| DEVCON INTERNATIONAL CORP Item 1A Risk Factors You should read and consider carefully each of the following factors, as well as the other information contained in, attached to or incorporated by reference in this report |
| If any of the following risks actually occur, our business, consolidated financial condition and results of operations could be materially and adversely affected and the value of our stock could decline |
| The risks and uncertainties described below are those that we currently believe may materially affect us |
| Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business operations |
| Risk Factors Relating to our Business Generally Our Officers and directors have the ability to significantly influence the outcome of any matters submitted to a vote of our shareholders |
| Our officers and directors beneficially own, directly or indirectly and, in the aggregate, a significant percentage of the outstanding shares of our common stock and have the ability to significantly influence the outcome of any matters submitted to a vote of our shareholders |
| We are subject to significant debt and debt service and will be subject to significant dividend service and redemption obligations which could have an adverse effect on our results of operations |
| On November 10, 2005, our subsidiaries which comprise our electronic security services division entered into the dlra70 million CapitalSource Revolving Facility, the proceeds of which were used in part to pay down and cancel the dlra35 million revolving credit facility provided by CIT Financial USA, Inc, or the CIT Facility, and pay the purchase price of the Coastal acquisition |
| The CapitalSource Revolving Credit Facility was increased in March 2006 to contribute to the funding of the Guardian acquisition and, as of December 31, 2005 and March 31, 2006, we had dlra55 million and dlra91 million, respectively, of borrowings outstanding |
| In addition, in order to fund the remainder of the purchase price of the Guardian acquisition, on March 6, 2006, we issued to certain investors an aggregate principal amount of dlra45 million of notes, which notes we anticipate will subsequently be exchanged for an aggregate of 45cmam000 shares of Series A Convertible Preferred Stock with an aggregate liquidation preference of dlra45cmam000cmam000 |
| These notes and shares of Series A Convertible Preferred Stock will be subject to regular interest, principal payment or dividend payment and redemption obligations |
| As a result of the foregoing transactions, we are now incurring significant interest expense |
| The degree to which we are leveraged could have significant consequences, including the following: • our ability to obtain additional financing in the future for capital expenditures, potential acquisitions, and other purposes may be limited or financing may not be available on terms favorable to us or at all; 16 ______________________________________________________________________ [17]Table of Contents • a substantial portion of our cash flows from operations must be used to pay our interest expense and repay our senior debt and notes and dividend and redemption obligations under the terms of the Series A Convertible Preferred Stock, which reduces the funds that would otherwise be available to us for our operations and future business opportunities; and • fluctuations in market interest rates will affect the cost of our borrowings to the extent not covered by interest rate hedge agreements because our credit facilities bear interest at variable rates |
| A default could result in acceleration of the indebtedness evidenced by the senior debt or the notes and permit our senior lenders to foreclose on our electronic security services assets |
| In addition, our failure to comply with the terms of the Series A Convertible Preferred Stock could result in an event of default, which, if not cured or waived, could permit holders of the Series A Convertible Preferred Stock to require us to redeem all, or a portion of, the outstanding principal amount of the Series A Convertible Preferred Stock and pay all accrued but unpaid dividends |
| The CapitalSource Revolving Facility contains a number of covenants imposing restrictions on our electronic security services division’s ability to, among other things: • incur more debt; • pay dividends, redeem or repurchase stock or make other distributions or impair the ability of any subsidiary to make such payments to the borrower; • make acquisitions or investments; • revise existing capital structure or principal line of business; • use assets as security in other transactions; • enter into transactions with affiliates (including extending loans to employees); • engage in any sale-leaseback or synthetic lease transaction; • impair the terms of any material contract; • merge or consolidate with others; • dispose of assets or use asset sale proceeds; • guarantee obligations of another; • create liens on our assets; and • extend credit |
| Also, the notes contain a number of covenants imposing restrictions on our ability to incur more debt, create liens on our assets or make payments with respect to existing debt |
| The CapitalSource Revolving Facility contains financial covenants that require our subsidiaries which comprise our electronic security services division to meet a number of financial ratios and tests |
| Failure to comply with the obligations in the CapitalSource Revolving Facility or the notes could result in an event of default, which, if not cured or waived, could permit acceleration of this indebtedness or of other indebtedness, allowing our senior lenders to foreclose on our electronic security services assets |
| 17 ______________________________________________________________________ [18]Table of Contents We will be subject to a financial covenant under the Series A Convertible Preferred Stock which will restrict our ability to incur indebtedness and could have an adverse effect on our results of operations |
| Upon effectiveness of approval of the shareholders of the private placement and exchange of the dlra45 million in notes for the Series A Convertible Preferred Stock, we will be subject to a financial covenant under the Series A Convertible Preferred Stock |
| The Series A Convertible Preferred Stock contains a financial covenant imposing a restriction on our ability to incur additional indebtedness |
| As a result, so long as any shares of Series A Convertible Preferred Stock remain outstanding, we will not be able to allow our indebtedness ratio to exceed a specified maximum leverage amount |
| Our failure to comply with this indebtedness ratio covenant could result in an event of default, which, if not cured or waived, could permit holders of the Series A Convertible Preferred Stock to require us to redeem all, or a portion of, the outstanding principal amount of the Series A Convertible Preferred Stock and pay all accrued but unpaid dividends |
| If we do not successfully implement our business strategy, we may not be able to repay or refinance our senior debt or the notes or comply with the terms of the Series A Convertible Preferred Stock |
| We may not be able to successfully implement our business strategy or realize our anticipated financial results |
| Accordingly, our cash flows and capital resources may not be sufficient to pay the interest charges on and principal payments of our senior debt or notes or comply with the dividend payment and redemption provisions of the Series A Convertible Preferred Stock |
| Failure to pay our interest expense, make our principal payments, pay dividends or effect a redemption would result in a default |
| A default relating to the senior debt, the notes or the Series A Convertible Preferred Stock, if not waived, could result in acceleration of the indebtedness evidenced by our senior debt and the notes, in which case the indebtedness would become immediately due and payable, or could permit holders of the Series A Convertible Preferred Stock to require us to redeem all, or a portion of, the outstanding principal amount of the Series A Convertible Preferred Stock and pay all accrued but unpaid dividends |
| If this occurs, our substantial indebtedness and the redemption amount for the Series A Convertible Preferred Stock could have important consequences to us and may, among other things: • limit our ability to obtain additional financing to fund our growth strategy, working capital, capital expenditures, debt service and dividend service requirements or other purposes; • limit our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make principal payments and fund debt and dividend service and redemption requirements; • cause us to be unable to satisfy our obligations under our existing or new debt agreements, the notes or the terms of the Series A Convertible Preferred Stock; • make us more vulnerable to adverse general economic and industry conditions; • limit our ability to compete with others who are not as highly leveraged as we are; • limit our flexibility in planning for, or reacting to, changes in our business, industry and market conditions; • cause us to sell assets; and • cause us to obtain additional equity capital or refinance or restructure all or a portion of our outstanding senior debt or the notes |
| In that case, the senior lenders would be able to foreclose on our assets |
| Even if new financing is available, it may not be on terms that are acceptable to us |
| In the case of default relating to dividends on the Series A Convertible Preferred Stock, if not cured or waived, it could permit the holders of the Series A Convertible Preferred Stock to require us to redeem all, or a portion of, the outstanding principal amount of the Series A Convertible Preferred Stock and pay all accrued but unpaid dividends Similarly, if we are not able to successfully implement our business strategy or realize our anticipated financial results, we may not be able to comply with the terms of the Series A Convertible Preferred Stock concerning the payment of dividends or requiring us to redeem, for cash, all outstanding shares of Series A Convertible Preferred Stock, in equal installments, on the fourth, fifth and sixth anniversary of completion of the private placement |
| If we fail to effect any required 18 ______________________________________________________________________ [19]Table of Contents redemption of the Series A Convertible Preferred Stock, the applicable redemption amount per unredeemed share of Series A Convertible Preferred Stock will bear interest at the rate of 1dtta5prca per month until paid in full and the investors will have the option to require us to convert any of those unredeemed shares into shares of our common stock substituting market prices for the conversion price, which market prices may be lower than the conversion price resulting in a larger number of shares of our common stock being issued, resulting in greater dilution to our existing shareholders |
| Our stock is thinly traded |
| While our stock trades on the Nasdaq, our stock is thinly traded and you may have difficulty in reselling your shares quickly |
| The low trading volume of our common stock is outside of our control, and we cannot guarantee that the trading volume will increase in the near future or that, even if it does increase in the future, it will be maintained |
| In addition, in the absence of an active public trading market, an investor may be unable to liquidate his investment in us |
| Trading of a relatively small volume of our common stock may have a greater impact on the trading price of our stock than would be the case if our public float were larger |
| We cannot predict the prices at which our common stock will trade in the future |
| We do not currently pay any dividends on our common stock |
| We have not paid any dividends on our common stock in the last 13 years |
| We anticipate that for the foreseeable future we will continue to retain any earnings for use in the operation of our business, except as required to pay dividends on the Series A Convertible Preferred Stock to be issued following shareholder approval following the acquisition of Guardian in March 6, 2006 |
| Any future determination to pay cash dividends will be at the discretion of our board of directors, after consideration of any restrictions on cash dividends as defined by our credit and debt agreements, and will depend on our earnings, capital requirements, financial condition and other factors deemed relevant by our board of directors |
| Risk Factors Relating to our Electronic Security Services Division We intend to continue our strategy of developing a strong regional presence and, as a result, experience significant growth, some of which may adversely affect our operating results, financial condition and existing business |
| To date, we have acquired SEC, Starpoint, Coastal and Guardian and plan to continue to acquire additional electronic security service companies |
| Acquisitions can divert management’s attention and result in greater administrative burdens and operating costs and, to the extent financed with debt, additional interest costs |
| We may not be able to manage or integrate acquired companies or businesses successfully |
| The success of our acquisition strategy will depend on, among other things: • the availability of suitable candidates; • purchase price multiples which may escalate as a result of increased competition from other electronic security services companies for the purchase of available candidates; • our ability to value those candidates accurately and negotiate favorable terms for those acquisitions; • the availability of funds to finance acquisitions; and • the availability of management resources to oversee the integration and operation of the acquired businesses |
| Financing for the acquisitions may come from several sources, including our existing cash on hand, the proceeds from the exercise of outstanding warrants, the incurrence of indebtedness or the issuance of additional common stock, preferred stock, debt (whether convertible or not) or other securities |
| The issuance of any additional securities could, among other things: • result in substantial dilution of the percentage ownership of our shareholders at the time of issuance; • result in the substantial dilution of our earnings per share; • adversely affect the prevailing market price for our common stock; and • result in increased indebtedness, which could negatively affect our liquidity and operating flexibility |
| 19 ______________________________________________________________________ [20]Table of Contents Our inability to continue to acquire businesses in the electronic security services business could have adverse consequences on our results of operations |
| Due to the continuing consolidation of the electronic security systems industry and the acquisition by us and other electronic security systems companies of a number of large portfolios of subscriber accounts, there may in the future be fewer large portfolios of subscriber accounts available for acquisition |
| We face competition for the acquisition of portfolios of subscriber accounts, and we may be required to offer higher prices for subscriber accounts we acquire in the future than we have offered in the past |
| A core component of our regional strategy is the acquisition of electronic security services businesses which will enable us to develop a leading regional presence in certain targeted markets and benefit from the increased brand recognition, maximization of market share and improved operating efficiencies that we believe will accompany this position |
| If we are unable to continue our acquisition program, we may be unable to achieve this regional presence in some or all of the markets we have targeted, which would have an adverse effect on our results of operations |
| Integrating our acquired businesses may be disruptive to or cause an interruption of our business which could have a material adverse effect on our operating results and financial condition |
| The process of integrating our acquired businesses may be disruptive to our business and may cause an interruption or a loss of momentum in our business as a result of the following factors, among others: • loss of key employees or customers; • higher than expected account attrition; • possible inconsistencies in standards, controls, procedures and policies among the combined companies and the need to implement company-wide financial, accounting, information and other systems; • failure to maintain the quality of services that the companies have historically provided; and • the need to coordinate geographically diverse organizations |
| These disruptions and difficulties, if they occur, may cause us to fail to realize the cost savings, revenue enhancements and other benefits from that integration and may cause material adverse short and long-term effects on our operating results and financial condition |
| Inherent uncertainties associated with the acquisition of past or future acquisition candidates may cause us or the acquisition candidates to lose key employees |
| Employees of a past or future acquisition candidate may experience uncertainty about their future roles with the surviving corporation |
| This uncertainty may adversely affect the surviving corporation’s ability to retain key management, sales and marketing personnel |
| Many of these employees may be critical to the business and operations of the surviving corporation |
| The loss of key personnel may imperil the acquisition of any such acquisition candidate or lead to disruptions of our operations |
| The loss of key personnel also could result in a loss of key information, expertise and know-how, which could result in future replacement costs associated with recruitment and training |
| We may encounter difficulties implementing our business plan |
| We expect that we will encounter challenges and difficulties in implementing our business plan |
| These challenges and difficulties relate to our ability to: • attract new customers and retain existing customers; • generate sufficient cash flow from operations or through additional debt or equity financings to support our regional growth strategy; • hire, train and retain sufficient additional financial reporting management, operational and technical employees; and • install and implement new financial and other systems, procedures and controls to support our regional growth strategy with minimal delays |
| 20 ______________________________________________________________________ [21]Table of Contents If we encounter greater than anticipated difficulties in integrating our electronic security services division into our general corporate structure, it may be necessary to take additional actions, which could divert management’s attention and strain our operational and financial resources |
| We may not successfully address any or all of these challenges, and our failure to do so would adversely affect our business plan and results of operations, our ability to raise additional capital and our ability to achieve enhanced profitability |
| Each of SEC, Starpoint, Coastal, and Guardian operated on different technology platforms that will have to be integrated |
| We plan to fully integrate the back-office software platforms for each of our acquired operations for standard processes, including accounts payable/receivable, human resources management, inventory management, customer service and other platforms to a single, unified platform |
| Each of SEC, Starpoint, Coastal and Guardian currently use a combination of different technology platforms for back-office support and security systems monitoring that will have to be integrated to achieve our objectives of growth and profitability |
| As with any technology switchover, we run the risk of potential operational challenges and service disruptions that could negatively impact our operations |
| The development and recognition of our regional brand may not advance as quickly or as effectively as we anticipate |
| Our regional growth strategy requires a recognized brand in the geographic areas in which we operate |
| In order to attract and retain the high quality customers we seek, we will have to develop and cultivate our brand |
| There is no guarantee that our brand will be adopted or recognized as a market leader in security systems monitoring services or as a regional brand |
| Even if the brand is cultivated effectively, it may require more time than we anticipate and may affect our further implementation of our growth strategy |
| Our electronic security services operations are geographically concentrated making us vulnerable to economic and environmental risks inherent to those locations |
| Our existing subscriber base is geographically concentrated predominantly in Florida and New York |
| Accordingly, our performance may be adversely affected by regional or local economic and environmental conditions, including weather conditions |
| Similarly, other unforeseen events, including war or terrorist activities could have a materially adverse effect on our results of operations |
| We may from time to time make acquisitions in regions outside of our current operating area as part of our regional focus |
| The acquisition of companies in other regions, or in metropolitan areas in which we do not currently have subscribers, requires an investment by us |
| In order for us to expand successfully into a new area, we must acquire companies with a sufficient number and density of subscriber accounts in that area to support the investment |
| We may not be able to locate these opportunities or, even if we locate these opportunities, an expansion into these new geographic areas may not generate operating profits |
| Our electronic security services division operates in a highly competitive environment and we may not be able to compete effectively for customers, causing us to lose all or a portion of our market share |
| The electronic security services business in the United States is highly competitive |
| New competitors are continually entering the field |
| Competition is based primarily on price in relation to quality of service |
| Sources of competition in the electronic security services business are other providers of central monitoring services, local electronic security systems and other methods of protection, such as manned guarding |
| Our electronic security services division competes with other major firms which have substantial resources, including ADT Security Services, Inc |
| (a subsidiary of Tyco International Limited), Brinks Home Security, a division of The Brinks Company, Protection One, and Honeywell Protection Services, a division of Honeywell, Inc, as well as many smaller regional and local companies |
| Many of these competitors are larger and have significantly greater resources than we do and may possess greater local market knowledge as well |
| We may not be able to continue to compete effectively for existing or potential customers, causing us to lose all or a portion of our market share |
| 21 ______________________________________________________________________ [22]Table of Contents Our electronic security services division is subject to significant government regulation and the failure to substantially comply with one or more of these regulations could adversely affect our electronic security services division’s business and results of operations |
| Our electronic security services division’s operations are subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements |
| The states in which we operate, as well as some local authorities, require us to obtain licenses or permits to conduct our electronic security service business |
| In addition, there has been a recent trend on the part of municipalities and other localities to attempt to reduce the level of false alarms through various measures, such as licensing of individual electronic security systems and the imposition of fines upon customers, revocation of licenses or non-response to alarms after a certain number of false alarms |
| While these statutes and ordinances have not had a material effect on our business operations to date, we are not able to predict whether these statutes or ordinances, or similar statutes or ordinances enacted by other jurisdictions, will adversely affect our business in the future |
| The electronic security services industry also is subject to the oversight and requirements of various insurance, approval, listing and standards organizations |
| Adherence to the standards and requirements of these organizations may be mandatory or voluntary depending upon the type of customer served, the nature of the electronic security services provided and the requirements of governmental jurisdiction |
| The nature of the services provided by our electronic security services division potentially exposes us to greater risks of liability for employee acts or omissions or product liability than may be inherent in many other service businesses |
| Cyclical industry and economic conditions have affected and may continue to adversely affect the financial condition and results of operations of our electronic security services division |
| The operating results of our electronic security services division may be adversely affected by the general cyclical pattern of the electronic security services industry |
| Demand for electronic security services is significantly affected by levels of commercial construction and consumer and business discretionary spending, which attrition would adversely affect our results of operations |
| Our electronic security services division’s business is subject to attrition of subscriber accounts |
| Our electronic security services division experiences attrition of subscriber accounts as a result of, among other factors, relocation of subscribers, adverse financial and economic conditions, and competition from other electronic security system companies |
| In addition, our electronic security services division experiences attrition of newly acquired accounts to the extent that we do not integrate these accounts or do not adequately service those accounts or because of dissatisfaction with prior service |
| Attrition and an increase in attrition rates could have a material adverse effect on our revenues and earnings |
| When acquiring accounts, we seek to withhold a portion of the purchase price as a partial reserve against subscriber attrition |
| If the actual attrition rate for the accounts acquired is greater than the rate assumed by us at the time of the acquisition, and we are unable to recoup our damages from the portion of the purchase price held back from the seller, such attrition could have a material adverse effect on our financial condition or results of operations |
| In addition, we may not be able to obtain purchase price holdbacks in future acquisitions, particularly acquisitions of large portfolios |
| Also, actual account attrition for acquired accounts may be greater than the attrition rate assumed or historically incurred by our electronic security services division |
| The effects of gross subscriber attrition have historically been offset by adding new accounts from subscribers who move into premises previously occupied by prior subscribers and in which electronic security systems are installed, conversions of accounts that were previously monitored by other electronic security services companies to our monitoring services and accounts for which we obtain a guarantee from the seller that provides for us to “put” back to the seller canceled accounts |
| The resulting figure is used as a guideline to determine the estimated life of subscriber revenues |
| It is our policy to review periodically actual account attrition and, when necessary, adjust the remaining estimated lives of our purchased accounts to reflect assumed future attrition |
| If actual account attrition significantly exceeds assumed attrition and we have to shorten the period over which we amortize the cost of purchased subscriber accounts, it could have a material adverse effect on our results of operations and financial condition |
| Our future success is dependent, in part, on key personnel and failure to retain these key personnel would adversely affect our operation |
| The future success or our electronic security services division depends significantly upon the efforts of certain key management personnel, such as Stephen J Ruzika, our Chief Executive Officer and President, and a small group of other 22 ______________________________________________________________________ [23]Table of Contents significant employees who we employed in connection with our recent acquisitions of electronic security services businesses |
| The loss of the services of any of these officers or other key employees could materially and adversely affect our business as we would no longer be able to benefit from their knowledge, experience and guidance |
| Declines in new construction may affect our sales |
| Demand for electronic security monitoring services to detect intrusion and fire is tied, in part, to new construction |
| The market for new construction and the real estate market in general are cyclical and, in the event of a decline in the market for new developments, it is likely that demand for our electronic security monitoring services to multi-family dwellings would also decline, which could negatively impact our results of operations |
| Lower crime rates could have an adverse effect on our results of operations |
| For the past several years crime rates have been dropping in the United States, particularly in the State of Florida |
| According to the Florida Department of Law Enforcement’s 2004 Annual Uniform Crime Report, Florida’s index crime rate has reached a 34-year low dropping by 6dtta0 percent in 2004, compared to 2003 |
| Particularly relevant to our business is the decrease in the number of burglaries |
| While the number of homes and businesses with installed electronic security systems has continued to increase even as crime rates have decreased, this may not continue to be the case |
| Any significant decrease in the number of homes and businesses installing new electronic security systems could have a material adverse effect on our business |
| Risk Factors Relating to our Materials Division and Construction Division We have identified material weaknesses in our internal control over financial reporting that may prevent us from being able to accurately report our financial results or prevent fraud, which could harm our business and operating results, the trading price of our stock and our access to capital |
| In connection with the completion of its audit of, and the issuance of an unqualified report on, our consolidated financial statements for the fiscal year ended December 31, 2005, our independent registered public accounting firm, KPMG, LLP, communicated to our management and Audit Committee that certain matters involving our internal controls were considered to be “material weaknesses”, as defined under the standards established by the Public Company Accounting Oversight Board |
| Our independent registered public accounting firm informed our management and our Audit Committee that these material weaknesses related to their belief that we did not have sufficient controls pertaining to the review and oversight of financial results constituting material weaknesses in our internal controls over financial reporting |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and assess on an on-going basis the design and operating effectiveness of our internal control structure and procedures for financial reporting |
| We are committed to continuously improving our internal controls and financial reporting |
| We are working with consultants with experience in internal controls to assist management and the Audit Committee in reviewing our current internal controls structure with a view towards meeting the formalized requirements of Section 404 of the Sarbanes-Oxley Act |
| However, to the extent our independent registered public accounting firm is required to provide an opinion as to the effectiveness of our internal controls, even if we are able to take remedial actions to correct the identified material weaknesses described above and any other material weaknesses identified as the evaluation and testing process is completed, there may be insufficient time for the remediated controls to be in operation to permit our independent registered public accounting firm to conclude that the remediated controls are effective |
| Thus, our independent registered public accounting firm would possibly provide an adverse opinion to the effect that our internal controls are ineffective as of the date of such evaluation, or may decline to issue an opinion as to the effectiveness of our internal controls |
| Under current regulations, the Company must be able to comply with the provision of Section 404 of the Sarbanes-Oxley Act of 2002 by our reporting period ending December 31, 2007 |
| If we are unable to conclude that our internal controls over financial reporting are effective at such time that we will be required to attest to them, or if our independent registered public accounting firm concludes that our internal controls are ineffective at such time, or is unable to conclude that our assessment is fairly stated or is unable to express an opinion on the effectiveness of our internal controls, our ability to obtain additional financing on favorable terms could be materially and 23 ______________________________________________________________________ [24]Table of Contents adversely affected, which, in turn, could materially and adversely affect our business, our financial condition and the market value of our securities |
| In addition, if we are unable to conclude our internal controls or disclosure controls are effective at such time that we will be required to attest to them, current and potential shareholders could lose confidence in our financial reporting and our stock price could be negatively impacted |
| We have agreed to settlement terms with respect to a dispute with a vendor of ours in St |
| Martin; however, the terms of the settlement have not yet been fulfilled and it is possible that the vendor could still pursue a claim against us |
| On July 25, 1995, our subsidiary, Societe des Carrieres de Grande Case, or SCGC, entered into an agreement with Mr |
| Fernand Hubert Petit, Mr |
| Michel Andre Lucien Petit, collectively referred to as, Petit, to lease a quarry located in the French side of St |
| Another lease was entered into by SCGC on October 27, 1999 for the same and additional property |
| Another subsidiary of ours, Bouwbedrijf Boven Winden, NA, or BBW, entered into a material supply agreement with Petit on July 31, 1995 |
| This agreement was amended on October 27, 1999 |
| Under the terms of this amendment, we became a party to the materials supply agreement |
| In May 2004, we advised Petit that we would possibly be removing our equipment within the timeframes provided in its agreements and made a partial quarterly payment under the materials supply agreement |
| On June 3, 2004, Petit advised us in writing that Petit was terminating the materials supply agreement immediately because Petit had not received the full quarterly payment and also advised that it would not renew the 1999 lease when it expired on October 27, 2004 |
| Petit refused to accept the remainder of the quarterly payment from us in the amount of dlra45cmam000 |
| Without prior notice to BBW, Petit obtained orders to impound BBW assets on St |
| Martin (the French side) and Sint Maarten (the Dutch side) |
| The assets sought to be impounded include bank accounts and receivables |
| Martin, but approximately dlra341cmam000 of its assets were impounded on Sint Maarten |
| In obtaining the orders, Petit claimed that dlra7dtta6 million is due on the supply agreement (the full payment that would be due by us if the contract continued for the entire potential term and we continued to mine the quarry), dlra2dtta7 million is due for quarry restoration and dlra3dtta7 million is due for pain and suffering |
| The materials supply agreement provided that it could be terminated by us on July 31, 2004 |
| In February 2005, SCGC, BBW and Devcon entered into agreements with Petit, which provided for the following: • The purchase by SCGC of three hectares of partially mined land located within the quarry property previously leased from Petit for approximately dlra1dtta1 million; • A two-year lease of approximately 15 hectares of land, or the 15 hectare lease, on which SCGC operates a crusher, ready-mix concrete plant and aggregates storage at a cost of dlra100cmam000; • The granting of an option to SCGC to purchase two hectares of unmined property prior to December 31, 2006 for dlra2 million, payable dlra1 million on December 31, 2006 and dlra1 million on December 31, 2008, subject to the terms below: • In the event that SCGC exercises this option, Petit agrees to withdraw all legal actions against us and our subsidiaries; • In the event that SCGC does not exercise the option to purchase and Petit is subsequently awarded a judgment, SCGC has the option to offset approximately dlra1dtta2 million against the judgment amount and transfer ownership of the three hectare parcel purchased by SCGC as stated above back to Petit; • The granting of an option to SCGC to purchase five hectares of unmined land prior to June 30, 2010 for dlra3dtta6 million, payable dlra1dtta8 million on June 30, 2010 and dlra1dtta8 million on June 30, 2012; and • The granting of an option to SCGC to extend the 15 Hectare Lease through December 31, 2008 (with annual rent of dlra55cmam000) if the two hectares are purchased and subsequent extensions of the lease (with annual rent of dlra65cmam000) equal to the terms of mining authorizations obtained from the French Government agencies |
| After conferring with our French counsel and upon review by management, we believe that we have valid defenses and offsets to Petit’s claims, including, among others, those relating to our termination rights and the benefit to Petit from us not mining the property |
| Based on the foregoing agreements and our review, management does not believe that the ultimate outcome of this matter will have a material adverse effect on our consolidated financial position or results of operations |
| At the time we exercise the options discussed above, we will obtain independent appraisals to determine the fair value of any non-cash consideration, including the exercise of the options discussed above, used in settlement of a judgment received by Petit, if any |
| 24 ______________________________________________________________________ [25]Table of Contents We have entered into transactions with our affiliates which result in conflicts of interests |
| We have entered into a number of transactions with our affiliates, including an investment in the Caribbean involving companies in which certain of our current and former officers and directors have an interest |
| Material transactions are disclosed in our audited consolidated financial statements and the periodic reports we file with the Securities and Exchange Commission |
| See “Item 13 — Certain Relationships and Related Transactions” |
| These transactions result in conflicts of interests |
| Our Audit Committee reviews and approves transactions between us and our affiliates, including our officers and directors |
| Our policy is that all of these transactions be reviewed and approved by the audit committee prior to completion |
| In addition, our Articles of Incorporation provide that no contract or other transaction between us and any other corporation shall in any way be invalidated by the fact that any of our directors are interested in or are directors or officers of the other party to the transaction |
| We are subject to some risks due to the nature of our foreign operations |
| The majority of our continuing operations in 2005 were conducted in foreign countries located in the Caribbean, primarily Antigua and Barbuda, Sint Maarten, St |
| Martin and the Bahamas |
| For the fiscal year ended December 31, 2005, 70prca of our revenue were derived from foreign geographic areas |
| The risks of doing business in foreign areas include potential adverse changes in US diplomatic relations with foreign countries, changes in the relative purchasing power of the US dollar, hostility from local populations, adverse effects of exchange controls, changes in either import or export tariffs, nationalization, interest rate fluctuations, 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, any civil unrest or insurrection that could result in uninsured losses and other political, economic and regulatory conditions, risks or difficulties |
| Adverse changes in currency exchange rates or raw material commodity prices, both in absolute terms and relative to competitors’ risk profiles, could adversely impact our operations |
| We are not subject to these risks in Puerto Rico or the US Virgin Islands, since these are United States territories |
| We believe our most significant foreign currency exposure is the Euro |
| We are also subject to US federal income tax upon the distribution of certain offshore earnings |
| Although we have not encountered significant difficulties in our foreign operations, we could encounter difficulties in the future |
| Some of the contracts involved in contracting business have fixed price terms which do not take into account unanticipated changes in production costs, which we would not be able to pass on to the customer |
| We generally enter into either fixed-price contracts that provide for an established price that does not vary during the term of the contract or unit-price contracts under which our fee is based on the quantity of work performed |
| Fixed-price and unit-price contracts, involve inherent risks, such as unanticipated increases in the cost of labor and/or materials, subcontracts that were unexpected at the time of bidding, bidding errors, unexpected field conditions, adverse weather conditions, the inability of subcontractors to perform, work stoppages and other events beyond our control |
| Although our attempts to minimize the risks inherent in our contracts by, among other things, obtaining subcontracts from reliable subcontractors, anticipating labor and material cost increases, anticipating contingencies, utilizing our cost control system and obtaining certain cost escalation clauses, we cannot assure you that we will be able to complete our current or future contracts at a profit |
| In addition, the longer the term of fixed-price and unit-price contracts, the greater the risks associated with that contract |
| We may incur specified penalties or losses under some of the clauses in the contracts governing our projects |
| Some of our contracts call for project completion by a specified date and may contain a penalty clause for our failure to complete a project by this date |
| During the year ended December 31, 2005, our construction division reported an operating loss of dlra2dtta9 million compared to dlra4dtta6 million of operating income for the corresponding period of 2004 |
| This decrease was primarily attributable to a substantial increase in the estimated costs to complete a current marina project in the US Virgin Islands due to operational difficulties encountered during the year |
| In addition, under the terms of some of our contracts, we make warranties that extend for a period of time beyond the completion of these contracts |
| 25 ______________________________________________________________________ [26]Table of Contents Our failure to enter into new contracts to replace completed contracts could have an adverse impact on our operations |
| We endeavor to ensure that our contracting resources are effectively utilized and to that end pursue new contracts as the completion time for existing contracts approaches |
| To the extent we have entered into contracts to which a significant part of our resources are committed, the failure to obtain new contracts upon the completion of these contracts could adversely affect our results of operations |
| General economic conditions in the markets in which we conduct business could have a material impact upon our operations |
| Our construction division and our materials division are materially dependent upon economic conditions in general, including recession, inflation, deflation, general weakness in construction and housing markets, changes in infrastructure requirements and, in particular, upon the level of development and construction activities in the Caribbean |
| A general downturn in the economy in this region would adversely affect the housing and construction industry and, therefore, would adversely affect our contracting and concrete and related products businesses |
| Our materials and construction divisions operate in a highly competitive environment and we may not be able to compete effectively for customers, causing us to lose all or a portion of our market share |
| We have competitors in the materials business in the locations where we conduct business |
| The competition includes local ready-mix concrete and local concrete block plants, and importers of aggregates and concrete blocks |
| We also encounter competition from the producers of asphalt, which is an alternative material to concrete for road construction |
| Most competitors, such as ready-mix and local concrete block producers, have a disadvantage compared to our material costs, but have an advantage over us in respect to lower overhead costs |
| With respect to our construction division, land development construction is extremely competitive |
| We compete with smaller local contractors as well as larger US and European based contractors in all our markets |
| Primary competitive factors include price, prior experience and relationships, the equipment available to complete the job, innovation, the available engineering staff to assist an owner in minimizing costs, how quickly a company can complete a contract, and the ability to obtain bonding which guarantees contract completion |
| We are highly dependent on supplies of cement and Barbuda sand and a failure to maintain adequate supplies would adversely affect our operations |
| Our operations are highly dependent upon our ability to acquire adequate supplies of cement, concrete block and Barbuda sand |
| We have experienced, in the past, and could experience in the future short term shortages of both cement and Barbuda sand which, temporarily, adversely affected our operations |
| Some of our significant customers are governmental agencies of islands in the Caribbean which may constitute a credit risk |
| We operate on several islands in the Caribbean |
| The governmental agencies of these islands are significant customers |
| Many of the island governments, with which we conduct business, have high levels of public debt relative to their revenue base |
| Accordingly, we may experience difficulty in collecting amounts due from these governmental agencies |
| We are highly dependent on the availability of barging and towing services in the Caribbean |
| Our construction division is highly dependent upon the availability of barging and towing services to move construction materials and equipment from the United States to various Caribbean islands and between Caribbean islands |
| Our materials division is highly dependent upon the availability of barging services to import sand, cement and block |
| We have experienced, in the past, and could experience in the future, a short-term shortage of barging capacity which would have an adverse affect on our operations |
| We are highly dependent upon having the ability to secure bid, payment, and performance bonds |
| Our construction division’s ability to secure new contracts is dependent upon being able to obtain bid, payment and performance bonds |
| We have no definitive bonding line |
| One of the underwriting criteria of the bonding company, which we utilize, is tangible net worth |
| Our tangible net worth decreased significantly during 2005 due to our net loss and the increase in Intangible Assets and Goodwill associated with the acquisitions of businesses in the electronic security division |
| This reduced our tangible net worth which could negatively affect our ability to secure new construction contracts |
| 26 ______________________________________________________________________ [27]Table of Contents We are highly dependent upon the ability to secure work permits for employees |
| Our construction division is dependent upon being able to secure work permits from the various Caribbean island governments for employees domiciled in other jurisdictions |
| We could, in the future, experience delays in securing these work permits, which could adversely affect its ability to perform under its contracts |
| We are highly dependent upon the ability to secure business licenses to operate in foreign jurisdictions, particularly in the Bahamas |
| Our construction division competes for business, in some jurisdictions, with local contractors |
| The governments in some of these foreign jurisdictions, particularly the Bahamas, encourage the awarding of contracts to local contractors |
| We may not, in the future, be able to secure all prerequisite business licenses to enter into or perform under construction contracts |