Form 10-K/A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-7152

DEVCON INTERNATIONAL CORP.

(Exact name of registrant as specified in its charter)

FLORIDA

59-0671992

3270;7381

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

(Primary Standard Industrial

Classification Code Number)

595 SOUTH FEDERAL HIGHWAY, SUITE 500

BOCA RATON, FLORIDA 33432

(Address of principal executive offices)

Registrant’s telephone number: (561) 208-7200

Title of each class on which registered

Securities registered pursuant to Section 12(b) of the Act:

NONE

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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 registrant’s 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

None

Explanatory Note

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 Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Critical Accounting Policies and Estimates”, the third paragraph of Note 1(j) of the Company’s Consolidated Financial Statements and the third and sixth paragraphs of Note 7 of the Company’s 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

PART II

Item 7. Management’s 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 subscriber’s 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 note’s effective interest rate.

We maintain allowances for doubtful accounts for estimated losses resulting from management’s review and assessment of our customers’ ability to make required payments. We consider the age of specific accounts, a customer’s 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:


		Page Number(s)
Report of Independent Registered Public Accounting Firm		5

Financial Statements:

Consolidated Balance Sheets as of December 31, 2005 and 2004		6

Consolidated Statements of Operations For Each of the Years in the Three-Year Period Ended December 31, 2005		8

Consolidated Statements of Cash Flows For Each of the Years in the Three-Year Period Ended December 31, 2005		10

Consolidated Statements of Stockholders’ Equity and Comprehensive (Loss) Income for Each of the Years in the Three-Year Period Ended December 31, 2005		12

Notes to Consolidated Financial Statements		13

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 Company’s 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

Consolidated Balance Sheets

December 31, 2005 and 2004

(Amounts shown in thousands except share and per share data)


	2005			2004
ASSETS

Current assets:
Cash and cash equivalents	$	4,634		$	34,928
Accounts receivable, net of allowance for doubtful accounts of $1,785 and $2,785, respectively		17,575			8,129
Accounts receivable, related party		469			1,046
Notes receivable		1,622			2,612
Notes receivable, related party		2,160			775
Costs and estimated earnings in excess of billings		2,046			1,130
Costs and estimated earnings in excess of billings, related party		20			—
Inventories		2,892			3,324
Prepaid expenses		1,464			747
Prepaid taxes		—			4,402
Other current assets		4,757			4,427

Total current assets		37,639			61,520

Property, plant and equipment, net:
Land		304			1,485
Buildings		400			847
Leasehold improvements		1,081			2,515
Equipment		23,136			49,357
Furniture and fixtures		1,039			948
Construction in process		1,629			2,019

Total property, plant and equipment		27,589			57,171
Less accumulated depreciation		(5,853	)		(29,426	)

Total property, plant and equipment, net		21,736			27,745

Investments in unconsolidated joint ventures and affiliates		339			362
Notes receivable, net of current portion		3,504			1,318
Notes receivable, related party, net of current portion		—			2,000
Customer lists, net of amortization $4,407 and $230, respectively		46,050			3,698
Goodwill		48,019			1,115
Other intangible assets, net of amortization $94 and $0, respectively		1,724			622
Other long-term assets		6,456			3,285

Total assets	$	165,467		$	101,665

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)


	2005			2004
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade and other	$	8,094		$	4,929
Accrued operational fees and taxes		2,215			1,521
Accrued expenses and other liabilities		7,169			3,547
Deferred revenue		4,808			761
Accrued expense, retirement and severance		897			948
Current installments of long-term debt		69			80
Current installments of long term debt, related party		1,725			1,725
Billings in excess of costs and estimated earnings		1,205			206
Billings in excess of costs and estimated earnings, related party		51			538
Deferred tax liability		—			4,080
Note payable to bank		8,000			—
Income tax payable		846			1,125

Total current liabilities		35,079			19,460

Long-term debt, excluding current installments		55,521			564
Retirement and severance, excluding current portion		4,098			4,013
Long-term deferred tax liability		5,213			—
Other long-term liabilities, excluding current portion		1,899			645

Total liabilities		101,810			24,682

Commitments and contingencies (Note 19)		—			—

Stockholders’ equity:
Common stock, $0.10 par value. shares authorized 15,000,000, shares issued 6,001,922 in 2005 and 5,753,057 in 2004, and shares outstanding 6,001,888 in 2005 and 5,738,713 in 2004		600			575
Additional paid-in capital		31,325			29,790
Retained earnings		33,624			48,106
Accumulated other comprehensive loss – cumulative translation adjustment		(1,892	)		(1,390	)
Treasury stock, at cost, 34 and 14,344 shares in 2005 and 2004, respectively		—			(98	)

Total stockholders’ equity		63,657			76,983

Total liabilities and stockholders’ equity	$	165,467		$	101,665

See accompanying notes to the consolidated financial statements

Consolidated Statements of Operations

For Each of the Years in the Three-Year Period Ended December 31, 2005

(Amounts shown in thousands except share and per share data)


	2005			2004			2003
Revenue
Materials revenue	$	26,318		$	26,529		$	24,410
Materials revenue, related party		—			1,308			2,540
Construction revenue		32,669			14,657			12,249
Construction revenue, related party		6,665			10,394			4,855
Security revenue		18,515			943			—
Other revenue		701			184			—

Total revenue		84,868			54,015			44,054

Cost of Sales
Cost of Materials		(24,492	)		(23,257	)		(22,906	)
Cost of Construction		(36,909	)		(17,547	)		(15,254	)
Cost of Security		(8,044	)		(648	)		—
Cost of Other		(407	)		(156	)		—

Gross profit		15,016			12,407			5,894

Operating expenses
Selling, general and administrative		(26,085	)		(14,125	)		(9,526	)
Severance and retirement		(1,155	)		(1,664	)		(1,996	)
Impairment of assets		(4,066	)		(203	)		(2,859	)

Operating loss		(16,290	)		(3,585	)		(8,487	)

Other income (expense)
Joint venture equity earnings		340			71			107
Interest expense		(2,650	)		(164	)		(151	)
Interest income, receivables		500			2,631			2,445
Interest income, banks		316			266			167
Other income		861			—			306
Loss on early extinguishment of debt		(1,008	)		—			—
Gain on Antigua Note		804			10,970			—

(Loss) income from continuing operations before income taxes		(17,127	)		10,189			(5,613	)

Income tax benefit (expense)		220			(1,286	)		32


	2005			2004		2003
Net (loss) income from continuing operations	$	(16,907	)	$	8,903	$	(5,581	)

Income from discontinued operations, net of income taxes of $1,708, ($845), and $2,420 in 2005, 2004, and 2003 respectively		2,591			1,734		(3,036	)

Net (loss) income	$	(14,316	)	$	10,637	$	(8,617	)

Basic (loss) income per share:
Continuing operations	$	(2.86	)	$	2.04	$	(1.66	)

Discontinued operations	$	.44		$	.40	$	(.91	)

Net income	$	(2.42	)	$	2.44	$	(2.57	)

Diluted (loss) income per share:
Continuing operations	$	(2.86	)	$	1.75	$	(1.67	)

Discontinued operations	$	.44		$	.34	$	(.91	)

Net income	$	(2.42	)	$	2.09	$	(2.57	)

Weighted average number of shares outstanding:
Basic		5,904,043			4,363,476		3,351,817

Diluted		5,904,043			5,096,566		3,351,817

See accompanying notes to the consolidated financial statements

Consolidated Statements of Cash Flows

For Each of the Years in the Three-Year Period Ended December 31, 2005

(Amounts shown in thousands except share and per share data)


	2005			2004			2003
Cash flows from operating activities:
Net (Loss) income	$	(14,316	)	$	10,637		$	(8,617	)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain on settlement of note receivable		—			(5,956	)		—
Non-cash stock compensation		75			586			99
Compensation expense for warrants		—			390			—
Depreciation and amortization		10,494			5,035			5,354
Deferred income tax		(4,007	)		1,539			(368	)
Provision for doubtful accounts and notes		260			1,547			72
Impairment on long-lived assets		4,066			622			2,859
Gain on sale of property and equipment		(2,651	)		(219	)		(306	)
Minority interest in loss of consolidated subsidiaries		(57	)		1			—
Loss on early extinguisment of debt		(883	)		—			—
Loan origination cost, amortization		100			—			—
Joint Venture (earnings)		(340	)		(8	)		33

Changes in operating assets and liabilities:
Accounts receivable		(4,743	)		(723	)		(3,988	)
Accounts receivable – related party		578			(157	)		(327	)
Notes receivable		(1,868	)		(377	)		(765	)
Notes Receivable - related party		615			167			2,544
Costs and estimated earnings in excess of billings		(916	)		40			2,353
Costs and estimated earnings in excess of billings, related party		(20	)		—			(1,533	)
Inventories		1,598			534			976
Prepaid and other current assets		3,216			(2,245	)		39
Other long-term assets		(460	)		(1,531	)		402
Accounts payable, accrued expenses and other liabilities		5,956			4,545			2,196
Billings in excess of costs and estimated earnings		999			(201	)		405
Billings in excess of costs and estimated earnings, related party		(488	)		269			269
Income tax payable		(220	)		(1,869	)		2,695
Other long-term liabilities		1,036			(177	)		1,847

Net cash (used in) provided by operating activities		(1,976	)		12,449			6,239

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)


	2005			2004			2003
Cash flows from investing activities:
Purchases of property, plant and equipment	$	(8,833	)	$	(9,299	)	$	(2,638	)
Cash paid for leasehold improvement		(799	)		(463	)		(311	)
Cash used in business acquisitions, net of cash acquired		(91,623	)		(3,848	)		—
Proceeds from disposition of property, plant and equipment and customer lists		10,830			209			412
Issuance of notes related to the sale of assets		—			(759	)		(1,416	)
Payments received on notes related to the sale of assets		273			9,461			160
Investments in unconsolidated joint ventures		363			(5	)		(9	)

Net cash used in investing activities		(89,789	)		(4,704	)		(3,802	)

Cash flows from financing activities:
Proceeds from issuance of stock		1,652			18,159			142
Purchase of stock treasury		(234	)		(136	)		(1,563	)
Proceeds from debt		8,000			—			56
Principal payments on debt		(22	)		(58	)		(46	)
Principal payments on debt, related party		—			(345	)		—
Cash paid for debt issuance cost		(1,895	)		—			—
Net (repayment) borrowing, lines of credit		53,970			—			(11	)

Net cash provided by (used in) activities financing activity		61,471			17,620			(1,422	)
Effect of exchange rate changes on cash		—			(467	)		38

Net (decrease) increase in cash and cash equivalents		(30,294	)		24,898			1,053

Cash and cash equivalents, beginning of year		34,928			10,030			8,977

Cash and cash equivalents, end of year	$	4,634		$	34,928		$	10,030

Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,416		$	164		$	151
Cash paid for income taxes	$	696		$	307		$	71

Supplemental non-cash items:
Non-cash reduction of note receivable	$	458		$	484		$	488
Issuance of shares for acquisition	$	130			—			—

See accompanying notes to the consolidated financial statements

Consolidated Statements of Stockholders’ Equity and Comprehensive (Loss) Income

For Each of the Years in the Three-Year Period Ended December 31, 2005

(Amounts shown in thousands except share and per share data)


	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total
Balance at Dec. 31, 2002	$	359		$	9,705		$	47,418		$	(1,612	)	$	(845	)	$	55,025
Comprehensive income:
Net (loss)								(8,617	)								(8,617	)
Currency translation adjustment		—			—			—			464			—			464

Comprehensive income								(8,617	)		464						(8,153	)
Repurchase of 229,396 shares														(1,563	)		(1,563	)
Retirement of 264,696 shares		(27	)		(731	)		(1,061	)					1,818			(1	)
Earned compensation - stock options					99												99
Exercise of 56,600 stock options		6			136			—			—			—			142

Balance at Dec. 31, 2003	$	338		$	9,209		$	37,740		$	(1,148	)	$	(590	)	$	45,549

Comprehensive income:
Net income								10,637									10,637
Currency translation adjustment		—			—			—			(242	)		—			(242	)

Comprehensive income								10,637			(242	)					10,395
Issuance of 2,000,000 shares for cash		200			17,232												17,432
Issuance of 214,356 shares for acquisition		21			2,017												2,038
Repurchase of 8,247 shares														(135	)		(135	)
Retirement of 80,703 shares		(8	)		(348	)		(271	)					627			—
Exercise of 236,231 stock options		24			1,056			—			—			—			1,080
Expense for services		—			390			—			—			—			390
Issuance of Stock Options					234			—			—			—			234

Balance at Dec. 31, 2004	$	575		$	29,790		$	48,106		$	(1,390	)	$	(98	)	$	76,983
Comprehensive income:
Net (loss)		—			—			(14,316	)		—			—			(14,316	)
Currency translation adjustment		—			—			—			(502	)		—			(502	)
Comprehensive (loss)		—			—			(14,316	)		(502	)					(14,818	)
Issuance of 13,718 shares for acquisition		1			129			—			—			—			130
Repurchase of 17,300 shares		—			—			—			—			(235	)		(235	)
Retirement of 31,610 shares of treasury stock		(3	)		(164	)		(166	)		—			333			—
Exercise of 266,757 stock options		27			1,495			—			—			—			1,522
Expense for services		—			75			—			—			—			75

Balance at Dec 31, 2005	$	600		$	31,325		$	33,624		$	(1,892	)	$	—		$	63,657

See accompanying notes to consolidated financial statements

DEVCON INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(1)	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Devcon International Corp. and it subsidiaries (“the Company”) provides electronic security services and products to financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of government departments and health care and educational facilities. The Company also produces and distributes ready-mix concrete, crushed stone, sand, concrete block, and asphalt and distributes bagged cement in the Caribbean. The Company also performs earthmoving, excavating and filling operations, builds golf courses, roads, and utility infrastructures, dredges waterways and constructs deep-water piers and marinas in the Caribbean.

(b)

BASIS OF PRESENTATION

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 Company’s 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 Company’s 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.

(c)

REVENUE RECOGNITION

SECURITY DIVISION

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 subscriber’s 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.

MATERIALS DIVISION

Revenue is recognized when the products are delivered (FOB Destination), invoiced at a fixed price and the collectibility is reasonably assured.

CONSTRUCTION DIVISION

The Company uses the percentage-of-completion method of accounting for both financial statements and tax reports. Revenue is recorded based on the Company’s 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 Company’s 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.

(d)

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash, time deposits and highly liquid debt instruments with an original maturity of three months or less.

(e)

ACCOUNTS RECEIVABLE, NET

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.

(f)

NOTES RECEIVABLE

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 note’s effective interest rate.

(g)

INVENTORIES

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.

(h)

PROPERTY, PLANT AND EQUIPMENT

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:


Buildings	15	-	30 years
Leasehold improvements	3	-	30 years
Equipment	3	-	20 years
Furniture and fixtures	3	-	10 years

Depreciation expense was $5.4 million, $3.7 million and $3.8 million for 2005, 2004 and 2003 respectively, excluding discontinued operations.

(i)

IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF

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 Company’s 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 Company’s consolidated financial statements , an impairment charge of $4.1 million was recorded as a result of the strategic review.

(j)

GOODWILL AND OTHER INTANGIBLE ASSETS

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.

(k)

FOREIGN CURRENCY TRANSLATION

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.

(l)

(LOSS) INCOME PER SHARE

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.

(m)

INCOME TAXES

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.

(n)

USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates.

(o)

STOCK OPTION PLANS

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:


	2004		2003
Expected dividend yield	—		—
Expected price volatility	27.5	%	25.5	%
Risk-free interest rate	3.6	%	3.0	%
Expected life of options	5.5 years		5.3 years

Had the Company determined compensation cost based on fair value at the grant date for our stock options under SFAS 123, the Company’s net (loss) income would have been the pro forma amounts below:


	2005			2004			2003
Net (loss) income, as reported	$	(14,316	)	$	10,637		$	(8,617	)
Add total stock based employee Compensation expense included in reported net income, net of tax		75			25			—
Deduct total stock-based employee compensation expense determined under fair-value based method for all rewards, net of tax		(79	)		(186	)		(136	)

Pro forma net (loss) income	$	(14,320	)	$	10,476		$	(8,753	)
Basic (loss) income per share, as reported	$	(2.42	)	$	2.44		$	(2.57	)
Basic (loss) income per share, pro forma	$	(2.43	)	$	2.40		$	(2.61	)
Diluted (loss) income per share, as reported	$	(2.42	)	$	2.09		$	(2.57	)
Diluted (loss) income per share, pro forma	$	(2.43	)	$	2.06		$	(2.61	)

(p)

RECLASSIFICATIONS

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.

(q)

LEASES

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.

(2)

FAIR VALUE OF FINANCIAL INSTRUMENTS

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.

(3)

RECEIVABLES

Accounts receivable consist of the following:


	(dollars in thousands) December 31,
	2005			2004
Materials division trade accounts	$	3,302		$	7,183
Materials division trade accounts, related party		—			79
Construction division trade accounts receivable, including retainage		7,874			2,895
Construction division trade accounts, including retainage, related party		469			967
Security division trade accounts		4,186			308
Due from sellers and other receivables		3,750			282
Due from employees		248			246

		19,829			11,960
Allowance for doubtful accounts		(1,785	)		(2,785	)

Total accounts receivable, net	$	18,044		$	9,175


	(dollars in thousands)
	2005			2004			2003
Allowance for doubtful accounts:
Beginning balance	$	2,785		$	2,166		$	2,773
Allowance charged to operations, net		320			1,547			72
Allowance obtained through acquisitions		293			40			—
Direct write-downs charged to the allowance		(1,613	)		(968	)		(679	)

Ending balance	$	1,785		$	2,785		$	2,166

Recovery of previously written off receivables:	$	10		$	12		$	18

The Construction division’s 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:


	(dollars in thousands) December 31,
	2005		2004
Unsecured promissory notes receivable with varying terms and maturity dates through 2010, (interest rates between 7.0% and 12.0%)	$	584	$	627
Notes receivable with varying terms and maturity dates through 2013, secured by property or equipment, (interest rates between 8% and 11%)		1,044		1,244
10.0 % note receivable, due on demand, secured by first mortgage on real property		—		64
Unsecured promissory notes receivable bearing interest at 8.0 % with varying maturity dates through 2006, guaranteed by a director of the Company and various owners of debtor, related party		2,160		2,775
Unsecured promissory note receivable bearing interest at 5.0% due in installments through 2008		2,631		—
Unsecured promissory notes receivable bearing interest at 8.0% due in 2006		339		—
Unsecured notes receivable bearing interest at 1.0 % over the prime rate, due in monthly installments through 2005 (interest rates between 6.25% and 7.15%)		—		315
Unsecured note bearing interest a 2.0 % over the prime rate, due in monthly installments through 2006 (interest rates between 7.25% and 8.15%)		528		557
Antigua Government notes and bonds		—		1,123

Trade notes receivable	$	7,286	$	6,705

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 Company’s Antigua subsidiaries entered into an Agreement for Satisfaction of Indebtedness and Amendment No. 10 to St. John’s 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 Company’s subsidiaries in Antigua, resulting in an income tax benefit of $0.7 million related to the reversal of accruals for uncertain tax positions.

(4)

INVENTORIES

Inventories consist of the following:


	(dollars in thousands) December 31,
	2005		2004
Security Services Inventory – component parts	$	910	$	406
Security Services Work in Process		390		—
Aggregates and Sand		847		2,097
Block, Cement, and Material Supplies		530		821
Other		215		—

	$	2,892	$	3,324

(5)

INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES AND AFFILIATES

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.

(6)

INTANGIBLE ASSETS AND GOODWILL

Intangible assets and goodwill consists of the following as of December 31, 2005 and December 31, 2004:


	(dollars in thousands)
	Goodwill			Customer Lists and Relationships			Other			Total
Ending balance, December 31, 2003	$	—		$	—		$	—		$	—
Acquisition of businesses		1,115			3,823			637			5,575
Purchased from third parties		—			90			—			90
Less disposition of cancelled customer accounts		—			(106	)		—			(106	)

		1,115			3,807			637			5,559
Less accumulated amortization		—			(109	)		(15	)		(124	)

Ending balance, December 31, 2004		1,115			3,698			622			5,435
Acquisition of businesses		49,078			47,678			1,200			97,956
Purchase price adjustment		(1,298	)		(848	)		—			(2,146	)
Purchased from third parties		—			669			—			669
Less disposition of cancelled customer accounts		—			(1,551	)		—			(1,551	)
Less sale of customer accounts		(876	)		(955	)		—			(1,831	)

		48,019			48,691			1,822			98,532
Less accumulated amortization		—			(2,641	)		(98	)		(2,739	)
Ending balance, net, December 31, 2005	$	48,019		$	46,050		$	1,724		$	95,793

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 Company’s intangible assets.


	2005		2004		2003
	(Amount in years)
Goodwill	(a	)	(a	)	(a	)
Customer accounts	11.2		11.6		—
Other	3.8		4.6		—

Weighted average	11.0		11.3		—

(a)	Goodwill is not amortized but, along with all other intangible assets, is reviewed for possible impairment each year at June 30^th or when indicators of impairment exist.

The table below reflects the estimated aggregate customer account amortization for each of the five succeeding years on the Company’s existing customer account base as of December 31, 2005.


	(dollars in thousands)
	2006		2007		2008		2009		2010
Aggregate amortization expense	$	6,133	$	5,497	$	5,497	$	5,442	$	4,842

(7)

ACQUISITIONS

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 Limited’s 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:


Purchase Price Allocation	(dollars in thousands)
Accounts receivable	$	1,021
Inventory		276
Fixed Assets		313
Contractual agreements		6,460
Customer relationships		11,370
Deferred revenue		(2,192	)
Other liabilities		(487	)
Goodwill		21,904

Total Price Allocation	$	38,665

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:


Preliminary Purchase Price Allocation	(dollars in thousands)
Cash	$	214
Accounts receivable		1,596
Inventory		890
Other current assets		164
Net fixed assets		1,002
Contractual agreements		8,700
Customer relationships		20,300
Non compete agreement		1,200
Accounts payable		(582	)
Accrued wages		(603	)
Deferred revenue		(584	)
Deferred tax liability		(7,126	)
Other liabilities		(492	)
Goodwill		25,821

Total Price Allocation	$	50,500

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:


	(dollars in thousands) Twelve Months Ended December 31
	2005			2004		2003
Revenue	$	101,796		$	89,192	$	75,364
Net (loss) income from continuing operations	$	(13,955	)	$	12,235	$	(7,988	)

(Loss) income per common share - basic	$	(2.36	)	$	2.80	$	(2.38	)
(Loss) income per common share - diluted	$	(2.36	)	$	2.40	$	(2.38	)

Weighted average shares outstanding:
Basic		5,904,043			4,363,476		3,351,817
Diluted		5,904,043			5,096,566		3,351,817

(8)

DEBT

Debt consists of the following:


	(dollars in thousands) December 31,
	2005		2004
Installment notes payable in monthly installments through 2008, bearing interest at a weighted average rate of 6.7 % and secured by equipment with a carrying value of approximately $250,000	$	91	$	112
Secured note payable due November 9, 2008, bearing interest at the LIBOR rate plus a margin ranging from 3.25% to 5.75%		54,967		—
Secured note payable due March 10, 2006, bearing interest at the prime interest rate, 7.0% at December 31, 2005		8,000		—
Unsecured note payable to the Company’s former Chairman, due October 1, 2006, bearing interest at the prime interest rate (7.00% at December 31, 2005)		1,725		1,725
Unsecured notes payable due through 2011, bearing interest at a rate of 7.0 %		532		532

Total debt outstanding	$	65,315	$	2,369

Total current maturities on long-term debt	$	9,794	$	1,805

Total long-term debt excluding current maturities	$	55,521	$	564

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 division’s ability to, among other things:

•

incur more debt;

•

pay dividends, redeem or repurchase stock or make other distributions or impair the ability of any subsidiary to make such payments to the borrower;

•

make acquisitions or investments;

•

revise existing capital structure or principal line of business;

•

use assets as security in other transactions;

•

enter into transactions with affiliates (including extending loans to employees);

•

engage in any sale-leaseback or synthetic lease transaction;

•

impair the terms of any material contract;

•

merge or consolidate with others;

•

dispose of assets or use asset sale proceeds;

•

guarantee obligations of another;

•

create liens on our assets; and

•

extend credit.

Also, the notes contain a number of covenants imposing restrictions on the Company’s 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 Company’s 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 Company’s 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:


2005	$	9,794
2006		12
2007		54,977
2008		—
2009		—
Thereafter		532

	$	65,315

(9)

COMMON STOCK

The following table sets forth the computation of basic and diluted share data:


	2005		2004		2003
Weighted average number of shares outstanding – basic	5,904,043		4,363,476		3,351,817
Effect of dilutive securities:
Options and Warrants	—		733,090		—

Weighted average number of shares outstanding – diluted	5,904,043		5,096,566		3,351,817

Options and Warrants not included above (anti-dilutive)	1,053,000		1,010,000		285,852

Shares outstanding:
Beginning outstanding shares	5,738,713		3,296,373		3,469,169
Repurchase of shares	(17,300	)	(8,247	)	(229,396	)
Issuance of shares	280,475		2,450,587		56,600

Ending outstanding shares	6,001,888		5,738,713		3,296,373

(10)

STOCK OPTION PLANS

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 plan’s full text was filed with the Company’s 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 Company’s 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 director’s 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:


	Employee Plans				Directors’ Plan
	Shares		Weighted Avg. Exercise Price		Shares		Weighted Avg. Exercise Price
Balance at December 31, 2002	759,195		$	3.67	34,000		$	5.98
Granted	93,000		$	6.79	—		$	—
Exercised	(51,600	)	$	2.41	(5,000	)	$	3.47
Expired	(18,000	)	$	6.18	(10,000	)	$	7.61

Balance at December 31, 2003	782,595		$	4.07	19,000		$	5.78
Granted	174,000		$	9.85	—		$	—
Exercised	(237,231	)	$	3.25	—		$	—
Expired	(2,800	)	$	1.50	(11,000	)	$	3.17

Balance at December 31, 2004	716,564		$	5.11	8,000		$	9.38
Granted	—		$	—	—		$	—
Exercised	(266,754	)	$	5.70	—		$	—
Expired	(13,000	)	$	7.58	—		$	—

Balance at December 31, 2005	436,810		$	5.68	8,000		$	9.38

Available for future grant	5,000

Weighted average information:


Price Range	Number Of Shares Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Life	Number Of Shares Exercisable	Weighted Average Exercise Price
$1.50-$2.94	206,925	$	2.01	6.1	184,550	$	1.97
$5.70-$7.00	61,885		6.51	7.1	44,325		6.48
$8.01-$9.38	123,000		8.64	7.5	41,667		8.76
$12.00-$15.83	53,000		12.72	8.6	33,000		12.23

Total	444,810	$	5.75	6.9	303,542	$	4.68

(11)

WARRANT ISSUANCE

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 Company’s 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.

(12)

INCOME TAXES

Income tax (benefit) expense consists of:


	(dollars in thousands)
	Current			Deferred			Total
2005:
Federal	$	(1,495	)	$	(4,120	)	$	(5,615	)
Foreign		5,395			—			5,395

	$	3,900		$	(4,120	)	$	(220	)
2004:
Federal	$	1,008		$	1,792		$	2,800
Foreign		(905	)		(609	)		(1,514	)

	$	103		$	1,183		$	1,286
2003:
Federal	$	215		$	(326	)	$	(111	)
Foreign		121			(42	)		79

	$	336		$	(368	)	$	(32	)

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:


	(dollars in thousands) December 31,
	2005			2004			2003
Computed “expected”
Tax (benefit) expense	$	(5,823	)	$	3,464		$	(1,909	)
Increase (reduction) in income taxes resulting from:
Repatriation of foreign income		2,890			5,270			2,118
Tax incentives of foreign subs		(2,811	)		(3,731	)		(646	)
Net operating loss not utilized		—			—			49
Change in deferred tax valuation allowance		1,494			(1,207	)		1,111
Additional foreign taxes		5,119			(799	)		(451	)
Differences in effective rate in foreign jurisdiction and other		(1,089	)		(1,711	)		(304	)

	$	(220	)	$	1,286		$	(32	)

Significant portions of the deferred tax assets and liabilities results from the tax effects of temporary difference:


	(dollars in thousands) December 31,
	2005			2004
Deferred tax assets:
Plant and equipment, principally due to differences in depreciation and capitalized Interest	$	182		$	157
Net operating loss carry-forwards		7,245			8,522
Foreign tax credit		3,134			—
Compensation		1,614			1,414
Estimated losses on construction projects		506			—
Reserves and other		69			2,448

Total gross deferred tax assets		12,750			12,541

Less valuation allowance		(9,875	)		(8,522	)

Net deferred tax assets		2,875			4,019

Deferred tax liabilities:
Intangible assets, principally due to purchase valuation of customer lists		(6,206	)		(264	)
Dividend distribution		—			(4,080	)

Total gross deferred tax liabilities		(6,206	)		(4,344	)

Net deferred tax asset (Liability)	$	(3,331	)	$	(325	)

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 Company’s 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.

(13)

FOREIGN SUBSIDIARIES

Combined financial information for the Company’s foreign Caribbean subsidiaries, except for those located in the U.S. Virgin Islands and Puerto Rico, are summarized as follows:


	(dollars in thousands) December 31,
	2005		2004
Current assets	$	14,645	$	30,490
Advances (from) to the Company		292		(522	)
Property, plant and equipment, net		14,897		16,880
Investments in joint ventures and affiliates, net		123		1,623
Notes receivable		4,078		2,905
Other assets		1,353		1,748

Total assets	$	35,388	$	53,124

Current liabilities	$	6,077	$	5,138
Long-term liabilities		3,304		1,599
Equity		26,007		46,387

Total liabilities and equity	$	35,388	$	53,124


	(dollars in thousands) December 31,
	2005		2004		2003
Revenue	$	59,647	$	41,246	$	32,292
Income before income taxes		3,090		15,643		426
Net income		2,798		15,037		165

(14)

LEASE COMMITMENTS

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:


	(dollars in thousands)
Years ending December 31,	Property		Vehicles and Equipment		Total
2006	$	1,295	$	510	$	1,805
2007		1,045		445		1,490
2008		847		444		1,291
2009		759		132		891
2010		621		12		633
Thereafter		2,101		—		2,101

Total Minimum lease payments	$	6,668	$	1,543	$	8,211

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.

(15)

SEGMENT REPORTING

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.


	(dollars in thousands) December 31,
	2005			2004			2003
Revenue (including inter-segment):
Construction	$	39,776		$	25,672		$	17,997
Material		26,496			28,352			26,811
Security		18,515			943			—
Other		862			184			—
Elimination of inter-segment revenue		(781	)		(1,136	)		(754	)

Total	$	84,868		$	54,015		$	44,054

Interest Expense:
Construction	$	(3	)	$	(22	)	$	—
Material		(41	)		(50	)		(56	)
Security		(2,455	)		—			—
Other		(151	)		(92	)		(95	)

Total	$	(2,650	)	$	(164	)		(151	)

Operating (loss), as revised:
Construction	$	(2,916	)	$	4,593		$	(467	)
Material		(6,947	)		(3,593	)		(5,258	)
Security		(771	)		(108	)		—
Other		(111	)		(56	)		(100	)
Unallocated corporate overhead		(5,545	)		(4,421	)		(2,662	)

Total	$	(16,290	)	$	(3,585	)	$	(8,487	)

Other income, net		(837	)		13,774			2,874

Income (Loss) before taxes	$	(17,127	)	$	10,189		$	(5,613	)

Total Assets:
Construction	$	30,861		$	19,683		$	14,266
Material		14,544			50,565			38,149
Security		114,483			6,654			—
Other		5,579			24,763			12,004

Total	$	165,467		$	101,665		$	64,419

Depreciation and amortization:
Construction	$	2,281		$	1,635		$	1,582
Material		2,646			3,111			3,772
Security		4,498			244			—
Discontinued		809			—			—
Other		260			45			—

Total	$	10,494		$	5,035		$	5,354


	(dollars in thousands) December 31,
	2005		2004		2003
Capital expenditures:
Construction	$	5,698	$	5,208	$	1,407
Material		2,216		3,163		1,412
Security		346		7		—
Other		1,373		1,384		130

Total	$	9,633	$	9,762	$	2,949

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 entity’s 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.


	(dollars in thousands) December 31,
	2005		2004		2003
Revenue by geographic areas:
U.S. and its territories	$	25,221	$	8,519	$	6,699
Netherlands Antilles		12,938		9,967		10,128
Antigua and Barbuda		12,921		10,810		14,323
French West Indies		6,853		6,131		5,828
Bahamas		26,917		16,866		6,985
Other foreign areas		18		1,722		91

Total	$	84,868	$	54,015	$	44,054

Property, plant and equipment, net, by geographic areas:
U.S. and its territories	$	6,840	$	10,948	$	15,281
Netherlands Antilles		297		1,199		145
Antigua and Barbuda		8,794		8,314		6,133
French West Indies		391		1,635		2,389
Bahamas		5,414		5,649		1
Other foreign areas		—		—		—

Total	$	21,736	$	27,745	$	23,949

(16)

RELATED PARTY TRANSACTIONS

The Company’s 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 entity’s managing committee.

•

As of January 1, 2003, the Company entered into a payment deferral agreement with the resort project whereby several notes, which are guaranteed partly by certain owners of the project, evidenced a loan totaling $2.0 million owed to the Company. Mr. Donald Smith, Jr. issued a personal guarantee for the total amount due under this loan agreement to the Company. The balance of the loan payable to the Company as of March 31, 2006, including accrued interest, is $1.7 million.

•

The Company has entered into construction contracts with the resort project. In late 2004, the Company entered into a $15.2 million contract, which contract has been increased to $15.9 million, to construct a marina and breakwater for the same entity. The resort project secured third party financing for this latter contract. The Company entered into a vertical construction contract with another entity for $3.0 million during the second quarter of 2005. Mr. Smith is a partner of this entity. In connection with currently active contracts on the project, the Company recorded revenues of $6.2 million for 2005. As of December 31, 2005, the marina and breakwater contract was substantially complete.

•

The outstanding balance of trade receivables from the resort project was $0.3 and $1.0 million as of December 31, 2005 and December 31, 2004, respectively. The outstanding balance of note receivables was $2.2 and $2.8 million as of December 31, 2005, and December 31, 2004, respectively. The Company has recorded interest income of $216,202, $206,491 and $158,840 for the years ended December 31, 2005, 2004 and 2003, respectively. The billings in excess of cost were $50,922 and $538,451 as of December 31, 2005 and December 31, 2004, respectively. Mr. Smith has guaranteed the payment of the receivables from the entity, up to a maximum of $3.0 million, including the deferral agreement described above.

•

In the second quarter of 2005, the Company entered into a construction contract to build a $3.0 million residence on Lot 22 of the resort project whereby certain investors in the entity owning and managing the resort provide the funding for the construction of the residence. At December 31, 2005, the company recorded revenue of $0.4 million with backlog of $2.5 million in connection with this project. On December 31, 2005, the receivable balance attributable to this job was $0.2 million and the costs in excess billings and estimated earnings was $20,247.

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 Company’s 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 venture’s 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 Company’s 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 Company’s directors, are principals of Coconut Palm and Royal Palm. Robert Farenhem is a principal of Royal Palm and was the Company’s 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 Company’s 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 Company’s 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 O’Rourke 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.

(17)

EMPLOYEE BENEFIT PLANS

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 employee’s salary. Company contributions totaled $267,499, $173,994 and $133,872 in 2005, 2004 and 2003, respectively.

(18)

COSTS AND ESTIMATED EARNINGS ON CONTRACTS

Included in the accompanying consolidated balance sheets under the following captions:


	(dollars in thousands) December 31,
	2005			2004
Costs and estimated earnings in excess of billings	$	2,066		$	1,130
Billings in excess of costs and estimated earnings		(1,256	)		(744	)

	$	810		$	386

Costs incurred on uncompleted contracts	$	38,940		$	15,590
Costs incurred on completed contracts		13,283			38,756
Estimated earnings		11,410			12,878

		63,633			67,224
Less: Billings to date		62,823			66,838

	$	810		$	386

(19)

COMMITMENTS AND CONTINGENCIES

During the second quarter 2002, the Company issued a construction contract performance guarantee together with one of the Company’s 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 Company’s 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:

•

The purchase by SCGC of three hectares of partially mined land located within the quarry property previously leased from Petit (the “Three Hectare Parcel”) for approximately $1.1 million, the purchase of which was settled in February 2005;

•

A two-year lease of approximately 15 hectares of land (the “15 Hectare Lease”) on which SCGC operates a crusher, ready-mix concrete plant and aggregates storage at a cost of $100,000, which arrangement was entered into February 2005;

•

The granting of an option to SCGC to purchase two hectares of unmined property prior to December 31, 2006 for $2.0 million, with $1.0 million on December 31, 2006 and $1.0 million payable on December 31, 2008, subject to the below terms:

•

In the event that SCGC exercises this option, Petit agrees to withdraw all legal actions against the Company and its subsidiaries.

•

In the event that SCGC does not exercise the option to purchase and Petit is subsequently awarded a judgment, SCGC has the option to offset approximately $1.2 million against the judgment amount and transfer ownership of the Three Hectare Parcel purchased by SCGC back to Petit.

•

The granting of an option to SCGC to purchase five hectares of unmined land prior to June 30, 2010 for $3.6 million, payable $1.8 million on June 30, 2010 and $1.8 million on June 30, 2012; and

•

The granting of an option to SCGC to extend the 15 Hectare Lease through December 31, 2008 (with annual rent of $55,000) if the two hectares are purchased and subsequent extensions of the lease (with annual rent of $65,000) equal to the terms of mining authorizations obtained from the French Government agencies.

After conferring with its French counsel and upon review by management, the Company believes that it has valid defenses and offsets to Petit’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s stock in DSH. Subsequently, in connection with the March 2006 acquisition of Guardian, the Company increased the facility with CapitalSource to $100 million.

(20)

BUSINESS AND CREDIT CONCENTRATIONS

For the construction and materials divisions, the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.

(21)

RETIREMENT AND SEVERANCE BENEFITS

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:


	(dollars in thousands)
2006	$	513
2007		498
2008		487
2009		476
2010		476


	(dollars in thousands)
	US Pension						Foreign Pension
	2005			2004			2005			2004
Weighted avg. discount rate		4.31	%		4.34	%		5.0	%		8.0	%
Expected return on plan assets		N/A			N/A			N/A			N/A
Rate of compensation increase		0.0	%		0.0	%		3.0	%		3.0	%
Service cost	$	98		$	101		$	61		$	44
Net pension costs	$	370		$	481		$	272		$	571

(22)

IMPAIRMENT OF LONG LIVED ASSETS

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.


Description of Cash Flow Unit	(dollars in thousands) Impairment Charge
Quarry, aggregate and concrete block operations - St. Martin	$	1,782
Construction operations		1,140
Quarry and Aggregate operations - Puerto Rico		1,009
DevMat joint venture operations		135
Total Impairment Charge	$	4,066

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 Company’s

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 3^rd 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 buyer’s 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 buyer’s 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 DevMat’s 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 Company’s 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:


	(dollars in thousands) 2003
St. Martin crusher & concrete operations	$	2,119
Sint Maarten block plant		232
Aguadilla crusher plant		438
Other assets		70

Total	$	2,859

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, management’s 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.

(23)

DISCONTINUED OPERATIONS

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 Company’s discontinued operations is as follows:


	(dollars in thousands) Period Ending December 31,
	2005			2004		2003
Total revenue	$	14,020		$	15,142	$	11,259

Pre-tax income from discontinued operations		1,997			889		(616	)
Pre-tax gain on disposal of discontinued operations		2,302			—		—

Income before tax		4,299			889		(616	)
Income tax (provision) benefit		(1,708	)		845		(2,420	)

Income from discontinued operations, net of income taxes	$	2,591		$	1,734	$	(3,036	)

A summary of the total assets of discontinued operations included in Other Current Assets is as follows:


	(dollars in thousands) December 31, 2004
Accounts receivable, net of allowance	$	1,515
Inventory		1,285
Property and equipment, net		6,883

Total Assets	$	9,683

(24)

SELECTED QUARTERLY DATA (Unaudited)


	(Amounts shown in thousands except share and per share data information)
	2005 Quarters												2004 Quarters
	1st			2nd			3rd			4th			1st			2nd		3rd		4th
Revenue	$	18,214		$	22,474		$	20,070		$	24,110		$	10,945		$	11,552	$	15,664	$	15,855
Gross Margin		4, 249			4,497			1,207			5,063			2,749			3,139		3,884		2,634
(Loss) income from:
Continuing operations		(2,428	)		(1,373	)		(3,239	)		(9,865	)		(61	)		328		2759	$	5877
Discontinued operations		865			953			1,455			(682	)		195			294		838		407
Net (loss) income		(1,564	)		(420	)		(1,784	)		(10,547	)		134			622		3,597		6,284

Net (Loss) income per common share Basic:
Continuing operations	$	(0.42	)	$	(0.23	)	$	(0.54	)	$	(1.64	)	$	(0.02	)	$	0.09	$	0.55	$	1.03
Discontinuing operations		0.15			0.16			0.24			(0.11	)		0.06			0.08		0.17		0.07
Net (Loss)		(0.27	)		(0.07	)		(0.30	)		(1.76	)		0.04			0.18		0.72		1.10

Net (Loss) income per common share diluted:
Continuing operations	$	(0.42	)	$	(0.23	)	$	(0.54	)	$	(1.64	)	$	(0.02	)	$	0.09	$	0.46	$	0.84
Discontinuing operations		0.15			0.16			0.24			(0.11	)		0.06			0.07		0.14		0.06
Net (Loss)		(0.27	)		(0.07	)		(0.30	)		(1.76	)		0.04			0.16		0.60		0.94

Stock Price:
High	$	17.49		$	14.96		$	15.35		$	11.57		$	10.10		$	14.75	$	18.80	$	16.95
Low		13.55			10.30			10.25			8.85			6.33			8.26		11.40		12.86

(25)

SUBSEQUENT EVENTS

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 Guardian’s 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, Guardian’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s Board of Directors. The Company has since been notified that Mr. Cunningham meets Nasdaq’s 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 O’Rourke, 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 AMP’s 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 PRCC’s assets to Mr. Criado, the Company had performed an analysis of PRCC Long-Lived assets for possible impairment in accordance with the Company’s 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 Company’s 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 PRCC’s assets was $1.0 million.

PART IV

Item 15. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K

Part IV of the Company’s 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.

(3)

Exhibits.


Exhibit Number		Description

23.1		Consent of KPMG LLP (1)

31.1		Chief Executive Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

31.2		Chief Financial Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

32.1		Chief Executive Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

32.2		Chief Financial Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

(1)	Filed herewith

SIGNATURE

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.


Date: April 12, 2007	DEVCON INTERNATIONAL CORP.

	By:	/s/ Richard Rochon
		Richard Rochon, Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Robert C. Farenhem
		Robert C. Farenhem, Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT SCHEDULE


Exhibit Number		Description

23.1		Consent of KPMG LLP (1)

31.1		Chief Executive Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

31.2		Interim Chief Financial Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

32.1		Chief Executive Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

32.2		Interim Chief Financial Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

(1)	Filed herewith