporated by reference to the exhibit shown in parenthesis and filed with Registrant's Current Report on Form 8-K dated May 2, 1990. 58 (9) Incorporated by reference to the exhibit showing in parenthesis and filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. (10) Incorporated by reference to the exhibit showing in parenthesis and filed with the Registrant's Proxy Statement dated May 6, 1992. (11) Incorporated by reference to the exhibit showing in parenthesis and filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. (12) Incorporated by reference to the exhibit showing in parenthesis and filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. (13) Incorporated by reference to the exhibit showing in parenthesis and filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (14) Incorporated by reference to the exhibit showing in parenthesis and filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. (15) Filed herewith. Management employee contracts, compensatory plans and other arrangements included as part of the exhibits referred to above are as follows: 10.1 Registrant's 1986 Non Qualified Stock Option Plan (3) (10.1) 10.2 Registrant's 1992 Stock Option Plan (10)(A) 10.3 Registrant's 1992 Directors' Stock Option Plan (10) (B) 10.4 V. I. Cement and Building Products, Inc. 401(k) Retirement and Savings Plan (14) 10.5 Life Insurance and Salary Continuation Agreement dated as of March 29, 1989, between the Registrant and Donald L. Smith, Jr.(5)(10.13) (b) Reports on Form 8-K. No Reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 27, 1998 DEVCON INTERNATIONAL CORP. By:/S/ DONALD L. SMITH, JR. --------------------------------- Donald L. Smith, Jr. Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. DEVCON INTERNATIONAL CORP. March 27, 1998 By:/S/ DONALD L. SMITH, JR. --------------------------- Donald L. Smith, Jr. Chairman, President and Chief Executive Officer March 27, 1998 By:/S/ RICHARD L. HORNSBY --------------------------- Richard L. Hornsby Executive Vice President and Director March 27, 1998 By:/S/ JAN A. NORELID --------------------------- Jan A. Norelid Vice President of Finance, Chief Financial Officer and Treasurer March 27, 1998 By:/S/ ROBERT A. STEELE --------------------------- Robert A. Steele Director March 27, 1998 By:/S/ ROBERT L. KESTER --------------------------- Robert L. Kester Director March 27, 1998 By:/S/ W. DOUGLAS PITTS ---------------------------- W. Douglas Pitts Director 60
Schedule II Valuation and Qualifying Accounts ALLOWANCE FOR DOUBTFUL BALANCE AT ADDITIONS BALANCE ACCOUNTS FOR THE YEAR BEGINNING CHARGED TO AT END ENDED DECEMBER 31, OF YEAR EXPENSE DEDUCTIONS OF YEAR - ---------------------- ----------- ---------- ---------- ------- 1995 $2,669,086 $ 301,510 $ (514,195) $2,456,401 ========== ========== =========== ========== 1996 $2,456,401 $ 302,863 $ 212,327 $2,971,591 ========== ========== =========== ========== 1997 $2,971,591 $2,336,089 $ (322,841) $4,984,839 ========== ========== =========== ========== ALLOWANCE FOR DOUBTFUL NOTES RECEIVABLE BALANCE AT ADDITIONS BALANCE ACCOUNTS FOR THE YEAR BEGINNING CHARGED TO AT END ENDED DECEMBER 31, OF YEAR EXPENSE DEDUCTIONS OF YEAR - ---------------------- ----------- ---------- ---------- ------- 1995 $ 1,884,819 $ - $ (1,047,480) $ 837,339 =========== ========== ============ =========== 1996 $ 837,339 $ - $ (724,806) $ 112,533 =========== ========== ============ =========== 1997 $ 112,533 $ 596,156 $ 104,537 $ 813,226 =========== ========== ============ ===========
61 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 3.2 Registrant's Amended and Restatd Bylaws 10.37 Purchase and Sale Agreement by and between Devcon Crown Bay Corp. and Crown Bay Marina Joint Venture I and Koben Capital Partners, Inc. 23.1 Consent of KPMG Peat Marwick, LLP 27.1 Financial Data Schedule EX-3.2 2 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS AS OF FEBRUARY 27, 1998 OF DEVCON INTERNATIONAL CORP. (A FLORIDA CORPORATION) INDEX PAGE NUMBER ARTICLE ONE - Offices.................................................................1 Section 1. Registered Office..........................................1 Section 2. Other Offices..............................................1 ARTICLE TWO - MEETINGS OF SHAREHOLDERS................................................1 Section 1. Place......................................................1 Section 2. Time of Annual Meeting.....................................1 Section 3. Call of Special Meetings...................................1 Section 4. Conduct of Meetings........................................1 Section 5. Notice and Waiver of Notice................................2 Section 6. Business of Special Meeting................................2 Section 7. Quorum.....................................................2 Section 8. Required Vote..............................................3 Section 9. Voting of Shares...........................................3 Section 10. Proxies....................................................3 Section 11. Shareholder List...........................................3 Section 12. Action Without Meeting.....................................3 Section 13. Fixing Record Date.........................................3 Section 14. Inspectors and Judges......................................4 Section 15. Nominations of Director Candidates.........................4 ARTICLE THREE - DIRECTORS.............................................................5 Section 1. Number, Election and Term..................................5 Section 2. Vacancies..................................................6 Section 3. Powers.....................................................6 Section 4. Place of Meetings..........................................6 Section 5. Annual Meeting.............................................6 Section 6. Regular Meetings...........................................6 Section 7. Special Meetings and Notice................................6 Section 8. Quorum and Required Vote...................................7 Section 9. Action Without Meeting.....................................7 Section 10. Telephone Meetings.........................................7 Section 11. Committees.................................................7 Section 12. Compensation of Directors..................................8 Section 13. Chairman of the Board......................................8 -i- ARTICLE FOUR - OFFICERS...............................................................8 Section 1. Positions..................................................8 Section 2. Election of Specified Officers by Board....................8 Section 3. Election or Appointment of Other Officers..................8 Section 4. Salaries...................................................8 Section 5. Term.......................................................9 Section 6. President..................................................9 Section 7. Vice Presidents............................................9 Section 8. Secretary..................................................9 Section 9. Treasurer..................................................9 ARTICLE FIVE - CERTIFICATES FOR SHARES...............................................10 Section 1. Issue of Certificates.....................................10 Section 2. Legends for Preferences and Restrictions on Transfer......10 Section 3. Facsimile Signatures......................................11 Section 4. Lost Certificates.........................................11 Section 5. Transfer of Shares........................................11 Section 6. Registered Shareholders...................................11 Section 7. Redemption of Control Shares..............................11 ARTICLE SIX - GENERAL PROVISIONS.....................................................12 Section 1. Dividends.................................................12 Section 2. Reserves..................................................12 Section 3. Checks....................................................12 Section 4. Fiscal Year...............................................12 Section 5. Seal......................................................12 ARTICLE SEVEN - AMENDMENTS OF BYLAWS.................................................12
-ii- DEVCON INTERNATIONAL CORP. AMENDED AND RESTATED BYLAWS AS OF FEBRUARY 27, 1998 ARTICLE ONE ONE OFFICES Section 1. REGISTERED OFFICE. The registered office of DEVCON INTERNATIONAL CORP., a Florida corporation (the "Corporation"), shall be located in the City of Deerfield Beach, State of Florida. Section 2. OTHER OFFICES. The Corporation may also have offices at such other places, either within or without the State of Florida, as the Board of Directors of the Corporation (the "Board of Directors") may from time to time determine or as the business of the Corporation may require. ARTICLE TWO MEETINGS OF SHAREHOLDERS Section 1. PLACE. All annual meetings of shareholders shall be held at such place, within or without the State of Florida, as may be designated by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Special meetings of shareholders may be held at such place, within or without the State of Florida, and at such time as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. TIME OF ANNUAL MEETING. Annual meetings of shareholders shall be held on such date and at such time fixed, from time to time, by the Board of Directors, provided, that there shall be an annual meeting held every calendar year at which the shareholders shall elect a board of directors and transact such other business as may properly be brought before the meeting. Section 3. CALL OF SPECIAL MEETINGS. Special meetings of the shareholders may be called by the President, the Board of Directors or by the Secretary on the written request of the holders of not less than one-tenth of all shares entitled to vote at the meeting. Section 4. CONDUCT OF MEETINGS. The Chairman of the Board (or in his absence, the President or such other designee of the Chairman of the Board) shall preside at the annual and special meetings of shareholders and shall be given full discretion in establishing the rules and procedures to be followed in conducting the meetings, except as otherwise provided by law or in these Bylaws. Section 5. NOTICE AND WAIVER OF NOTICE. Except as otherwise provided by law, written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered (i) not less than ten (10) nor more than sixty (60) days before the day of the meeting with respect to annual meetings and special meetings called by the Board and (ii) sixty (60) days before the day of the meeting with respect to special meetings requested by shareholders, either personally or by first-class mail, by or at the direction of the President, the Secretary, or the officer or person calling the meeting, to each shareholder of record entitled to vote at such meeting. If the notice is mailed at least thirty (30) days before the date of the meeting, it may be done by a class of United States mail other than first-class. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. If a meeting is adjourned to another time and/or place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the Board of Directors, after adjournment, fixes a new record date for the adjourned meeting. Whenever any notice is required to be given to any shareholder, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before, during or after the time of the meeting stated therein, and delivered to the Corporation for inclusion in the minutes or filing with the corporate records, shall be equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the shareholders need be specified in any written waiver of notice. Attendance of a person at a meeting shall constitute a waiver of (a) lack of or defective notice of such meeting, unless the person objects at the beginning to the holding of the meeting or the transacting of any business at the meeting, or (b) lack of defective notice of a particular matter at a meeting that is not within the purpose or purposes described in the meeting notice, unless the person objects to considering such matter when it is presented. Section 6. BUSINESS OF SPECIAL MEETING. Business transacted at any special meeting shall be confined to the purposes stated in the notice thereof. Section 7. QUORUM. The holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at meetings of shareholders except as otherwise provided in the Corporation's articles of incorporation (the "Articles of Incorporation"). If, however, a quorum shall not be present or represented at any meeting of the shareholders, the shareholders present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally notified and called. The shareholders present at a duly organized meeting may continue to transact business notwithstanding the withdrawal of some shareholders prior to adjournment, but in no event shall a quorum consist of the holders of less than one-third (1/3) of the shares entitled to vote and thus represented at such meeting. -2- Section 8. REQUIRED VOTE. The vote of the holders of a majority of the shares entitled to vote and represented at a meeting at which a quorum is present shall be the act of the Corporation's shareholders, unless the vote of a greater number is required by law, the Articles of Incorporation, or these Bylaws. Section 9. VOTING OF SHARES. Each outstanding share, regardless of class, shall be entitled to vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class are limited or denied by the Articles of Incorporation or the Florida General Corporation Act. Section 10. PROXIES. A shareholder may vote in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless expressly provided therein to be irrevocable, and unless otherwise made irrevocable by law. Section 11. SHAREHOLDER LIST. The officer or agent having charge of the Corporation's stock transfer books shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of, and the number and class and series, if any, of shares held by each. Such list, for a period of ten (10) days prior to such meeting, shall be subject to inspection by any shareholder at any time during the usual business hours at the place where the meeting is to be held. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer book or to vote at any such meeting of shareholders. Section 12. ACTION WITHOUT MEETING. Any action required by the statutes to be taken at a meeting of shareholders, or any action that may be taken at a meeting of the shareholders, may be taken without a meeting or notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted with respect to the subject matter thereof, and such consent shall have the same force and effect as a vote of shareholders taken at such a meeting. Section 13. FIXING RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purposes, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days, and, in case of a meeting of shareholders, not less than ten (10) days, prior to the date on which -3- the particular action requiring such determination of shareholders is to be taken; provided, however, that with respect to a special shareholders meeting requested by shareholders, the record date shall be the date the particular requesting shareholder first delivers his/her demand to the Company for the purposes stated therein, and such date may not be altered through (i) an amended demand or (ii) the replacement of an old demand with a new demand having a substantially similar purpose. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which the notice of the meeting is mailed or the date on which the resolutions of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 13, such determination shall apply to any adjournment thereof, except where the Board of Directors fixes a new record date for the adjourned meeting or as required by law. Section 14. INSPECTORS AND JUDGES. The Board of Directors in advance of any meeting may, but need not, appoint one or more inspectors of election or judges of the vote, as the case may be, to act at the meeting or any adjournment thereof. If any inspector or inspectors, or judge or judges, are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors or judges. In case any person who may be appointed as an inspector or judge fails to appear or act, the vacancy may be filled by the Board of Directors in advance of the meeting, or at the meeting by the person presiding thereat. The inspectors or judges, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots and consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate votes, ballots and consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting, the inspector or inspectors or judge or judges, if any, shall make a report in writing of any challenge, question or matter determined by him or them, and execute a certificate of any fact found by him or them. Section 15. NOMINATIONS OF DIRECTOR CANDIDATES. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board at an annual or special meeting of shareholders may be made by or at the direction of (i) the Board by any nominating committee or person appointed by the Board or (ii) any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the procedures set forth in this paragraph; provided, however, that nominations of persons for election to the Board at a special meeting may be made only if the election of directors is one of the purposes described in the special meeting notice required by Section 607.0705 of the Florida Business Corporation Act. Nominations of persons for election at annual meetings, other than nominations made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than One Hundred Twenty (120) -4- days nor more than One Hundred Eighty (180) days prior to the first anniversary of the date of the Corporation's notice of annual meeting provided with respect to the previous year's annual meeting; provided, however, that if no annual meeting was held in the previous year or the date of the annual meeting has been changed to be more than 30 calendar days earlier than the date contemplated by the previous year's proxy statement, such notice by the shareholder to be timely must be so received not later than the close of business on the tenth (10th) day following the date on which notice of the date of the annual meeting is given to shareholders or made public, whichever first occurs. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director at the annual meeting, (i) the name, age, business address and residence address of the proposed nominee, (ii) the principal occupation or employment of the proposed nominee, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the proposed nominee, and (iv) any other information relating to the proposed nominee that is required to be disclosed in solicitations for proxies for election of directors pursuant to Rule 14a under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice of nominees for election at the annual meeting, (i) the name and record address of the shareholder, and (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the shareholder. The Corporation may require any proposed nominee for election at an annual or special meeting of shareholders to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the requirements of this paragraph, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE THREE DIRECTORS Section 1. NUMBER, ELECTION AND TERM. The number of directors of the Corporation shall be fixed from time to time by action of the shareholders. The directors shall be elected at the annual meeting of the shareholders, except as provided in Section 2 of this Article, and each director elected shall hold office for the term for which he is elected and until his successor is elected and qualified. Directors need not be residents of the State of Florida, shareholders of the Corporation or citizens of the United States. Any director may be removed at any time, with or without cause, at a special meeting of the shareholders called for that purpose. Section 2. VACANCIES. A director may resign at any time by giving written notice to the Board of Directors or the Chairman of the Board. Such resignation shall take effect at the date of receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. -5- Any vacancy occurring in the Board of Directors and any directorship to be filled by reason of an increase in the size of the Board of Directors shall be filled by the affirmative vote of a majority of the current directors though less than a quorum of the Board of Directors, or may be filled by an election at an annual or special meeting of the shareholders called for that purpose. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, or until the next election of one or more directors by shareholders if the vacancy is caused by an increase in the number of directors. Section 3. POWERS. The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised and done by the shareholders. Section 4. PLACE OF MEETINGS. Meetings of the Board of Directors, regular or special, may be held either within or without the State of Florida. Section 5. ANNUAL MEETING. The first meeting of each newly elected Board of Directors shall be held, without call or notice, immediately following each annual meeting of shareholders. Section 6. REGULAR MEETINGS. Regular meetings of the Board of Directors may also be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. Section 7. SPECIAL MEETINGS AND NOTICE. Special meetings of the Board of Directors may be called by the President and shall be called by the Secretary on the written request of any two directors. Written notice of special meetings of the Board of Directors shall be given to each director at least twenty-four (24) hours before the meeting. Except as required by statute, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Notices to directors shall be in writing and delivered personally or mailed to the directors at their addresses appearing on the books of the Corporation. Notice by mail shall be deemed to be given at the time when the same shall be received. Notice to directors may also be given by telegram, and shall be deemed delivered when the same shall be deposited at a telegraph office for transmission and all appropriate fees therefor have been paid. Whenever any notice is required to be given to any director, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8. QUORUM AND REQUIRED VOTE. A majority of the directors shall constitute a quorum for the transaction of business and the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a greater -6- number is required by the Articles of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted that might have been transacted at the meeting as originally notified and called. Section 9. ACTION WITHOUT MEETING. Any action required or permitted to be taken at a meeting of the Board of Directors or committee thereof may be taken without a meeting if a consent in writing, setting forth the action taken, is signed by all of the members of the Board of Directors or the committee, as the case may be, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 10. TELEPHONE MEETINGS. Directors and committee members may participate in and hold a meeting by means of conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person at the meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground the meeting is not lawfully called or convened. Section 11. COMMITTEES. The Board of Directors, by resolution adopted by a majority of the whole Board of Directors, may designate from among its members an executive committee and one or more other committees, each of which, to the extent provided in such resolution, shall have and may exercise all of the authority of the Board of Directors in the business and affairs of the Corporation except where the action of the full Board of Directors is required by statute. Vacancies in the membership of a committee shall be filled by the Board of Directors at a regular or special meeting of the Board of Directors. The executive committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. The designation of any such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. Section 12. COMPENSATION OF DIRECTORS. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 13. CHAIRMAN OF THE BOARD. The Board of Directors may, in its discretion, choose a chairman of the board who shall preside at meetings of the shareholders and of the directors and shall be an ex officio member of all standing committees. The Chairman of the Board shall have such other powers and shall perform such other duties as shall be designated by the Board of Directors. The Chairman of the Board shall be a member of the Board of Directors -7- but no other officers of the Corporation need be a director. The Chairman of the Board shall serve until his successor is chosen and qualified, but he may be removed at any time by the affirmative vote of a majority of the Board of Directors. ARTICLE FOUR OFFICERS Section 1. POSITIONS. The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Secretary and a Treasurer, and, if elected by the Board of Directors by resolution, a Chairman of the Board. Any two or more offices may be held by the same person. Section 2. ELECTION OF SPECIFIED OFFICERS BY BOARD. The Board of Directors at its first meeting after each annual meeting of shareholders shall elect a President, one or more Vice Presidents, a Secretary and a Treasurer. Section 3. ELECTION OR APPOINTMENT OF OTHER OFFICERS. Such other officers and assistant officers and agents as may be deemed necessary may be elected or appointed by the Board of Directors, or, unless otherwise specified herein, appointed by the President of the Corporation. The Board of Directors shall be advised of appointments by the President at or before the next scheduled Board of Directors meeting. Section 4. SALARIES. The salaries of all officers of the Corporation to be elected by the Board of Directors pursuant to Article Four, Section 2 hereof shall be fixed from time to time by the Board of Directors or pursuant to its discretion. The salaries of all other elected or appointed officers of the Corporation shall be fixed from time to time by the President of the Corporation or pursuant to his direction. Section 5. TERM. The officers of the Corporation shall hold office until their successors are chosen and qualified. Any officer or agent elected or appointed by the Board of Directors or the President of the Corporation may be removed, with or without cause, by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officers or agents appointed by the President of the Corporation pursuant to Section 3 of this Article Four may also be removed from such officer positions by the President, with or without cause. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise shall be filled by the Board of Directors, or, in the case of an officer appointed by the President of the Corporation, by the President or the Board of Directors. Section 6. PRESIDENT. The President shall be the Chief Executive Officer of the Corporation, shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. In the absence of the Chairman of the Board or in the event the Board of Directors shall not have -8- designated a chairman of the board, the President shall preside at meetings of the shareholders and the Board of Directors. Section 7. VICE PRESIDENTS. The Vice Presidents in the order of their seniority, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President. They shall perform such other duties and have such other powers as the Board of Directors shall prescribe or as the President may from time to time delegate. Section 8. SECRETARY. The Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all the proceedings of the meetings of the shareholders and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. He shall keep in safe custody the seal of the Corporation and, when authorized by the Board of Directors, affix the same to any instrument requiring it. Section 9. TREASURER. The Treasurer shall have the custody of corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors at its regular meetings or when the Board of Directors so requires an account of all his transactions as treasurer and of the financial condition of the Corporation. ARTICLE FIVE CERTIFICATES FOR SHARES Section 1. ISSUE OF CERTIFICATES. The Corporation shall deliver certificates representing all shares to which shareholders are entitled; and such certificates shall be signed by the President or a Vice President, and the Secretary or an Assistant Secretary of the Corporation, and may be sealed with the seal of the Corporation or a facsimile thereof. No certificate shall be issued for any share until the consideration therefor has been fully paid. Each certificate representing shares shall state upon the face thereof, the name of the Corporation, that the Corporation is organized under the laws of the State of Florida, the name of the person to whom issued, the number and class and the designation of the series, if any, that such certificate represents, and the par value of each share represented by such certificate. Section 2. LEGENDS FOR PREFERENCES AND RESTRICTIONS ON TRANSFER. Every certificate representing shares issued by the Corporation shall set forth or fairly summarize upon the face or -9- back of the certificate, or shall state that the Corporation will furnish to any shareholder upon request and without charge a full statement of: (a) The designations, preferences, limitations, and relative rights of the shares of each class or series authorized to be issued. (b) The variations in the relative rights and preferences between the shares of each such series, if the Corporation is authorized to issue any preferred or special class in series and so far as the same have been fixed and determined. (c) The authority of the Board of Directors to fix and determine the relative rights and preferences of subsequent series. Every certificate representing shares that are restricted as to the sale, disposition, or transfer of such shares shall also indicate that such shares are restricted as to transfer and there shall be set forth or fairly summarized upon the certificate, or the certificate shall indicate that the Corporation will furnish to any shareholder upon request and without charge, a full statement of such restrictions. If the Corporation issues any shares that are not registered under the Securities Act of 1933, as amended, and registered or qualified under the applicable state securities laws, the transfer of any such shares shall be restricted substantially in accordance with the following legend: "THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AT HOLDER'S EXPENSE, AN OPINION (SATISFACTORY TO THE CORPORATION) OF COUNSEL (SATISFACTORY TO THE CORPORATION) THAT REGISTRATION IS NOT REQUIRED." Section 3. FACSIMILE SIGNATURES. The signatures of the President or a Vice President and the Secretary or Assistant Secretary upon a certificate may be facsimiles, if the certificate is manually signed by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of the issuance. Section 4. LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a -10- condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. Section 5. TRANSFER OF SHARES. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 6. REGISTERED SHAREHOLDERS. The Corporation shall be entitled to recognize the exclusive rights of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Florida. Section 7. REDEMPTION OF CONTROL SHARES. As provided by the Florida General Corporation Act, if a person acquiring control shares of the Corporation does not file an acquiring person statement with the Corporation, the Corporation may redeem the control shares at fair market value at any time during the 60- day period after the last acquisition of such control shares. If a person acquiring control shares of the Corporation files an acquiring person statement with the Corporation, the control shares may be redeemed by the Corporation only if such shares are not accorded full voting rights by the shareholders as provided by law. ARTICLE SIX GENERAL PROVISIONS Section 1. DIVIDENDS. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in cash, property, or its own shares pursuant to law and subject to the provisions of the Articles of Incorporation. Section 2. RESERVES. The Board of Directors may by resolution create a reserve or reserves out of earned surplus for any proper purpose or purposes, and may abolish any such reserve in the same manner. Section 3. CHECKS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. -11- Section 4. FISCAL YEAR. The fiscal year of the Corporation shall end on December 31 of each year, unless otherwise fixed by resolution of the Board of Directors. Section 5. SEAL. The corporate seal shall have inscribed thereon the name and state of incorporation of the Corporation. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE SEVEN AMENDMENTS OF BYLAWS These Bylaws may be altered, amended or repealed or new Bylaws may be adopted at any meeting of the Board of Directors at which a quorum is present, by the affirmative vote of a majority of the directors present at such meeting; provided, however, that the Articles of Incorporation specify that the shareholders shall fix the number of directors of the Corporation as provided in Article Three, Section 1 of these Bylaws and such provision may not be amended without amending the Articles of Incorporation. -12- EX-10.37 3 EXHIBIT 10.37 PURCHASE AND SALE AGREEMENT AND ESCROW INSTRUCTIONS by and between DEVCON CROWN BAY CORP., a Florida corporation and CROWN BAY MARINA JOINT VENTURE I, a U. S. Virgin Islands general partnership (collectively, "Seller") and KOBEN CAPITAL PARTNERS, INC. ("BUYER") Property: Crown Bay Marina St. Thomas U. S. Virgin Islands DATED: SEPTEMBER 18, 1997 TABLE OF CONTENTS PAGE ---- I. Purchase and Sale Agreement...............................................1 1.1. Description of the Property.......................................1 1.2. Agreement to Purchase.............................................3 1.3. Consent To Transfer the VIPA Lease................................3 II. Purchase Price and Payment...............................................3 2.1. Purchase Price....................................................3 2.2. Allocation of Purchase Price......................................3 III. Title Insurance and Survey..............................................4 3.1. Survey and Title Documents........................................4 3.2. UCC Report........................................................4 3.3. Title Policy......................................................4 3.4. Title Inspection..................................................4 IV. Property Evaluation......................................................4 4.1. Inspection Period.................................................4 4.2. Physical Inspection of Property...................................5 4.3. Inspection of Books and Records...................................5 V. Seller's Representations and Warranties...................................6 VI. Covenants of Seller......................................................8 6.1. Future Operations.................................................8 6.2. Certification of Non-Foreign Status...............................9 6.3. Estoppel Certificates.............................................9 VII. Buyer's Representations and Warranties..................................9 VIII. Conditions to Buyer's Obligations.....................................10 IX. Conditions to Seller's Obligation.......................................10 X. Escrow and Closing.......................................................10 10.1. Escrow..........................................................10 10.2. Closing Date; Termination of Escrow.............................11 10.3. Costs and Fees..................................................11 10.4. Prorations......................................................12 10.5. Security Deposits...............................................12 10.6. Inventory.......................................................12 10.7. Seller's Deliveries to Escrow...................................12 10.8. Seller's Deliveries Outside of Escrow...........................13 10.9. Buyer's Deliveries to Escrow....................................14 10.10. Buyer's Deliveries Outside of Escrow...........................14 10.11. Closing of Escrow..............................................14 10.12. Default........................................................15 XI. General Provisions......................................................15 11.1. Possession of Property; Risk of Loss...........................15 11.2. Further Assurances.............................................16 11.3. Notices........................................................16 11.4. Recovery of Dispute Costs......................................17 11.5. Amendment......................................................17 11.6. Assignment.....................................................17 11.7. Binding Effect.................................................18 11.8. Exhibits and Entire Agreement..................................18 11.9. Governing Law; Jurisdiction....................................18 11.10. Captions.......................................................18 11.11. Commissions....................................................18 11.12. Escrow Agent...................................................18 XII. Consulting Services....................................................19 12.1. Services/Fees..................................................19 12.2. Net Cash Flow..................................................21 12.3. Lease Extension Bonus..........................................22 12.4. Fiscal Year....................................................23 12.5. Capital Expenditures...........................................23 XIII. Deferred Maintenance..................................................23 XIV. Contingent Liabilities.................................................23 XV. Financial Statements....................................................23 XVI. Survive Closing........................................................24 ii PURCHASE AND SALE AGREEMENT AND ESCROW INSTRUCTIONS This Purchase and Sale Agreement and Escrow Instructions (the "Agreement") is entered into as of the 18th day of September, 1997, by and between Devcon Crown Bay Corp., a Florida corporation ("DEVCON"), and Crown Bay Marina Joint Venture I, a Virgin Islands partnership ("CBMJV") (collectively, "SELLER"), and Koben Capital Partners, Inc., a Delaware corporation or its assigns ("BUYER"). I. PURCHASE AND SALE AGREEMENT. 1.1. Description of the Property. It is the intent of the parties to this Agreement to agree on the terms whereby Seller will transfer to Buyer the following real, personal and intangible property that constitute Crown Bay Marina, as depicted on the drawing attached as Exhibit A-1 (the "CROWN BAY MARINA"): 1. A leasehold interest in the upland real property and submerged land described in Exhibit A-2 (the "LEASEHOLD") held by CBMJV pursuant to that certain Ground Lease dated August 29, 1985 between Shoreline Marine, Inc. and the U.S. Virgin Islands Port Authority ("VIPA"), which was assigned to CBMJV (the "LEASE"). 2. The personal property described on EXHIBIT B hereto (the "PERSONAL PROPERTY"). 3. The contracts and agreements relating to the Property, including, without limitation, those listed on EXHIBIT C hereto (the "CONTRACTS"). 4. The certain licenses, permits and other governmental authorizations relating to the Property, including, without limitation, those listed on EXHIBIT D hereto (the "LICENSES"). 5. All buildings, facilities, parking facilities, structures, fixtures, footings, foundations, amenities and other improvements to, or located on, the land covered by the Leasehold (the "IMPROVEMENTS"). 6. All the rights-of-way, easements, tenements and hereditaments, and other rights, if any, appurtenant to the Real Property and all littoral and/or riparian rights, if any, 2 relating to the Real Property and all right, title and interest of Seller in and to any streets, highways or rights of way adjacent to the land covered by the Leasehold, any water or mineral rights owned by or leased to Seller (the "APPURTENANCES"). 7. All leases, occupancy agreements, license agreements, concession agreements, rental agreements and other written agreements, entered into with Tenants (as hereinafter defined), relating to the Real Property, together with all supplements, amendments and modifications thereto. 8. All other tangible and intangible assets (excluding cash and cash-like items), properties or rights of Seller which are used or held for use in connection with the Real Property and the business conducted thereon of every kind and description, tangible or intangible, vested or unvested, contingent or otherwise, as the same shall exist on the Closing Date, including, without limitation, all goodwill in connection with the ownership, operation and maintenance of the Property and the business conducted thereon, all warranties and guaranties relating to any of the foregoing, all books, records, guest lists, customer lists, files, budgets, projections, strategic plans, surveys, studies, plans, building plans and specifications, drawings, test reports and inspection and engineering reports now or hereafter in the possession of the Seller in connection with the ownership, operation, maintenance and management of the business conducted at the Real Property to the extent transferable. This sale does not include any insurance claims related to Hurricane Marilyn of 1995 which are currently outstanding or which have not yet been made but which may be made in the future ("HURRICANE CLAIMS"). The Leasehold, the Improvements and the Appurtenances are referred to in this Agreement as the "REAL PROPERTY." The Real Property, Personal Property, Contracts and Licenses, and all of Seller's rights in and to all tangible and intangible assets (excluding insurance claims, except as set forth herein, accounts receivable, fuel inventory and cash and cash-like items), including without limitation the right to use the name "Crown Bay Marina", are referred to as the "PROPERTY." 2 1.2. AGREEMENT TO PURCHASE. Seller will sell, and Buyer will buy, the Property on the terms and conditions set forth herein. 1.3. CONSENT TO TRANSFER THE LEASE. Prior to the Closing (as hereinafter defined) Seller shall use its best efforts to obtain the consent of VIPA (the "VIPA CONSENT"), to assign the Lease from CBMJV to Buyer. Buyer understands that VIPA will be relying on the financial condition of Buyer in deciding whether or not to grant such consent. Accordingly, on or after the Closing Date, Buyer will provide up to two (2) years of rent under the Lease to VIPA as additional security for the Lease obligations, and Buyer will ensure that it has up to $100,000 of cash working capital to it, all only to the extent required to obtain the VIPA Consent. Buyer shall promptly furnish to VIPA all documentation as reasonably requested by VIPA as part of the approval process and as required by VIPA to evidence the approval or the assignment and assumption by Buyer and "Buyer" of the Lease. II. PURCHASE PRICE AND PAYMENT. 2.1. PURCHASE PRICE. Buyer will pay a purchase price for the Property of $3,300,000 (the "PURCHASE PRICE"), based on 24 remaining seasons (periods starting from November 1 through May 1). If less than 24 seasons are available pursuant to the Lease, the Purchase Price shall be reduced by $100,000 per unavailable season. In the event that less than 23 seasons are available pursuant to the Lease, Seller shall have the option not to close. The Purchase Price is payable at the Closing all in cash. Buyer has previously placed a $100,000 deposit (the "DEPOSIT") into Escrow (as hereinafter defined) with the Escrow Agent (as hereinafter defined), which Deposit shall, if the Closing occurs, be paid to Seller and credited against the Purchase Price. 2.2. ALLOCATION OF PURCHASE PRICE. Prior to the Closing, the parties shall use their best efforts to agree upon an allocation of the Purchase Price among the items of Property being purchased based upon their relative fair market values; provided, that if Buyer and Seller are unable to so agree prior to the Closing, Closing shall still occur. The parties shall use any such allocation for federal and state income tax purposes. 3 III. TITLE INSURANCE AND SURVEY. 3.1. SURVEY AND TITLE DOCUMENTS. During its Inspection Period (as defined below), Buyer shall obtain, and shall furnish a copy to Seller and to a title insurance company selected by Buyer (the "TITLE COMPANY") a survey of the Real Property prepared by a surveyor selected by Buyer (the "SURVEY"). During its Inspection Period, Buyer shall obtain, and shall furnish a copy to Seller of, a title insurance commitment covering the Real Property in favor of Buyer (the "TITLE COMMITMENT"). 3.2. UCC REPORT. Within 20 days after the execution of this Agreement, Seller shall deliver to Buyer's counsel a UCC report (the "UCC REPORT") with respect to Seller and any trade names under which the Property has been operated during the last three years from any governmental offices in the Virgin Islands in which financing statements are required to be filed in order to perfect a security interest in the property covered thereby. 3 3. TITLE POLICY. A condition to Buyer's obligation to close the transactions contemplated hereby shall be the issuance by the Title Company at Closing of its leasehold policy of title insurance (or a marked-up commitment equivalent executed and delivered by the Title Company), insuring title to the Real Property in the name of Buyer subject only to those matters reflected in the Title Commitment (and any matters caused by Buyer), as such Title Commitment has been reviewed and approved by Buyer during the Inspection Period (the "TITLE POLICY"), so long as Buyer has complied with all of the requirements of the Title Company to the issuance thereof, other than requirements to be complied with by Seller as set forth therein. Buyer shall pay the cost of such policy. 3.4. TITLE INSPECTION. Buyer shall have until October 21, 1997 to review the Survey, the UCC Report, the Title Commitment and all of the other diligence items described in Articles III and IV hereof, all of which shall be deemed approved by Buyer if Buyer does not elect to terminate this Agreement in accordance with Section 4.1, below. IV. PROPERTY EVALUATION. 4.1. INSPECTION PERIOD. The "INSPECTION PERIOD" shall begin on the date of the full execution of this Agreement, and end on the earlier to occur of (i) the date that is five business days prior to the Outside Date (as hereinafter defined) and (ii) the 4 date that Buyer gives notice to Seller of its intention to proceed with the transaction contemplated by this Agreement pursuant to Section 10.2. At the end of the Inspection Period, Buyer shall give notice to Seller that Buyer elects, in Buyer's sole discretion, (1) to proceed with acquisition of the Property, (2) extend the Inspection Period an additional thirty (30) days to resolve any "unknown items" prior to Closing, or (3) not to acquire the Property, in which case this Agreement shall terminate. In the event of termination, the Deposit shall be returned to Buyer. Failure by Buyer to deliver any notice required or permitted under this Section within the periods prescribed herein shall be deemed an irrevocable election not to acquire the Property and to terminate this Agreement, time being of the essence. 4.2. PHYSICAL INSPECTION OF PROPERTY. Buyer shall have until the end of the Inspection Period in which to inspect and examine the Property and conduct all tests and hazardous waste examinations to the extent Buyer deems necessary to determine the condition of the Property. Buyer shall have access to all buildings, improvements, storage areas, other spaces, equipment and personalty that are included in the Property upon providing reasonable prior notice to Seller; provided that Seller may, if it so elects, accompany Buyer while Buyer's secures such access. Buyer shall indemnify Seller from and against any damages incurred by Seller as a result of Buyer's (or its agents' affiliates', employees' or contractors') acts or omissions on the Property during the Inspection Period, excluding damages caused by Seller's acts or omissions, or those of Seller's agents, affiliates, employees or contractors, and Buyer shall maintain (or insure that its agents maintain) liability insurance in an amount of at least $1 million covering such potential liability during the Inspection Period, insuring Buyer and Seller and delivering proof of same to Seller prior to entering the Property. Buyer shall not, without Seller's prior written consent, talk to tenants or do anything which damages the Property during the Inspection Period, and Buyer shall be responsible for promptly repairing any damage thereto that it does cause. The two immediately preceding sentences shall survive any termination of this Agreement, notwithstanding any contrary provision provided elsewhere herein. 4.3. INSPECTION OF BOOKS AND RECORDS. Buyer and its representatives shall have until the end of the Inspection Period to inspect and examine all books, records, files, leases, and 5 other documents relating to the management, operation and financial condition of the Property. V. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and warrants to Buyer as follows: (a) To the best knowledge of Seller (such knowledge being deemed, for purposes of this Article V, to be solely the actual knowledge of Ronald Moorhead, Richard Caruso and Carole Dudley, with Seller acknowledging that such individuals are the individuals with primary responsibility for the management and operation of the Property), all water, sewer, gas, steam, electric, telephone, cable television, access and drainage facilities and all other utilities necessary to the current operation of the Property are currently available to the Property, are in working order and are adequate for Seller's present use of the Property. To the best knowledge of Seller, there is unrestricted direct access to the Property from an existing public street. To the best knowledge of Seller, there are no facts or conditions that will result in the termination of the present access from the Property to utility services, or from the Property to existing public streets adjoining the Property. (b) To the best knowledge of Seller: the use, occupancy, operation and condition of the Property comply with all applicable zoning and building laws to which it is subject; and all applicable certificates of occupancy, permits, licenses and other evidences of compliance which are or were required or necessary to be obtained in connection with the ownership, operation and use of the Property have been obtained and complied with. (c) To the best knowledge of Seller, there is one (1) under ground and five (5) above ground storage tanks, and no other storage tanks, on the Property. Seller has no knowledge as to the contents of the underground storage tank on the Property referenced above. To the best knowledge of Seller, Seller has received no written notices (that have not been complied with and fully resolved) that would indicate that the Property is in violation of any laws relating to environmentally hazardous materials. (d) There are no pending or, to the best of Seller's knowledge, threatened, claims, suits, actions, or arbitrations or regulatory, legal, or other proceedings or investigations 6 affecting the Seller, the Property or Seller's rights and obligations under this Agreement except as shown on EXHIBIT E hereto. There is no pending or, to the best of Seller's knowledge, contemplated, condemnation of the Property, or any part of it. (e) Devcon is a corporation and CBMJV is a general partnership, duly organized, validly existing and in good standing under the laws of the State of Delaware and the U.S. Virgin Islands, respectively, with full power and authority, without default or the obtaining of any approvals or consents (except those contemplated herein and those that will be in place at Closing), to perform its obligations hereunder and to carry on their respective businesses as now conducted and to own and operate its properties and assets. Neither the execution nor the performance of this transaction will constitute a breach of Seller's organizational documents. The persons executing this Agreement on behalf of Seller have the full right and authority to execute this Agreement on behalf of Seller and to bind Seller. (f) The rent roll and, to the best knowledge of Seller, other Financial Statements of the Property (the "RENT ROLL"), and the Lease, Licenses and Contracts as supplied to Buyer, are true, correct and complete in all material aspects. To the best knowledge of Seller, there are no leases, licenses or agreements affecting the Property or to which Seller is a party other than the Lease, the Contracts listed on EXHIBIT C, the Licenses listed on EXHIBIT D, and those matters of public record. (g) To the best of Seller's knowledge, the ten-year renewal option granted to the lessee in Section 1.02 of the Lease (the "VIPA LEASE OPTION") is and, after the assignment of the Lease to Buyer, will be, valid, binding and enforceable against VIPA in accordance with its terms. (h) All applicable real estate or personal property taxes, sales taxes, occupation taxes, retail sales taxes, fuel taxes, gross receipts taxes and other special taxes that are due have been paid. (i) To the best knowledge of Seller, the Lease, the Licenses and the Contracts are in full force and effect and unmodified. Seller (i) has paid all rents and other charges to the extent due and payable under the Lease, (ii) to the best of its knowledge, is not in default under the Lease, (iii) has 7 received no notice of default from VIPA and (iv) to the best knowledge of Seller, knows of no default by VIPA under the Ground Lease. Buyer acknowledges that, except for the inquiry referred to in the definition of "the best knowledge of Seller" set forth above, Seller has made no investigation or inquiry for purposes of rendering the representations and warranties set forth in this Article V. VI. COVENANTS OF SELLER. 6.1. FUTURE OPERATIONS. Seller agrees and covenants that until the Closing: (a) Seller shall continue to operate the business conducted on, and maintain, the Property in the ordinary course of business in a manner consistent with the way it has been operated and maintained in the preceding 12 months (provided that Seller need not make any capital improvements during the contract period), attempt to preserve material business relationships with third parties of the business conducted at the Real Property, not sell, dispose of or abandon any assets used in the operation of the business conducted at the Real Property, except in the ordinary course of business and consistent with past practice, not make material changes in any method of marketing, management or operation, accounting methods, practices or procedures, collection or credit extension policies or cash management methods, practices or procedures and not consent to any zoning changes, or sell, transfer, assign, dispose of, or consent to the utilization of, any development rights, including riparian rights, if any. Except as provided in Section 1.3 above, Seller shall not enter into, modify, extend or cancel the Lease, any Contract , any License, or other agreement affecting the Property or any portion thereof, including without limitation any License, agreement or governmental entitlement that will bind Buyer or affect the Property after the Closing, without Buyer's prior written approval, which shall not be unreasonably withheld, except that Seller may enter into, modify, extend or cancel boat slip or storage leases in the ordinary course of business in accordance with Seller's standard schedule of rents. (b) Seller shall provide to Buyer a list of the work performed, pursuant to the insurance settlement from Hurricane Marilyn, on EXHIBIT F hereto. 8 6.2. CERTIFICATION OF NON-FOREIGN STATUS. At the Closing, Seller shall complete, execute and deliver a fully executed Certification that Seller is not a Foreign Person in form acceptable to Buyer and Seller, if such statement is accurate. If Seller is not able to provide Buyer with such certification, Buyer shall be entitled to withhold a portion of the Purchase Price as called for by the Internal Revenue Code of the United States. 6.3. ESTOPPEL CERTIFICATES. Prior to the Closing, Seller shall use its best efforts to deliver to Buyer estoppel certificates (the "ESTOPPEL CERTIFICATES"), addressed to Buyer and in form and substance reasonably satisfactory to Buyer (which forms shall be delivered to Seller by Buyer within fifteen (15) days after the date hereof), executed by any tenants of the Property other than boat slip or storage tenants and tenants with Lease terms with less than six (6) months remaining ("TENANTS"), and by VIPA with respect to the Lease (including clarification of the exact method and basis for the calculation of rent under the Lease during the option period and assurance that the VIPA Lease Option is and, after the assignment of the Lease to Buyer, will be valid, binding and enforceable against VIPA in accordance with its terms, and that VIPA is in compliance with the terms of the master lease for the Leasehold). Buyer shall also obtain written evidence that the lease agreement to which the VIPA Lease is subject is in full force and effect and is not in default and the Buyer shall receive at Closing an assignment of any non-disturbance or recognition agreement between the Seller and the lessor under such other lease. VII. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer hereby represents and warrants to Seller that Buyer is a corporation duly organized and existing and in good standing under the laws of the State of Delaware and has full right and authority, without default and without the requirement of securing consents or approvals, except those that will be in place as of the Closing Date, to perform its obligations hereunder and to carry on its business as now conducted and to own and operate its properties and assets. The persons executing this Agreement on behalf of Buyer have the full right and authority to execute this Agreement on behalf of Buyer and to bind Buyer. 9 VIII. CONDITIONS TO BUYER'S OBLIGATIONS. Buyer's obligation to proceed with the purchase of the Property and the Closing is conditioned upon all of the following (any of which may be waived by Buyer, and only by Buyer): (a) Performance by Seller of all of its obligations under this Agreement as called for hereby, and no event having occurred which constitutes a default by Seller under this Agreement. (b) All of the representations and warranties of Seller contained in this Agreement shall be true and accurate in all material respects as of the Closing Date. (c) Receipt of Title Policy at the Closing, so long as Buyer has complied with all of the requirements of the Title Company to the issuance thereof, other than requirements to be complied with by Seller as set forth herein. (d) Receipt by Buyer of a properly executed VIPA Consent and confirmation that the VIPA Lease Option is, and after the assignment of the Lease to the Buyer in connection with the Closing, will be, valid, binding and enforceable in accordance with its terms against VIPA. (e) The physical and environmental condition of the Property shall be substantially the same on the date of the Closing as on the date hereof, reasonable wear and tear excepted. IX. CONDITIONS TO SELLER'S OBLIGATION. Seller's obligation to proceed with the sale of the Property and the Closing is conditioned upon Buyer having performed all of its obligations under this Agreement and no event having occurred which constitutes a default of Buyer under this Agreement. X. ESCROW AND CLOSING. 10.1. ESCROW. Buyer and Seller shall open an escrow ("ESCROW") to implement this transaction by depositing a signed copy of this Agreement with Greenberg Traurig, et. al. ("ESCROW AGENT"), as agent for Chicago Title Insurance Company (the "ESCROW HOLDER") as soon as possible after the execution of this Agreement. Seller, Buyer and Escrow Agent agree to the escrow provisions attached hereto as EXHIBIT G. The Escrow Holder is 10 authorized and instructed to act in accordance with this Agreement, which shall constitute escrow instructions for this transaction. If the Escrow Holder requires any additional instructions, the parties agree to provide mutually acceptable additions or deletions that do not substantially alter this Agreement. 10.2. CLOSING DATE; TERMINATION OF ESCROW. Escrow shall close on or before November 21, 1997 (as such date may be extended by extension of the Inspection Period under Section 4.1 above or by the mutual agreement of Seller and Buyer, the "OUTSIDE DATE") on a time and date specified in writing by Buyer to Seller no later than five(5) business days prior to such specified date. If Buyer consummates the transaction prior to October 6, 1997, the Purchase Price shall be reduced by $75,000 in the form of early closing bonus ("EARLY CLOSING BONUS"). If the transaction closes after October 6, 1997, but before November 22, 1997, the $75,000 Early Closing Bonus will be cumulatively reduced by $1,666.67 for each day after October 6, 1997 until final consummation of the sale. The dates set forth in the preceding two (2) sentences shall not be extended or otherwise affected by any extension of the Outside Date beyond November 21, 1997, by reason of the extension of the expiration of the Inspection Period, or otherwise, and such dates are absolute. If the Closing does not occur by the Outside Date, upon written demand of any party who has complied with all of its obligations hereunder, the Escrow Holder shall return to each party who has complied with all of its obligations under this Agreement, all funds and documents deposited in Escrow by such party (excluding the Deposit which shall be disposed of as otherwise provided herein) and this Agreement shall terminate. As used herein, the term "CLOSING" shall mean the mutual execution and delivery of all of the documents referenced in Sections 10.7, 10.8, 10.9 and 10.10 hereof, and the occurrence of all other events described in Section 10.11 hereof, and the term the "Closing Date" shall mean the date on which the Closing occurs. 10.3. COSTS AND FEES. Except as otherwise provided in Section 11.4, below, Buyer and Seller shall each pay its own attorneys' fees incurred in this transaction. Buyer shall pay the cost of the Title Commitment, the Survey, the Title Policy, recording charges, documentary stamp tax and transfer taxes and any sales or other taxes payable in connection with the transfer of the Property, if any, in an amount not to exceed $1,000 and one-half of the escrow fees. Seller shall pay for the UCC 11 Report, documentary stamp and transfer taxes and any sales or other taxes payable in connection with the transfer of the Property, if any, that are in excess of the $1,000 paid by Buyer and one-half of the escrow fees. 10.4. EMPLOYEES/PRORATIONS. Real property taxes, utilities, storage fees, state sales taxes, insurance, wages and salaries, rents and all other operating expenses shall be prorated as of 12:00 midnight of the day prior to the Closing Date (the "Cut-Off Time"). Seller shall pay to all employees their accrued wages and vacation and sick pay, if any, through the day prior to the Closing Date. Buyer may hire any of Seller's existing employees if Buyer so desires, and Seller will consult with Buyer after Closing to assist Buyer in obtaining approvals to expand the improvements on the Property, or otherwise relating to the Property, if Buyer so requests. The Purchase and sale hereunder shall not include any accounts receivables, all of which shall be assigned to Seller at Closing, and Seller may collect such receivables. All accounts receivables collected by Buyer shall be remitted to Seller. Buyer agrees that upon receipt of payment from any person or entity who is indebted to the business conducted at the Real Property both with respect to accounts receivable accruing prior to and subsequent to the Cut-Off Time, such collection shall be applied as designated by such account debtor designation or if the application thereof is not reasonably determinable, then any such collections shall be applied first to the payment in full of any amounts due to Buyer on accounts accruing subsequent to the Cut-Off Time and then to the indebtedness accrued prior to the Cut-Off Time. 10.5. SECURITY DEPOSITS. On the Closing Date, an amount equal to all security deposits held by Seller with respect to the Property shall be delivered to Buyer by offsetting such amount against the cash amount owed by Buyer to Seller. 10.6. INVENTORY. All fuel (and other) inventory ("INVENTORY") shall be transferred to Buyer on the Closing Date for a price equal to the fair market value of such inventory. 10.7. SELLER'S DELIVERIES TO ESCROW. Seller shall deliver to Escrow prior to the Closing Date: an Assignment of Lease and Assumption of Obligations in recordable form, conveying title to the Lease, with special warranty of title (the "ASSIGNMENT OF LEASE"); a deed in recordable form and with 12 special warranty of title, conveying title to the Improvements, Appurtenances and all other real property portions of the Property (the "Deed"); and an Assignment of Leases, Contract Rights and Intangibles/Bill of Sale from Seller to Buyer conveying title to the Personal Property, Contracts, Licenses, Inventory and other tangible and intangible assets relating to, or a part of, the Property, Assignment of Space Lease, each of which documents shall be duly executed and acknowledged by Seller and in form and substance reasonably satisfactory to Buyer and Seller and such other documents as are reasonably required by Buyer. 10.8. SELLER'S DELIVERIES OUTSIDE OF ESCROW. Seller shall deliver to Buyer prior to or at the Closing Date the following items, each of which shall be in form and substance reasonably satisfactory to Buyer and duly executed and acknowledged by Seller: (a) Certification that Seller is not a Foreign Person, if such certification is accurate. (b) The originals of the VIPA Estoppel Certificate and all other Estoppel Certificates to the extent obtained by Seller. (c) The original VIPA Consent. (d) Original executed counterparts (or copies certified by Seller as true and correct, if originals are unavailable) of all Contracts, Licenses, space leases and other occupancy agreements to be transferred to Buyer. (e) All documentation necessary to transfer title to any motor vehicles to Buyer. (f) Evidence of Seller's good standing and incumbency certificates and corporate resolutions evidencing Seller's authority to consummate the transactions contemplated hereby as are required by the Title Company, and any other documentation reasonably requested by Buyer's counsel or the Escrow Holder to complete the transaction contemplated hereby or by the Title Company to show the authority of Seller to sell the Real Property. (g) Letters addressed to each party (other than Seller) to a Contract or lease, occupancy or license agreement and all other customers, duly executed by Seller, notifying such 13 parties of change in ownership and otherwise in form and substance as reasonably approved by Seller and Buyer. 10.9. BUYER'S DELIVERIES TO ESCROW. Buyer shall deliver to Escrow, prior to the Closing Date, the following items: (a) A cash payment equal to the balance of the Purchase Price. (b) A cash payment equal to Buyer's share of the costs incurred in connection with the Closing. (c) A cash payment for purchase of the Inventory. (d) A cash payment for any amounts, if any, owed by Buyer under Section 10.4 or otherwise due and payable by Buyer hereunder on the Closing Date. (e) The Assignment of Lease and Assumption of Obligations (assuming all obligations of the Property arising from and after the Closing Date), duly executed and acknowledged by Buyer. 10.10. BUYER'S DELIVERIES OUTSIDE OF ESCROW. Buyer shall deliver to Seller and the Title Company, prior to the Closing Date evidence of Buyer's good standing and incumbency certificates and resolutions evidencing Buyer's authority to consummate the transactions contemplated hereby, and all other documents or payments required by this Agreement or documents reasonably required by Seller's counsel, the Title Company or the Escrow Holder to complete this transaction. 10.11. CLOSING OF ESCROW. The Escrow Holder shall close the Escrow by taking the following actions on the Closing Date: (a) Record (or cause to be recorded, in due course) the Deed and the Assignment of Lease, in the appropriate governmental records. (b) Deliver to Seller the amount of the Purchase Price and other amounts payable to Seller as adjusted, after taking into account any charges attributable to Seller and prorations described above. (c) Record and deliver such other documents or take such other actions as may be necessary to effect the Closing. 14 As soon as practical after the Closing, the Escrow Holder shall deliver copies of the recorded documents to Buyer's counsel or Seller's counsel, as appropriate, at the address set forth in Section 11.3. 10.12. DEFAULT. (a a) In the event the transactions contemplated hereby fail to close as a result of a default by Buyer hereunder, without default by Seller hereunder, then Seller shall be entitled to retain the Deposit as liquidated damages, and Seller shall have no further rights or remedies against Buyer as a result thereof or otherwise, with respect to this Agreement. The parties agree that the Deposit is a fair and reasonable estimate of the damages that would be incurred by Seller in the event the transactions contemplated hereby fail to close as a result of a default by Buyer hereunder. (b) In the event the transactions contemplated hereby fail to close as a result of a default by Seller hereunder, Buyer's sole remedy hereunder shall be to either (i) terminate this Agreement and receive the return of the Deposit plus an amount equal to all of Buyer's out-of-pocket expenses incurred by Buyer from and after the date hereof in connection with this transaction ; or (ii) bring an action for specific performance against Seller to compel Seller to perform its obligations hereunder. In addition, if either (a) such remedy of specific performance is unavailable because Seller has either previously sold the Property or has otherwise intentionally frustrated Buyer's ability to compel Seller to convey the Property to Buyer as required hereby, or (b) Seller has elected to terminate this Agreement because less than 23 seasons are available under the Lease (as described in subsection 2.1 above), Buyer shall be entitled to reimbursement of Buyer's out-of-pocket expenses incurred from and after the date hereof in connection with this transaction, but not to exceed the sum of $75,000.00, and, in the case of (a) above, Buyer shall also be entitled to exercise any and all of its other remedies available at law or equity, without limitation. Buyer shall not otherwise be entitled to seek damages from Seller as a result of any default by Seller hereunder. XI. GENERAL PROVISIONS. 11.1. POSSESSION OF PROPERTY; RISK OF LOSS. Possession of the Property shall be transferred on the Closing Date. All risks of loss with respect to the Property shall be borne by 15 Seller until the later of the transfer of title or the transfer of physical possession to Buyer (in the event Seller fails to transfer possession on the Closing Date). Any nonmaterial damage to or destruction of the Property between the date of this Agreement and the Closing Date shall be repaired by Seller, at its sole cost, to the extent legally possible and as soon as reasonably possible, and any insurance proceeds and rights thereto transferred and assigned to Seller. If there is damage or destruction to the Property with a cost to repair in excess of $100,000.00 between the date of this Agreement and the Closing Date and if such damage is not repaired prior to the Closing Date, Buyer may, at its option: (a) elect to terminate this Agreement; or (b) proceed with the Closing, in which event any insurance proceeds attributable to such damage, destruction or condemnation and rights thereto shall be payable and assigned to Buyer, to the extent of the damage not repaired by Seller prior to Closing. 11.2. FURTHER ASSURANCES. From time to time, at Buyer's request, whether on or after the Closing Date, and without further consideration, Seller shall execute and deliver any further instruments of conveyance and take such other actions as Buyer may reasonably require to complete more effectively the transfer to reasonably require to complete more effectively the transfer to Buyer of the Property to be acquired under this Agreement, at Buyer's sole cost and expense. 11.3. NOTICES. Communications relating to this Agreement shall be in writing and shall be delivered personally, or sent by facsimile, United States mail, first class postage prepaid, private messenger or private courier service, to the parties or their assignees at the following fax numbers or addresses: If to Seller: Devcon Crown Bay Corporation Crown Bay Marina Joint Venture I 1350 E. Newport Center Drive, Suite 201 Deerfield Beach, Florida 33433 Fax Number: (954) 429-1506 16 with a copy to: Jerrold A. Wish, Esq. Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. 1221 Brickell Avenue Miami, Florida 33131 Fax Number: (305) 579-0717 If to Buyer: Koben Capital Partners, Inc. 485 Fifth Avenue, 9th Floor New York, New York 10017 Fax Number (212) 681-9337 with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017-8954 Fax Number (212) 455-2502 A party may change these addresses by written notice to the other delivered in accordance with this Section. If a communication is mailed under this provision, it shall be deemed received on the earlier of (i) three business days after it is mailed or (ii) the date it is actually received. A communication by any other method permitted under this Section shall be effective when actually received. 11.4. RECOVERY OF DISPUTE COSTS. If the parties hereto become involved in any litigation arising under or otherwise related to this Agreement, the prevailing party shall be entitled to recover any costs incurred (including costs and attorneys' fees) in enforcing or protecting its rights hereunder. The provisions of this paragraph shall survive Closing co-extensively with all other surviving provisions of the Agreement. 11.5. AMENDMENT. This Agreement may only be modified if the modification is in writing and is signed by the party against whom enforcement is sought. 11.6. ASSIGNMENT. Buyer shall have the right to assign this Agreement to any entity formed by Buyer or any of its affiliates for the purpose of acquiring the Property, so long as 17 such assignment (including the timing thereof) does not prevent the timely obtaining of the VIPA Consent and such assignee assumes Buyer's obligations hereunder in writing. 11.7. BINDING EFFECT. This Agreement shall be binding upon, and inure to the benefit of, the respective successors, assigns and legal representatives of the parties. 11.8. EXHIBITS AND ENTIRE AGREEMENT. All exhibits referred to in this Agreement are incorporated into this Agreement and made a part of it. This Agreement contains all of the terms and provisions of the agreement between the parties with respect to the subject matter of this Agreement. This Agreement supersedes all other prior agreements, representations and understandings of the parties bearing upon the meaning and effect of this Agreement, whether oral or written. 11.9. GOVERNING LAW; JURISDICTION. This Agreement is to be governed by, and construed in accordance with, the internal laws of the State of Florida. 11.10. CAPTIONS. The captions and section headings used in this Agreement are for the convenience of the parties only and shall not be used in construing it. 11.11. COMMISSIONS. Seller shall pay a commission of $23,000 to International Marina Realty, Inc. and $67,000 to Marina Management Services, Inc. (the "BROKERS"). There shall be no other commissions paid by Buyer or Seller in connection with the purchase and sale of the property. Buyer and Seller shall each indemnify the other against and hold the other harmless from any claim for any fee, commission or other compensation made by any person or entity other than the Brokers claiming to have been employed, engaged or otherwise retained by the indemnifying party. 11.12. ESCROW AGENT. The Escrow Agent shall not be liable for any actions taken in good faith, but only for its gross or willful negligence or willful misconduct. The parties hereby indemnify and hold the Escrow Agent harmless from and against any loss, liability, claim or damage whatsoever (including reasonable attorney's fees and court costs at trial and all appellate levels) the Escrow Agent may incur or be exposed to in its capacity as escrow agent hereunder except for gross negligence or willful misconduct. If there be any dispute as to disposition of any proceeds held by the Escrow Agent 18 pursuant to the terms of this Agreement, the Escrow Agent is hereby authorized to interplead said amount or the entire proceeds with any court of competent jurisdiction and thereby be released from all obligations hereunder. The parties recognize that the Escrow Agent is the law firm representing Seller, and hereby agree that such law firm may continue to represent Seller in any litigation pursuant to this Agreement. The Escrow Agent shall not be liable for any failure of the Escrow Holder or any depository bank or other financial institution. XII. CONSULTING SERVICES. 12.1. SERVICES/FEES. For the period ending on the earlier of the date that is three Fiscal Years (as hereinafter defined) following the Closing Date and the date that Buyer sells the Property to a third party purchaser, the Seller shall render consulting services to Buyer consisting of (i)general advice and consultation regarding the business operations of the Crown Bay Marina and (ii) actively assisting Buyer and facilitating negotiations with VIPA in an effort to obtain a ten year extension of the Lease. In consideration for Seller rendering such services, upon the terms set forth below, Seller shall be paid an incentive consulting fee equal to (a) the lease Extension Bonus (as hereinafter defined) and (b) a percentage of "Net Cash Flow" (as hereinafter defined) from the Property for a three "Fiscal Year" (as hereinafter defined) period following the Closing Date pursuant to the following percentages (the "PERCENTAGE PROVISION"). FISCAL YEAR 1 PERCENTAGE FOR NET CASH FLOW PER YEAR APPLICABLE TIERS ---------------------- ---------------- $0-$624,999.99 0% $625,000~$774,999.99 40% $775,000~$874,999.99 60% Over $875,000 75% FISCAL YEARS 2-3 PERCENTAGE FOR NET CASH FLOW PER YEAR APPLICABLE TIERS ---------------------- ---------------- $0-$674,999.99 0% $675,000~$774,999.99 40% $775,000~$874,999.99 60% Over $875,000 75% 19 Percentage Provision payments shall not be reduced by any "Lease Extension Bonus" (as hereinafter defined) payments made by Buyer to Seller. Any earned Percentage Provision payments which are not paid due to there being insufficient funds because of any payments of the Lease Extension Bonus shall be due and payable the following Fiscal Year. The Seller's participation in the Percentage Provision payments shall not exceed $500,000 in the aggregate during the three-Fiscal Year period. Distribution of Percentage Provision payments to the Seller, if any, will be made annually within 60 days from the end of the Fiscal Year subject to any local, state, and federal required tax withholdings. Buyer reserves the right to sell the Property at any time, and, in the event of an arm's length transaction with change of control, no Percentage Provision payments will be due in respect of the Fiscal Year in which the third-party sale ("THIRD-PARTY SALE") occurs, however, Seller shall receive payment upon such sale in the amount set forth in the following schedule of the Percentage Provision, provided that the Property is sold for more than the sum of $3,750,000 plus amounts spent on "Capital Expenditures" (as hereinafter defined), if any made by the Buyer through the date of such sale: FISCAL YEAR AMOUNT/FORMULA ------- -------------- 1 If the Property is sold at any time during the first Fiscal Year, Seller shall be paid 50% of the gross sale proceeds ("GROSS SALE PROCEEDS") over the sum of $3,750,000 plus amounts spent on Capital Expenditures, if any. The amount paid to the Seller under this clause shall not exceed $500,000 in aggregate. Any payments due under this paragraph will be payable at the closing of the Third-Party Sale. 20 FISCAL YEAR AMOUNT/FORMULA ------- -------------- 2 If the Property is sold at any time during the second Fiscal Year, Seller shall be paid Percentage Provision payments (not to exceed $500,000 less any previous Percentage Provision payments) for Fiscal Years 2 and 3 pursuant to the Percentage Provision determined by the first Fiscal Year Net Cash Flow increased by 5% once as the projected Net Cash Flow for each of the two remaining Fiscal Years. Any payments due under this paragraph will be payable only from available Gross Sale Proceeds above the sum of $3,750,000, plus amounts spent on Capital Expenditures, if any, made by the Borrower through the date of such sale and shall be paid at the closing of the Third-Party Sale. 3 If the Property is sold at any time during the third Fiscal Year, Seller shall receive earn-out payments (not to exceed $500,000 less any previous Earn Out Provision payments) for Fiscal Year 3 pursuant to the Percentage Provision determined by the second Fiscal Year Net Cash Flow grown by 5% once as the projected Net Cash Flow for the one remaining Fiscal Year. Any payments due under this paragraph will be payable only from available Gross Sale Proceeds above the sum of $3,750,000, plus amounts spent on Capital Expenditures, if any, made by the Borrower through the date of such sale, and shall be paid at the closing of the Third-Party Sale. 12.2. NET CASH FLOW. "Net Cash Flow" from the Property is defined as gross operating revenue (including business interruption proceeds but excluding other insurance proceeds) less (i) cost of goods sold, (ii) all operating expenses including, but not limited to, gross receipt taxes and VIPA royalty and ground lease payments (repair and maintenance expenses shall be consistent with historical categorization vis- 21 a-vis capital expenditures) (iii) capital reserve of $60,000 per annum, (iv) management fee of $65,000 per annum ($85,000 per annum if not managed by Marina Management Services), (v) pre-identified major capital expenditures (to be identified and agreed prior to Closing Date), (vi) prior year Net Cash Flow losses, if any, and (vii) upon occurrence of any insured event, $33,000 in deductible expenses (applicable until the current insurance policy expires or is replaced with a new policy selected by the Buyer). Any payments made to the Seller pursuant to the Earn Out Provision and Lease Extension Bonus are excluded as expenses for determining Net Cash Flow. 12.3. LEASE EXTENSION BONUS. Upon receiving a written extension of the term of the Lease (in addition to the current 14-year original lease term plus 10-year option period) from the VIPA prior to the Closing Date, Buyer shall pay Seller $250,000 as a lease extension bonus ("LEASE EXTENSION BONUS") on the Closing Date, provided that the lease extension shall have a minimum extension period of ten (10) original lease years in the form, and upon terms, acceptable to Buyer in its reasonable discretion (a "QUALIFYING LEASE EXTENSION"). If the lease extension is executed following the Closing Date, the $250,000 Lease Extension Bonus will be cumulatively reduced by $9,523.81 a month, commencing on the fourth month from the Closing Date, on the second day of the month until a final executed and legally binding copy of the Qualifying Lease Extension is delivered to Buyer. Buyer's obligation to pay any Lease Extension Bonus will terminate on the second anniversary of the Closing Date. Any Lease Extension Bonus earned following the Closing Date will be payable, on the last day of the month, ratably over a 12-month period ("BONUS MONTHLY PAYMENTS") from available Net Cash Flow less any third-party debt service ("DEBT SERVICE"). For purposes of this calculation, Debt Service shall not exceed 80% of trailing, 12-month Net Operating Income determined at the Closing Date. "NET OPERATING INCOME" shall be defined as gross operating revenue less (i) cost of goods sold, (ii) all operating expenses, and (iii) management fee as set forth in clause (iv) of Section 12.2 above. If Bonus Monthly Payments are not paid in full following the initial 12-month period due to unavailable Net Cash Flow, Seller shall continue to receive Bonus Monthly Payments until the Lease Extension Bonus is paid in full. 22 If the Property is sold in a Third-Party Sale prior to the full payment of the Lease Extension Bonus, the unpaid Lease Extension Bonus will be due and payable only from the Gross Sales above the sum of $3,750,000 plus amounts expended on Capital Expenditures made by the Buyer through the date of such Third-Party Sale plus the amount of any payments made to the Seller based upon the Percentage Provision pursuant to Section 12.1 above in connection with such Third-Party Sale. 12.4. FISCAL YEAR. "Fiscal Year" shall mean each consecutive twelve month period between the first day of the calendar month following Closing and the last day of the calendar month of Closing. 12.5. CAPITAL EXPENDITURES. "Capital Expenditures" shall mean expenditures for the acquisition, replacement, repair or improvements to fixed or capital assets which should be capitalized under GAAP. XIII. DEFERRED MAINTENANCE. Prior to the Closing Date, Seller agrees to restore (or, if Seller elects not to do such restoration, provide a credit towards the Purchase Price in an amount equal to the reasonably estimated cost to Borrower to do such restoration) the wooden finger docks located on the C Dock of the Crown Bay Marina to its original concrete condition and any faulty electrical posts (subject to further review by Buyer's electrician). If Seller has commenced such restoration but such restoration is not completed prior to the Closing Date, funds in an amount equal to the reasonably estimated cost to Borrower to do such restoration shall be escrowed with the Escrow Holder until such repairs are completed upon terms reasonably satisfactory to the Seller and the Buyer. XIV. CONTINGENT LIABILITIES. Prior to the Closing Date, Seller shall settle (or provide a credit towards the Purchase Price) in a manner satisfactory to the Buyer in its reasonable discretion all contingent liabilities associated with Atlantis Submarine due to over charging of utility expenses. XV. FINANCIAL STATEMENTS. Seller shall receive quarterly financial statements prepared by Buyer following 60 days from each fiscal quarter end of Buyer. Seller shall have the right at reasonable times during business hours and upon reasonable prior notice to inspect and audit Buyer's books and records to verify 23 income and expenditures affecting Seller's entitlements to payments from Buyer under the provisions of Article XII above. XVI. SURVIVE CLOSING.. The provisions of Article XII hereof shall survive Closing, and shall be memorialized in a memorandum executed by Buyer and Seller and recorded at Closing (the "MEMORANDUM"). The Memorandum shall state that it does not, and Seller's rights to receive payments under Article XII hereof (collectively, "SELLER'S RIGHTS") do not, constitute any lien on the Property or any part thereof, and that Seller expressly disclaims any right to lien the Property (including by way of Lis Pendens) as a result thereof. However, Seller's Rights shall be secured by a lien (the "LIEN") on the proceeds of any sale or financing (other than the proceeds of any mortgage financing used to purchase the Property hereunder) of the Property, and the Memorandum shall so state. Until the Expiration Date (as defined below) Seller's Rights, the Memorandum and the Lien shall continue and upon the Expiration Date all of Seller's Rights, the Memorandum and the Lien shall cease and expire. Seller shall obtain the written statement of Buyer's title insurance company that the Memorandum would not constitute an exception to title to the Property that would need to be shown as such in any owner's or mortgagee's title insurance policy, as a condition to being able to record such Memorandum. The Memorandum shall automatically expire on the date (the "EXPIRATION DATE") which is the earlier to occur of (i)one hundred eighty (180) days after the end of the third Fiscal Year following the Closing Date, unless Seller has commenced any action to enforce Seller's Rights in any court of competent jurisdiction prior to such date; or (ii) the occurrence of a Third-Party Sale and payment to Seller of all amounts owed to Seller pursuant to Seller's Rights; or (iii) the recordation in the Public Records of a written termination of the Memorandum executed by Seller. Such Expiration Date shall be automatic but, upon request by Buyer, Seller shall execute and deliver to Buyer written evidence thereof in any reasonable form provided by Buyer. 24 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date specified in the first paragraph. WITNESS: SELLER: DEVCON CROWN BAY CORP., a Florida corporation By:/S/ RICHARD L. HORNSBY - --------------------------- --------------------------- Richard L. Hornsby President - --------------------------- CROWN BAY MARINA JOINT VENTURE I, a Virgin Islands partnership By: Devcon Crown Bay Corp., a Florida corporation By:/S/ RICHARD L. HORNSBY - --------------------------- -------------------------- Richard L. Hornsby President - --------------------------- By: Devcon Crown Bay II Corp., a Florida corporation By:/S/ RICHARD L. HORNSBY - ---------------------------- -------------------------- Richard L. Hornsby President - --------------------------- BUYER: KOBEN CAPITAL PARTNERS, INC., a Delaware corporation By:/S/ KOSEI P. OHNO - --------------------------- ------------------------------ Name: Kosei P. Ohno Title: President - --------------------------- 25 ESCROW AGENT: By: /s/ GREENBERG TRAURIG ET AL - ------------------------- ----------------------------- Name: Jerrold A. Wish Title: Attorney - ------------------------- 26 LIST OF EXHIBITS Exhibit A-1: Depiction of Crown Bay Marina Exhibit A-2: Legal Description of the Leasehold Exhibit B: Personal Property Inventory Exhibit C: Contracts Exhibit D: Licenses Exhibit E: Litigation Exhibit F: Work Pursuant to Insurance Settlement, (Hurricane Marilyn), 1995-96. Exhibit G: Escrow Provisions 27 EXHIBIT G Escrow Provisions The Deposit shall be held in escrow by Escrow Agent and deposited in an escrow account. The Deposit, plus any interest earned from the investment thereof, shall be delivered by Escrow Agent to Sellers, to Buyers or, if pursuant to subparagraph (D) hereof, to a court having appropriate jurisdiction, in accordance with the terms of this Exhibit. Delivery of the Deposit shall be made by uncertified, unendorsed check of Escrow Agent. A. At the Closing, upon Sellers' delivery of the deed and the other documents required by this Agreement and Buyers' payment of the balance of the purchase price, Escrow Agent shall deliver the Deposit to Sellers. If the Deposit shall be so delivered to Sellers and/or Buyers, Escrow Agent shall thereupon be discharged and released from all liability hereunder. B. If at any time Escrow Agent shall receive a notice from either Sellers or Buyers (the "Notifying Party") to the effect that: (a) the other party (the "Other Party") has defaulted under this Agreement of this Agreement is null and void or terminated pursuant to the provisions hereof, (b) a copy of the notice and a statement in reasonable detail of the basis for the claimed default or termination was given as provided herein to the Other Party prior to or contemporaneously with the giving of such certificate to Escrow Agent, and (c) in the case of a claimed default, to the knowledge of the Notifying Party, the claimed default has not been timely cured, then, Escrow Agent shall give written notice to the Other Party of such demand. Unless Escrow Agent shall have received contrary instructions from the Other Party within ten (10) days after Escrow Agent's receipt of the certificate, Escrow Agent shall, within five (5) days after the expiration of such 10 day period, deliver the Deposit to the Notifying Party and thereupon be discharged and released from any and all liability hereunder. If Escrow Agent shall receive contrary instructions from the Other Party within ten (10) days after Escrow Agent's receipt of the Notifying Party's certificate, or if for any other reason escrowee in good faith shall G-1 elect not to make delivery, Escrow Agent shall not so deliver the Deposit but shall continue to hold the same pursuant hereto subject to subparagraph (D) hereof. C. Escrow Agent shall be entitled to rely upon the authenticity of any signature and the genuineness and validity of any writing received by Escrow Agent pursuant to or otherwise relating to this Paragraph. D. In case of (i) receipt of contradictory instructions pursuant to subparagraph (C) hereof, (ii) any dispute as to any matter arising under this Paragraph, (iii) any alleged default by Sellers or Buyers under this Agreement or (iv) any uncertainty as to the meaning or applicability of any of the provisions hereof, Escrow Agent may, at its options at any time thereafter, deposit the funds and investments then being held by it in escrow into a court having appropriate jurisdiction and shall thereby be discharged and released of any and all liability hereunder. E. Sellers and Buyers recognize and acknowledge that the Escrow Agent is serving without compensation and solely as an accommodation to the parties hereto and they each agree that Escrow Agent shall not be liable to either of the parties for any act or omission hereunder or any matter or thing arising out of its conduct hereunder, except for Escrow Agent's willful misconduct or negligence. F. Greenberg Traurig Hoffman Lipoff Rosen & Quentel has acknowledged agreement to these provisions by signing in the place indicated at the end of the Agreement. G-2 EX-23.1 4 ACCOUNTANTS' CONSENT The Board of Directors Devcon International Corp. and Subsidiaries: We consent to incorporation by reference in the registration statements (No. 33- 32968 and No. 33-59557) on Form S-8 and (No. 33-65235) on Form S-3 of Devcon International Corp. and subsidiaries of our report dated March 27, 1998, relating to the consolidated balance sheets of Devcon International Corp. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and the related financial statement schedule, which report appears in the December 31, 1997 annual report on Form 10- K of Devcon International Corp. and subsidiaries. KPMG PEAT MARWICK LLP Fort Lauderdale, Florida March 27, 1998 EX-27 5
5 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 876,368 125,000 18,913,836 (4,984,839) 4,779,121 27,895,994 66,767,866 (27,119,417) 86,433,260 19,183,305 0 449,894 0 0 12,064,133 86,433,260 64,243,751 64,243,751 53,678,713 0 22,975,774 150,000 2,668,277 (15,229,013) 307,010 (15,536,023) 0 0 0 (15,536,023) (3.45) (3.45)
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