Devcon International 10-K 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
For the fiscal year ended December 31, 2005
For the transition period from to
Commission file number 0-7152
DEVCON INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
595 SOUTH FEDERAL HIGHWAY, SUITE 500
BOCA RATON, FLORIDA 33432
(Address of principal executive offices)
Registrants telephone number: (561) 208-7200
Title of each class on which registered
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Act.
Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of April 12, 2006, the number of shares of the registrants Common Stock outstanding was 6,014,404. The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2005 was approximately $36,391,922 based on a closing sale price of $10.50 for the Common Stock on such date. For purposes of the foregoing computation, all executive officers, directors and 5 percent beneficial owners of the registrant are deemed to be affiliates. Further, the classification of affiliate specifically excludes shares beneficially owned by virtue of voting rights granted pursuant to a proxy, but not owned of record by Coconut Palm Investors I, Ltd. Such determinations should not be deemed to be an admission that such executive officers, directors or 5 percent beneficial owners are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
This Amendment No. 1 to the Form 10-K for the fiscal year ended December 31, 2005 (the Form 10-K) of Devcon International Corp. (the Company) is being filed to amend the penultimate paragraph of Part II, Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates, the third paragraph of Note 1(j) of the Companys Consolidated Financial Statements and the third and sixth paragraphs of Note 7 of the Companys Consolidated Financial Statements to remove the reference to an independent appraisal firm used in connection with the preparation of purchase price allocations related to customer account acquisitions. Except for the deletion of this reference to the independent appraisal firm, the Form 10-K remains unchanged
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates
Our discussion of our financial condition and results of operations is an analysis of the consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), consistently applied. Although our significant accounting policies are described in Note 1, Description of Business and Summary of Significant Accounting Policies, to our consolidated financial statements, the following discussion is intended to describe those accounting policies and estimates most critical to the preparation of our consolidated financial statements. The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowance for credit losses, inventories and loss reserve for inventories, cost-to-complete construction contracts, assets held for sale, intangible assets, income taxes, taxes on un-repatriated earnings, warranty obligations, impairment charges, restructuring, business divestitures, pensions, deferral compensation and other employee benefit plans or arrangements, environmental matters, and contingencies and litigation. We base our estimates on historical experience and on various other factors that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue in the security division for repair and installation services, for which no monitoring contract is connected, is recognized when the services are performed.
Revenue in the security division for monitoring services is recognized monthly as services are provided pursuant to the terms of subscriber contracts, which have prices that are fixed and determinable. We assess the subscribers ability to meet the contract terms, including meeting payment obligations, before entering into the contract. Nonrefundable installation charges and a portion of related direct costs to acquire the monitoring contract, such as sales commissions, are deferred and recognized over the estimated life of a new subscriber relationship which we have estimated at 10 years. If the site being monitored is disconnected prior the original expected life is completed, the unamortized portion of the deferred installation and direct costs to acquire are expensed.
Revenue and earnings on construction contracts, including construction joint ventures, are recognized on the percentage-of-completion-method based upon the ratio of costs incurred to estimated final costs, for which collectibility is reasonably assured. We recognize revenue relating to claims only when there exists a legal basis supported by objective and verifiable evidence and additional identifiable costs are incurred due to unforeseen circumstances beyond our control. Change-orders for additional contract revenue are recognized if it is probable that they will result in additional revenue and the amount can be reliably estimated.
Revenue for the materials division is recognized when the products are delivered (FOB Destination), invoiced at a fixed price and the collectibility is reasonably assured.
Provisions are recognized in the statement of income for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue. Contract cost is recorded as incurred and revisions in contract revenue and cost estimates are reflected in the accounting period when known. We estimate costs to complete our construction contracts based on experience from similar work in the past. If the conditions of the work to be performed change or if the estimated costs are not accurately projected, the gross profit from construction contracts may vary significantly in the future. The foregoing, as well as weather, stage of completion and mix of contracts at different margins may cause fluctuations in gross profit between periods and these fluctuations may be significant.
Notes receivable are recorded at cost, less a related allowance for impaired notes receivable. Management, considering current information and events regarding the borrowers ability to repay their obligations, considers a note to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the notes effective interest rate.
We maintain allowances for doubtful accounts for estimated losses resulting from managements review and assessment of our customers ability to make required payments. We consider the age of specific accounts, a customers payment history. For our construction and materials divisions, specific collateral given by the customer to secure the receivable is obtained when we determine necessary. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.
We write down inventory for estimated obsolescence or lack of marketability arising from the difference between the cost of inventory and the estimated market value based upon assessments about current and future demand and market conditions. If actual market conditions were to be less favorable than those projected by management, additional inventory reserves could be required. If the actual market demand surpasses the projected levels, inventory write downs are not reserved.
We maintain an accrual for retirement agreements with our executives and certain other employees. This accrual is based on the life expectancy of these persons and an assumed weighted average discount rate of 4.3%. Should the actual longevity vary significantly from the United States insurance norms, or should the discount rate used to establish the present value of the obligation vary, the accrual may have to be significantly increased or diminished at that time.
Based on a written legal opinion from Antiguan counsel, we did not record a contingent liability of $6.1 million, excluding any interest or penalties, for taxes assessed by the Government of Antigua and Barbuda for the years 1995 through 1999. In December 2004, we entered into an agreement with Antigua settling certain obligations. Pursuant to this agreement, these assessments were deemed paid. See Note 3, Foreign Subsidiaries, to our consolidated financial statements.
The EDC completed a compliance review on one of our subsidiaries in the US Virgin Islands on February 6, 2004. The compliance review covered the period from April 1, 1998 through March 31, 2003 and resulted from our application to request an extension of tax exemptions from the EDC. We are working with the EDC to resolve the issues. One of those issues is whether certain items of income qualified for exemption benefits under our then-existing tax exemption, including notice of failure to make gross receipts tax payments of $505,000 and income taxes of $2.2 million, not including interest and penalties. This is the first time that a position contrary to our or any position on this specific issue has been raised by the EDC. In light of these recent events, and based on discussions with legal counsel, we established a tax accrual at December 31, 2003 for such exposure which approximates the amounts set forth in the EDC notice. In September 2005 and 2004, the statute of limitations with respect to the income tax return filed by us for the year ended December 31, 2001 and 2000, respectively, expired. Accordingly, in the third quarter of 2005 and 2004, we reversed $37,440 and $2.3 million respectively of the tax accrual established at December 31, 2003. We will work with the EDC regarding this matter and if challenged by the U.S. Virgin Islands taxing authority would vigorously contest its position.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such a determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such a determination.
We determine for our construction and materials division our fixed assets recoverability on a subsidiary level or group of asset level. If we, as a result of our valuation in the future, assess the assets not to be recoverable, a negative adjustment to the book value of those assets may occur. On the other hand, if we impair an asset, and the asset continues to produce income, we may record earnings higher than they should have been if no impairment had been recorded.
We determine the lives of goodwill and other intangible assets acquired in a purchase business combination. Some of these assets, such as goodwill, we determine to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB 142. This testing is based on subjective analysis and may change from time to time. We tested goodwill and other intangible assets for impairment on June 30, 2005 and will test for impairment annually each June 30. Other identifiable intangible assets with estimated useful lives are amortized over their respective estimated useful lives. The review of impairment and estimation of useful life is subjective and may change from time to time.
Customer accounts are stated at fair value based on the discounted cash flows over the estimated life of the customer contracts and relationships. The Company uses a valuation study at the time of each acquisition to determine the value and estimated life of customer accounts purchased in order to determine an appropriate method by which to amortize the acquired asset. The amortization life is based on historic analysis of customer relationships combined with estimates of expected future revenues from customer accounts. The Company amortizes customer accounts on a straight-line basis over the expected life of the customer which varies from 4 to 17 years and records an additional charge equal to the remaining unamortized value of the customer account for accounts which discontinued service before the expected life. The additional charge for discontinued accounts is equal to the remaining net book value of the customer contract and relationship for the specific customer account canceled.
We are not presently considering changes to any of our critical accounting policies and we do not presently believe that any of our critical accounting policies are reasonably likely to change in the near future. There have not been any material changes to the methodology used in calculating our estimates during the last three years. Our CEO and CFO have reviewed all of the foregoing critical accounting policies and estimates.
Our exposure to market risk resulting from changes in interest rates results from the variable rate of our senior secured revolving credit facility with CapitalSource, as an increase in interest rates would result in lower earnings and increased cash outflows. The interest rate on our senior secured revolving credit facility is payable at variable rates indexed to either LIBOR or the Base Rate. The effect of each 1% increase in the LIBOR rate and the Base Rate on our senior secured revolving credit facility would result in an annual increase in interest expense of approximately $0.5 million. Based on the U.S. yield curve as of December 31, 2005 and other available information, we project interest expense on our variable rate debt to increase approximately $0.06, $0.03, $0.0 and $0.0 million for the years ended December 31, 2006, 2007, 2008 and 2009, respectively
We have 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 we deal 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 our financial position or results of operations.
Item 8. Financial Statements and Supplementary Data
The financial information and the supplementary data required in response to this Item are as follows:
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Devcon International Corp.:
We have audited the consolidated financial statements of Devcon International Corp. and subsidiaries (the Company) as listed in the accompanying index. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Devcon International Corp. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
April 15, 2006
Fort Lauderdale, Florida
Certified Public Accountants
December 31, 2005 and 2004
(Amounts shown in thousands except share and per share data)
See accompanying notes to the consolidated financial statements
Consolidated Balance Sheets (continued)
December 31, 2005 and 2004
(Amounts shown in thousands except share and per share data)
See accompanying notes to the consolidated financial statements
For Each of the Years in the Three-Year Period Ended December 31, 2005
(Amounts shown in thousands except share and per share data)
See accompanying notes to the consolidated financial statements
For Each of the Years in the Three-Year Period Ended December 31, 2005
(Amounts shown in thousands except share and per share data)
See accompanying notes to the consolidated financial statements
Consolidated Statements of Cash Flows (Continued)
For Each of the Years in the Three-Year Period Ended December 31, 2005
(Amounts shown in thousands except share and per share data)
See accompanying notes to the consolidated financial statements
For Each of the Years in the Three-Year Period Ended December 31, 2005
(Amounts shown in thousands except share and per share data)
See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
These consolidated financial statements include the accounts of Devcon International Corp. and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The Companys investments in unconsolidated joint ventures and affiliates are accounted for under the equity and cost methods. Under the equity method, original investments are recorded at cost and then adjusted by the Companys share of undistributed earnings or losses of these ventures. Other investments in unconsolidated joint ventures in which the Company owns less than 20% are accounted for by using the cost method.
Revenue in the security division for repair and installation services, for which no monitoring contract is connected, is recognized when the services are performed.
Revenue in the security division for monitoring services is recognized monthly as services are provided pursuant to the terms of subscriber contracts, which have prices that are fixed and determinable. The Company assesses the subscribers ability to meet the contract terms, including meeting payment obligations, before entering into the contract. In accordance with Staff Accounting Bulletin 104 (SAB 104), nonrefundable installation charges and a portion of related direct costs to acquire the monitoring contract, such as sales commissions, are deferred. The capitalized costs related to the installation are then amortized over the 10 year life of an average customer contract. If the site being monitored is disconnected prior to completion of the original expected life, the unamortized portion of the deferred installation and direct costs to acquire are recognized.
Revenue is recognized when the products are delivered (FOB Destination), invoiced at a fixed price and the collectibility is reasonably assured.
The Company uses the percentage-of-completion method of accounting for both financial statements and tax reports. Revenue is recorded based on the Companys estimates of the completion percentage of each project, based on the cost-to-cost method. Anticipated contract losses, when probable and estimable, are charged to income. Changes in estimated contract profits are recorded in the period of change. Selling, general and administrative expenses are not allocated to contract costs. Monthly billings are based on the percentage of work completed in accordance with each specific contract. While some contracts extend longer, most are completed within one year. Revenue is recognized under the percentage-of-completion method when there is an agreement for the work, with a fixed price for the work performed or a fixed price for a quantity of work delivered, and collectibility is reasonably assured. The Company recognizes revenue relating to claims only when there exists a legal basis supported by objective and verifiable evidence and additional identifiable costs are incurred due to unforeseen circumstances beyond the Companys control. Change-orders for additional contract revenue are recognized if it is probable that they will result in additional revenue and the amount can be reliably estimated.
Cash and cash equivalents include cash, time deposits and highly liquid debt instruments with an original maturity of three months or less.
The Company performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management.
Notes receivable are recorded at cost, less a related allowance for impaired notes receivable. Management, considering current information and events regarding the borrowers ability to repay their obligations, considers a note to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the notes effective interest rate.
For the security division, inventories are primarily electronic sensors, wire and control panels (component parts) purchased from independent suppliers. The inventories of component parts are valued at lower of cost or market. If the installation of security systems will have future recurring revenue, the costs to install are deferred and included in work in process inventory. When the installation is complete, the deferred installation costs are capitalized and included in other current and long term assets accordingly. The capitalized installation costs are then amortized over the life of an average customer contract life or 10 years. If the site being monitored is disconnected prior to completion of the original expected life, the unamortized portion of the deferred installation and direct costs to acquire are expensed.
For the construction and materials division purchased inventory, primarily cement, concrete block and sand are valued at invoice cost plus inbound freight. Manufactured aggregate and concrete block inventory values include allocable blasting, extracting, crushing, and washing costs, which includes labor, supplies, extraction royalties and quarry department direct overhead. Selling and general administrative costs are not allocated to inventory. Amounts are removed from inventory based upon average costs, which are adjusted quarterly.
Property, plant and equipment are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.
Useful lives or lease terms for each asset type are summarized below:
Depreciation expense was $5.4 million, $3.7 million and $3.8 million for 2005, 2004 and 2003 respectively, excluding discontinued operations.
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future
undiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value of the asset is determined by reviewing both the fair market value of the asset if sold individually and the average of probability weighted future cash flows generated by the asset or group of assets discounted at a risk free rate of return over the expected useful life of the asset.
If the long-lived assets are continuing to be used in the operations of the business, any impairment in value is recognized in Operating Expenses of the continuing operations of the business. Additionally, the remaining depreciable life of the assets is reviewed to determine if the events or circumstances leading to the impairment analysis indicate a change in the future depreciable life should be made.
If the long-lived assets are identified as being planned for disposal or sale, they would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
In accordance with this policy, the Company determined, in fourth quarter of 2005, that the long-lived assets of the Companys constructions division, its remaining materials operations and DevMat, an 80 percent-owned joint venture providing power, water and sewer treatment services, should be reviewed for possible impairment. That determination was the result of a strategic review by the Company of its Construction and Materials operations following the January 15, 2006 termination of a November 28, 2005 letter of intent with a potential purchaser to purchase those assets. As more fully described in Note 22 to Companys consolidated financial statements , an impairment charge of $4.1 million was recorded as a result of the strategic review.
Goodwill represents the excess of costs over fair value of assets of businesses acquired. Pursuant to FASB Statement No. 142 (FASB 142), goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB 142. The Company tests goodwill for impairment as of June 30 of each year.
FASB 142 also requires that customer accounts and intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Customer accounts are stated at fair value based on the discounted cash flows over the estimated life of the customer contracts and relationships. The Company uses a valuation study at the time of each acquisition to determine the value and estimated life of customer accounts purchased in order to determine an appropriate method by which to amortize the asset. The amortization life is based on historic analysis of customer relationships combined with estimates of expected future revenues from customer accounts. The Company amortizes customer accounts on a straight-line basis over the expected life of the customer which varies from 4 to 17 years and records an additional charge equal to the remaining unamortized value of the customer account for accounts which discontinued service before the expected life. The additional charge for discontinued accounts is equal to the remaining net book value of the customer contract and relationship for the specific customer account canceled.
All balances denominated in foreign currencies are revalued at year-end rates to the respective functional currency of each subsidiary. For the subsidiary, with a functional currency other than the US dollar, assets and liabilities have been translated into U.S. dollars at year-end exchange rates. Income statement accounts are translated into U.S. dollars at average exchange rates during the period. The translation adjustment (decreased) increased equity by ($502,610), ($241,263) and $463,581 in 2005, 2004 and 2003, respectively. Gains or losses on foreign currency transactions are reflected in the net income of the period. The (expense) income recorded in selling, general & administrative expenses was ($306,069), $184,449 and $(40,287), in 2005, 2004 and 2003, respectively.
The Company does not record a foreign exchange loss or gain on long-term inter-company debt for its subsidiary. This gain or loss is deferred and combined with the translation adjustment of said subsidiary. If and when the debt is paid, in part or whole, the deferred loss or gain will be realized and will affect the respective result of the period.
The Company computes (loss) income per share in accordance with the provisions of SFAS No. 128, Earnings per Share, which establishes standards for computing and presenting basic and diluted income per share. Basic (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares outstanding during the period. Diluted (loss) income per share is computed assuming the exercise of stock options under the treasury stock method and the related income tax effects, if not antidilutive. For loss periods, common share equivalents are excluded from the calculation, as their effect would be antidilutive. See Note 9 of the notes to the consolidated financial statements for the computation of basic and diluted number of shares.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company and certain of its domestic subsidiaries file consolidated federal and state income tax returns. Subsidiaries located in U.S. possessions and foreign countries file individual income tax returns. U.S. income taxes are not provided on undistributed earnings, which are expected to be permanently reinvested by foreign subsidiaries, unless the earnings can be repatriated in a tax-free or cash-flow neutral manner.
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates.
The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 148.
The Company did not grant any options in 2005. The per-share weighted-average fair value of stock options granted during 2004 and 2003 was $3.11 and $2.32, respectively, on the grant date, using the Black Scholes option-pricing model with the following assumptions:
Had the Company determined compensation cost based on fair value at the grant date for our stock options under SFAS 123, the Companys net (loss) income would have been the pro forma amounts below:
Certain reclassification of amounts previously reported have been made to the accompanying consolidated financial statements in order to maintain consistency and comparability between periods presented.
In September 2005, the Company sold its U.S. Virgin Islands quarries, concrete batch plant, and building products business. For purposes of comparability, the results of these operations have been reclassified from continuing to discontinued operations for all years presented in the accompanying Consolidated Statements of Operations.
In accordance with SFAS No. 13, the Company performs a review of newly acquired leases to determine as whether a lease should be treated either as a capital or operating lease. Capital leased assets are capitalized and depreciation over the term to of the initial lease. A liability equal to the present value of the aggregated lease payments would be recorded utilizing the stated lease interest rate. If an interest rate is not stated the Company will determine an estimated cost of capital to be utilized that rate to calculate the present value. If the lease has an increasing rate over time and/or is an operating lease all leasehold incentives, rent holidays, or other incentives will be consider in determining if a deferred rent liability is required. Leasehold incentives are capitalized and depreciated over the initial term of the lease.
The carrying amount of financial instruments including cash, cash equivalents, the majority of the accounts receivable, other current assets, accounts payable trade and other, accrued expenses and other liabilities, and notes payable to banks approximated fair value at December 31, 2005 because of the short maturity of these instruments. The carrying value of debt and most notes receivable approximated fair value at December 31, 2005 and 2004 based upon the present value of estimated future cash flows.
Accounts receivable consist of the following:
The Construction divisions trade accounts receivable includes retention billings of $1,703,388 and $652,391 as of December 31, 2005 and 2004, respectively.
Notes receivable consists of the following:
Included in notes and other receivables is an unsecured note due from the Government of Antigua and Barbuda (the Government) totaling a net amount of $987,500 in 2004. The balance amount of $987,500 was collected in the first quarter of 2005. These notes were originally executed in connection with a construction contract in 1987. During the following nine years, eight amendments to the agreement were executed, primarily due to additional work contracted. In 1987, the notes were placed on the cost recovery method, and all payments received from the Government from agreed upon sources were recorded as reduction of the principal balance of the notes. Payments from agreed upon sources were derived from lease proceeds from a rental of a United States military base, fuel tax revenues and proceeds from a real estate venture.
In April 2000, the Company executed the ninth amendment to the agreement with the Government and the notes were removed from the cost recovery method. The original notes receivable were consolidated into two new 15-year notes and the stated interest rate was reduced from 10 % to 6 % annually. Payments from agreed upon sources were expanded to include an additional monthly payment of $61,400, starting in August 2000, and up to $2.5 million in offsets against future duties and taxes to be incurred by the Company. In total, the agreement called for $155,000 to be received monthly and $312,500 to be received quarterly, until maturity in 2015. The Government did not fulfill its payment obligations in 2003. Since April 28, 2000 the Company has been recognizing interest income on the notes under the accrual basis. Receipts on the notes were $12.2 million in 2004. Interest income recognized in 2004 and 2003 was $2.6 million and $1.9 million, respectively. The Company records payments received, first to the projected principal reductions for the period, then to accrued interest, and lastly to additional reduction of principal. Interest income is recognized on the notes only to the extent payments are received or amounts are offset against money owed to the Government.
Antigua-Barbuda Government Development Bonds 1994-1997 series amounting to $68,661 in 2003 were fully reserved for in 2004. The Company also has net trade receivables from various Government agencies of $9,372 and $116,053 in 2005 and 2004, respectively.
During 2003 and 2004, the Government of Antigua did not meet all of its payment obligations to the Company. However, in December 2004, the Companys Antigua subsidiaries entered into an Agreement for Satisfaction of Indebtedness and Amendment No. 10 to St. Johns Dredging and Deep Water Pier Construction (the Satisfaction Agreement) with the government of Antigua and Barbuda (Antigua). Pursuant to the terms of the Satisfaction Agreement, AMP and Antigua agreed to a settlement in which approximately $29.0 million in debt owed by Antigua to AMP was deemed satisfied in exchange for certain cash payments made to those companies by Antigua, as well as the remittance of all outstanding tax assessments and other relief from current and future taxes and duties. At the time of settlement, the notes had a recorded book value of approximately $5.8 million. As a result of this Satisfaction Agreement and in exchange for the cancellation of the outstanding debt owed to AMP by Antigua, AMP received $11.5 million in cash; a commitment for an additional $987,500 of cash which was received in the first quarter of 2005, a $7.5 million credit toward future withholding taxes incurred by AMP or the Company, plus a waiver of all taxes and duties due and owing through December 31, 2004. The Company recognized $5.1 million of the future withholding tax benefit based on the current plans for repatriation of foreign-earnings. The Satisfaction Agreement also settled the litigation over a $6 million assessment issued with respect to the Companys subsidiaries in Antigua, resulting in an income tax benefit of $0.7 million related to the reversal of accruals for uncertain tax positions.
Inventories consist of the following:
At December 31, 2005 and 2004, the Company had investments in unconsolidated joint ventures and affiliates consisting of a 1.2 % equity interest in a real estate project in the Bahamas, see Note 16, a 33.3 % interest in a real estate company in Puerto Rico. At December 31, 2004, the Company had a 50% interest in a real estate project in South Florida. During 2005 the real estate project in South Florida sold the remaining property. The Company received proceeds of $368,000 and realized a gain on investment of $343,573. Equity earnings of $340,000, $71,300 and $107,162 were recognized in 2005, 2004, and 2003, respectively, on ventures accounted for under the equity method.
Intangible assets and goodwill consists of the following as of December 31, 2005 and December 31, 2004:
Amortization expense was $4.2 million, $0.2 million and $0.0 million for the years ended December 31, 2005, 2004, 2003 respectively.
The table below presents the weighted average life in years of the Companys intangible assets.
The table below reflects the estimated aggregate customer account amortization for each of the five succeeding years on the Companys existing customer account base as of December 31, 2005.
On February 28, 2005, the Company, through Devcon Security Services Corporation, (DSS) a wholly owned subsidiary, completed the acquisition of certain net assets of Starpoint Limiteds electronic security services operation (an entity controlled by Adelphia Communications Corporation, a Delaware corporation) for approximately $40.2 million in cash based substantially upon contractually recurring monthly revenue of approximately $1.15 million. The transaction was completed pursuant to the terms of an Asset Purchase Agreement, dated as of January 21, 2005 as amended (the Asset Purchase Agreement). Other than the Asset Purchase Agreement, there is no material relationship between the parties. The transaction received approval by the United States Bankruptcy Court for the Southern District of New York in an order issued on January 28, 2005.
The Company utilized $24.6 million of the $35.0 million available under a Credit Facility provided by CIT, as discussed in Note 8, Debt, to these consolidated financial statements, to satisfy a portion of the cash purchase price for the acquisition. The balance of the purchase price, including payment of $0.6 million of transaction costs, was satisfied by using cash on hand.
The acquisition was recorded using the purchase method of accounting. The purchase price allocation is based upon a valuation study at the time of the acquisition to determine the value and estimated life of the customer accounts purchased in order to determine an appropriate method by which to amortize the asset. The purchase price, adjusted for certain non-performing contracts as well as certain working capital adjustments, has been recorded pursuant to the terms of the Asset Purchase Agreement and appropriately allocated to each account set out below. Results included for the acquisition are for the period February 28, 2005 to December 31, 2005.
The purchase price allocation is as follows:
On November 10, 2005, DSH entered into a Stock Purchase Agreement with the sellers of the issued and outstanding capital stock, and certain of Sellers representatives, of Coastal Security Company, (Coastal), pursuant to which DSH agreed to purchase all of the issued and outstanding capital stock of Coastal for approximately $50.4 million in cash. As more completely discussed in Note 8, Debt, to these Consolidated Financial Statements, to finance the acquisition, in addition to utilizing existing cash, the Company refinanced its existing senior secured revolving credit facility provided by certain lenders and CIT Financial USA, Inc, with a new $70 million Credit Agreement with CapitalSource Finance LLC.
The acquisition was recorded using the purchase method of accounting. The purchase price allocation is based upon a valuation study at the time of the acquisition to determine the value and estimated life of the customer accounts purchased in order to determine an appropriate method by which to amortize the asset. Under the purchase method of accounting, the purchase price allocation may be adjusted for up to one year based on information which, if known at the date of acquisition would have effected the allocation. Additionally, under the terms of the Stock Purchase Agreement, there can be adjustments to the purchase price, and thereby the allocation thereof, based on a post closing review of the final balance sheet and recurring monthly monitoring revenue of Coastal. Any adjustments, when determined, may change the following allocation.
The preliminary purchase price allocation is as follows:
The following table shows the condensed consolidated results of continuing operations of the Company, Starpoint Limited (the electronic security operations of Adelphia Communications) and Coastal, as though these acquisitions had been completed at the beginning of each year reported on:
Debt consists of the following:
In 2001, the Company entered into a revolving line of credit facility with a bank in the United States that provides for borrowings up to a maximum amount of $1,000,000, with interest charged at LIBOR plus 2.50 % and matures June 30, 2006. The bank can demand repayment of the loan and cancellation of the line of credit facility, if certain financial or other covenants are in default. The Company also maintains lines of credit with local banks in Sint Maarten and Antigua, $200,000 and $185,000, respectively. No amounts were outstanding under these lines of credit as of December 31, 2005 and 2004.
On February 28, 2005, the Company, through Devcon Security Services Corp. (DSS), one of its indirect wholly-owned subsidiaries, completed the acquisition of certain net assets of the electronic security services operations of Adelphia Communications Corporation, a Delaware corporation, for approximately $40.2 million in cash. DSS and its direct parent, Devcon Security Holdings, Inc. (DSH), a wholly-owned subsidiary of the Company, financed this acquisition through available cash on hand and a $35 million senior secured revolving credit facility provided by certain lenders and CIT Financial USA, Inc., serving as agent.
On November 10, 2005, DSH entered into a Stock Purchase Agreement with the sellers of the issued and outstanding capital stock, and certain of Sellers representatives, of Coastal Security Company, (Coastal), pursuant to which Holdings agreed to purchase all of the issued and outstanding capital stock of Coastal for approximately $50.4 million in cash. In order to obtain the necessary funds to complete to the stock purchase, DSH and DSS, (together the Borrowers), entered into a Credit Agreement with CapitalSource Finance LLC, (as Agent and Lender), along with other lenders party to the Credit Agreement from time to time (Lenders) (collectively, the Credit Agreement). The facility with CapitalSource, which replaced the CIT facility, provided a three-year revolving credit facility in the maximum principal amount of $70,000,000 for the purpose of providing funds for permitted acquisitions, to refinance existing indebtedness, for the purchase and generation of alarm contracts, for the issuance of letters of credit and for other lawful purposes not prohibited by the Credit Agreement. In connection with the replacement of the CIT facility,
the Company expensed $0.9 million of unamortized debt issuance costs. The Borrowers agreed to secure all of their obligations under the loan documents relating to the Credit Agreement by granting to Agent, for the benefit of Agent and Lenders, a security interest in and second priority perfected lien upon (1) substantially all of their existing and after-acquired personal and real property, and (2) all capital stock owned by each Borrower of each other Borrower. In addition, the Company pledged to Agent, for the benefit of Agent and Lenders, all of its capital stock of DSS. The interest rate on the outstanding obligations under the Credit Agreement is tied to the prime rate plus a margin as specified therein or, at the Borrowers option, to LIBOR plus a margin.
Also, on November 10, 2005 and in connection with the acquisition of Coastal, the Borrowers entered into a Bridge Loan Agreement with CapitalSource Finance LLC, as lender (CapitalSource), providing for a 120-day bridge loan in the principal amount of $8,000,000 for the purchase and generation of alarm contracts, the acquisition of Coastal, and for other lawful purposes not prohibited by the Bridge Loan Agreement. The Borrowers agreed to secure all of their obligations under the loan documents relating to the Bridge Loan Agreement by granting to CapitalSource a security interest in and first priority perfected lien upon (1) substantially all of their existing and after-acquired personal and real property, and (2) all capital stock owned by each Borrower of each other Borrower. In addition, Devcon pledged to CapitalSource all of its capital stock of DSS as further security for the Borrowers obligations under the loan documents relating to the Bridge Loan Agreement. The interest rate on the outstanding obligations under the Bridge Loan Agreement is at the prime rate.
Also in connection with the Bridge Loan Agreement, the Company entered into a Guaranty with CapitalSource, dated as of November 10, 2005 (the Guaranty), pursuant to which the Company guaranteed the payment and performance of the Borrowers obligations under the Bridge Loan documents as well as all costs, expenses and liabilities that may be incurred or advanced by CapitalSource in any way in connection with the foregoing. In both the Credit Agreement and the Bridge Loan Agreement, the Borrowers provided Agent and Lenders (with respect to the Credit Agreement) and CapitalSource (with respect to the Bridge Loan Agreement) with indemnification for liabilities arising in connection with such agreements, representations and warranties, agreements and affirmative and negative covenants including financial covenants as set forth in such agreements.
The Credit Agreement and the Bridge Loan Agreement are cross-collateralized and cross-defaulted. Events of default under the Credit Agreement, include but are not limited to: (a) failure to make principal or interest payments when due and such default continues for three business days, and failure to make payments to Agent for reimbursable expenses within ten business days of their request, (b) any representation or warranty proves incorrect in any material respect, (c) failure to observe obligations relating to cash management, negative covenants (including regarding mergers, investments, loans, indebtedness, guaranties, liens and sale of stock and assets) and financial covenants (regarding a leverage ratio, a fixed charge coverage ratio, annual capital expenditure limitations and an attrition ratio of not greater than 11%), (d) defaults under the Bridge Loan Agreement, (e) a default or breach with respect to any indebtedness and certain guaranty obligations in excess of $300,000 individually or $500,000 in the aggregate, (f) certain events related to insolvency or the commencement of bankruptcy proceedings and (g) any change of control, change of management or the occurrence of any material adverse effect, as further set forth in the Credit Agreement. Upon an event of default under the Credit Agreement and the Bridge Loan Agreement, CapitalSource, as Agent or Bridge Loan Lender, as the case may be, may avail itself of various remedies including, without limitation, suspending or terminating existing commitments to make advances or immediately demanding payment on outstanding loans, as well as other remedies available to it under law and equity. As of December 31, 2005, the Company was in compliance with the covenants of the credit agreement and bridge loan.
The CapitalSource Revolving Facility contains a number of covenants imposing restrictions on our electronic security services divisions ability to, among other things:
Also, the notes contain a number of covenants imposing restrictions on the Companys ability to incur more debt, create liens on assets or make payments with respect to existing debt
The CapitalSource Revolving Facility contains financial covenants that require the Companys subsidiaries which comprise of the 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 senior lenders to foreclose on the Companys electronic security services assets. As of December 31, 2005, the Company had $0.3 million of additional borrowing capacity available on the CapitalSource Revolving Facility.
The effective interest on all debt outstanding, excluding lines of credit, was 9.1% at December 31, 2005 and 5.2 % at December 31, 2004.
The total maturities of all debt subsequent to December 31, 2005 are as follows:
The following table sets forth the computation of basic and diluted share data:
The Company adopted stock option plans for officers and employees in 1986, 1992 and 1999, and amended the 1999 plan in 2003. While each plan terminates 10 years after the adoption date, issued options have their own schedule of termination. Until 1996, 2002 and 2009, options to acquire up to 300,000, 350,000, and 600,000 shares, respectively, of common stock may be granted at no less than fair market value on the date of grant.
The amendment of the 1999 stock option plan was approved at the shareholders meeting in June 2003. The amendment increased the number of available shares available for option grants from 350,000 to 600,000. The amended plans full text was filed with the Companys proxy statement to the 2003 annual shareholders meeting.
All stock options granted pursuant to the 1986 Plan not already exercisable, vest and become fully exercisable (1) on the date the optionee reaches 65 years of age and for the six-month period thereafter or as otherwise modified by the Companys Board of Directors, (2) on the date of permanent disability of the optionee and for the six-month period thereafter, (3) on the date of a change of control and for the six-month period thereafter, and (4) on the date of termination of the optionee from employment by the Company without cause and for the six-month period after termination. Stock options granted under the 1992 and 1999 Plan vest and become exercisable in varying terms and periods set by the Compensation Committee of the Board of Directors. Options issued under the 1992 and 1999 Plan expire after 10 years.
The Company adopted a stock-option plan for directors in 1992 that terminated in 2002. Options to acquire up to 50,000 shares of common stock were granted at no less than the fair-market value on the date of grant. The 1992 Directors Plan provides each director an initial grant of 8,000 shares and additional grants of 1,000 shares annually immediately subsequent to their reelection as a director. Stock options granted under the Directors Plan have 10-year terms, vest and become fully exercisable six months after the issue date. As the directors plan was fully granted in 2000, the directors have received their annual options since then from the employee plans.
Stock option activity by year was as follows:
Weighted average information:
On July 30, 2004, the Company closed the transaction with Coconut Palm Capital Investors I, Ltd. (Coconut Palm), which the Company entered into on April 2, 2004. The transaction received shareholder approval at the annual meeting on July 30, 2004. Coconut Palm purchased from the Company 2,000,000 units for a purchase price of $9.00 per unit.
Each unit (a Unit) consists of (i) 1 share of common stock, par value $0.10 (the Common Stock), of the Company (ii) a warrant to purchase 1 share of Common Stock at an exercise price of $10.00 per share with a term of 3 years, (iii) a warrant to purchase 1/2 share of Common Stock at an exercise price of $11.00 per share with a term of 4 years and (iv) a warrant to purchase 1/2 share of Common Stock at an exercise price of $15.00 per share with a term of 5 years. Coconut Palm distributed 50 percent of the warrants to Messrs. Rochon, Ferrari, Ruzika and others for future services to the Company. Based on the value of the warrants the Company recorded a one-time compensation expense of $390,000 in the third quarter 2004.
Based on the number of shares that Coconut Palm purchased and the number of shares of Common Stock of the Company outstanding on July 30, 2004, Coconut Palm acquired approximately 35.3 percent of Common Stock outstanding immediately after the closing of the Purchase Agreement. Coconut Palm will also be entitled, on a fully diluted basis, to acquire up to 57.6 percent of the Common Stock of the Company outstanding upon exercise of the warrants. In addition, two individuals designated by Coconut Palm, Richard C. Rochon and Mario B. Ferrari were elected to the Companys board of directors.
In connection with the March 2006 issuance of $45,000,000 of term notes, the Company issued warrants to acquire an aggregate of 1,650,943 shares of common stock at an exercise price of $11.925 per share. This issuance of Warrants is further discussed in Note 25, Subsequent Events, to these Consolidated Financial Statements.
Income tax (benefit) expense consists of:
The actual expense differs from the expected tax (benefit) expense computed by applying the U.S. federal corporate income tax rate of 34% to (loss) income before income taxes is as follows:
Significant portions of the deferred tax assets and liabilities results from the tax effects of temporary difference:
In assessing the ability to realize a portion of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making the assessment. The valuation allowance for deferred tax assets as of December 31, 2005 was $9.9 million. The increase (decrease) in valuation allowance was $1.3 million, $(1.2) million and $1.1 million in 2005, 2004 and 2003, respectively. The increase in valuation allowance primarily consisted of the addition of a $2.6 million valuation on the foreign tax credit created from the withholding taxes deemed paid and an increase of $1.4 million in valuation allowance due to a net increase in 2005 foreign net operating losses. These increases were offset in part by a reduction in the valuation allowance due to a reduction in prior year foreign net operating loss carry forward.
During 2005, the Corporation repatriated $20.4 million of previously un-remitted earnings from Antigua, of which $5.1 million was withheld for Antiguan withholding taxes, which were deemed paid by utilization of a portion of the $7.5 million tax credit received as part of an agreement with the Antiguan Government.
At December 31, 2005, approximately $27.6 million of foreign subsidiaries earnings have not been distributed. These earnings are considered permanently reinvested in the subsidiaries operations, unless the earnings can be repatriated in a tax-free or cash-flow neutral manner. Should the foreign subsidiaries distribute these earnings to the parent company or provide access to these earnings, taxes of approximately $9.4 million at the U.S. federal tax rate of 34%, net of foreign tax credits, may be incurred. At December 31, 2005, the Company had accumulated net operating loss carry-forwards available to offset future taxable income in its Caribbean operations of about $19.5 million, which expire at various times through the year 2011. All tax loss carryforwards at December 31, 2005, consisted of net operating losses expiring from 2006 to 2011.
During 2005, the Companys subsidiary, Virgin Islands Cement & Building Products, Inc. sold its materials business for $13.3 million. The net impact on the deferred asset was a reduction of the asset by $1.0 million. The tax on income, from discontinued operations including the gain, was $1.7 million. This was partially offset by a loss in continuing operations.
In November, 2005, the Company acquired Coastal Security Services, Inc. for $50.5 million in a stock purchase. In conjunction with the identification and valuation of finite lived assets under FAS 141, an additional deferred liability of $7.1 was established through the purchase accounting.
Combined financial information for the Companys foreign Caribbean subsidiaries, except for those located in the U.S. Virgin Islands and Puerto Rico, are summarized as follows:
The Company leases real property, buildings and equipment under operating leases that expire over periods of one to ten years. Future minimum lease payments under non-cancelable operating leases with terms in excess of one year as of December 31, 2005 are as follows:
Total rent expense for property was $1,636,474, $1,716,825 and $1,796,518 in 2005, 2004 and 2003, respectively. Total operating lease and rental expense for vehicles and equipment was $2,747,793, $1,977,277 and $1,375,990 in 2005, 2004 and 2003, respectively. The equipment leases are normally on a month-to-month basis. Some operating leases provide for contingent rentals or royalties based on related sales and production; contingent rent expense amounted to $ 16,274, $12,549 and $14,846 in 2005, 2004 and 2003, respectively. Included in the above minimum lease commitments are royalty payments due to the owners of the Societe des Carrieres de Grand Case (SCGC) quarry. See Note 19, Commitments and Contingencies to these consolidated financial statements.
The Company received a rent holiday of five months and a leasehold incentive of $68,500 when the Company renewed the lease office location in Deerfield Beach, Florida starting January 1, 2004. The Company also received a leasehold incentive of $559,102 for the principal executive offices in Boca Raton, Florida. In addition, the Company has a prepaid rent balance of $100,000 for the executive offices. This will be utilized over the first ten months of 2006. Under SFAS No. 13, a deferred rent liability of $701,120 was recorded for these two leases. The leasehold improvements are being amortized through the end of the initial lease terms, excluding renewal periods, through May 2009 and August 2015 for Deerfield Beach and Boca Raton, respectively.
The Company is organized based on the products and services it provides. Under this organizational structure the Company has three reportable divisions: Construction, Materials and Security. The Construction division consists of land development and marine construction projects. The Materials division includes manufacturing and distribution of ready-mix concrete, concrete block, crushed aggregate and cement. The Electronic Security Services division provides installation, monitoring and maintenance of electronic security systems for commercial and residential customers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Operating loss is revenue less operating expenses. In computing operating loss, the following items have not been added or deducted: interest expense, income tax expense, equity in earnings from unconsolidated joint ventures and affiliates, interest and other income and minority interest. The note receivable from the Government of Antigua and Barbuda is included in total assets, other. This note was paid off in 2005.
Additionally, the Company recorded a $1.0 million of loss on debt extinguished by the electronic security services division in 2005 as a result of refinancing the CIT facility.
Revenue by geographic area includes sales to unaffiliated customers based on customer location, not the selling entitys location. The Company moves its equipment from country to country; therefore, to make this disclosure meaningful the geographic area separation for assets is based on the location of the legal entity owning the assets. One customer, the owner of the project in the Bahamas, account for $6.2 million, $10.4 million and $4.9 million of revenue in 2005, 2004 and 2003, respectively, reported in the Construction segment.
The Companys policies and codes provide that related party transactions be approved in advance by either the audit committee or a majority of disinterested directors.
The Company leases from the wife of Mr. Donald L. Smith, Jr., a Director and former Chairman and Chief Executive Officer of the Company, a 1.8-acre parcel of real property in Deerfield Beach, Florida. This property is being used for our equipment logistics and maintenance activities. The property is subject to a 5-year lease entered into a January 2002 providing for rent of $95,000 per year. This rent was based on comparable rental contracts for similar properties in Deerfield Beach, as evaluated by management.
The Company has entered into various construction and payment deferral agreements with an entity which owns and manages a resort project in the Bahamas in which Mr. Donald L. Smith Jr., a director and former Chairman and Chief Executive Officer of the Company, a prior Director of the Company and a subsidiary of the Company are minority partners owning 11.3 percent, 1.55 percent and 1.2 percent, respectively. Mr. Smith is also a member of the entitys managing committee.
On June 6, 1991, the Company issued a promissory note in favor of Donald Smith, Jr., a Director and former Chairman and Chief Executive Officer of the Company, in the aggregate principal amount of $2,070,000. The note provided that the balance due under the note was due on January 1, 2004, but this maturity date has been extended by agreement between Mr. Smith and the Company to October 1, 2006. The note is unsecured and bears interest at the prime rate. As of December 31, 2005 and 2004, $1.7 million is outstanding under the note. The balance under the note becomes immediately due and payable upon a change of control. However, under the terms of a guarantee dated March 10, 2004, by and between the Company and Mr. Smith where Mr. Smith guarantees various notes receivable from Emerald Bay Resort amounting to $2.2 million, Mr. Smith must maintain collateral in the amount of $1.8 million. The note defines a change of control as the acquisition or other beneficial ownership, the commencement of an offer to acquire beneficial ownership, or the filing of a Schedule 13D or 13G with the SEC indicating an intention to acquire beneficial ownership, by any person or group, other than Mr. Smith and members of his family, of 15% or more of the outstanding shares of the Companys common stock.
The Company owns a 50% interest in ZSC South, a joint venture, which is in the process of being liquidated. Mr. W. Douglas Pitts, a director, owns a 5% interest in the joint venture. Courtelis Company manages the joint ventures operations and Mr. Pitts is the President of Courtelis Company. In the third quarter of 2005, the joint venture sold its last remaining parcel of land and the Company recorded a gain of $0.4 million.
On July 30, 2004, the Company purchased an electronic security services company managed and controlled by Mr. Ruzika, our CEO, for approximately $4.7 million, subject to certain purchase price adjustments after the closing. The initial
allocation of the assets of the company purchased was based on fair value and included $70,000 of working capital, $306,000 of property, plant and equipment, $2.6 million of customer contracts, $356,000 of deferred tax assets and $1.7 million of goodwill and other intangibles. The Company assumed $277,000 of deferred revenue liability. The Company paid the purchase price with a combination of $2.5 million in cash and 214,356 shares of the Companys common stock. Additionally, on October 5, 2005, 13,718 shares were issued upon finalization of the purchase price adjustments.
Mr. James R. Cast, a former director, through his tax and consulting practice, has provided services to us for more than ten years. The Company paid Mr. Cast $59,400 and $59,400 for consulting services provided to the Company in 2005, 2004 and 2003, respectively. Additionally, Mr. Cast resigned from the Board of Directors in January 2006. Before resigning, the Company entered into an agreement for tax and consulting services to be performed during 2006 for a specified number of consulting hours and for the total amount of $75,000.
The Company has entered into a retirement agreement with Mr. Richard Hornsby, former Senior Vice President and director. He retired from the company at the end of 2004. During 2005 he received his full salary. From 2006 he will receive annual payments of $32,000 for life. During 2003, the Company recorded an expense of $232,000 for services rendered; this amount was paid out in 2005. The Company expensed the net present value of the obligation to pay Mr. Hornsby $32,000 annually for life, over his estimated remaining service period at the Company, during 2004. The net present value of the future obligation is estimated at $337,596 at December 31, 2005.
On August 12, 2005, the Company entered into a Management Services Agreement, dated as of August 12, 2005 (the Management Agreement), with Royal Palm Capital Management, LLLP (Royal Palm), to provide management services. Royal Palm Capital Management, LLLP is an affiliate of Coconut Palm Capital Investors I Ltd. (Coconut Palm) with whom the Company completed a transaction on June 30, 2004, whereby Coconut Palm invested $18 million into the Company for purposes of the Company entering into the electronic security services industry. Richard Rochon and Mario Ferrari, two of the Companys directors, are principals of Coconut Palm and Royal Palm. Robert Farenhem is a principal of Royal Palm and was the Companys interim CFO from April 2005 until December 2005.
The management services to be provided include, among other things, assisting the Company with, among other matters, establishing certain office, accounting and administrative procedures, obtaining financing relating to business operations and acquisitions, developing and implementing advertising, promotional and marketing programs, facilitating certain securities matters (both proposed offerings and ongoing compliance issues) and future acquisitions and dispositions, developing tax planning strategies, and formulating risk management policies. Under the terms of the Management Agreement, the Company is obligated to pay Royal Palm a management fee in the amount of $30,000 per month. In connection with this agreement, the Company incurred $274,702 during the year ended December 31, 2005.
On January 23, 2006, the Company entered into a stock purchase agreement with Donald L. Smith, Jr., a director and former Chairman and Chief Executive Officer, under the terms of which the Company agreed to sell to Mr. Smith all of the issued and outstanding shares of two of our subsidiaries, Antigua Masonry Products, Ltd., an Antigua corporation, or AMP, and M21 Industries, Inc., which subsidiaries collectively comprise the operations of the Companys materials division in Antigua, for an aggregate purchase price equal to approximately $5 million, subject to adjustments provided in the stock purchase agreement. The stock purchase agreement permitted $1,725,000 of the purchase price to be paid by cancellation of a note payable by the Company to Mr. Smith. The Company retained the right to review other offers to purchase these Antigua operations. The parties to the stock purchase agreement elected to exercise their right to negotiate the sale of the Companys materials division in Antigua with a third party. As a result, on March 2, 2006, the Company entered into a stock purchase agreement with A. Hadeed or his nominee and Gary ORourke and terminated the stock purchase agreement entered into with Mr. Smith on January 23, 2006. The terms of the new stock purchase agreement provided for a purchase price equal to approximately $5.1 million, subject to adjustments provided in the stock purchase agreement. The entire purchase price was contemplated to be paid entirely in cash as opposed to the partial payment through surrender of the $1,725,000 note the Company had previously issued to Mr. Smith. In addition, the terms of the new stock purchase agreement excluded M21 Industries, Inc. from the sale but contemplated transfers of certain assets from the Antigua operations to Devcon as well as the pre-closing transfer to AMP of certain preferred shares in AMP that were owned by Devcon. The purchaser has agreed to pay all taxes incurred as a result of the transaction. The Company completed the sale of its materials division in Antigua on May 2, 2006.
The Company sponsors various 401(k) plans for some employees over the age of 21 who have completed a minimum number of months of employment. The Company matches employee contributions between 3.0% and 4.0% of an employees salary. Company contributions totaled $267,499, $173,994 and $133,872 in 2005, 2004 and 2003, respectively.
Included in the accompanying consolidated balance sheets under the following captions:
During the second quarter 2002, the Company issued a construction contract performance guarantee together with one of the Companys customers, Northshore Partners, Inc., (Northshore), in favor of Estate Plessen Associates L.P. and JPMorgan Chase Bank, for $5.1 million. Northshore Partners was an important customer on St. Croix and the construction contract that Northshore Partners had with Estate Plessen Associate L.P. had requirements for the Companys construction materials. The Company provided a letter of credit for $500,000 as collateral for its performance guarantee. The construction project was finished in September 2003 and the performance guarantee expired, without a claim being made, in 2005. The Company received an up front fee of $154,000, recognition of which was deferred until expiration of the guarantee and determination that the Company had no contingent liability. Such determination was made and the $154,000 fee was recognized in the third quarter of 2005.
On July 25, 1995, a Company subsidiary, Société des Carriéres de Grande Case (SCGC), entered into an agreement with Mr. Fernand Hubert Petit, Mr. Francois Laurent Petit and Mr. Michel Andre Lucien Petit, (collectively, Petit) to lease a quarry located in the French side of St. Martin. Another lease was entered into by SCGC on October 27, 1999 for the same and additional property. Another Company subsidiary, Bouwbedrijf Boven Winden, N.A. (BBW), entered into a material supply agreement with Petit on July 31, 1995. This agreement was amended on October 27, 1999. Pursuant to the amendment, the Company became a party to the materials supply agreement.
In May 2004, the Company advised Petit that it would possibly be removing its 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 the Company 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 has refused to accept the remainder of the quarterly payment from the Company in the amount of $45,000.
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. BBW has no assets on St. Martin, but approximately $341,000 of its assets has been impounded on Sint Maarten. In obtaining the orders, Petit alleged that $7.6 million is due on the supply agreement (the full payment that would be due by the Company if the contract continued for the entire potential term and the Company continued to mine the quarry), $2.7 million is due for quarry restoration and $3.7 million is due for pain and suffering. The materials supply agreement provided that it could be terminated by the Company on July 31, 2004.
In February 2005, SCGC, BBW and the Company entered into agreements with Petit, which provided for the following:
After conferring with its French counsel and upon review by management, the Company believes that it has valid defenses and offsets to Petits claims, including, among others, those relating to its termination rights and the benefit to Petit from the Company not mining the property. Based on the foregoing agreements and its review, management does not believe that the ultimate outcome of this matter will have a material adverse effect on the consolidated financial position or results of operations of the Company.
The Company will obtain independent appraisals to determine the fair value of any non-cash consideration, including the exercise of the options listed above, used in settlement of a judgment received by Petit, if any.
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 except for certain violations of regulations governing the exploitation of our quarry in Saint Martin. In the fourth quarter of 2005, the Company received a Statement of Observations resulting from a site examination on September 23, 2005. The site examination was conducted by Drire, the Saint Martin agency charged with the responsibility of enforcing regulations governing the exploitation of quarries. The Company is in the process of addressing the items identified in the Statement of Observations, none of which are anticipated to have a material adverse effect upon the Company. Compliance with environmental protection laws has not had a material adverse effect on the Companys consolidated financial condition, results of operations or cash flows in the past and is not expected to have a material adverse effect in the foreseeable future.
The Companys Senior Loan provided by CIT issued in February 2005 was refinanced in November 2005. Accordingly, with its repayment, a non-recourse performance guarantee secured by the Companys stock in DSH was released.
In connection with the CIT Senior Loan repayment, and financing the acquisition of Coastal Security Services in November 2005, the Company entered into a $70 million revolving credit agreement with CapitalSource Finance LLC replacing in full the CIT facility. The specific terms of the CapitalSource revolving credit facility are more specifically described in Note 8 of the consolidated financial statements. The Company has signed a non-recourse performance guarantee with CapitalSource and pledged, as collateral, the Companys stock in DSH. Subsequently, in connection with the March 2006 acquisition of Guardian, the Company increased the facility with CapitalSource to $100 million.
For the construction and materials divisions, the Companys customer base is primarily located in the Caribbean with the most substantial credit concentration within the Construction division. Typically, customers within this division engage the company to develop large marinas, resorts and other site improvements and consequently, make up a larger percentage of total sales.
For the years ended December 31, 2005, 2004 and 2003, the company reported revenue for one Bahamian customer of 7.3%, 15.3% and 8.8% of total revenue respectively. As of December 31, 2005, the ongoing project for the abovementioned customer had backlog of $0.3 million. A subsidiary and one of the Companys directors are minority owners of and the director is a member of the managing committee of the entity developing this project.
As of December 31, 2005, the Company had receivables from the customer mentioned above that represented 26% of consolidated receivables. The total receivable balance from this customer is made up of $4.2 million related to the construction project in the Bahamas . Of this balance, $0.8 million is retention. Other receivables for the same client related to the Companys DevMat Joint Venture total $0.3 million. All receivables for this customer are current accounts receivables. For the period ended December 31, 2005, there were no receivables from a single customer that represented more than 10% of total receivables with the exception of the customer mentioned above. As of December 31, 2004, the total receivable from another customer was $3.7 million consisting of $0.9 million of current accounts receivable and $2.8 million of notes receivable. Although receivables are generally not collateralized, the Company may place liens or their equivalent in the event of nonpayment. The Company estimates an allowance for doubtful accounts based on the creditworthiness of customers as determined by specific events or circumstances and by applying a percentage to the receivables within a specific aging category.
For the year ended December 31, 2005, one customer in the construction division made up 27.7% of total sales for the construction division. This customer is building a marina on the island of Chub Cay, in the Bahamas.
No single customer within the Materials or the Securities division accounted for more than 10% of total sales. For the security division, the Companys customer base is concentrated in Florida and New York, New York.
The Company has separate union agreements with its employees on St. Thomas, St. Croix and Antigua. The agreement for Antigua was renewed and will expire in November 2006. The agreement for St. Thomas was renewed in 2003. This agreement and the one for St. Croix will expire in March 2006. In the past, there have been no labor conflicts.
Management believes that the Companys ability to produce its own sand and stone gives it a competitive advantage because of the substantial investment required to produce sand and stone, the difficulty in obtaining the necessary environmental permits to establish quarries, and the moratorium on mining beach sand imposed by most Caribbean countries. If the Company is unable to produce its own sand and stone, the consolidated financial position, results of operations, or cash flows could be adversely affected.
The Company provides, to certain employees, defined retirement and severance benefits. Accrued benefits which arise in accordance with this requirement are based upon periodic actuarial valuations which use the projected unit credit method for calculation and are charged to the consolidated statements of income in a systematic basis over the expected average remaining service lives of current employees who are eligible to receive the required benefits. The net expense with respect to certain of these required benefits is assessed in accordance with the advice of professional qualified actuaries. The net expense included in the consolidated statements of income for the years ended December 31, 2005, 2004 and 2003 amounted to $1.2 million, $1.7 million and $2.0 million, respectively. The actuarial present value of the accumulated benefits at December 31, 2005 and 2004 with respect to these accrued benefits, was $5.0 million.
The obligations which arise under these plans are not governed by any regulatory agency and there is no requirement to fund the obligations and accordingly the Company has not done so. Obligations which are payable to employees upon retirement or separation with the Company are paid from cash on hand at the time of retirement or separation in accordance with the terms of the respective plans.
The following sets forth the estimated cash requirement to be paid out to eligible employees for the next five years:
Impairment Charge in 2005
An analysis of the various construction contracts, quarry and material aggregate sites as well as the operations of the DevMat Joint Venture determined that for purposes of compliance with SFAS No. 144, the Company had five identifiable cash flow operating units for which an impairment analysis should be prepared. Those operating cash flow units and the impairment charge for each are shown below.
The Quarry, aggregate and concrete block operations on the Island of St. Martin have closely related operational management and heavily integrated interdependence for the manufacture of concrete and block. A discounted forecast of future operating cash flows for the St. Martin operations resulted in an impairment charge of $1.8 million. The operations have historically generated losses and breakeven to negative net cash flows after required capital expenditures to maintain the assets. The ability to generate revenues and resulting value of the assets for the St. Martin operations is largely controlled by the island economy of St. Martin and fair market value for the long-lived assets sold individually was considered but did not identify a value greater than the forecast of cash flows. The future depreciable life of the St. Martin assets was determined as unchanged from historic rates.
The Construction operations consist of an existing back log of construction projects combined with a forecast of projects which are under various states of preparing bids and expected start dates. The preparation of bids, budgeting, equipment management and contract administration is performed centrally at the Companys
Construction offices in Deerfield Beach, Florida. Accordingly, an appropriate amount of administrative overheads were identified and charged to the gross margin forecasted for the construction projects. After review of the forecasted discounted cash flows, an impairment charge of $1.1 million was determined from a discounted forecast of future operating cash flows for the Construction operations. The future depreciable life of the Construction operation assets was determined as unchanged from historic rates.
The Quarry and aggregate operations in Puerto Rico are 50% owned by the Company and were operated under a lease which was due to expire in March 2006. Negotiations on the lease with the landlord were in process at December 31, 2005. Additionally, during the 3rd quarter of 2005, sales for Puerto Rico were negatively impacted by the loss of a major customer. During January 2006 negotiations for extension of the lease, one of the 25% owners of the operations proposed to purchase substantially all of the operating assets of the operations including responsibility to refurbish the quarry site upon conclusion of the lease. The buyers offer was contingent upon successful negotiation of a lease extension. The Company had been considering a plan for possible abandonment of the operations when negotiations for the lease extension and efforts to obtain replacement customers in the fourth quarter of 2005 had failed to reach a successful conclusion. On March 30, 2006 the buyer and the Company reached agreement on all material terms of the sale and the lease extension was materially agreed upon between the buyer and the landlord. The Company continues to sell previously crushed aggregate with an expected sale date in April 2006. As a result the Company compared the plan for abandonment with the buyers proposal resulting in an impairment of $1.0 million as determined by net proceeds from sale of the operations in Puerto Rico. The terms of the sale are more specifically described in Note 25, Subsequent Events, to these consolidated financial statements.
The DevMat operations consist of stationary and portable processing equipment which provides desalination and sewage treatment services. The operations are 80% owned by the Company. After developing a probability forecast of the revenues and expenses of the DevMat operations, the Company determined that there was an impairment of $135,000 on DevMats long-lived assets. The Company further determined that the useful life expected for the long-lived assets was approximately five years from December 31, 2005 after considering a reasonable amount of capital expenditures projected to maintain the assets during the reduced useful life.
Impairment Charges in 2004 and 2003.
In accordance with its policy, the Company recorded charges for impairment losses in the Materials Division in 2004 and 2003 of approximately $0.6 million and $2.9 million respectively.
In December 2004, the Company recorded an impairment charge based upon a review of leasehold improvements on three of its quarry sites. It was determined that the aggregate material, included within these quarry bases, was no longer providing a future benefit to the Companys extraction operations and, accordingly, a $0.6 million charge was recorded in the fourth quarter of 2004.
In the first quarter of 2003, the Company recorded an impairment expense of $2.9 million. This consisted of the following items:
The St. Martin/Sint Maarten operations were determined to be impaired due to continuing losses. The Company could not project sufficient future earnings to cover the long-lived assets. An impairment charge of $2.1 million was recorded to write down the St. Martin crusher and concrete plant to their estimated fair value, using an estimated probable sales price as determinant of the value. The Sint Maarten concrete and aggregate sales operations have an estimated fair value in excess of recorded long-lived assets, and therefore no impairment was recorded for this part of the business. The Sint Maarten block plant was impaired, using an estimated probable sales price for parts of the plant as determinant of the value, and an operational decision has been made to close the plant and dismantle it. The Company is currently importing all of its concrete for blocks.
The plant in Aguadilla, Puerto Rico, is leased to a third party, whose extraction permit was cancelled in February 2003. In April 2003, the lessee asked for a moratorium on payments, at the same time as he gave notice of the extraction permit being cancelled. As a result of these actions, managements expectation of future cash flows and the fact that the only source of revenue for the plant has come from the lessee, the Company recorded an impairment charge of $438,000 to write down the plant to its estimated fair value, using an estimated probable sales price as determinant of the value. In September 2003, the third party received its extraction permit and restarted aggregates processing operations and paying the lease.
Other assets, dredge equipment, asphalt plant, batch plant, generators, and other assets, not in use in Puerto Rico, St. Croix, St. Kitts and other islands were written down to net realizable value with impairment charges of $70,000 in 2003.
On September 30, 2005, the Company and its wholly owned subsidiary, V.I. Cement & Building Products, Inc. completed the sale of its U.S. Virgin Islands material operations to Heavy Materials, LLC, a U.S. Virgin Islands limited liability company and private investor group (Purchaser), pursuant to an Asset Purchase Agreement dated as of August 15, 2005, for $10.7 million in cash plus the issuance of a promissory note (the Note) to the Company in the aggregate principal amount of $2.6 million. The Note has a term of three years bearing interest at 5% per annum with only interest being paid quarterly in arrears during the first 12 months and principal and accrued interest being paid quarterly (principal being paid in 8 equal quarterly installments) for the remainder of the term of the Note until the maturity date. The cash proceeds, net of closing costs, totaling $10.4 million was received in October 2005. The first two quarterly payments due December 31, 2005 and March 31, 2006 were received by the Company.
The accompanying Consolidated Statements of Operations for all the years presented have been adjusted to classify the U.S Virgin Islands material operations as discontinued operations. Selected statement of operations data for the Companys discontinued operations is as follows:
A summary of the total assets of discontinued operations included in Other Current Assets is as follows:
Acquisition of Guardian/Private Placement of Notes and Warrants. On March 6, 2006, the Company completed the acquisition of Guardian International, Inc. under the terms of an Agreement and Plan of Merger, dated as of November 9, 2005, between the Company, an indirect wholly-owned subsidiary of the Company, and Guardian in which the Company acquired all of the outstanding capital stock of Guardian for an estimated aggregate cash purchase price of approximately $65.5 million. This purchase price consisted of (i) approximately $23.6 million paid to the holders of the common stock of Guardian, (ii) approximately $23.3 million paid to redeem two series of Guardians preferred stock, (iii) approximately $13.3 million used to assume and pay specified Guardian debt obligations and expenses and (iv) approximately $1.0 million used to satisfy specified expenses incurred by Guardian in connection with the merger. The balance of the purchase price, approximately $3.3 million, has been placed in escrow. Subject to reconciliation based upon recurring monthly revenue and net working capital levels as of closing and subject to other possible adjustments, Guardians common shareholders are expected to receive a pro rata distribution from the escrowed amount approximately six months after the closing. The merger was approved by shareholders of Guardian on February 24, 2006.
In addition, in order to finance the acquisition of Guardian, on March 6, 2006, the Company issued to certain investors under the terms of a Securities Purchase Agreement, dated as of February 10, 2006, an aggregate principal amount of $45 million of notes along with warrants to acquire an aggregate of 1,650,943 shares of the Companys common stock at an exercise price of $11.925 per share. The Company also increased the amount of cash available under the CapitalSource revolving credit facility from $70 million to $100 million and used $35.6 million under this facility together with the net proceeds from the issuance of the notes and warrants to purchase Guardian and repay the $8 million CapitalSource Bridge Loan.
The notes accrue interest at 8% per annum and mature the earlier of July 31, 2005 or the date the Company obtains shareholder approval for issuance of the Preferred shares discussed below. Additionally, the interest is payable at maturity
which is expected to be on or before July 31, 2006, but not later than January 1, 2007. The allowable circumstances for the maturity date to extend beyond July 31, 2006 to a date prior to January 1, 2007 must arise from the time possibly needed for the Securities and Exchange Commission to complete its review, of an information statement to be filed with the Securities and Exchange Commission and ultimately delivered by us to our shareholders in connection with the issuance of the Series A Convertible Preferred Stock. The Company anticipates that under the terms of the Securities Purchase Agreement, the private placement investors will subsequently receive an aggregate of 45,000 shares of Series A Convertible Preferred Stock, par value $.10 per share, to be issued by us with a liquidation preference equal to $1,000 per share (the original purchase price per share) plus accrued and unpaid dividends per share, and convertible into common stock at a conversion price equal to $9.54 per share of common stock. This conversion price and the exercise price of the Warrants issued with the notes are and will be subject to certain anti-dilution adjustments. The issuance of the Series A Convertible Preferred Stock and of the Warrants could also cause the issuance of greater than 20% of our outstanding shares of common stock upon the conversion of the Series A Convertible Preferred Stock and the exercise of the Warrants. The creation of a new class of preferred stock is subject to shareholder approval under Florida law, while, for various reasons related to the potential issuance of greater than 20% of our outstanding shares of common stock, the issuance of the Series A Convertible Preferred Stock requires shareholder approval under the rules of Nasdaq. On February 10, 2006, holders of more than 50% of the Companys common stock approved the amendment to our articles of incorporation creating a new class of preferred stock and the issuance of Series A Convertible Preferred Stock, however, this approval will not be effective and the Series A Convertible Preferred Stock will not be issued until the Securities and Exchange Commission rules and regulations relating to the delivery of an Information Statement on Schedule 14C to our shareholders have been satisfied. The Company anticipates that the sale of the shares of the Series A Convertible Preferred Stock will take place on or before July 31, 2006, but not later than January 1, 2007.
Resignation and Replacement of Independent Director. On January 23, 2006, Mr. James R. Cast resigned from the Board of Directors of the Company. Mr. Cast was an independent director, as defined by Nasdaq National Market (Nasdaq). In accordance with Nasdaq Marketplace Rule 4350(c) requiring a majority of the Companys Board of Directors to be Independent, , Nasdaq notified the Company it had until the earlier of the next annual shareholders meeting or January 23, 2007 to replace the independent director position or face delisting. On February 15, 2006, Mr. P. Rodney Cunningham was appointed to the Companys Board of Directors. The Company has since been notified that Mr. Cunningham meets Nasdaqs rules for independence thereby removing the delisting notice deadline.
Divestiture of Antigua Operations. On March 2, 2006, the Company entered into a Stock Purchase Agreement with A. Hadeed or his nominee and Gary ORourke, under which we completed the sale of all of the issued and outstanding common shares of AMP. In connection with this sale, the purchasers acknowledged that preferred shares of AMP with a face value equal to EC 1,436,485 (US $532,032) as of the date of the sale (collectively, the Preferred Shares) are outstanding and owned beneficially and of record by certain third parties and that such Preferred Shares are reflected as debt on AMPs books and records. The purchasers further acknowledged that their acquisition of AMP was subject to the Preferred Shares and that the purchasers have sole responsibility of satisfying and discharging all obligations represented by such Preferred Shares, which represents an aggregate amount slightly in excess of $500,000. Under the terms of this Stock Purchase Agreement, the purchasers acquired 493,051 common shares of AMP for a purchase price equal to $5.1 million, subject to certain adjustments. This purchase price was paid entirely in cash. In addition, the transaction included transfers of certain assets from the Antigua operations to us, as well as pre-closing transfers to AMP of certain preferred shares in AMP that were owned by us. The purchasers have agreed to pay all taxes incurred as a result of the sale.
Divestiture of Joint Venture assets of Puerto Rico Crushing Company (PRCC), On March 30, 2006, the Company reached an advanced stage of discussions on a sale agreement whereby Mr. Jose Criado, through a company controlled by Mr. Criado, would purchase the fixed assets and substantially all of the inventory of PRCC as well as assume substantially all employee related severance costs and liabilities arising from the lease agreement (including reclamation and leveling) for the quarry land for a purchase price of $700,000 in cash and a two-year 5% note in an amount equal to the value of inventory as of the closing date. If the negotiations are successful, the Company expects to complete the divestiture before the end of April 2006. The anticipated net proceeds from the sale will approximate the net book value of the related assets after giving effect to the impairment charge of approximately $1.0 million recorded by the Company on the long-lived assets of PRCC at December 31, 2005. See additional discussion of impairment in Note 22 to the consolidated financial statements.
Independent to and prior to the Company reaching material agreement on the terms of the sale of PRCCs assets to Mr. Criado, the Company had performed an analysis of PRCC Long-Lived assets for possible impairment in accordance with the Companys accounting policies and SFAS No. 144, Impairment of Long Lived Assets. The events which caused the Company to prepare the Impairment analysis were the change of control of a major customer of PRCC, causing reduced revenue in the second half of 2005; the inability to obtain sufficient new revenue by December 31, 2005 to generate positive cash flows; and the January 15, 2006 termination of a November 28, 2005 Letter of Intent to sell materially all the assets of the Companys remaining construction division, materials division and DevMat assets. More detailed information on the Impairment analysis is included in Note 22, Impairment of Long-Lived assets, included in the Consolidated Financial Statements of the Company at December 31, 2005. The resulting impairment charge related to PRCCs assets was $1.0 million.
Item 15. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
Part IV of the Companys Form 10-K for the fiscal year ended December 31, 2005 is hereby amended solely to add the following exhibits required to be filed in connection with this Amendment No. 1.
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Amendment to be signed on its behalf by the undersigned thereunto duly authorized.