10-Q 1 d10q.txt QUARTERLY REPORT - 06/30/2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________. Commission File No. 0-7152 DEVCON INTERNATIONAL CORP. (Exact Name of Registrant as Specified in its Charter) FLORIDA 59-0671992 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1350 E. Newport Center Drive, Suite 201, Deerfield Beach, FL 33442 (Address of Principal Executive Offices) (Zip Code) (954) 429-1500 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.10 par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES X NO ______ ----- As of August 8, 2002 the number of shares outstanding of the Registrant's Common Stock was 3,583,660. DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES INDEX
Page Number ----------- Part I. Financial Information: Condensed Consolidated Balance Sheets June 30, 2002 and December 31, 2001 (unaudited) .............. 3-4 Condensed Consolidated Statements of Operations Three and Six Months Ended June 30, 2002 and 2001 (unaudited) .................................................. 5 Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2002 and 2001 (unaudited) .................................................. 6-7 Notes to Condensed Consolidated Financial Statements (unaudited) .................................................. 8-11 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................... 12-19 Quantitative and Qualitative Disclosures About Market Risk ... 19 Part II. Other Information ............................................ 20-21
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Condensed Consolidated Balance Sheets June 30, 2002 and December 31, 2001 (Unaudited)
June 30, December 31, 2002 2001 ------------ ------------ Assets ------ Current assets: Cash and cash equivalents $ 9,250,685 $ 7,994,327 Receivables, net 10,552,865 12,162,049 Costs and estimated earnings in excess of billings 1,849,780 229,056 Inventories 3,946,740 3,736,759 Prepaid expenses and other assets 1,144,437 645,665 ------------ ------------ Total current assets 26,744,507 24,767,856 Property, plant and equipment, net: Land 1,462,068 1,462,068 Buildings 1,111,954 1,135,954 Leasehold improvements 3,427,400 3,159,536 Equipment 50,069,759 49,567,905 Furniture and fixtures 749,395 684,849 Construction in process 3,078,647 2,793,580 ------------ ------------ 59,899,223 58,803,892 Less accumulated depreciation (29,570,165) (27,578,652) ------------ ------------ Total property, plant & equipment, net 30,329,058 31,225,240 Investments in unconsolidated joint ventures and affiliates 322,192 315,858 Receivables, net 10,497,168 10,596,702 Other assets 1,099,577 1,046,091 ------------ ------------ Total assets $ 68,992,502 $ 67,951,747 ============ ============
See accompanying notes to unaudited condensed consolidated financial statements. 3 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Condensed Consolidated Balance Sheets June 30, 2002 and December 31, 2001 (Unaudited) (Continued)
June 30, December 31, 2002 2001 ------------ ------------ Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable, trade and other $ 4,073,617 $ 4,093,229 Accrued expenses and other liabilities 2,321,451 2,214,575 Notes payable to banks 616,000 - Current installments of long-term debt 414,874 1,143,097 Billings in excess of costs and estimated earnings 55,422 414,837 Income taxes 1,178,851 699,118 ------------ ------------ Total current liabilities 8,660,215 8,564,856 Long-term debt, excluding current installments 2,425,542 2,454,809 Deferred income taxes 77,561 205,344 Deferred gain on sale of businesses - 1,142,537 Other liabilities 2,085,995 1,738,930 ------------ ------------ Total liabilities 13,249,313 14,106,476 Stockholders' equity: Common stock 372,176 374,128 Additional paid-in capital 10,064,648 10,133,527 Accumulated other comprehensive loss - cumulative translation adjustment (1,870,248) (2,516,382) Retained earnings 48,140,402 46,941,249 Treasury stock at cost (963,789) (1,087,251) ------------ ------------ Total stockholders' equity 55,743,189 53,845,271 ------------ ------------ Commitments and contingencies Total liabilities and stockholders' equity $ 68,992,502 $ 67,951,747 ============ ============
See accompanying notes to unaudited condensed consolidated financial statements. 4 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Condensed Consolidated Statements of Operations Three and Six Months Ended June 30, 2002 and 2001 (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Materials revenue $ 9,494,798 $ 11,147,276 $ 18,452,364 $ 22,315,092 Construction revenue 4,003,445 3,438,751 8,432,102 5,487,424 ------------ ------------ ------------ ------------ Total revenue 13,498,243 14,586,027 26,884,466 27,802,516 Cost of materials (7,555,964) (8,874,234) (15,396,502) (18,112,664) Cost of construction (3,611,058) (2,786,169) (7,133,859) (4,857,840) ------------ ------------ ------------ ------------ Gross profit 2,331,221 2,925,624 4,354,105 4,832,012 Operating expenses: Selling, general and administrative expenses (2,774,855) (2,708,255) (5,639,528) (4,959,228) ------------ ------------ ------------ ------------ Operating (loss) income (443,634) 217,369 (1,285,423) (127,216) Other income (deductions): Joint venture equity gain 5,260 25,312 6,334 25,312 Gain (loss) on sale of equipment and property 23,022 (57,253) 108,470 (19,711) (Loss) gain on sale of business (7,422) - 1,040,973 - Interest expense (76,156) (103,806) (152,004) (213,977) Interest and other income 977,312 828,639 1,992,954 1,311,719 Minority interest - 19,876 - 57,032 ------------ ------------ ------------ ------------ 922,016 712,768 2,996,727 1,160,375 ------------ ------------ ------------ ------------ Income before income taxes 478,382 930,137 1,711,304 1,033,159 Income tax expense (65,949) (60,108) (361,484) (114,171) ------------ ------------ ------------ ------------ Net income $ 412,433 $ 870,029 $ 1,349,820 $ 918,988 ============ ============ ============ ============ Earnings per share Basic $ 0.11 $ 0.24 $ 0.38 $ 0.25 ============ ============ ============ ============ Diluted $ 0.11 $ 0.22 $ 0.35 $ 0.23 ============ ============ ============ ============ Weighted average number of shares outstanding Basic 3,588,175 3,651,893 3,588,256 3,661,874 ============ ============ ============ ============ Diluted 3,890,624 3,991,468 3,893,168 3,999,264 ============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements. 5 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2002 and 2001 (Unaudited)
2002 2001 ----------- ----------- Cash flows from operating activities: Net income $ 1,349,820 $ 918,988 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,433,752 2,529,641 Deferred income taxes benefit (155,871) (88,042) Provision for doubtful accounts and notes 168,543 141,345 (Gain) loss on sale of equipment and property (108,470) 19,711 Gain on sale of businesses (1,040,973) - Joint venture equity gain (6,334) (25,312) Minority interest income - (57,032) Changes in operating assets and liabilities: Decrease (increase) in receivables 821,050 (2,536,607) (Increase) decrease in costs and estimated earnings in excess of billings (1,620,724) 1,137,139 Increase in inventories (152,675) (212,319) Increase in prepaid expenses and other current assets (510,868) (649,352) Increase in other assets (13,302) (45,075) Increase (decrease) in accounts payable, accruals and other liabilities 284,984 (2,537,117) (Decrease) increase in billings in excess of costs and estimated earnings (359,415) 1,721,903 Increase (decrease) in income taxes payable 479,733 (30,866) Increase in deferred gain and other liabilities 245,501 137,755 ----------- ----------- Net cash provided by operating activities $ 1,814,751 $ 424,760 ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment $(1,307,692) $(2,983,359) Proceeds from sale of property and equipment 160,530 135,950 Payments received on notes 1,065,135 1,096,109 Investment in unconsolidated joint ventures - (5,306) Issuance of notes (236,840) (275,000) ----------- ----------- Net cash used in investing activities $ (318,867) $(2,031,606) ----------- -----------
See accompanying notes to unaudited condensed consolidated financial statements. 6 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2002 and 2001 (Unaudited) (Continued)
2002 2001 ----------- ----------- Cash flows from financing activities: Issuance of stock $ 29,400 $ 26,400 Purchase of treasury stock (127,436) (198,125) Proceeds from debt - 940,698 Principal payments on debt (757,490) (834,012) Net borrowings (repayments) of bank credit line and overdrafts 616,000 (300,000) ----------- ----------- Net cash used in financing activities $ (239,526) $ (365,039) ----------- ----------- Net increase (decrease) in cash and cash equivalents $ 1,256,358 $(1,971,885) Cash and cash equivalents, beginning of period 7,994,327 8,166,954 ----------- ----------- Cash and cash equivalents, end of period $ 9,250,685 $ 6,195,069 =========== =========== Supplemental disclosures of cash flow information Cash paid for: Interest $ 157,151 $ 218,257 =========== =========== Income taxes $ 18,168 $ 229,013 =========== =========== Supplemental disclosures of noncash investing activities: Receipt of notes in settlement of receivables $ 1,235,187 $ 1,904,015 =========== =========== Translation gain (loss) adjustment $ 646,134 $ (402,177) =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements. 7 DEVCON INTERNATIONAL CORP. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements The unaudited condensed consolidated financial statements include the accounts of Devcon International Corp. and its majority-owned subsidiaries (the "Company"). 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, 2001 (the "2001 Form 10-K"). In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the Company's financial position as of June 30, 2002 and the results of its operations and cash flows for the three and six months ended June 30, 2002 and 2001. The results of operations for the three and six months ended June 30, 2002 and 2001 are unaudited and are not necessarily indicative of the results to be expected for the full year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the financial statements and related footnotes included in the Company's 2001 Form 10-K. Earnings Per Share Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is 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. Certain options were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market prices of the common shares.
June 30, 2002 June 30, 2001 Option price Options Option price Options From To outstanding From To outstanding Dilutive options $1.50 $6.25 580,400 $1.50 $ 6.75 748,500 Not included options $6.63 $9.63 232,795 $7.00 $14.00 66,295
Three Months Ended Six Months Ended Weighted average number June 30, June 30, June 30, June 30, of shares outstanding 2002 2001 2002 2001 --------- --------- --------- --------- Basic 3,588,175 3,651,893 3,588,256 3,661,874 Effect of dilutive securities: Options 302,449 339,575 304,912 337,390 --------- --------- --------- --------- Diluted 3,890,624 3,991,468 3,893,168 3,999,264 ========= ========= ========= =========
For additional disclosures regarding the employee stock options, see the 2001 Form 10-K. 8 Notes to Unaudited Condensed Consolidated Financial Statements (Continued) Comprehensive Income The Company's total comprehensive income, comprised of net income and foreign currency translation adjustments, for the three and six months ended June 30, 2002 and 2001 was as follows:
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net income $ 412,433 $ 870,029 $1,349,820 $ 918,988 Other comprehensive income (loss) - foreign currency transaction adjustments 714,133 (88,877) 646,134 (491,054) ---------- ---------- ---------- ---------- Total comprehensive income $1,126,566 $ 781,152 $1,995,954 $ 427,934 ========== ========== ========== ==========
Segment Reporting The following sets forth the revenue and income before income taxes for each of the Company's business segments for the three months ended June 30, 2002 and 2001:
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2002 2001 2002 2001 ------------ ------------ ------------ ----------- Revenue (including inter-segment) Materials $ 9,528,596 $ 11,229,444 $ 18,886,959 $ 22,520,318 Construction 4,020,385 3,476,019 8,458,293 5,553,239 Elimination of inter-segment (50,738) (119,436) (460,786) (271,041) ------------ ------------ ------------ ------------ Total revenue $ 13,498,243 $ 14,586,027 $ 26,884,466 $ 27,802,516 ============ ============ ============ ============ Operating (loss) income Materials $ (200,000) $ 164,000 $ (1,037,000) $ 566,000 Construction (73,000) 365,000 251,000 (53,000) Unallocated corporate overhead (170,634) (311,631) (499,423) (640,216) ------------ ------------ ------------ ------------ Total operating (loss) income (443,634) 217,369 (1,285,423) (127,216) Other income, net 922,016 712,768 2,996,727 1,160,375 ------------ ------------ ------------ ------------ Income before income taxes $ 478,382 $ 930,137 $ 1,711,304 $ 1,033,159 ============ ============ ============ ============
9 Notes to Unaudited Condensed Consolidated Financial Statements (Continued) New Accounting Standards SFAS No. 143 requires that entities record as a liability obligations associated with the retirement of a tangible long-lived asset when such obligations are incurred, and capitalize the cost by increasing the carrying amount of the related long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect a material impact from the adoption of SFAS No. 143 on its financial position and results of operation. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishments of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and amends SFAS No. 13, "Accounting for Leases." This statement updates, clarifies and simplifies existing accounting pronouncements. SFAS 145 is effective for transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have an impact on the Company's financial position and results of operation. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will be effective for the Company for disposal activities initiated after December 31, 2002. The Company does not expect a material impact from the adoption of SFAS 146 on its financial position and results of operation. Environmental Matters The Company is involved, on a continuing basis, in monitoring its compliance with environmental laws and in making capital and operating improvements necessary to comply with existing and anticipated environmental requirements. While it is impossible to predict with certainty, management currently does not foresee such expenses in the future as having a material effect on the Company's business, results of operations, or financial condition. Antigua Tax Assessment During the fourth quarter of 2001, the Company's three subsidiaries in Antigua were assessed $6.1 million in income and withholding taxes for the years 1995 through 1999. The Company is appealing the assessments in the appropriate venues. The Company believes that if any tax is accrued in the future, it will not have an immediate cash flow effect on the Company, but will result in an offset between tax owed and the approximately $30 million receivable from the Government of Antigua. It is too early to predict the final outcome of the appeals process or to estimate the ultimate amount of loss, if any, to the Company. Based on the advice from local Antiguan tax consultants and local Antiguan counsel, management believes the Company's defenses to be meritorious and does not believe that the ultimate outcome will have a material adverse effect on the consolidated financial position or results of operations of the Company. 10 Notes to Unaudited Condensed Consolidated Financial Statements (Continued) Contingent Liabilities During the second quarter 2002, the Company issued a construction contract performance guarantee together with one of the Company's customers, Northshore Partners, Inc., in favor of Estate Plessen Associated L.P. and JPMorgan Chase Bank, for $5.1 million. The Company issued a letter of credit for $500,000 as collateral for the transaction. The construction project is estimated to be finished within two years and the guarantee expires two years after completion. The Company received an up front fee of $154,000, which will be recognized over the life of the project and is entitled to an additional $52,000 fee at the end of the project. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements, as well as the financial statements and related notes included in the Company's 2001 Form 10-K. Introduction 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 involve risks and uncertainties that are beyond the Company's control, and actual results may differ materially depending on many factors, including, without limitation, the financial condition of our customers, changes in domestic and foreign economic and political conditions, demand for our services, changes in our competitive environment, changes in infrastructure requirements, changes in available financing and/or cash flow, fixed price contract risks, bidding errors, unanticipated increase in costs, penalty clauses, United States currency fluctuations versus other currencies, foreign nations' exchange controls, restrictions on withdrawal of foreign investments and terrorist acts that directly or indirectly could affect our business. 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. Critical Accounting Policies and Estimates The Company has identified significant accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. The Company believes its most significant accounting policies are related to the following areas: estimations of cost to complete construction contracts, allowance for credit losses, loss reserves for inventories, accruals for deferred compensation agreements, Antiguan tax assessment evaluation, tax on un-repatriated earnings, valuation of the Antigua and Barbuda Government notes and the valuation allowance of deferred taxes. Details regarding the Company's use of these policies and the 12 related estimates are described fully in the Company's 2001 Form 10-K. During 2002, there have been no material changes to the Company's significant accounting policies that impacted the Company's financial condition or results of operations. Comparison of Three Months Ended June 30, 2002 With Three Months Ended June 30, 2001 Revenue The Company's revenue during the second quarter of 2002 was $13.5 million as compared to $14.6 million during the same period in 2001. This 7.5 percent decrease was primarily due to a decrease of $1.7 million in materials revenue, partially offset by an increase in construction revenue of $565,000. The Company's materials division revenue decreased 14.8 percent to $9.5 million during the second quarter of 2002 as compared to $11.1 million for the same period in 2001, due to a decrease in all types of material sold, such as concrete, aggregates and block. Certain islands suffered a higher decline than others, such as St. Croix and Puerto Rico. St. Croix's revenue diminished as a large expansion project on the island for which the Company was providing material was completed at the end of 2001. Puerto Rico's revenue diminished partly due to lower demand and partly due to the Company leasing out its Aguadilla operations. We believe that a downturn on St. Maarten/St. Martin was the result of a slowdown in the island's economy, due to reduced tourism on the island in the aftermath of the events of September 11, 2001. The only island with a positive trend was Antigua. We believe that Antigua and St. Thomas will improve its volumes the next quarter, while we do not foresee any improvement on St. Martin. Revenue from the Company's construction division increased 16.4 percent to 4.0 million during the second quarter of 2002 as compared to $3.4 million for the same period in 2001. This increase is mainly due to continued work on five contracts in the Bahamas, four of which are further described below. The Company's backlog of unfilled portions of land development contracts at June 30, 2002 was $9.0 million, involving nine contracts. The backlog of four contracts for a project in the Bahamas amounted to $6.5 million. A Company subsidiary, the President, and a director of the Company are minority partners of the entity developing this project. The Company expects that most of these contracts will be completed during 2002. The Company is actively bidding and negotiating additional projects in other areas of the Caribbean. The Company cannot currently determine whether demand for this division's services will increase, decrease or remain the same throughout 2002. Cost of Materials Cost of materials as a percentage of materials revenue remained the same at 79.6 percent during the second quarter of 2002 compared to the same period in 2001. This was the result of a decrease in margin in St. Martin, offset by improved margin in the US Virgin Islands. 13 Cost of Construction Cost of construction as a percentage of construction revenue increased to 90.2 percent during the second quarter of 2002 from 81.0 percent during the same period in 2001. This increase is primarily attributable to decreased margin on a contract in Antigua, and lower margin on a contract in the Bahamas, and also to the varying profitability levels of individual contracts and the stage of completion of such contracts. Operating Expenses Selling, general and administrative expense ("SG&A expense") increased by 2.5 percent to $2.8 million for the second quarter of 2002 from $2.7 million for the same period in 2001. The increase in SG&A expense was primarily due to severance expense and increases in professional fees and other expenses, offset to a lesser extent by reduced salary cost. As a percentage of revenue, SG&A expense increased to 20.6 percent during the second quarter as compared to 18.6 percent for the same period last year. This increase is due to the fact that the company has not yet been able to decrease its overhead cost to the same extent as revenue has decreased. Operating (Loss) Income The Company had an operating loss of $444,000 for the second quarter of 2002 compared to operating income of $217,000 for the same period in 2001. The Company's materials division operating loss was $200,000 during the second quarter of 2002 compared to income of $164,000 during the same period in 2001. This increase in operating loss is primarily attributable to decreased gross margin on St. Martin, offset to a lesser extent by a smaller increase on St. Thomas, and to increased SG&A expenses in St. Martin and Antigua. The Company's construction division had an operating loss of $73,000 during the second quarter of 2002 compared to operating income of $365,000 during the same period in 2001. This decrease was attributable to decreased margins on contracts in the Bahamas and Antigua, to marine equipment being idle, to varying profitability levels of individual contracts, and the stage of completion of such contracts. Other Income (Deductions) Gain on sale of equipment and property was $23,000 compared to a loss of $57,000 for the same period in 2001. Interest and other income increased in the second quarter of 2002 to $977,000 compared to $829,000 for the same period in 2001, primarily due to an increase in the interest recognized on the note receivable from the Government of Antigua, and, to a lesser extent, to interest income from financed construction projects. Interest expense decreased to $76,000 from $104,000 for the same period in 2001, primarily due to decreased outstanding debt. 14 Income Taxes The company operates in various tax jurisdictions with various tax rates, and depending on where profits or losses are recognized during the period, the effective tax rate will vary. In certain jurisdictions certain income is not taxable, and in certain jurisdictions, the Company enjoys certain tax exemptions. The effective tax rate for the second quarter of 2002 was 13.8 percent as compared to 6.5 percent for the same period in 2001. Net Income The Company had net income of $412,000 during the second quarter of 2002 as compared to $870,000 during the same period in 2001. Comparison of Six Months Ended June 30, 2002 With Six Months Ended June 30, 2001 Revenue The Company's revenue during the first six months of 2002 was $26.9 million as compared to $27.8 million during the same period in 2001. This 3.3 percent decrease was primarily due to a decrease in materials revenue of $3.9 million, partially offset by an increase of $2.9 million in construction revenue. The Company's materials division revenue decreased 17.3 percent to $18.5 million during the first six months of 2002 as compared to $22.3 million for the same period in 2001. This decrease was due primarily to a decrease of $1.1 million in cement sales as a result of the termination of the Company's cement distribution agreement with Union Maritima Internacional, S.A. ("UMAR") on March 1, 2001, along with a decrease in concrete sales of 17.8 percent, in block sales of 15.2 percent and in aggregate sales of 11.5 percent. The Company believes that the events of September 11, 2001 resulted in reduced tourism and a corresponding slowdown in the economies on the islands on which the Company operates. These market conditions have resulted in a decrease in materials sales on the islands on which the Company operates, except for Antigua. Revenue from the Company's construction division increased 53.7 percent to $8.4 million during the first six months of 2002 as compared to $5.5 million for the same period in 2001. This increase is mainly due to continued work on five contracts in the Bahamas, four of which are further described below. The Company's backlog of unfilled portions of land development contracts at June 30, 2002 was $9.0 million, involving 9 contracts. The backlog of four contracts for a project in the Bahamas amounted to $6.5 million. A Company subsidiary, the President, and a director of the Company are minority partners of the entity developing this project. The Company expects that most of these contracts will be completed during 2002. The Company is actively bidding and negotiating additional projects in the Caribbean. The Company cannot currently determine whether demand for this division's services will increase, decrease or remain the same throughout 2002. 15 Cost of Materials Cost of materials as a percentage of materials revenue increased to 83.4 percent during the first six months of 2002 from 81.2 percent for the same period in 2001. This increase was primarily the result of a decrease in revenue, which resulted in fixed costs of sales weighing heavier on the margins for the division, and reduced margins in St. Martin. This was partially offset by elimination of low margin sales of cement. Cost of Construction Cost of construction as a percentage of construction revenue decreased to 84.6 percent during the first six months of 2002 from 88.5 percent during the same period in 2001. This decrease is primarily attributable to increased volumes and improved margins on some contracts in the Bahamas and Antigua, and also to the varying profitability levels of individual contracts and the stage of completion of such contracts. Operating Expenses Selling, general and administrative expense ("SG&A expense") increased by 13.7 percent to $5.6 million for the first six months of 2002 compared to $5.0 million for the same period in 2001. The increase in SG&A expense was primarily due to severance expense, losses on foreign exchange, increases in professional fees and other expenses. As a percentage of revenue, SG&A expense increased to 21.0 percent during the first six months as compared to 17.8 percent for the same period last year. Operating Loss The Company had an operating loss of $1.3 million for the first six months of 2002 compared to $127,000 for the same period in 2001. The Company's materials division operating loss was $1.0 million during the first six months of 2002 compared to income of $566,000 during the same period in 2001. This increase in operating loss is primarily attributable to decreased volumes on all islands, except Antigua, and to increased SG&A expenses. In particular the company has had a deteriorating result in St. Martin. The company is currently reviewing its options to reverse the negative trend on St. Martin, and has laid off personnel in that operation. The Company's construction division had operating income of $251,000 during the first six months of 2002 compared to a loss of $53,000 during the same period in 2001. This increase was attributable to increased volumes in the Bahamas and Antigua, offset to a lesser extent of losses incurred as a result of idle marine equipment. This increase was also attributed to increased profitability levels of individual contracts. Other Income (Deductions) At the time of the sale of the operations in Dominica, the Company entered into a profit and loss participation agreement until March 31, 2002. During this time the gain on the sale of the operations were deferred. At March 31, 2002, the Company recognized a gain on sale of business 16 of $1.0 million. Gain on sale of equipment and property was $108,000 compared to a loss of $20,000 for the same period last year. Interest and other income increased in the first six months of 2002 to $2.0 million compared to $1.3 million for the same period in 2001, primarily due to an increase in the interest recognized on the note receivable from the Government of Antigua, and, to a lesser extent, to interest income from financed construction projects. Interest expense decreased to $152,000 from $214,000 for the same period in 2001, primarily due to decreased outstanding debt. Income Taxes The company operates in various tax jurisdictions with various tax rates, and depending on where profits or losses are recognized during the period, the effective tax rate will vary. In certain jurisdictions certain income is not taxable, and in certain jurisdictions, the Company enjoys certain tax exemptions. The effective tax rate for the second quarter of 2002 was 21.1 percent as compared to 11.1 percent for the same period in 2001. Net Income The Company had net income of $1.3 million for the first six months of 2002 as compared to $919,000 for the same period in 2001. Liquidity and Capital Resources The Company generally funds its working capital needs from operations and bank borrowings. In the land development construction business, the Company must expend considerable funds for equipment, labor and supplies to meet the needs of particular projects. The Company's capital needs are greatest at the start of any new contract, since the Company generally must complete 45 to 60 days of work before receiving the first progress payment. As a project continues, a portion of the progress billing is usually withheld as retainage until all work is complete, further increasing the need for capital. During the second quarter of 2002, the Company provided long-term financing in the amount of $1.2 million to certain customers who utilized its land development construction services. The Company has also provided financing for other business ventures from time to time. With respect to the Company's materials 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. These purchases of equipment should result in cash expenditures of approximately $3.0 million during 2002. The Company has, since the beginning of 2000, funded most of these expenditures out of its current working capital. Management believes the cash flow from operations, existing working capital, and funds available from lines of credit will be adequate to meet the company's needs during the next 12 months. Historically, the Company has used a number of lenders to finance a portion of our machinery and equipment purchases, however, since 2001 there are no outstanding amounts owed to these lenders. Management believes it has significant collateral and financial stability to be able to obtain significant financing, should it be required. 17 As of June 30, 2002, the Company's liquidity and capital resources included cash and cash equivalents of $9.3 million and working capital of $18.1 million. As of June 30, 2002, total outstanding liabilities were $13.2 million. As of June 30, 2002, the Company had available lines of credit totaling $534,000. Cash flows provided by operating activities for the six months ended June 30, 2002 were $1.8 million compared with $425,000 for the same period in 2001. The primary use of cash for operating activities during the six months ended June 30, 2002 was an increase in costs and estimated earnings in excess of billings of $1.6 million, and an increase in other current assets of $511,000, offset to a lesser extent by a decrease in receivables and an increase in income taxes payable. Net cash used in investing activities was $319,000 in the first six months of 2002. Purchases of property, plant and equipment were $1.3 million. The Company issued new notes receivable for $237,000 and receipts on notes receivable were $1.1 million. Net cash used in financing activities was $240,000 for the first six months of 2002, consisting primarily of principal payments of debt, offset to a lesser extent by proceeds from notes payable to banks. The Company's accounts receivable has an average of 56 days of sales outstanding as of June 30, 2002. This is an improvement from 78 days at the end of December 2001. The Company's materials segment has remained substantially the same at 61 days at the end of this quarter as compared to 60 days at the end of last year. The construction segment has improved substantially to 45 days as compared to 113 days at the end of last year. The improvement was due to large cash receipts from the venture in the Bahamas in the beginning of this quarter. The Company does not consider notes receivable in this calculation. The Company entered into a new unsecured credit line of $1.0 million in May 2001 with a bank in Florida. The bank can demand repayment of the loan and cancellation of the overdraft facility, if certain financial or other covenants are in default. The Company is in compliance with the covenants as of June 30, 2002. There was an outstanding balance of $616,000 as of June 30, 2002. The interest rate on indebtedness outstanding under the credit line is at a rate variable with Libor. The Company has borrowed approximately $2.1 million from the Company President. The note is unsecured and bears interest at the prime rate. Three hundred fifty five thousand is due on demand, and $1.8 million is due on July 1, 2003. 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 entered into an agreement with the Company President in June 2000, whereby Mr. Smith shall receive a retirement benefit. The accrued liability as of June 30, 2002 was $943,000, and the Company estimates to accrue an additional $369,000 through March 2003. The Company estimates that the total accrual will then be sufficient to cover its obligations under the aforementioned agreement. 18 Receivables at June 30, 2002 include a net balance of $7.2 million, consisting of promissory notes due from the Government of Antigua and Barbuda, substantially all of which is classified as a long-term receivable. The gross balance of the notes is $30.7 million. The notes were restructured on April 28, 2000 and call for both quarterly and monthly principal and interest payments until maturity in 2015. The notes are paid from agreed upon sources, which consist of lease proceeds from the rental of a United States military base, fuel tax revenue, proceeds from a real estate venture and other sources. Receipts recorded for the six months ended June 30, 2002 were $1.9 million. During the second quarter 2002, the Company issued a construction contract performance guarantee together with one of the Company's customers for $5.1 million. The Company issued a letter of credit for $500,000 as collateral for the transaction. The construction project is estimated to be finished within two years and the guarantee expires two years after completion. Repurchase of Company Shares On August 9, 2002 the Board of Directors ("Board") approved a plan for the Company to purchase Company shares in the open market for up to $3.0 million. The timing of share repurchases, the actual number of shares purchased and the price to be paid will depend upon the availability of shares, the prevailing market prices and other considerations which may in the opinion of the Board or management affect the advisability of purchasing Devcon shares. The Company has repurchased 19,525 shares so far during 2002 at an average price of $6.53. Related Party Transactions The Company has certain transactions with some of the Directors or employees. Details regarding the Company's transaction with related parties are described fully in the Company's 2001 Form 10-K. During the second quarter of 2002, there have been no material changes to the Company's related party transactions. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to financial market risks due primarily to changes in interest rates, which it manages primarily by managing the maturities of its financial instruments. The Company does not use derivatives to alter the interest characteristics of its financial instruments. Management does not believe a change in interest rate will materially affect the Company's financial position or results of operations. The Company has significant operations overseas. Generally, all significant activities of the overseas affiliates are recorded in their functional currency, which is generally the currency of the country of domicile of the affiliate. The foreign functional currencies that the Company deals with are Netherlands Antilles Guilders, Eastern Caribbean Units and Euros. The first two are pegged to the U.S. dollar and have remained fixed for many years. Management does not believe a change in the Euro exchange rate will materially affect the Company's financial position or result of operations. The French operations are approximately 10% of the Company's total operations. 19 PART II. Other Information Item 1. Legal Proceedings The Company is from time to time involved in routine litigation arising in the ordinary course of its business, primarily related to its construction activities. The Company is subject to certain Federal, state and local environmental laws and regulations. Management believes that the Company is in compliance with all such laws and regulations. Compliance with environmental protection laws has not had a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows in the past and is not expected to have a material adverse impact in the foreseeable future. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matter to a Vote of Security Holders The Company held its Annual Shareholders Meeting on June 14, 2002. The issues submitted to a vote of the security holders and the results of the voting are as follows: 1) Election of five directors For Withheld --------- --------- Jose A. Bechara, Jr., Esq. 3,483,561 1,246 Richard L. Hornsby 3,480,561 4,246 Robert L. Kester 3,480,261 4,546 W. Douglas Pitts 3,480,561 4,246 Donald L. Smith, Jr. 3,481,261 3,546 Robert A. Steele 3,480,561 4,246 The Board consists of six directors. All nominees were elected to serve for a one-year period. 2) Proposal to ratify the appointment of KPMG LLP as the Company's auditor for 2002 For Against Withheld --------- ------- -------- 3,435,968 600 708 20 Item 5. Other Information None Item 6. Exhibits and Reports On Form 8-K (a) Exhibits: Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: None 21 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: August 12, 2002 S/ JAN A. NORELID ----------------- Jan A. Norelid Vice President - Finance 22 EXHIBIT INDEX Exhibit Description 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002