-----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, KxxBkfcuKAzqoH/7Bhu6ZAF8dwVuGzbb6VO3wymgebdtl4bmHL8vv2L7SSTDRyPS iv1BaoVy5x6DvfkbR5+RYw== 0000950170-99-001785.txt : 19991117 0000950170-99-001785.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950170-99-001785 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 000-07152 FILM NUMBER: 99754762 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-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________. Commission File No. 0-7152 DEVCON INTERNATIONAL CORP. (Exact Name of Registrant as Specified in its Charter) FLORIDA 59-0671992 (State or Other Jurisdiction of (I.R.S.Employer Incorporation or Organization) Identification No.) 1350 E. NEWPORT CENTER DRIVE, SUITE 201, DEERFIELD BEACH, FL 33442 (Address of Principal Executive Offices) (Zip Code) (954) 429-1500 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.10 PAR VALUE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [X] NO [ ] As of November 10, 1999 the number of shares outstanding of the Registrant's Common Stock was 4,498,935. DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES INDEX PAGE NUMBER ----------- Part I. Financial Information: Condensed Consolidated Balance Sheets September 30, 1999 (unaudited) and December 31, 1998...................................... 3-4 Condensed Consolidated Statements of Operations Three and Nine Months Ended September 30, 1999 and 1998 (unaudited)................................... 5 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 1999 and 1998 (unaudited)............................................ 6-7 Notes to Condensed Consolidated Financial Statements... 8-9 Management's Discussion and Analysis of Financial Conditions and Results of Operations............................................. 10-17 Part II. Other Information...................................... 18-19 2 PART I. FINANCIAL INFORMATION DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Condensed Consolidated Balance Sheets September 30, 1999 and December 31, 1998 September 30, December 31, 1999 1998 ------------ ------------ (Unaudited) ASSETS Current assets: Cash $ 861,226 $ 899,605 Cash equivalents 1,064,479 1,359,253 Receivables, net 11,986,801 12,611,437 Costs in excess of billings and estimated earnings 580,064 710,557 Inventories 4,841,378 4,468,718 Assets held for sale 8,722,458 2,868,922 Other 487,429 398,592 ------------ ------------ Total current assets 28,543,835 23,317,084 Property, plant and equipment Land 1,920,538 2,167,318 Buildings 2,372,240 3,560,545 Leasehold interests 3,670,339 6,632,206 Equipment 52,428,534 58,340,451 Furniture and fixtures 772,616 642,314 Construction in process 2,013,306 406,344 ------------ ------------ 63,177,573 71,749,178 Less accumulated depreciation (24,668,599) (28,715,682) ------------ ------------ 38,508,974 43,033,496 Investments in unconsolidated joint ventures and affiliates 269,181 237,370 Receivables, net 9,466,276 13,173,472 Intangible assets, net of accumulated amortization 1,047,444 1,165,692 Other assets 1,272,605 1,503,005 ------------ ------------ Total assets $ 79,108,315 $ 82,430,119 ============ ============ (Continued) See accompanying notes to condensed consolidated financial statements. 3 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Condensed Consolidated Balance Sheets September 30, 1999 and December 31, 1998 (Continued) September 30, December 31, 1999 1998 ------------ ------------ (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade and other $ 4,943,620 $ 6,917,119 Accrued expenses and other liabilities 1,798,971 3,186,375 Notes payable to banks 1,150,000 88,108 Current installments of long-term debt 6,686,404 5,539,151 Billings in excess of costs and estimated earnings 197,797 315,007 Income taxes 376,203 361,071 ------------ ------------ Total current liabilities 15,152,995 16,406,831 Long-term debt, excluding current installments and notes payable to banks 17,170,904 18,153,451 Minority interest in consolidated subsidiaries 1,081,448 1,762,809 Deferred income taxes 387,654 399,056 Other liabilities 1,648,570 2,067,413 ------------ ------------ Total liabilities 35,441,571 38,789,560 ------------ ------------ Stockholders' equity: Common stock 449,894 449,894 Treasury stock (78,132) -- Additional paid-in capital 12,064,133 12,064,133 Accumulated other comprehensive income- cumulative translation adjustment (1,275,112) (859,376) Retained earnings 32,505,961 31,985,908 ------------ ------------ Total stockholders' equity 43,666,744 43,640,559 ------------ ------------ Total liabilities and stockholders' equity $ 79,108,315 $ 82,430,119 ============ ============ See accompanying notes to condensed consolidated financial statements. 4 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Condensed Consolidated Statements of Operations Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Concrete and related products revenue $ 13,976,050 $ 12,240,876 $ 42,897,787 $ 38,000,309 Contracting revenue 2,866,006 4,908,014 10,604,325 10,058,542 Other revenue -- -- -- 371,386 ------------ ------------ ------------ ------------ Total revenue 16,842,056 17,148,890 53,502,112 48,430,237 Cost of concrete and related products revenue 11,930,686 10,015,008 35,059,938 30,484,462 Cost of contracting revenue 2,444,278 3,921,682 8,964,862 8,524,426 Cost of other revenue -- (1,474) -- 246,088 ------------ ------------ ------------ ------------ Gross profit 2,467,092 3,213,674 9,477,312 9,175,261 Selling, general and administrative expenses 2,736,587 2,778,852 9,060,334 8,219,376 Credit for litigation (635,603) -- (1,054,602) -- ------------ ------------ ------------ ------------ Operating income 366,108 434,822 1,471,580 955,885 Other income (deductions) Joint venture equity income (loss) 16,400 -- (13,600) -- Gain (loss) on sale of property and equipment (241,743) 73,138 (133,231) 119,134 Interest expense (568,473) (525,629) (1,822,637) (1,624,722) Interest and other income 283,438 290,409 654,497 1,107,655 Minority interest 205,012 7,215 681,361 (2,360) ------------ ------------ ------------ ------------ (305,366) (154,867) (633,610) (400,293) ------------ ------------ ------------ ------------ Income before income taxes 60,742 279,955 837,970 555,592 Income tax (expense) benefit (131,149) 42,309 (317,917) (127,871) ------------ ------------ ------------ ------------ Net income (loss) (70,407) 322,264 520,053 427,721 ============ ============ ============ ============ Basic (loss) earnings per share $ (0.02) $ 0.07 $ 0.12 $ 0.10 ============ ============ ============ ============ Diluted (loss) earnings per share $ (0.02) $ 0.07 $ 0.11 $ 0.09 ============ ============ ============ ============ Weighted average number of shares outstanding-basic 4,473,935 4,498,935 4,489,361 4,498,935 ============ ============ ============ ============ Weighted average number of shares-diluted 4,473,935 4,515,277 4,560,290 4,527,604 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 5 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows Nine Months September 30, 1999 and 1998 (Unaudited)
1999 1998 ----------- ----------- Cash flows from operating activities: Net income $ 520,053 $ 427,721 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,788,656 4,408,761 Provision for doubtful accounts and notes 169,194 (163,937) Loss (gain) on sale of equipment 133,231 (119,134) Credit for litigation (1,054,602) -- Joint venture equity loss 13,600 -- Minority interest (income) loss (681,361) 2,360 Changes in operating assets and liabilities: Decrease in receivables, net 262,870 992,781 Decrease (increase) in costs in excess of billings and estimated earnings 130,493 (1,737,748) Increase in inventories (375,480) (176,922) (Increase) decrease in other current assets (88,835) 302,370 (Increase) decrease in other assets (95,571) 90,822 Decrease in accounts payable, trade and other (2,247,137) (1,532,333) (Decrease) increase in billings in excess of costs and estimated earnings (117,210) 870,342 Increase (decrease) in income taxes payable 162,280 (112,374) Increase (decrease)in other liabilities 115,880 (328,185) ----------- ----------- Net cash provided by operating activities 1,636,061 2,924,524 ----------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment (6,937,355) (6,308,764) Proceeds from disposition of property, plant and equipment 493,387 3,698,785 Payments received on notes 3,387,699 2,126,979 Investment in affiliates (45,411) (112,020) Advances from affiliates -- 18,166 Issuance of notes (16,000) (514,135) Purchase of treasury stock (78,132) -- ----------- ----------- Net cash used in investing activities $(3,195,812) $(1,090,989) ----------- -----------
(Continued) See accompanying notes to condensed consolidated financial statements. 6 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 1999 and 1998 (Unaudited) (Continued)
1999 1998 ----------- ----------- Cash flows from financing activities: Proceeds from debt $ 6,841,300 $ 6,180,803 Principal payments on debt (6,676,594) (8,788,563) Net borrowings from bank credit line/overdrafts 1,061,892 828,154 ----------- ----------- Net cash provided by (used in) financing activities 1,226,598 (1,779,606) ----------- ----------- Net (decrease) increase in cash and cash equivalents (333,153) 53,929 Cash and cash equivalents, beginning of period 2,258,858 1,001,368 ----------- ----------- Cash and cash equivalents, end of period $ 1,925,705 $ 1,055,297 =========== =========== Supplemental disclosures of cash flow information Cash paid for: Interest $ 1,808,423 $ 1,722,397 =========== =========== Income taxes $ 155,636 $ 124,875 =========== =========== Supplemental disclosures of non-cash investing and financing activities: Property, plant and equipment transferred to assets held for sale $ 6,035,102 $ 197,584 =========== ===========
See accompanying notes to condensed consolidated financial statements. 7 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES (Unaudited) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. The accounting policies followed by the Company are set forth in Note (l) to the Company's financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 1998. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the Company's financial position as of September 30, 1999 and the results of its operations for the three and nine months ended September 30, 1999 and 1998 and the cash flows for the nine months ended September 30, 1999 and 1998. The results of operations for the nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. EARNINGS PER SHARE Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of outstanding options is reflected in diluted earnings per share by application of the treasury stock method. For loss periods, weighted average common share equivalents are excluded from the calculation as their effect would be antidilutive. Options to purchase 524,300 and 146,300 shares of common stock, at prices ranging from $1.50 to $2.94 per share, were outstanding for the quarters ended September 30, 1999 and 1998, respectively. For the quarter ended September 30, 1999 the options were not included in the computation of diluted earnings per share because the inclusion of the options would be antidilutive. Options to purchase 320,475 and 365,000 shares of common stock, at prices ranging from $3.00 to $14.00 per share, were outstanding for the quarters ended September 30, 1999 and 1998, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market prices of the common shares. For additional disclosures regarding the outstanding employee stock options, see the 1998 Form 10-K. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires that all items recognized under accounting standards as components of comprehensive income be reported in annual financial statements that are displayed with the same prominence as other annual 8 financial statements. The Company's total comprehensive income, comprised of translation adjustments, for the nine month period ended September 30, 1999 and 1998 were as follows: 1999 1998 --------- --------- Net income $ 520,053 $ 427,721 Other comprehensive loss (415,736) (68,617) --------- --------- Total comprehensive income $ 104,317 $ 359,104 ========= ========= SEGMENT REPORTING The following sets forth the revenue and income before income taxes for each of the Company's business segments for the nine months ended September 30, 1999 and 1998. 1999 1998 ------------ ------------ Revenue (including intersegment) Concrete and related products $ 43,239,243 $ 38,195,158 Contracting 11,139,980 10,058,542 Other -- 371,386 Elimination of intersegment revenue (877,111) (194,849) ------------ ------------ Total revenue 53,502,112 48,430,237 ============ ============ Operating income (loss): Concrete and related products 400,000 1,075,000 Contracting 609,000 245,000 Other -- 117,000 Credit for litigation 1,055,000 -- Unallocated corporate overhead (592,420) (481,115) ------------ ------------ 1,471,580 955,885 Total operating income Other deductions (633,610) (400,293) ------------ ------------ Income before income taxes 837,970 555,592 ============ ============ 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION All dollar amounts of $1.0 million or more are rounded to the nearest one tenth of a million; all other dollar amounts are rounded to the nearest one thousand and all percentages are stated to the nearest one tenth of one percent. This Form 10-Q contains certain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which represent the Company's expectations and beliefs. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control, and actual results may differ materially depending on a variety of important factors, including the financial condition of the Company's customers, changes in domestic and foreign economic and political conditions, demand for the Company's services and products, risk and uncertainties related to large foreign construction projects and changes in the Company's competitive environment. The Company cautions that the factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of such factors or the effect that any such factor may have on the Company's business. PROPOSED DISPOSITION OF CERTAIN ASSETS The Company gave an international leading cement producer a 30-day option to purchase all of the Company's bulk cement terminals and cement bagging facilities for $22.0 million, with a net book value of $4.4 million. The option holder paid the Company a non-refundable fee of $1.0 million on October 1, 1999 for this option. At the expiration of the option, the two parties agreed to extend the option period for an additional, refundable payment of $6.0 million, leaving a balance to be paid of $15.0 million. The two parties are currently working diligently to receive all required government and other consents to the transaction. The Company believes that the final agreement will be signed by the end of November and that a closing of the transaction will take place within 90 days subsequent to the signing of the agreement. However, there can be no assurances that the agreement will be signed or that the transaction will be closed. COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998 REVENUE The Company's revenue during the third quarter of 1999 was $16.8 million as compared to $17.1 million during the same period in 1998. This 1.8 percent decrease was primarily due to a decrease in contracting revenue offset to a lesser extent by an increase in concrete and related products revenue. 10 The Company's concrete and related products division revenue increased 14.2 percent to $14.0 million during the third quarter of 1999 as compared to $12.2 million for the same period in 1998, primarily as a result of an increase in demand for this division's products on certain Caribbean islands, offset to a lesser extent by decreased demand on other islands. The Company cannot currently determine whether demand for this division's products will increase, decrease or remain the same throughout 1999. Revenue from the Company's land development contracting division decreased by 41.6 percent to $2.9 million during the third quarter of 1999 as compared to $4.9 million for the same period in 1998. The Company's backlog of unfilled portions of land development contracts at September 30, 1999 was $12.0 million, involving 6 projects. The backlog of one project in the Bahamas amounts to $7.4 million. A Company subsidiary, the President, and a director of the Company are minority partners of the entity developing this project. The project has not yet received its total financing and completion of the project is pending on additional financing, however, there can be no assurances that financing can be obtained. The Company is negotiating a change order to the contract of $9.0 million that the Company believes will be signed in the fourth quarter. Upon approval, the Company would have a significant increase in the revenue and gross margin associated with this contract, which could have a significant impact on the results of the fourth quarter. The Company expects that part of the backlog outstanding at September 30, 1999 will be completed by the end of 1999. COST OF CONCRETE AND RELATED PRODUCTS Cost of concrete and related products as a percentage of concrete and related products revenue increased to 85.4 percent during the third quarter of 1999 from 81.8 percent for the same period in 1998. This increase was primarily attributable to increased cost on two of the islands and to changes in the mix of products sold in the third quarter of 1999 compared to 1998. COST OF CONTRACTING Cost of contracting as a percentage of land development contracting revenue increased to 85.3 percent during the third quarter of 1999 from 79.9 percent during the same period in 1998. This increase is primarily attributable to the decrease in contract volume and to the varying profitability levels of individual contracts and the stage of completion of such contracts. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense ("SG&A expense") decreased by 1.5 percent to $2.7 million for the third quarter of 1999 from $2.8 million for the same period in 1998. As a percentage of revenue, SG&A expense remained the same at 16.2 percent during the third quarter as compared to the same period last year. CREDIT FOR LITIGATION In the third quarter the Company recognized a reduction in the accrual for litigation, due to the claimants were denied the multiplier effect on the legal fee award in the Fore Golf lawsuit. The Company also recognized income due to the settlement of the lawsuit with GOAA. The credit for litigation for the quarter was $636,000. See also Item 1, Legal Proceedings. 11 DIVISIONAL OPERATING INCOME The Company had an operating income of $366,000 for the third quarter of 1999, as compared to $435,000 for the same period in 1998. The Company's concrete and related products division operating loss was $203,000 during the third quarter of 1999 compared to $24,000 during the same period in 1998. This increase is primarily attributable to decreased gross profit of $179,000, mainly due to increased production costs in Puerto Rico. The Company's land development contracting division had an operating income of $131,000 during the third quarter of 1999 compared to $598,000 during the same period in 1998. This decrease was primarily attributable to the reduction in sales volume and to varying profitability levels of individual contracts and the stage of completion of such contracts. OTHER INCOME Minority interest income amounted to $205,000 due to losses in a consolidated joint venture. Interest income decreased in the third quarter of 1999 compared to the same period in 1998, primarily due to the Company recognizing less interest income on the notes receivable due from the Government of Antigua and Barbuda. NET INCOME (LOSS) The Company had a net loss of $70,000 during the third quarter of 1999 as compared to an income of $322,000 during the same period in 1998. The Company recognized income from a credit for litigation in the third quarter of 1999 of $636,000. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998 REVENUE The Company's revenue during the first nine months of 1999 was $53.5 million as compared to $48.4 million during the same period in 1998. This 10.5 percent increase was due to increases in concrete and related products revenue. The Company's concrete and related products division revenue increased 12.9 percent to $42.9 million during the first nine months of 1999 as compared to $38.0 million for the same period in 1998, primarily as a result of an increase in demand for this division's products on Antigua, St. Martin, and Tortola, offset to a lesser extent by decreased demand on other islands. The Company cannot currently determine whether demand for this division's products will increase, decrease or remain the same throughout 1999. Revenue from the Company's land development contracting division increased by 5.4 percent to $10.6 million during the first nine months of 1999 as compared to $10.1 million for the same period in 1998. This increase is primarily due to the Company continuing various contracts that were started during the prior quarters and to revenue on a contract in the Bahamas. The Company's backlog of unfilled portions of land development contracts at September 30, 1999 was $12.0 million, involving 6 projects. The backlog of the project in the Bahamas amounts to $7.4 million. A Company subsidiary, the President, and a director of the Company are minority partners of the entity developing this project. The project has not yet 12 received its total financing and completion of the project is pending on additional financing, however, there can be no assurances that financing can be obtained. The Company is negotiating a change order to the contract of $9.0 million that the Company believes will be signed in the fourth quarter. Upon approval, the Company would have a significant increase in the revenue and gross margin associated with this contract, which could have a significant impact on the results of the fourth quarter. The Company expects that part of the backlog outstanding at September 30, 1999 will be completed by the end of 1999. The Company cannot currently determine whether the contract revenue will increase, decrease or remain the same throughout 1999. COST OF CONCRETE AND RELATED PRODUCTS Cost of concrete and related products as a percentage of concrete and related products revenue increased to 81.7 percent during the first nine months of 1999 from 80.2 percent for the same period in 1998. This increase was primarily attributable to higher production cost on some islands and to changes in the mix of products sold in the third quarter of 1999 compared to 1998. COST OF CONTRACTING Cost of contracting as a percentage of land development contracting revenue decreased to 84.5 percent during the first nine months of 1999 from 84.7 percent during the same period in 1998. This decrease is primarily attributable to the varying profitability levels of individual contracts and the stage of completion of such contracts. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense ("SG&A expense") increased by 10.2 percent to $9.1 million for the first nine months of 1999 from $8.2 million for the same period in 1998. As a percentage of revenue, SG&A expense decreased to 16.9 percent for the first nine months in 1999 compared to 17.0 percent during the third quarter compared to the same period last year. CREDIT FOR LITIGATION The Company recognized during the first nine months of 1999 a credit for litigation totaling $1.1 million. This was a result of an order from a Florida circuit court requiring another party to pay the Company prejudgment interest and subsequent settlement of that case and a reduction of the accrual for the Fore Golf litigation. See also Item 1, Legal Proceedings. DIVISIONAL OPERATING INCOME The Company had an operating income of $1.5 million for the first nine months of 1999, as compared to $956,000 for the same period in 1998. The Company's concrete and related products division operating income was $400,000 during the first nine months of 1999 compared to $1.1 million during the same period in 1998. This decrease is primarily attributable to lower worker's compensation expense in 1998 and increased cost in 1999 for doubtful accounts for the concrete and related products division, offset to a lesser extent by an increase in gross profit in 1999. The Company's land development contracting division had an operating income of $609,000 during the first nine months of 1999 compared to $245,000 during the same period in 1998. This improvement was primarily attributable to a reduction in SG&A expenses. There was also an expense taken on a large contract in 1998. 13 OTHER INCOME Minority interest income increased due to losses in a consolidated joint venture. Net interest income/expense increased to an expense of $1.2 million in 1999 from $517,000 in 1998, primarily due to the Company recognizing less interest income on the receivable due from the Government of Antigua and Barbuda and to a lesser extent to an increase of interest expense due to increased borrowings and higher interest rates. NET INCOME The Company had a net income of $520,000 during the first nine months of 1999 as compared to $428,000 during the same period in 1998. The Company recognized income from a credit for litigation during 1999 of $1.1 million. LIQUIDITY AND CAPITAL RESOURCES The Company generally funds its working capital needs from operations and bank borrowings. In the land development contracting business, the Company must expend considerable funds for equipment, labor and supplies to meet the needs of particular projects. The Company's capital needs are greatest at the start of any new contract, since the Company generally must complete 45 to 60 days of work before receiving the first progress payment. In addition, as a project continues, a portion of the progress billing is usually withheld as retainage until all work is complete, further increasing the need for capital. On occasion the Company has provided long-term financing to certain customers who have utilized its land development contracting services. The Company has also provided financing for other business ventures from time to time. With respect to the Company's concrete and related products division, accounts receivable are typically outstanding for a minimum of 60 days and in some cases much longer. The nature of the Company's business requires a continuing investment in plant and equipment, along with the related maintenance and upkeep costs of such equipment. The Company has funded many of these expenditures out of its current working capital. However, notwithstanding the foregoing and after factoring in the Company's obligations as set forth below, management believes that the Company's cash flow from operations, existing working capital and funds available from lines of credit will be adequate to meet the Company's anticipated needs for operations during the next twelve months. As of September 30, 1999, the Company's liquidity and capital resources included cash and cash equivalents of $1.9 million and working capital of $13.4 million. Included in working capital is approximately $8.7 million of assets held for sale. Although management's intention is to sell these assets within the next 12 months, there can be no assurance that all assets will be sold. As of September 30, 1999, total outstanding liabilities were $35.4 million. As of September 30, 1999, the Company had available lines of credit totaling $550,000. Cash flows provided by operating activities for the nine months ended September 30, 1999 was $1.6 million compared with $2.9 million in 1998. The primary use of cash for operating activities during the nine months ended September 30, 1999 was a decrease in accounts payable and accruals of $2.2 million. Net cash used in investing activities was $3.2 million in the first nine months of 1999. Purchases of property, plant, and equipment were $6.9 million. The purchases were almost completely financed. Proceeds from sale of property, plant 14 and equipment were $493,000 and repayment of debt was $6.7 million. Receipts on notes receivables were $3.4 million. The Company entered into a credit agreement with a Caribbean bank in November 1996 for a total credit of $7.0 million. One part of the credit agreement is a term loan for $6.0 million repayable in monthly installments through November 2002. The Company had $3.2 million of the borrowings outstanding on this loan at September 30, 1999. The second part is a revolving line of credit of $1.0 million. The credit line has been re-approved and extended until February 2000. The Company had $950,000 outstanding under this line of credit at September 30, 1999. The interest rate on indebtedness outstanding under both loans is at a rate variable with the prime rate. The credit agreement is collateralized by various parcels of real property and other assets located in the United States Virgin Islands and certain other areas. The Company has a $500,000 unsecured overdraft facility from a commercial bank in the Caribbean. The facility is due on demand and bears interest at 14.0 percent per annum. At September 30, 1999, the Company had no borrowings outstanding under this line. The Company has borrowed approximately $3.9 million from the Company President. The note is unsecured and bears interest at 10.0 percent. Three hundred thousand is due on demand and $3.6 million is due on October 1, 2000. The President has the option of making the note due on demand should a "Change of Control" occur. A Change of Control has occurred if a person or group acquires 15.0 percent or more of the common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15.0 percent or more of the common stock. The Company has borrowed $1.7 million from one of its directors and his family. The notes are secured by equipment and bear interest at 10.0 percent. The notes have equal monthly payments over 5 years. The Company issued a loan in November 1999 for $1.0 million to the project in the Bahamas, in which the President and one of the Company's directors are minority partners. The loan is secured by equipment. The Company purchases equipment from time to time as needed for its ongoing business operations. The Company is currently replacing or upgrading some equipment (principally concrete trucks and quarry equipment) used by the concrete and related products division. This should result in a net cash expenditure, after financing part of the equipment purchases, of approximately $2.5 million during 1999. The Company has identified some equipment and real property not needed for its ongoing operations and it plans to sell those assets. The net carrying cost of these assets is $8.7 million. Any proceeds from these sales would be used to reduce debt and provide working capital. The Company believes it has available or can obtain sufficient financing for its contemplated equipment replacements and additions. Historically, the Company has used a number of lenders to finance a portion of its machinery and equipment purchases on an individual asset basis. At September 30, 1999, amounts outstanding to these lenders totaled $17.5 million. These loans are typically repaid over a three to five-year term in monthly principal and interest installments. A significant portion of the Company's outstanding debt bears interest at variable rates. The Company could be negatively impacted by a substantial increase in interest rates. The company is negotiating a sale of the Company's bulk cement terminal assets for a total of $22.0 million. If this sale is completed, the Company will reduce its outstanding debt substantially and thus will reduce its interest expense. At 15 the same time, the Company will be paying a higher cost for the cement the Company uses in its ready-mix and block production facilities. The net effect on the Company's earnings of this transaction cannot, at this point, be determined. Receivables at September 30, 1999 include $9.1 million, net, of promissory notes and bonds due from the Government of Antigua, $2.0 million of which is classified as a current receivable. The gross balance of the notes and bonds is $34.9 million. The notes called for both quarterly and monthly principal and interest payments until maturity in 1997. The notes were not satisfied at maturity but the Antiguan government has advised the Company that payments from agreed upon sources will continue until the obligation is satisfied. The agreed upon sources are lease proceeds from a rental of a United States military base, fuel tax revenues and proceeds from a real estate venture. Cash receipts, for the nine months in 1999 from agreed upon sources, were $1.8 million. YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. If not addressed, such computer systems, software products and embedded technology may be unable to properly interpret dates beyond the year 1999, which could cause system failures or miscalculations and lead to disruptions in the Company's activities and operations. The Company has identified three major areas determined to be critical for successful Year 2000 compliance: o Information systems such as PCs, networks, batch-plant computers o Third party relationships, including customers, suppliers, and government agencies o Equipment which may contain microprocessors with embedded technology The Company has taken an inventory of all computers and software and the Company has started planning the changes needed for these systems to become Year 2000 compliant. The Company has implemented a new information system for its financial reporting. The Company has selected a new distribution system for the island subsidiaries. The current systems on the islands are being modified and the Company anticipates to be compliant before the end of 1999. The Company is in the process of contacting suppliers and customers regarding their Year 2000 compliance status. The Company's contact includes questioning them about imbedded micro-processors. The Company has received responses from the majority of its vendors. The responses vary from being compliant to estimated time frames when they are going to be compliant. The Company has initiated a Year 2000 contingency plan development process to mitigate potential disruptions in its activities and operations that may be created by failures of critical business partners, equipment and internal systems. However, the Company can provide no assurance that it will correctly anticipate the level, impact or duration of non-compliance by critical business partners, equipment or internal systems, or that contingency plans will be sufficient to mitigate the impact of non-compliance. The Company estimates to spend around $350,000 on the Year 2000 project. This consists of PCs, software and other related costs. 16 The Company cannot assure that its systems or the computer systems of other companies with whom the Company conducts business will be Year 2000 compliant prior to December 31, 1999. Management has determined that making the required system changes will have no material impact on the Company's consolidated financial position, results of operations or cash flows. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133 requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains and losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date of SFAS No. 133 was delayed by SFAS No. 137 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF SFAS No. 133, to fiscal years beginning after June 15, 2000. Management does not anticipate a significant impact of the adoption of SFAS 133 on the Company's consolidated financial position, results of operations or cash flows. REPURCHASE OF COMPANY SHARES On May 14, 1999 the Company announced its plan to purchase Company shares in the open market for up to $500,000. The timing of share repurchases, the actual number of shares purchased and the price to be paid will depend upon the availability of shares, the prevailing market prices and other considerations which may in the opinion of the Board of Directors or management affect the advisability of purchasing Devcon shares. In June the Company purchased 25,000 shares for a cost of $3.13 each, and additional 16,800 shares in October for an average cost of $4.72. 17 II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 8, 1999, a final judgment was entered in favor of the Company and against the Greater Orlando Aviation Authority ("GOAA") in the amount of $542,688. On May 7, 1999, the Florida circuit court awarded prejudgment interest on the judgment amount from August 8, 1995 until paid. The Company filed an appeal on the underlying merits of the case to seek reimbursement of additional costs and profit in connection with the construction project, which was performed between 1992 and 1995. On August 20, 1999, the Company settled this litigation with GOAA and was paid of total of $850,000. In 1992, Fore Golf, Inc. sued the Company in the Ninth Judicial Circuit, Orange County, Florida, Case No. CI-92-5289. The Company was sued by Fore Golf, Inc. for work which this subcontractor allegedly performed in 1990 and 1991 during construction of two golf courses at Disney World in Orlando, Florida, the alleged unpaid contract balance in connection with this project, and inefficiency costs. In June 1997, the court issued an order establishing liability and damages against the Company. The Court entered a final judgment in favor of the plaintiff for damages and prejudgment interest. Subsequently, the trial court also awarded the plaintiff attorneys' fees. The Company accrued a total of $4.5 million in 1997. The Company posted a bond for the damages, prejudgment interest and plaintiff's attorneys' fees. This bond is personally guaranteed by the Company's President. The Company settled its lawsuit with Fore Golf, Inc. and its creditors in March 1999. The settlement called for a cash payment of approximately $300,000 and aggregate payments of $460,000 over a period of 4 years. The Company settled on payment terms with the lawyers of Fore Golf during the third quarter of 1999 and their request for hearing to receive a multiplier on the lawyer's fee award in the Florida Supreme Court was denied in October of 1999. The Company is from time to time involved in routine litigation arising in the ordinary course of its business, primarily related to its contracting activities. The Company is subject to certain Federal, state and local environmental laws and regulations. Management believes that the Company is in compliance with all such laws and regulations. Compliance with environmental protection laws has not had a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows in the past and is not expected to have a material adverse impact in the foreseeable future. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None 18 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the third quarter of fiscal 1999. 19 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: November 15, 1999 By: /S/ JAN A. NORELID ------------------------ Jan A. Norelid Vice President 20 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27 Financial Data Schedule 21 EX-27 2
5 9-MOS Dec-31-1999 Jan-01-1999 Sep-30-1999 1,925,705 0 16,570,442 (4,583,641) 4,841,378 28,543,835 63,177,573 (24,668,599) 78,841,315 15,152,995 0 0 0 449,894 10,710,889 78,841,315 53,502,112 53,502,112 44,024,800 44,024,800 6,816,705 0 1,822,637 837,970 317,917 520,053 0 0 0 520,053 .12 .11
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