DEVC Devcon Intl Corp (MM)

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2007

(1) INTERIM FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements include the accounts of Devcon International Corp. and its subsidiaries (the “Company”), required to be consolidated in accordance with U.S. generally accepted accounting principles (GAAP). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the 2006 Annual Report on Form 10-K/A except for the accounting policy relating to accounting for uncertainty in income taxes, and should be read in conjunction with the consolidated financial statements and notes thereto.

The unaudited condensed consolidated financial statements for the nine months ended September 30, 2007 and 2006 included herein have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain only normal reoccurring adjustments necessary to present fairly the Company’s financial position as of September 30, 2007, and the results of its operations and cash flows for the three months ended September 30, 2007 and 2006, and the nine months ended September 30, 2007 and 2006.

Certain prior year amounts have been restated or reclassified to conform to the current period presentation.

Background of Restatement

During the fourth quarter of 2007, the Company will be filing an amendment to its Form 10-K/A for the year ended December 31, 2006 and its Form 10Q for the three months ended March 31, 2007 and the six months ended June 30, 2007. The Company is in the process of reviewing the fair market valuation and accounting treatment of certain derivative liabilities as well as the carrying value of the related Series A Convertible Preferred Stock, par value $.10 (“Preferred Stock”). The substantive changes to be reflected in such amendments will be (1) the re-valuation of the derivative liability 2) adjustment to the carrying value of the Preferred Stock and 3) reclassification of Preferred Stock dividends payable and accretion charges to net loss available for common shareholders.

Valuation of Derivative Liability

On October 20, 2006, pursuant to the terms of the Securities Purchase Agreement, as amended (“SPA”), the private placement investors received, in exchange for the Notes, an aggregate of 45,000 shares of Preferred Stock, par value $.10 per share, with a liquidation preference equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share. Upon the issuance of the Preferred Stock, the following embedded derivatives were identified within the Preferred Stock: i) the ability to convert the Preferred Stock for common stock; ii) the option of the Company to satisfy dividends payable on the Preferred Stock in common stock in lieu of cash; iii) the potential increase in the dividend rate of the Preferred Stock in the event a certain level of net cash proceeds from the sale of the construction and material division assets are not realized within a specified time frame (referred to as the legacy asset rate adjustment) and (iv) a change in control redemption right. The embedded derivatives within the Preferred Stock were bifurcated and valued as a single compound derivative liability at $5.8 million at the date of issuance. Upon further review it was concluded that the valuation model used did not properly address a capping feature in the conversion option. Using a binomial model it was concluded that the embedded derivatives within the Preferred Stock that were bifurcated should have been valued at $0.5 million. At December 31, 2006, this adjustment impacted the carrying value of the Preferred Stock, as well as interest expense.

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Reclassification of Dividends Payable and Accretion Charges

The Preferred Stock accrues dividends in accordance with the SPA. The dividends accrued for the three and six months ended March 31, 2007 and June 30, 2007 were incorrectly charged to interest expense instead of deducted from net loss available for common stockholders in accordance with FASB Statement No. 128, Earnings per Share. The accretion of the discount on the Preferred Stock was also incorrectly charged to interest expense instead of deducted from net loss available for common stockholders. In addition, issuance expenses related to preferred stock with redemption features that are not classified as liabilities in accordance with FASB Statement No. 150, Financial Instruments with Characteristics of Both Liabilities and Equity, should be deducted from such preferred stock or from additional paid-in capital arising in connection with the sale of the stock. The accretion should be charged to retained earnings (unless declared out of paid-in capital). Therefore, the amortization of the issuance costs related to the Preferred Stock was reclassified from interest expense and deducted from net loss available for common stockholders. These amounts have been properly presented for the three and nine months ended September 30, 2007.

The effect of the foregoing on the Company’s consolidated balance sheet at December 31, 2006 is expected to be as follows (000s):

Certain balance sheet amounts at December 31, 2006 have been restated to reflect the effect of the foregoing.

(2) SIGNIFICANT ACCOUNTING POLICIES

Income Taxes

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes” and FSP FIN 48-1, which amended certain provisions of FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that the Company determine whether the benefits of the Company’s tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. The provisions of FIN 48 also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. In connection with our adoption of FIN No. 48, we analyzed the filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. There was no impact on our condensed consolidated financial statements upon adoption of FIN No. 48 on January 1, 2007. The Company did not have any unrecognized tax benefits and there was no effect on the financial condition or results of operations for the three and nine months ended September 30, 2007 as a result of implementing FIN 48, or FSP FIN 48-1. In accordance with FIN 48, the Company adopted the policy of recognizing penalties in selling, general and administrative expenses and interest, if any, related to unrecognized tax positions as income tax expense.

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Capitalized Software

The Company accounts for internal-use software development costs in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position 98-1, “Accounting for the Cost of Software Developed or Obtained for Internal Use,” or SOP 98-1. SOP 98-1 specifies that software costs, including internal payroll costs, incurred in connection with the development or acquisition of software for internal use is charged to technology development expense as incurred until the project enters the application development phase. Costs incurred in the application development phase are capitalized and will be depreciated using the straight-line method over an estimated useful life of three years, beginning when the software is ready for use. During the three and the nine months ended September 30, 2007 and 2006, the amounts capitalized were insignificant.

(3) RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measures.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption of SFAS No. 157 will have on its future consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for the Company on January 1, 2008. The Company is evaluating the impact that the adoption of SFAS No. 159 will have on its future results of operations and financial position.

(4) LIQUIDITY

On April 2, 2007, effective as of March 30, 2007, Devcon International Corp., entered into certain Forbearance and Amendment Agreements (the “Forbearance Agreements”) with each of certain institutional investors (the “Required Holders”) holding, in the aggregate, a majority of the Company’s previously-issued Preferred Stock. The intent of the Forbearance Agreements was to amend certain terms of the Preferred Stock. On June 29, 2007, the Company’s shareholders approved the Amended Certificate of Designations at the Company’s annual shareholder meeting. The Company filed the Amended Certificate of Designations and an amended and restated Registration Stock Rights Agreement with the Secretary of State of Florida on July 13, 2007, effective as of such date (“Closing Date”). The Amended SPA contains terms similar to the original SPA entered into among the parties on February 10, 2006, except that one holder agreed to sell back to the Company warrants to purchase 1,284,067 shares of the Company’s common stock, and the parties thereto acknowledged and agreed that the Company’s dividend payment obligations with respect to the Preferred Stock accruing prior to the Closing Date of the Amended SPA have been satisfied by adding such dividends to the Stated Value of the shares of Preferred Stock. Thus, the Company now has the option of paying the dividends in kind and not to deplete cash resources for these dividend payments. At September 30, 2007, approximately $2.9 million of dividends accrued were paid-in-kind and reclassified to the carrying value of the Preferred Stock. In addition, each of the parties to the Amended SPA waived certain Triggering Events (as defined in the Certificate of Designations) that may have occurred prior to the Closing Date, certain rights to receive Registration Delay Payments and certain other provisions set forth in the governing documents.

On April 3, 2007, an institutional investor who held shares of the Company’s Preferred Stock, but was not a party to the Forbearance Agreements, transmitted a notice of redemption to the Company alleging the Company failed to timely pay certain Registration Delay Payments constituting a Triggering Event which gave such investor the right to require the Company to redeem all shares of Preferred Stock held by such investor. The Company disagreed with this investor. The investor held shares of the Company’s Preferred Stock with a face value equal to $7.0 million. On April 25, 2007, this investor filed a lawsuit in the United States District Court for the Southern District of New York. The Company did not believe that a liability for any registration delay payments in accordance with the Registration Rights Agreement was warranted.

On September 25, 2007, certain subsidiaries (the “Borrowers”) of the Company entered into a Consent and Fifth Amendment (the “Fifth Amendment”) with CapitalSource Finance LLC (“CapitalSource”). The Fifth Amendment to the Credit Agreement dated as of November 10, 2005, as amended, increased the total commitment to $105.0 million from $100.0 million (with the borrowers having the ability to increase this commitment further to $125.0 million), extended the maturity date of the Credit Agreement to September 25, 2010, and adjusted the interest rate and certain financial and other covenants provided therein.

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The proceeds from the Credit Agreement were used to partially fund the redemption of certain shares of the Company’s Preferred Stock in connection with settlement arrangements the Company had entered into to settle all claims set forth in the lawsuit (the “Lawsuit”) previously disclosed under the caption “Preferred Stockholder” in “Item 3—Legal Proceedings” of the Company’s Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 30, 2007. On September 28, 2007, the total amount paid by the Company upon redemption of the shares was $7.4 million, which included accrued dividends since January 1, 2007. (See Note 7-Debt).

(5) ACQUISITIONS

On March 6, 2006, the Company completed the acquisition of Guardian International, Inc. (“Guardian”) 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, excluding transaction costs of $1.7 million. This purchase price consisted of (i) approximately $24.6 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 consideration, approximately $3.3 million, was placed in escrow. Subject to reconciliation based upon RMR and net working capital levels as of closing and subject to other possible adjustments, Guardian common shareholders received a partial pro-rata distribution from escrow in July 2006, with the balance pending resolution of certain specific income tax matters. In September 2007, the income tax matters were resolved and the remaining balance in escrow of $0.3 million was distributed to the Guardian common shareholders.

In order to finance the acquisition of Guardian, the Company increased the amount of cash available under its 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 notes and warrants, to purchase Guardian and repay the $8 million CapitalSource Bridge Loan. The Company issued to certain investors, under the terms of the SPA dated as of February 10, 2006, an aggregate principal amount of $45 million of notes. On October 20, 2006, the notes were exchanged for Preferred Stock (See Note 9-Preferred Stock).

The Company recorded the acquisition using the purchase method of accounting. The purchase price allocation is based upon a valuation study as to fair value. Additionally, the purchase price allocation reflects adjustments since the acquisition date resulting from information subsequently obtained to complete an estimate of the fair value of the acquired assets and liabilities. Through September 30, 2007, the net effect of those adjustments was $2.9 million of additional value allocated to goodwill, primarily related to the estimated value of deferred tax liabilities. The 2006 results of operations included for the acquisition are for the period March 6, 2006 to September 30, 2006, as compared to results of operations for the nine months ended September 30, 2007.

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The purchase price allocation was as follows:

Purchase Price Allocation-Guardian

Acquired deferred revenue results from customers who are billed for monitoring and maintenance services in advance of the period in which the services are provided, on a monthly, quarterly or annual basis. This deferred revenue would be recognized as monitoring and maintenance services are provided pursuant to the terms of subscriber contracts.

The following table shows the proforma consolidated results of the Company and Guardian, as though the Company had completed this acquisition at the beginning of the 2006 fiscal year:

Proforma Statement of Acquisition

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(6) DISCONTINUED OPERATIONS

On March 30, 2007, the Company’s Board of Directors passed a resolution which authorized management to sell the remaining assets of the Construction, Materials and Utilities Divisions upon such terms and conditions, including price, as management determined to be appropriate. The Board resolution provided the Company’s management with the authority and commitment to establish a plan to sell these assets, some of which have been sold with the remaining assets being immediately available for sale. The Company is seeking to identify potential buyers which we expect to finalize within one year of the date of the board resolution. Therefore, in accordance with FASB No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets (“FASB No. 144”)”, as of September 30, 2007, the Company has classified the related assets as held for sale and the related operations have been treated as discontinued operations for all periods presented.

On March 21, 2007, the Company completed the transactions contemplated by a certain Asset Purchase Agreement, dated as of March 12, 2007 (“Asset Purchase Agreement”), by and between the Company and BitMar Ltd., a Turks and Caicos corporation and successor-in-interest to Tiger Oil, Inc., a Florida corporation (“Purchaser”), consisting of the sale of fixed assets, inventory and customer lists constituting a majority of the assets of the Company’s construction division (“Construction Division”), for approximately $5.3 million, subject to a holdback of $525,000 to be retained for resolution of certain indemnification matters in the form of a non-negotiable promissory note bearing a term of 120 days. As of September 30, 2007, the promissory note was applied to reduce amounts the Company owed to the Purchaser. The Company retained working capital of $8.0 million, including approximately $1.7 million in notes receivable, as of March 31, 2007. The majority of the Company’s leasehold interests were retained by the Company with the Purchaser assuming only the Company’s shop location at Southwest 10th Street, Deerfield Beach, Florida and entering into a 90-day sublease of the headquarters of the Construction Division located at 1350 East Newport Center Drive in Deerfield Beach, Florida. As of June 27, 2007, the Company has entered into an extended sublease agreement beyond the original 90 day period with the Purchaser. In addition, the Company entered into a three-year noncompetition agreement under the terms of which the Company agreed not to engage in business competitive with that of the Construction Division in any country, territory or other area bordering the Caribbean Sea and the Atlantic Ocean (“Territory”), excluding any production and distribution of ready-mix concrete, crushed stone, sand, concrete block, asphalt and bagged cement throughout the Territory and also agreed to other standard provisions concerning the non-solicitation of customers and employees of the Construction Division. In addition, Seller and Purchaser entered into a Transition Services Agreement under the terms of which, Seller agreed to make available certain of Seller’s employees and independent contractors and other non-employees to assist Purchaser with the operation of the Construction Division through September 16, 2007. As of September 30, 2007, the Transition Services Agreement has been informally extended between the parties.

As a result of this transaction, in the fourth quarter of 2006, the Company recognized an impairment charge on the construction assets of approximately $2.8 million. An additional loss on the sale of these assets of $261,828 was recorded during the nine months ended September 30, 2007 upon final transfer of assets to the Purchaser. The Company established an accrued liability of $201,659 for the Deerfield lease in accordance with FASB No. 146 “Accounting for Costs Associated with Exit or Disposal Activities (“FASB No. 146”).” At September 30, 2007, the related unpaid balance was $177,678. This accrued liability is included in other long term liabilities in the accompanying condensed consolidated balance sheet and charged to discontinued operations. The Company also accrued employee severance and retention costs in accordance with FASB No. 146. This amounted to $759,742 and the severance portion was included in accrued expense, retirement and severance and the payroll related benefits were included in accrued expenses and other liabilities. All of these amounts were charged to discontinued operations. During the three months ended September 30, 2007, the Company accrued an additional $391,000 which comprised of costs associated with additional contingencies, unanticipated jurisdictional employment requirements, and costs associated with closure of certain plant facilities. For the nine months ended September 30, 2007, the Company made payments of $1,106,003 related to these charges. At September 30, 2007, the related unpaid severance balance amounted to $50,305.

As of February 28, 2007 the Purchaser assumed performance of the contracts transferred pursuant to the sale agreement, (i.e., all rights, benefits, duties and obligations for work performed after this date become the responsibility of the Purchaser). The Company will continue to recognize revenue of these contracts during this interim period. In these cases the Purchaser will be performing as a subcontractor, for which the Purchaser has indemnified the Company from any new contract completion risks relating to these contracts.

Donald L. Smith, Jr., the Company’s former Chairman and Chief Executive Officer and a current director of the Company and Donald L. Smith, III, a former officer of the Company, are principals of the Purchaser. Other than the Asset Purchase Agreement, Transition Services Agreement and the Company’s relationship with Donald L. Smith, Jr. and Donald L. Smith, III, there is no material relationship between the Company and the Purchaser of which the Company is aware.

On June 27, 2006, the Company sold its Boca-Raton-based third-party monitoring operations.

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On May 2, 2006, the Company sold its fixed assets and substantially all of the inventory of Puerto Rico Crushing Company (“PRCC”) in a sale agreement with Mr. Jose Criado, through a company controlled by Mr. Criado. As part of the sale, Mr. Criado assumed 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, which was $27,955.

On March 2, 2006, the Company entered into a Stock Purchase Agreement with A. Hadeed or his nominee and Gary O’Rourke, under which the Company completed the sale of all of the issued and outstanding common shares of Antigua Masonry Products (“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 “AMP Preferred Shares”) were outstanding and owned beneficially and of record by certain third parties and that such AMP Preferred Shares were reflected as debt on AMP’s books and records. The purchasers further acknowledged that their acquisition of AMP was subject to the AMP Preferred Shares and that the purchasers have sole responsibility of satisfying and discharging all obligations represented by such AMP Preferred Shares. 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 the Company, as well as pre-closing transfers to AMP of certain preferred shares in AMP that were owned by the Company.

The accompanying Condensed Consolidated Statements of Operations for all the quarters presented have been adjusted to classify all non-electronic security services divisions as discontinued operations. Selected statement of operations data for the Company’s discontinued operations is as follows:

A summary of the total assets of discontinued operations included in the accompanying condensed consolidated balance sheet is as follows:

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(7) DEBT

On February 10, 2006, the Company issued to certain investors, under the terms of the SPA, an aggregate principal amount of $45 million of notes (the “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. In order to finance the acquisition of Guardian, which took place on March 6, 2006, the Company increased the amount of cash available under its Credit Agreement 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 Agreement.

The Credit Agreement contains a number of non-financial covenants imposing restrictions on the Company’s electronic security services division’s ability to, among other things, i) incur more debt, ii) pay dividends, redeem or repurchase stock or make other distributions or impair the ability of any subsidiary to make such payments to the borrower; iii) use assets as security in other transactions, iv) merge or consolidate with others or v) guarantee obligations of others. The Credit Agreement also contains financial covenants that require the Company’s subsidiaries which comprise the electronic security services division to meet a number of financial ratios and tests. Failure to comply with the obligations in the Credit Agreement 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.

In October and November 2006, the Company was not in compliance with certain financial covenants and on December 29, 2006, obtained a waiver and third amendment to the Credit Agreement that waived these breaches and amended the following provisions of the Credit Agreement; (i) increased the maximum leverage ratio from 26.0x to 1.0 to 26.6x to 1.0 (ii) reduced the minimum fixed charge coverage ratio from 1.25 to 1.0 to 1.15 to 1.0 and (iii) increased the maximum capital expenditures from $1.5 million to $1.75 million. As a result of this waiver and third amendment, at December 31, 2006, the Company was in compliance with the covenants of the Credit Agreement. On May 10, 2007, the Company received a fourth amendment to the Credit Agreement which amended the fixed charge coverage ratio calculation from using interest paid in cash to accrued interest.

On September 25, 2007, certain subsidiaries (the “Borrowers”) of the Company entered into a Consent and Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement with CapitalSource Finance LLC (“CapitalSource”). The Fifth Amendment to the

Credit Agreement dated September 25, 2007, increased the total commitment to $105.0 million from $100.0 million (with the Borrowers having the ability to increase this commitment further to $125.0 million), extended the maturity date of the Credit Agreement to September 25, 2010, increased the Maximum Leverage Ratio to 28.0x, amended Minimum Fixed Charge Coverage Ratio to be 1.25 to 1.0 after June 30, 2008, and certain financial and other covenants provided therein. The Company incurred debt issuance costs amounting to $0.7 million, consisting primarily of commitment fees. These debt issuance costs are being amortized over the term of the loan using the effective interest rate method. The Company’s effective interest rate at September 30, 2007 and 2006 was 11.5% and 11.2%, respectively. At September 30, 2007, the Company was in compliance with the debt covenant requirements.

At September 30, 2007, the Company had $10.6 million of unused facility under the Credit Agreement and $2.5 million of borrowing capacity. The effective interest rate on all debt outstanding was 11.5% and 11.2% for the nine months ended September 30, 2007 and 2006, respectively.

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(8) PREFERRED STOCK

On February 10, 2006, the Company issued to certain investors, under the terms of the SPA 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.

On October 20, 2006, pursuant to the terms of the SPA, the private placement investors received, in exchange for the Notes, an aggregate of 45,000 shares of Preferred Stock, par value $0.10 per share with a liquidation preference equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share for each share of Preferred Stock.

The Preferred Stock has an 8% dividend rate payable quarterly in cash or stock at the option of the Company, on April 1, July 1, October 1 and January 1. The dividend rate is subject to adjustment as defined in the SPA. The Preferred Stock is convertible into the Company’s common stock at a price of $9.54 or 90% of the lowest Closing Bid Price for the last 3 trading days, if in default. The conversion price is subject to adjustment for anti-dilution transactions, as defined. Shares may be redeemed in cash if 1) the shares are not registered, 2) at maturity on or about October 20, 2012, in three equal installments payable in cash on the 4th, 5th and 6th anniversary of the issuance date, 3) at the option of the holder, for cash, on May 11, 2009 or 4) at the option of the Company, for cash, on or after May 11, 2009. The Preferred Stock has a mandatory conversion into common stock, at the option of the Company, after 2 years from date of issuance, if the common stock price exceeds 175% of the conversion price for 60 consecutive trading days.

The Preferred Stock was issued at a discount of $0.5 million on October 20, 2006. The Company is amortizing the discount over the term of the Preferred Stock using the effective interest rate method. The Preferred Stock is classified outside stockholders’ equity as it may be mandatorily redeemable at the option of the holder or upon the occurrence of an event that is not solely within the control of the Company. Any preferred dividends, as well as the accretion of the $0.5 million discount are deducted from net income (loss) available for common stockholders. The Preferred Stock is accreted to its liquidation value based on the effective interest rate method over the period to the earliest redemption date. The accretion of the discount is charged to retained earnings (if a deficit balance, then the charge is to additional paid-in capital). For the three and nine months ended September 30, 2007, the amortization of the discount on the Preferred Stock amounted to less than $0.1 million and $0.1 million, respectively, and was charged to net loss available for common stockholders. At September 30, 2007 and December 31, 2006, the unamortized portion of the Preferred Stock discount amounted to $0.3 million and $0.5 million, respectively. In addition, in connection with entering into the Notes, Warrants and Preferred Stock arrangements, the Company paid fees totaling $3.9 million. These fees were accounted for as deferred issuance costs and are amortized on a straight line basis over 4.0 years. Amortization expense related to these deferred financing costs amounted to $0.2 million for the three months ended September 30, 2007 and 2006, and $0.5 million and $0.4 million for the nine months ended September 30, 2007 and 2006, respectively. Subsequent to the conversion of the Notes, these amounts were charged to additional paid-in capital and deducted from net loss available for common stockholders. The unamortized balance of deferred issuance costs at September 30, 2007 and December 31, 2006, amounted to $2.4 million and $3.3 million, respectively, and are recorded as a reduction of the carrying value of the Preferred Stock in the accompanying consolidated balance sheet. In addition, the Company determined that the Preferred Stock has several embedded derivatives that met the requirements for bifurcation at the date of issuance. (See Note 9-Derivative Instruments.)

The issuance of the Preferred Stock and of the Warrants could cause the issuance of greater than 20% of the Company’s outstanding shares of common stock upon the conversion of the Preferred Stock and the exercise of the Warrants. The creation of a new class of preferred stock was subject to shareholder approval under Florida law, while, for various reasons related to the potential issuance of greater than 20% of the Company’s outstanding shares of common stock, the issuance of the Preferred Stock required shareholder approval under the rules of NASDAQ. Holders of more than 50% of the Company’s common stock approved the foregoing. The approval became effective after the Securities and Exchange Commission rules and regulations relating to the delivery of an information statement on Schedule 14C to our shareholders was satisfied.

On April 2, 2007, effective as of March 30, 2007, the Company entered into the Forbearance Agreements with certain institutional investors (the “Required Holders”) holding, in the aggregate, a majority of the Company’s previously issued Preferred Stock.

Under the terms of these Forbearance Agreements, the Required Holders agreed that for a period of time ending no later than January 2, 2008, they would each refrain from taking any remedial action with respect to the Company’s failure (the “Effectiveness Failure”) to have declared effective by the Securities and Exchange Commission a registration statement registering the resale of the shares of the Company’s common stock underlying the Preferred Stock and Warrants as required by a Registration Rights Agreement, dated February 10, 2006, by and between the Company, the Required Holders and the remaining holder of the Preferred Stock

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(the “Registration Rights Agreement”). The parties also agreed to refrain from declaring the occurrence of any “Triggering Event” with respect to the Effectiveness Failure and from delivering any Notice of Redemption at Option of Holder with respect thereto or demanding any amounts due and payable with respect to the Effectiveness Failure, including without limitation, any Registration Delay Payments.

The Forbearance Agreements also contain agreements to amend the governing Certificate of Designations to revise certain terms of the Preferred Stock, including, without limitation, a reduction in the conversion price of the Preferred Stock to $6.75, allowance for the accrual of dividends on the Preferred Stock at a rate equal to 10% per annum, which dividends may be payable in-kind, and a revision of the definition of the Leverage Ratio. The revised definition shall provide for the Leverage Ratio to be calculated as a multiple of recurring monthly revenue (“Performing RMR”) as opposed to EBITDA and a revision of the Maximum Leverage Ratio covenant to require the Maximum Leverage Ratio to equal 38x Performing RMR, commencing on June 30, 2008. The parties to the Forbearance Agreement also agreed to allow dividends to accrue but not be payable until the expiration of the Forbearance Period. At December 31, 2006, the Company accrued $0.9 million of dividends payable which is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets. For the three and nine months ended September 30, 2007, $1.1 million and $3.3 million, respectively, of dividends payable were declared from and charged to additional paid-in capital and deducted from net loss available for common shareholders.

Pursuant to the terms of these Forbearance Agreements, the Company agreed to submit to its shareholders for approval at the Company’s annual shareholder meeting a form of Amended and Restated Certificate of Designations (the “Amended Certificate of Designations”) setting forth certain revised terms of the Preferred Stock as described in the Forbearance Agreements, as previously announced by the Company.

On June 29, 2007, the Company’s shareholders approved the Amended Certificate of Designations at the Company’s annual shareholder meeting. The Company filed the Amended Certificate of Designations with the Secretary of State of Florida on July 13, 2007, effective as of such date. In connection with the filing of the Amended Certificate of Designations, the Company and the parties to the Forbearance Agreements entered into the Amended SPA and the Amended and Restated Registration Rights Agreement. The Amended SPA contains terms similar to the original SPA entered into among the parties on February 10, 2006, except that one holder agreed to sell back to the Company warrants to purchase 1,284,067 shares of the Company’s common stock, and the parties thereto acknowledged and agreed that the Company’s dividend payment obligations with respect to the Preferred Stock accruing prior to the Closing date (July 13, 2007) of the Amended SPA have been satisfied by adding such dividends to the Stated Value of the shares of Preferred Stock. Thus, the Company now has the option of paying the dividends in-kind and not to deplete cash resources for these dividend payments. At September 30, 2007, approximately $2.9 million of accrued dividends were paid in-kind and reclassified to the carrying value of the Preferred Stock. The carrying value of the Preferred Stock at September 30, 2007, and December 31, 2006, was $38.2 million and $41.2 million, respectively.

On September 28, 2007, the Company redeemed 7,000 shares of the Company’s Preferred Stock at $1,000 stated value per share, in connection with previously disclosed settlement arrangements the Company had entered into to settle all claims set forth in the lawsuit (the “Lawsuit”) previously disclosed under the Caption “Series A Convertible Preferred Stockholder” in “Item 3—Legal Proceedings” of the Company’s Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 30, 2007, the total amount paid by the Company upon redemption of the shares was $7.4 million, which included accrued dividends since January 1, 2007.

In connection with the redemption of the Preferred Stock, for the three months ended September 30, 2007, the Company charged to additional paid-in-capital $0.4 million of unamortized deferred issuance costs and $0.1 million of unamortized discount related to the pro-rata portion of the Preferred Stock that was redeemed.

(9) DERIVATIVE INSTRUMENTS

Derivative financial instruments, such as warrants and embedded derivative instruments of a host instrument, which risk and rewards of such derivatives are not clearly and closely related to the risk and rewards of the host instrument, are generally required to be bifurcated and separately valued from the host instrument with which they relate.

The following freestanding and embedded derivative financial instruments were identified with the issuance of the Notes : i) the warrants, which is a freestanding derivative, and ii) the right to purchase the Preferred Stock upon issuance (“the Right to Purchase”), which is a freestanding derivative instrument within the SPA. The Company valued the warrants and the Right to Purchase at March 6, 2006, their date of issuance, using an appropriate option pricing model (“the Model”). The warrants, which were issued in connection with the issuance of the Notes, are detachable and have a three-year life expiring on March 6, 2009. The Rights to Purchase are deemed to be issued in connection with the issuance of the Notes, and have a life which expires on the date the

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Preferred Stock is issued. The Model determined an $8.6 million aggregate value for these derivatives and this value has been recorded as derivative instrument liability and classified as current or long term in accordance with respective maturity dates. The Model assumptions for initial valuation of the Warrants and Rights to Purchase the Preferred Stock as of the issuance date were a risk free rate of 4.77% and 4.77%, respectively, and volatility for the Company’s common stock of 50% and 30%, respectively. The volatility factors differ because of the specific terms related to the warrants and the conversion rights. Since these derivatives are associated with the Notes, the face value of the notes was recorded net of the $8.6 million attributed to these derivative liabilities. Accordingly, the Company accreted the $8.6 million carrying value of the Notes, using the effective interest rate method, over the life of the Notes and recorded a non-cash charge amounting to $8.6 million to interest expense from the date of issuance through October 20, 2006, the date of exchange of the Notes into Preferred Stock.

Additionally, the derivative liability amounts have been re-valued at each balance sheet date with the resulting change in value being recorded as income or expense to arrive at net income. From the date of issuance through October 20, 2006, an aggregate benefit of $7.3 million has been recorded with respect to the re-valuation of these derivatives liabilities and the fair value of the Right to Purchase derivative liability was adjusted to zero at October 20, 2006 as the Right to Purchase was executed by the Note Holders. The remaining derivative liability at October 20, 2006 of $1.3 million related to the Warrants.

On October 20, 2006, pursuant to the terms of the SPA, the private placement investors received, in exchange for the Notes, an aggregate of 45,000 shares of Preferred Stock, par value $.10 per share, with a liquidation preference equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share. Upon the issuance of the Preferred Stock, the following embedded derivatives were identified within the Preferred Stock: i) the ability to convert the Preferred Stock for common stock; ii) the option of the Company to satisfy dividends payable on the Preferred Stock in common stock in lieu of cash; iii) the potential increase in the dividend rate of the Preferred Stock in the event a certain level of net cash proceeds from the sale of the our construction and material division assets are not realized within a specified time frame (referred to as the legacy asset rate adjustment) and (iv) a change in control redemption right. The embedded derivatives within the Preferred Stock were bifurcated and valued as a single compound derivative liability at $0.5 million at the date of issuance. On April 2, 2007, the Company entered into Forbearance Agreements with respect to the Preferred Stock with some of the institutional investors, which among other amended terms eliminated the legacy rate adjustment and provided for payment of dividends in cash, therefore, at December 31, 2006, the legacy rate adjustment and the dividend put option derivatives were deemed to have zero value. The Company recorded a $3.2 million charge during the quarter ended December 31, 2006, related to the write off of this net derivative asset.

As indicated in Note 8-Preferred Stock, effective July 13, 2007, the Company entered into an Amended SPA which contains terms similar to the original SPA entered into among the parties on February 10, 2006, except that one holder agreed to sell back to the Company warrants to purchase 1,284,067 shares of the Company’s common stock. The Company purchased back the warrants at fair value which was determined to be $0.2 million. At September 30, 2007, the derivative liability was adjusted accordingly.

A binomial model is being used on a quarterly basis to re-value the derivative instruments to market value. The model assumptions for revaluation of the Warrants and the embedded derivatives at September 30, 2007, were a risk free rate of 4.92%, and volatility for the Company’s common stock of 45.0%. For the three and nine months ended September 30, 2007, an aggregate benefit of $0.4 million and $2.3 million, respectively, has been recorded with respect to the re-valuation of these derivatives liabilities. At September 30, 2007, the derivative liability amounted to $2.0 million and it was primarily related to the conversion feature in the preferred stock. At September 30, 2007, the fair value of the remaining Warrants was insignificant. At December 31, 2006, the derivative liability amounted to $4.5 million, of which $3.7 million related to the conversion feature in the preferred stock and $0.8 million related to the Warrants.

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(10) CAPITAL STOCK

On July 24, 2007, the Company’s Board of Directors approved the repurchase of up to $5.0 million of its common stock between July 24, 2007 and December 31, 2008. At September 30, 2007, the Company had repurchased 163,834 shares for a total cost of $0.6 million.

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