DEVC Devcon Intl Corp (MM)

Item 1. Business

General

Devcon International Corp. (“Devcon” or “the Company”) was incorporated in Florida in 1951 as Zinke-Smith, Inc. and adopted its present name in October 1971. Our stock has been publicly traded on the Nasdaq Global Market System since March 1972. Today, Devcon is a holding company that has three operating divisions: electronic security services, materials and construction.

Until 2004, our construction and materials divisions were our primary operations. Between 2002 and 2004, however, our management engaged in a review of strategic alternatives to enter into new lines of business that had a prospect of providing predictable, recurring revenue. In April 2005, we began a process of reviewing in detail the operations of our materials and construction divisions, which were incurring operating losses. This strategic review and shift in operational focus resulted in a series of acquisitions and divestitures which together allowed us to pursue our objective of becoming a large regional provider of electronic security services. The acquisitions and divestitures were as follows:

Acquisitions:

Dispositions:

The sale of the construction division assets substantially completed the transformation of Devcon into being primarily an electronic security services company, which transition had been ongoing for over a year.

Electronic Security Services

We are a leading regional provider of electronic security alarm monitoring services, including monitoring of burglary, fire, medical, environmental, video and CCTV, and security access systems to residential, both single and multi-family homes, financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of government departments and healthcare and educational facilities. We also have wholesale customers, where we monitor security systems on behalf of independent security companies. We believe the electronic security systems monitoring industry presents an attractive opportunity for predictable recurring revenues.

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Our electronic security services division operates primarily in the state of Florida and in the New York City metropolitan area. We provide monitoring services to retail, commercial and wholesale customers (where we monitor a third-party security company’s customers). Many commercial customers have multiple accounts with us. We provide monitoring services to our customers from two monitoring facilities:

The electronic security services industry is highly competitive and fragmented and consists of local, regional and national providers. Our business strategy is based on building a leading regional presence. Specifically, we believe that the most effective way to build brand recognition, maximize market share, and boost operating efficiencies is to become a market leader in targeted regions that have favorable long-term demographic trends. We believe that developing a familiar, community-oriented brand is more effective than developing a national brand and will allow us to reach a top market share position in the areas in which we choose to operate.

We seek to develop a leading regional presence in growth markets in regions that have favorable demographic and population growth trends, as well as customer density opportunities that can be leveraged. Our first target region is in the Southeast, with a primary focus on the state of Florida. With our acquisitions of SEC, Starpoint, Coastal and Guardian, we have achieved significant customer density in the state of Florida.

Our revenue from electronic security services in 2006 was primarily generated from recurring monitoring and services revenue. The other sources of revenue include non-recurring service revenue and installation revenue.

As part of our commitment to provide high quality service to our customers, our electronic security services division maintains a trained installation and service force. These employees are trained to install and service the various types of commercial and residential security systems marketed by us.

Security alarm systems include many different types of devices installed at a customer’s premises, which are designed to detect or react to various occurrences or conditions, such as intrusion, movement, fire, smoke, flooding, environmental conditions (including temperature or humidity variations), industrial operations (such as water, gas or steam pressure and process flow controls) and other hazards. In most systems, these detection devices are connected to a microprocessor-based control panel which communicates through telephone lines or wireless devices to a monitoring center where alarm and supervisory signals are received and recorded. Systems may also incorporate an emergency “panic button” which, when pushed, causes the control panel to transmit an alarm signal that takes priority over other alarm signals. In most systems, control panels can identify the nature of the alarm and the areas within a building where the sensor was activated and transmit the information to one of our central monitoring stations. Commercial applications may also include access control systems and closed circuit television, tailored to the customers’ specific needs. In addition, we provide wireless alarm systems where desired by our customers.

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We do not manufacture any of the components used in our electronic security services businesses. Due to the general availability of the components used in our electronic security services business, we are able to obtain the components of our systems from a number of different sources and to supply our customers with the latest technology generally available in the industry. We are not dependent on any single source for our supplies and components and have not experienced any material shortages of components.

Our new retail customers are generated through our internal sales force. We have eleven sales and customer service branches which handle installations and service. In addition, the Company has two specialized units:

1) New Construction – The Company has two offices in Florida with dedicated representatives who market our services primarily to developers. Through this group, the Company obtains residential subscribers by working directly with home builders. The company markets and installs residential security systems, as well as a variety of other options, such as structured wiring for telephone, intercom systems and computer systems, into homes during their construction.

2) Community Associations – This specialized subset of the residential group also markets our services to Home Owners Associations and Gated Communities, delivering high-quality customer care and service required by these premier communities that are prevalent in the Florida market. This group provides a full-range of services to meet the needs of planned communities and community-owned facilities, including U.L. monitoring, maintenance of existing systems, Video and CCTV, all levels of access control, and burglary and fire systems. Agreements range from five to 20 years in length and can represent service for hundreds to thousands of residences in each community.

Our relationship with our customers begins with an initial consultation to determine the potential customers’ needs and is followed by an equipment and service proposal. Our customers then sign contracts with us that allow us to provide ongoing electronic security system monitoring and maintenance services after the installation of an electronic security system. Most of the monitoring and service we provide is covered by multi-year contracts with RMR. The length of our contracts ranges from three to twenty years, depending on the type of customer and how the contract was acquired and in certain markets provides for automatic renewals for a fixed period (typically one year) unless we or the customer elect to cancel the contract at the end of its term. Customers may also purchase an extended service protection plan, which covers the costs of normal repairs of the security system and which is billed along with the monitoring charges. Based upon the average lengths of customer relationships represented by accounts acquired by us during the last two years, we believe the average length of our customer relationships is approximately ten years.

Our two monitoring facilities operate 24 hours per day, 365 days per year. Each monitoring facility incorporates the use of communications and computer systems that route incoming alarm signals and telephone calls to operators. Each operator within a monitoring facility monitors a computer screen that displays information concerning the nature of the alarm signal, the customer whose alarm has been activated and the premises at which the alarm is located. Other non-emergency signals are generated by low battery status, arming and disarming of the alarm monitoring system by authorized users and test signals and these signals are processed automatically by the computer. Depending upon the type of service for which the customer has contracted, monitoring facility personnel respond to alarms by relaying information to local fire or police departments or other emergency providers, notifying the customer or taking other appropriate action.

Both of our central monitoring facilities hold Underwriter’s Laboratories, Inc., or UL, listings. UL specifications for monitoring centers cover building integrity, back up computer and power systems, staffing and standard operating procedures. In many jurisdictions, applicable law requires that security alarms for certain buildings be monitored by UL- listed facilities. In addition, a UL listing is required by certain commercial customers’ insurance companies as a condition to insurance coverage. In addition, our Hollywood, Florida location holds the Factory Mutual, or FM rating, the industry standard for fire alarm monitoring.

In addition to our retail monitoring (i.e., residential, including community associations, and commercial) our wholesale business serves independent alarm monitoring companies. Typically, we act as the sole provider of monitoring services to independent monitoring companies.

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Branch customer service personnel, during business hours, answer non-emergency telephone calls regarding service, billing, payment and alarm activation issues. Outside normal business hours, customers are directed to a central monitoring station that operates 24 hours per day, allowing a customer to always speak with one of our representatives. In addition, overflow calls at the branches are automatically re-routed to a central monitoring station in order to provide immediate assistance to customers.

Customer attrition has a direct impact on our results of operations, since it affects our revenue, amortization expense, borrowing capacity and cash flow. We define attrition as a ratio which measures the value of lost customer RMR as the numerator divided by the total value of RMR averaged over time to represent an annualized attrition rate. Attrition occurs in our business due to many reasons, including, but not limited to, the following:

Construction

On March 21, 2007, we sold the majority of our construction assets, construction inventory and customer lists of the construction division and are currently transitioning our remaining contracts to the buyer either through assignment of the contracts or working with the buyer on a subcontract basis. We do not currently intend to enter into any new construction contracts. Accordingly, the below description is predominantly historical but is provided due to the recent nature of the sale, the reflection of the construction division in our consolidated financial statements and because we are still involved in the transitioning activities described below, which we believe may still impact our results of operations and financial condition. For further information on our transition activities, see “Item 1A-Risk Factors.”

General . Our construction division performed earthmoving, excavating and filling operations, built golf courses, roads, and utility infrastructures, dredged waterways and constructed deep-water piers and marinas, primarily in the Caribbean. We historically provided these development services to both private enterprises and government agencies. The revenue related to the work performed by our construction division has been recognized on a percentage-of-completion basis. The majority of our contracts have generally been completed in less than one year. The work has been bid or negotiated at a fixed price or at a unit price where our fee is based upon the quantity of work performed and is often measured in yards, meters or tons rather than time or a time and materials basis. Changes in the scope of the work that were requested by the customer were included in the contract value when duly authorized and agreed upon. We performed the majority of our work utilizing our internal labor and equipment resources.

Operations . We obtained leads for new projects from customers, engineering firms and architectural firms with whom we have established relationships. First, we decided whether to submit a bid or negotiate to undertake a particular project. We prepared and submitted timely proposals detailing what we believed would best meet the customers’ objectives. We also provided long-term or short-term financing from time-to-time to certain customers to obtain construction contracts. During 2006, we financed $0.9 million for one construction project and, as of the end of 2006, the outstanding balance with respect to this project, totaled $1.1 million, including principal and interest. The President of our construction division reviewed all project proposals and bids. After a customer accepted our proposal, a formal contract was prepared and negotiated between the parties. We assigned one of our project managers to maintain close contact with the customer and their project engineers. Other staff was assigned to supervise personnel and the relocation, purchase, lease and maintenance of equipment. Construction management was responsible for the scheduling and monitoring of our operations.

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Backlog . Our backlog of unfulfilled portions of construction contracts at December 31, 2006 was approximately $7.1 million, involving 14 projects. This compares to $17.0 million, involving 18 projects at December 31, 2005. One contract in the Netherlands Antilles represents 34%, one in Antigua represents 20% and one in the Bahamas represents 17% of the total backlog. Between December 31, 2006 and March 30, 2007, we entered into one new construction contract in the U.S. Virgin Islands valued at $2.1 million.

Bonding. We were required by our customers to obtain bid, payment and performance bonds to bid on certain construction contracts.

Customers. Our primary customers were large private and government agencies located throughout the Caribbean. During 2006, we provided services to 23 customers which generated contract revenue of $35.2 million in the year. Three customers represented a concentration of more than 10% of construction revenue. Those three customers represented 12.4%, 11.1%, 10.9% individually or 34.4% of total construction division revenue in 2006.

Equipment . Our businesses required us to lease or purchase and maintain equipment. As of December 31, 2006, our equipment included cranes, bulldozers, road graders, rollers, backhoes, earthmovers, hydraulic dredges and barges. At certain times, some of this equipment was idle between construction jobs until suitable construction contracts were found.

Materials

General. Our materials division produces and distributes ready-mix concrete, crushed stone, sand, and distributes bagged cement on the Caribbean island of Sint Maarten and St. Martin. On September 30, 2005, we sold our materials operations on the islands of St. Thomas and St. Croix, on March 2, 2006, we sold our Antigua operations, and on May 2, 2006 we sold the operating assets of our Puerto Rico joint venture. See “Divestiture of U.S. Virgin Islands, Antigua and Puerto Rico Operations” below.

As of December 31, 2006, the only operation at the St. Martin facility was production of ready mix concrete. In March 2007, access to the St. Martin facility was blocked by the landlord due to a legal dispute and the facility is currently not operational, pending legal access remedies (see Item 3. Legal Proceedings- Petit ).

The description below of our materials division, as of December 31, 2006, gives effect to the divestiture of our operations in the U.S. Virgin Islands, Antigua and Puerto Rico. In addition, our historical results of operations for the years ended December 31, 2006, 2005 and 2004 have been revised to exclude the results of operations of the U.S. Virgin Islands, Antigua and Puerto Rico so as to provide comparability of results.

In 2006, we manufactured and distributed ready-mix concrete and crushed aggregate. We also distributed imported aggregate, concrete blocks and bagged cement. Our sales can be segregated into the following groups. Each years’ sales have been adjusted to exclude the sales of the materials operations described above:

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Ready-Mix Concrete. Our concrete batch plants mix cement, sand, crushed stone, water and chemical additives to produce ready-mix concrete for use in local construction. Concrete mixer trucks owned and operated by various third parties deliver the concrete to the customer’s job site. We believe our ready-mix operations are the largest on the Caribbean island on which we trade. We purchase the bulk and jumbo bags of cement for use in our ready mix operation.

Quarry Operations, Crushed Stone and Aggregate Production . We own portions of and lease portions of a quarry site in St. Martin at which we extract rock from exposed mineral formations. This rock is sold as boulders or crushed to sizes ranging from 3  ¹ / 2 -inch stones down to manufactured sand. The resulting aggregate is then sorted, cleaned and stored. The aggregate is sold to customers and used in our operations to make concrete products. Our quarry is the only quarry on the island of Sint. Maarten and St. Martin. As of December 31, 2006, we were not producing aggregate due to a dispute with our landlord. See Item 3. Legal Proceedings- Petit.

Bagged Cement . We purchase bagged cement for resale.

Supplies . We normally obtain all of the crushed rock and some of the sand necessary for our production of ready-mix concrete from our own quarry. We currently are importing all of our crushed rock from St Croix and sand from other Caribbean islands. We purchase bulk cement from the cement terminal located on Sint Maarten. All of our concrete blocks are imported from the Dominican Republic.

Leasing of Concrete Trucks and Other Equipment . In St. Martin and Sint Maarten, substantially all of our concrete trucks and concrete pump trucks have been sold or are leased to former employees that are now in the concrete delivery and pumping business. We have outsourced some of the loading and movement of rock material. Also, we have in some instances sold or leased equipment to former employees or third parties for them to perform work for us. The overall effect of these decisions has been a reduction of fixed costs, resulting in a larger percentage of costs being variable with revenue.

Customers . Our primary customers are building contractors, government agencies, asphalt pavers and individual homeowners. Customers generally pick up quarry products, concrete block and bagged cement at our facilities, and we generally deliver ready-mix concrete to the customers’ job sites. Only one customer was responsible for more than 10% of materials revenue for the period ending December 31, 2006, representing 28.4% of total revenues.

Competition. We have competitors in the materials business in the locations at which we conduct business. The competition includes local ready-mix concrete, and importers of aggregates and concrete blocks. We also encounter competition from the producers of asphalt, which is an alternative material to concrete for road construction. Most competitors have a disadvantage to us with respect to our material costs, but have an advantage over us with respect to lower overhead costs.

Business Development . We obtain our leads and proposed project information from architects, engineers, customers, local Departments of Transportation and local Ministries of Works with whom we have established relationships.

Equipment . Our businesses require us to lease or purchase and maintain equipment. As of December 31, 2006, our equipment included excavators, bulldozers, backhoes, rock crushers, concrete batch plants, concrete mixer and pump trucks and other items.

Divestiture of U.S. Virgin Islands, Antigua and Puerto Rico Operations . As a part of our revised strategic focus on businesses with more predictable recurring revenue, on September 30, 2005, we and our wholly-owned subsidiary, V.I. Cement & Building Products, Inc., or VICBP, a Delaware corporation, sold certain assets constituting our U.S. Virgin Islands ready-mix concrete, aggregates, concrete block and cement materials and supplies business to Heavy Materials, LLC, a U.S. Virgin Islands limited liability company. The purchase price for this sale was $10.7 million in cash plus an additional amount equal to the net realizable value of

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accounts receivable and certain assets associated with these operations as of the closing date, September 30, 2005. The net realizable value was paid by the purchaser on the closing date by issuance of a promissory note to us in an aggregate principal amount of $2.6 million with a term of three years bearing interest at 5% per annum with interest only being paid quarterly in arrears during the first twelve months and principal and accrued interest being paid quarterly (principal being paid in eight equal quarterly installments) for the remainder of the term of the note until the maturity date. The sold U.S. Virgin Islands operations represented 41.0% of our materials division’s revenue as of the time of sale.

In addition, on March 2, 2006, we 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, a subsidiary of ours, the business of which constituted all of our materials operations in Antigua. In connection with this sale, the purchasers acknowledged that preferred shares of AMP with a face value equal to European Currency EC $1,436,485 (U.S. $532,032 as of the date of the sale) were outstanding and owned beneficially and of record by certain third-parties and that these 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 preferred shares and that the purchasers had sole responsibility of satisfying and discharging all obligations represented by these 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 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.

On May 2, 2006, the Company sold its fixed assets and substantially all of the inventory of 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.

Investments, Joint Ventures and Other Assets

We have invested or participated in several joint ventures in connection with our construction and materials divisions.

DevconMatrix Utility Resources, LLC (“DevMat”). In June 2003, we formed a joint venture in the water desalination and sewage treatment industry. We own 80% of the joint venture. Matrix Desalination, Inc. owns the remaining 20%. Our customer base consists of resorts, industrial plants and residential communities. In 2006, DevMat leased and operated both water desalination and waste water treatment plants situated on various islands of the Bahamas. We had $0.6 million in revenue and incurred $0.3 million of operating expenses for the year ended December 31, 2006.

Construction Technologies Limited. During 2004 and 2005, we made advances of $1.9 million and $0.5 million, respectively, to Construction Technologies Limited, or CTC, a limited liability company incorporated in St. Christopher and Nevis, or St. Kitts. The advances were made pursuant to a project funding agreement. Under the project funding agreement, we agreed to advance $2.3 million to fund CTC’s cash requirements in fulfilling its obligation to construct approximately 6.5 miles of road for the National Housing Corporation, a statutory agency of the government of St. Kitts. The advances are being repaid from the proceeds of an EC $10.0 million (U.S. $3.7 million) promissory note, which was issued to CTC by the NHC as consideration for the project. We have possession of the NHC Note, which has been guaranteed by the government of St. Kitts. The NHC has been instructed by CTC to make payments due under the NHC Note to us. The principal of the NHC Note is repayable in fourteen equal semi-annual installments, beginning on April 30, 2005, and bears interest at 7%. Pursuant to the terms of the funding agreement, we are entitled to retain 81.66% of payments made under the NHC Note. We received installments totaling $0.8 million and $0.7 million in 2005 and 2006, respectively. We retained, pursuant to the funding agreement, $0.6 million and $0.6 million from these receipts in 2005 and 2006, respectively. The retained funds were applied to reduce the $2.3 million balance of original advances to $1.7 million and $1.1 million, as of December 31, 2005 and 2006, respectively. Additionally, we have trade receivables from and made other secured loans to CTC in conjunction with other transactions entered into in the ordinary course of business. CTC is a leading producer of concrete in St. Kitts.

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West Highland Development Company, Inc., Puerto Rico. During the period 1998 through 2006, we invested a total of $199,000 for a 33.3% interest in a real estate joint venture in Puerto Rico that owns approximately 100 acres of land in Aguadilla, Puerto Rico. In January 2004, the local government advised us that it intended to expropriate approximately 2 acres of the real estate in Aguadilla. The joint venture responded to the expropriation proceeding by filing a complaint in February 2004. In the fourth quarter of 2004, the joint venture received the uncontested expropriation proceeds totaling $385,070 and paid off its bank loan, which had been guaranteed by us. In 2007, the legal representative for the agency, with which the joint venture filed a complaint, resubmitted a mutually acceptable settlement proposal with a favorable recommendation. The settlement proposal would result in an additional $182,580 being received by the joint venture.

Belvedere. In February 2003, we entered into a development agreement with the Island Territory of Sint Maarten to market and develop 197 single-family homes in the Belvedere subdivision of the Island Territory. Through December 31, 2006, ten houses had been sold. The Development Agreement contemplated completion of the Belvedere Project by February 2007. Due to delays in the Island Territory establishing a Mortgage Guarantee Fund and other limiting factors, in April 2006, we and a Commissioner for the Island Territory mutually agreed to terminate the Development Agreement. Under a separate agreement with Pream Consultants N.V., we subcontracted substantially all of our obligations, other than the funding obligation, under the Development Agreement. In November 2005, we terminated the Pream Agreement for reasons provided for in the agreement. Our investment in the Belvedere Project was $478,102 and $550,285 as of December 31, 2006 and December 31, 2005, respectively. During 2006, we recorded an impairment charge of $111,710 with respect to the three remaining unsold partially-built houses. The impairment charge was based upon an independent appraisal of the houses. As of December 31, 2006 and 2005 these assets were classified as assets held for sale.

Financing

On November 9, 2005, we signed an Agreement and Plan of Merger with Devcon Acquisition, Inc., an indirect wholly-owned subsidiary of ours, and Guardian in which we agreed to acquire all of the outstanding capital stock of Guardian, in turn, owned 100% of Mutual Central Alarms Services, Inc., and Stat-land Burglar Alarm System and Devices, Inc. On March 6, 2006, we completed the acquisition of Guardian under the terms of the Agreement and Plan of Merger. The aggregate cash purchase price was 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, 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.

To finance the Guardian acquisition, we issued to accredited institutional investors under the terms of a Securities Purchase Agreement, or SPA, 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 our common stock at an exercise price of $11.925 per share. The warrants expire on the third anniversary of their March 6, 2006, issuance date and are valued using a discounted cash flow model, which takes into account the exercise price, volatility of our stock and our stock price at issuance. The notes bore interest at a rate equal to 8% per annum (which rate would have increased to 18% per annum in the event we failed to make payments required under the notes when due). We also increased the amount of cash available under our revolving credit facility with CapitalSource Finance, LLC, or CapitalSource Revolving Credit Facility, from $70 million to $100 million and used $35.6 million under this facility to finance the remaining purchase consideration of the Guardian acquisition, repay an $8 million CapitalSource Bridge Loan and to increase working capital. For further information on our indebtedness, see “Item 1A – Risk Factors”.

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On October 20, 2006, under the terms of the SPA, these investors received, in exchange for the notes, an aggregate of 45,000 shares of our Series A Convertible 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. The conversion price of the Series A Convertible Preferred Stock and the exercise price of the warrants issued with the notes are subject to customary anti-dilution adjustments. The issuance of the Series A Convertible Preferred Stock and of the warrants could have caused 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. Our Board approved the creation of a new class of preferred stock and the creation of the Series A Convertible Preferred Stock, as well as the issuance of the Series A Convertible Preferred Stock and 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 our outstanding shares of common stock, the issuance of the Series A Convertible Preferred Stock required shareholder approval under the rules of Nasdaq. On February 10, 2006, holders of more than 50% of our Common Stock approved the amendment to our articles of incorporation creating a new class of preferred stock and the issuance of the Series A Convertible Preferred Stock.

In connection with the issuance of these securities, we entered into a Registration Rights Agreement, under the terms of which we agreed to use our best efforts to cause a registration statement to be declared effective by the Securities and Exchange Commission no later than January 25, 2007. This registration statement would register the resale of the shares of our common stock issuable upon conversion of the Series A Convertible Preferred Stock, exercise of the warrants and in payment of the dividend obligations under the Certificate of Designations governing the Series A Convertible Preferred Stock. The Registration Rights Agreement provides that, to the extent we fail to cause this registration statement to be declared effective by the Securities and Exchange Commission by the effectiveness deadline, we must pay registration delay payments in the amount of one percent (1.0%) of the aggregate purchase price paid by the investors for the Series A Convertible Preferred Stock, or $450,000, for every 30 days (pro rated for periods totaling less than thirty days) this effectiveness failure remains.

On October 23, 2006, we filed a registration statement to register the resale of these shares. The Securities and Exchange Commission reviewed this registration statement and, as a consequence of recent clarifications by the Staff of Rule 415 under the Securities Act of 1933, as amended, we have encountered difficulties determining when all of these shares may be registered and sold by the investors. These clarifying interpretations were issued by the Staff after we and the Investors had entered into the Registration Rights Agreement and issued the shares of Series A Convertible Preferred Stock. Accordingly, we have been unable to cause this registration statement to be declared effective by the Securities and Exchange Commission.

Under the terms of the Registration Rights Agreement, these registration delay payments accrue from January 26, 2007 until the earlier of us successfully obtaining a waiver or amendment of these registration delay payments or the registration statement being declared effective. The registration delay payments are not payable until every thirtieth day after the effectiveness failure. Accordingly, the first registration delay payment was due on February 26, 2007. In addition, under the Certificate of Designations governing the Series A Convertible Preferred Stock, (a) the failure of the applicable Registration Statement to be declared effective by the Securities and Exchange Commission on the date that is sixty (60) days after the applicable effectiveness deadline or (b) our failure to pay to the investors any amounts when and as due under the Certificate of Designations or any other transaction document contemplated in the

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Certificate of Designations is defined as a “Triggering Event” allowing the Required Holders, as defined below, to require us to redeem all shares of their Series A Convertible Preferred Stock by the fifth business day after transmitting notice to us of their desired redemption. Under the terms of the Certificate of Designation, this redemption would be effected by us being required to pay in cash an amount equal to 115.0% of the face value of all or a portion, as applicable, of the outstanding shares of the Series A Convertible Preferred Stock, plus all accrued but unpaid interest and dividends. To the extent our stock price at the time of this redemption request multiplied by the number of shares into which the Series A Convertible Preferred Stock is convertible exceeds this cash payment amount, the redemption would be effected by payment of this higher amount increased by the same 15.0% premium, plus all accrued but unpaid interest and dividends.

Based upon general statements made by certain officials within the Securities and Exchange Commission to the private equity marketplace with respect to its recent clarification of Rule 415, we believe an amendment of the terms of the Series A Convertible Preferred Stock and possibly the warrants would be necessary in order to permit us to cause a Registration Statement covering some portion of these shares to be declared effective by the Securities and Exchange Commission. As indicated below, we have been holding discussions with the investors as to the form these amendments will take but have not yet reached a final agreement with the investors as to these terms. Approval by the “Required Holders”, defined as those investors holding, in the aggregate, a majority of the Series A Convertible Preferred Stock, is all that is required for these amendments to take effect. We cannot assure you that we and the investors will be able to agree to and enter into the necessary amendments. In addition, to date the Securities and Exchange Commission has provided very little to no public guidance regarding its recent clarifications of Rule 415. Accordingly, we cannot predict the Securities and Exchange Commission’s final position with respect to Rule 415.

In furtherance of these negotiations, on April 2, 2007, effective as of March 30, 2007, we entered into Forbearance and Amendment Agreements (the “Forbearance Agreements) with investors constituting the “Required Holders”, i.e. investors holding, in the aggregate, a majority of the Company’s previously-issued Series A Convertible 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 shall each refrain from taking any remedial action with respect to the Company’s failure (the “Effectiveness Failure”) to have declared effective by the United States Securities and Exchange Commission a registration statement registering the resale of the shares of our common stock underlying the Series A Convertible Preferred Stock and warrants as required by a Registration Rights Agreement, dated February 20, 2005, by and between the Company, the Required Holders and the remaining holder of the Series A Preferred Shares (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. No remedial actions were taken by the Required Holders.

Pursuant to the terms of these Forbearance Agreements, we agreed to submit to our shareholders for approval at our annual shareholder meeting a form of Amended and Restated Certificate of Designations (the “Amended Certificate of Designations”) setting forth certain revised terms of the Series A Convertible Preferred Stock as described in the Forbearance Agreements. On June 29, 2007, our shareholders approved the Amended Certificate of Designations at the annual shareholder meeting. We 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 an Amended and Restated Securities Purchase Agreement, dated as of July 13, 2007 (the “Amended Securities Purchase Agreement”), and an Amended and Restated Registration Rights Agreement, dated as of July 13, 2007 (the “Amended Registration Rights Agreement”).

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The Amended Securities Purchase Agreement contains terms similar to the original Securities Purchase Agreement 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 our common stock, par value $.10 (the “Common Stock”). The Amended Certificate of Designations also included a reduction in the conversion price of the Series A Convertible Preferred Stock to $6.75, allowance for the accrual of dividends on the Series A Convertible 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. In addition, each of the parties to the Amended Securities Purchase Agreement waived certain rights to receive Registration Delay Payments and certain other provisions set forth in the governing documents. In addition, the parties executed an Amended and Restated Registration Rights Agreement which removed the obligation to have declared effective by the United States Securities and Exchange Commission by January 2, 2008 a registration statement registering the resale of our shares of common stock underlying the Series A Convertible Preferred Stock and warrants as required by the Registration Rights Agreement, dated February 20, 2005.

With respect to the other holder of the Series A Convertible Preferred Stock, which did not enter into the Forbearance Agreements but had filed a lawsuit against the Company, on August 16, 2007, the Company entered into a Settlement Agreement and Release of Claims (the “Settlement Agreement”) pursuant to which the Company resolved all claims against the Company set forth in the lawsuit such holder filed. Pursuant to the Settlement Agreement, the Company paid to such holder an amount equal to $7.1 million and all accrued interest since January 1, 2007 (the “Settlement Amount”) and the holder returned all shares of the Company’s Series A Convertible Preferred Stock held by the holder to the Company. In return, all parties to the lawsuit entered into mutual releases releasing each other from any and all claims.

No unregistered securities were sold or issued in 2006, 2005 or 2004. In January 2007, 144,162 unregistered shares were issued as a partial payment of dividends related to our outstanding shares of Series A Convertible Preferred Stock.

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Financial Information about Geographic Areas

The following table sets forth our revenue by geographic area. Revenue by geographic area includes sales to unaffiliated customers based on customer location, not the selling entity’s location. We move our equipment from country to country; therefore, to make this disclosure meaningful, the geographic delineation of assets is based upon the location of the legal entity owning the assets.

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Tax Exemptions and Benefits

Some of our offshore earnings are not taxed or are taxed at rates lower than U.S. statutory Federal income tax rates due to tax exemptions and tax incentives.

The U.S. Virgin Islands Economic Development Commission granted us tax exemptions on most of our U.S. Virgin Islands earnings through March 2003. We have applied for an extension of this tax exemption; however, there is no guarantee that it will be granted. The EDC completed a compliance review on our subsidiary in the U.S. Virgin Islands on February 6, 2004. The compliance review covered the period from April 1998 through March 31, 2003 and resulted from our application to request an extension of tax exemptions from the EDC. The EDC’s compliance report cited our failure to make gross receipts tax payments of $505,000 and income tax payments of $2.2 million, excluding interest and penalties. This was the first time that a position contrary to ours or any position on this specific issue had been raised by the EDC. In light of these events, and based on discussions with legal counsel, we established a tax accrual at December 31, 2003 for such exposure which approximated the amounts set forth in the EDC review report. In September 2005 and 2004, the statute of limitations with respect to the income tax return filed by us for the years 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 have not had recent communication with the EDC regarding this matter and if challenged by the U.S. Virgin Islands taxing authority would vigorously contest its position. These tax accrual matters have been included in the results of discontinued operations.

For periods after December 31, 2003, we have accrued, but on the advice of Virgin Islands counsel, not remitted, gross receipts taxes, which would be due should our application for an extension of benefit be withdrawn or denied. Following the sale of the U.S. Virgin Islands ready-mix concrete, aggregates, concrete block and concrete materials business in September 2005, we did not generate any additional revenue which is covered under the applications for extension benefits. Accordingly, the accrual for this gross receipts tax exposure at December 31, 2006 was $2.0 million and will remain unchanged in the future pending resolution of the application for extensions. In addition, at December 31, 2006, we had accrued $0.5 million in accrued interest relating to this obligation.

U.S. tax laws provide that certain of our offshore earnings are not taxable for U.S. federal income tax purposes, and most post-April 1988 earnings from our materials business in the U.S. Virgin Islands can be distributed to us free of U.S. income tax. Any distribution to Devcon International Corp, the parent company, of: (1) earnings from our U.S. Virgin Islands operations accumulated prior to April 1, 1988; or (2) earnings from our other non-U.S. incorporated operations, would subject us to U.S. federal income tax on the amounts distributed, less applicable taxes paid in those jurisdictions according to specific rules concerning foreign tax credits. In December 2004, we distributed $4.7 million of the earnings from one of our subsidiaries in Antigua. The distribution was made under the benefit of a deemed payment provision of a settlement agreement between the government of Antigua and Barbuda and us. The settlement agreement with the government of Antigua and Barbuda provided for withholding tax credits of $7.5 million for dividend distributions made by us from Antigua through the years 2005 to 2007. At December 31, 2006, 2005 and 2004, $15.4 million, $27.6 million and $44.4 million, respectively, of accumulated earnings had not been distributed to the parent company.

During 2005, we distributed $20.4 million of dividends from Antigua using $5.1 million of the withholding tax credits.

During 2006, we distributed an additional $4.6 million of earnings before the sale of the materials division subsidiaries in Antigua, using another $1.2 million of the withholding tax credits. We intend to use the remaining $1.2 million of withholding tax credit to the extent we distribute dividends from our remaining Antigua operations.

For further information on our tax exemptions and income taxes, see Note 16, Income Taxes.

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Intellectual Property

We possess trade names used in our Caribbean operations, of which none are registered. We believe that trade names, which are normally derivatives of the corporate names of our local subsidiaries, have name recognition and are valuable to us. However, for our construction and materials divisions, our trade names have no book value on our consolidated balance sheet.

Devcon International Corp. owns a State of Florida service mark registration and a federal service mark registration for the DEVCON service mark, and Devcon Security Holdings, Inc. owns a State of Florida service mark registration and a federal service mark registration for the DEVCON SECURITY SERVICES service mark. Each of the registrations covers the use of the applicable mark in connection with installation and maintenance of burglar and security alarm systems and monitoring of burglar and security alarm systems. The DEVCON SECURITY SERVICES and DEVCON federal service mark registrations were both granted in 2006. The Florida registrations were granted in 2005.

Devcon Security Services, Inc., or DSS, owns U.S. federal trademark registrations for the marks CENTRAL ONE ^® , as used with installation, maintenance and monitoring of residential, commercial and industrial burglar and security alarm systems. Additionally, DSS owns State of Florida trademark registrations for CENTRAL ONE, FAX BACK AND COMPREHENSIVE DEALER SERVICES. DSS owns U.S. federal trademark registrations for the marks GIBRALTAR SECURITY ALARM SYSTEMS ^® and PREPARE AND PROTECT ^® , each as used with installation and maintenance of burglar electronic security systems, fire alarms, home and commercial security systems, voice intercom systems and closed circuit television and card access systems, as well as a U.S. federal trademark registration for its SECURITY BY GUARDIAN INTERNATIONAL and G logo ^® as used with installation, monitoring and maintenance of voice intercom systems and closed circuit television and card access systems. Additionally, DSS owns State of Florida trademark registrations for its GUARDIAN INTERNATIONAL SECURITY and G logo as well as its G logo, each for use with installation, monitoring and maintenance of burglar electronic security systems, fire alarms, home and commercial security systems, and installation and maintenance of voice intercom systems, as well as a State of Florida trademark registration for PRECISION SECURITY SYSTEMS as used with commercial and residential electronic security system sales, service and monitoring. Currently, there are no pending or threatened litigation or claims relating to our trademarks. Also, to the best of our knowledge, there are no unasserted possible claims or assessments that may call for financial disclosure. We cannot assure you that third parties will not attempt to assert superior trademark rights in similar marks or that we will be able to successfully enforce and protect our rights in the trademarks against third party infringers

Business Address

Our executive offices are located at 595 South Federal Highway, Suite 500, Boca Raton, Florida 33432, our telephone number is (561) 208-7200 and our web address is www.devc.com . In addition, we use www.devcon-security.com as a separate web address in connection with electronic security services division. In this document, the terms “Company”, “we”, “our”, “us” and “Devcon” refer to Devcon International Corp. and its subsidiaries.

Employees

At December 31, 2006, we employed 703 persons. As of that date, we employed 524 persons in our electronic security services division, 18 of whom are members of a union; we employed 117 persons in our construction division, four of whom are members of a union; we employed 49 persons in our materials division, none of whom are members of a union; and we employed 13 persons in corporate administration, none of whom are members of a union. Most employees are employed on a full-time basis. We believe employee relations are satisfactory.

In connection with the sale of our construction division, we entered into a Transition Services Agreement with the buyer under the terms of which, we have agreed to make available specified employees and independent contractors and other non-employees of ours to assist the buyer with the operation of the construction division through September 16, 2007.

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Environmental Matters

We are involved, on a continuing basis, in monitoring our compliance with environmental laws and in making capital and operating improvements necessary to comply with existing and anticipated environmental requirements. While it is impossible to predict with certainty, we currently do not foresee such expenses in the near future as having a material effect on our business, results of operations or financial condition. See Item 3, Legal Proceedings, and Note 21, Commitments and Contingencies.

Subsequent Events

Resignation of Chief Executive Officer. On January 22, 2007, Mr. Stephen J. Ruzika resigned as our Chief Executive Officer. Also on January 22, 2007, our Board of Directors appointed Richard C. Rochon, our Chairman of the Board, to the position of Acting Chief Executive Officer. Mr. Rochon has been our Chairman since January 24, 2006, and a director of ours since 2004. Mr. Rochon is Chairman and Chief Executive Officer of Royal Palm Capital Partners, a private investment and management firm. He is also a Principal of Royal Palm Capital Management, LLLP, an affiliate of Royal Palm Capital Partners.

Resignation of Chief Financial Officer. On February 9, 2007, Mr. George M. Hare resigned as our Chief Financial Officer. On February 13, 2007, our Board of Directors appointed Robert C. Farenhem, a Principal of Royal Palm Capital Management, LLLP, to the position of Chief Financial Officer. Mr. Farenhem has been a Principal and the Chief Financial Officer of Royal Palm Capital Partners since April 2003 and has been a director and officer of Coconut Palm Acquisition Corp., a blank check company, since April 29, 2005. Between April 18, 2005 and December 20, 2005, Mr. Farenhem was our Interim Chief Financial Officer.

Sale of Construction Division. On March 21, 2007, we completed the transactions contemplated by an Asset Purchase Agreement, dated as of March 12, 2007 entered into by us and BitMar Ltd., a Turks and Caicos corporation and successor-in-interest to Tiger Oil, Inc., a Florida corporation, consisting of the sale of fixed assets, inventory and customer lists constituting a majority of the assets of the construction division, for approximately $5.3 million, subject to a holdback of $525,000 to be retained for resolution of indemnification matters in the form of a non-negotiable promissory note bearing a term of 120 days. We retained working capital of $6.7 million, including approximately $2.1 million in notes receivable, as of December 31, 2006. The majority of our leasehold interests were retained by us with the buyer assuming only our 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. In addition, we entered into a three-year noncompetition agreement under the terms of which we 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, excluding any production and distribution of ready-mix concrete, crushed stone, sand, concrete block, asphalt and bagged cement throughout this territory and also agreed to other standard provisions concerning the non-solicitation of customers and employees of the construction division. In addition, we and the buyer entered into a Transition Services Agreement under the terms of which, we have agreed to make available specified employees and independent contractors and other non-employees of ours to assist the buyer with the operation of the construction division through September 16, 2007.

As a result of this transaction, we recognized a loss from the sale in the fourth quarter of 2006 of approximately $2.8 million, exclusive of any employee severance and other transaction-related expenses which will be recognized in the first quarter of 2007. We have not yet determined the amount of these transaction-related expenses as they are pending resolution of a closing matter.

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

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Forbearance and Amendment Agreements . On April 2, 2007, effective as of March 30, 2007, the Company entered into the Forbearance Agreements with the Required Holders holding, in the aggregate, a majority of the Company’s previously-issued Series A Convertible Preferred Stock. See discussion above under Financing, “Item 1-Business-Financing.”

Item 1A. Risk Factors

You should read and consider carefully each of the following factors, as well as the other information contained in, attached to or incorporated by reference in this report. If any of the following risks materialize, our financial condition and results of operations could be materially and adversely affected and the value of our stock could decline. The risks and uncertainties described below are those that we currently believe may materially affect us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business operations.

General Risk Factors Relating to our Business

Our officers and directors have the ability to significantly influence the outcome of any matters submitted to a vote of our shareholders.

Certain of our officers and directors through their affiliation with Coconut Palm Capital Investors I, Inc. have the power to vote, in their sole discretion, all of the securities owned by the former limited partners of Coconut Palm Capital Investors I, Ltd. Determining the current holdings of the former limited partners is a time-consuming task and is performed annually to coincide with the record date for the Annual Shareholders’ Meeting.

As of September 25, 2006 (the record date), the directors and executive officers, as a group, beneficially owned 78.27% of our common stock, assuming beneficial ownership is defined as including common stock ownership after exercising all warrants or options exercisable within 60 days of this date. Therefore, they have the ability to significantly influence the outcome of any matters submitted to a vote of our shareholders. Risks that may result from this ability are largely focused on the following variables:

Our future success is dependent, in part, on key personnel and failure to retain these key personnel would adversely affect our operation. In addition, inherent uncertainties associated with the acquisition of past or future acquisition candidates may cause the acquisition candidates or us to lose key employees.

We are highly dependent on the skills, experience and services of key personnel. As a result, we have entered into employment agreements with certain members of senior management. The loss of such key personnel could have a material adverse effect on our business, operating results or financial condition. We do not maintain key man life insurance with respect to these key individuals. Our potential growth and expansion are expected to place increased demands on our management skills and resources. Therefore, our success also depends upon our ability to recruit, hire, train and retain additional skilled and experienced management personnel. Employment and retention of qualified personnel is important due to the competitive nature of our industry. Our inability to hire new personnel with the requisite skills could impair our ability to manage and operate our business effectively. On January 22, 2007, Stephen J. Ruzika, our Chief Executive Officer and, on February 9, 2007, George M. Hare, our Chief Financial Officer, resigned from their positions with our company. Mr. Ruzika possessed a significant amount of knowledge regarding the electronic security services industry. The departure of any additional officers with similar knowledge of the industry could have a material adverse effect on our financial condition and results of operations.

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Employees of a past or future acquisition candidate may experience uncertainty about their future roles with the surviving corporation. This uncertainty may adversely affect the surviving corporation’s ability to retain key management, sales and marketing personnel. Many of these employees may be critical to the business and operations of the surviving corporation. The loss of key personnel may imperil the acquisition of any such acquisition candidate or lead to disruptions of our operations. The loss of key personnel also could result in a loss of key information and expertise, which could result in future replacement costs associated with recruitment and training.

We are subject to significant debt, debt service, dividend service and redemption obligations which could have an adverse effect on our results of operations.

Our electronic security services division has a $100 million CapitalSource Revolving Credit Facility and, as of December 31, 2006 and December 31, 2005, we had $89.1 million and $55 million, respectively, of borrowings outstanding. In addition, we have an aggregate of 45,000 shares of Series A Convertible Preferred Stock with an aggregate liquidation preference of $45 million. These shares of Series A Convertible Preferred Stock are subject to regular dividend payment and redemption obligations. On April 2, 2007, we entered into a Forbearance Agreement with respect to the Series A Convertible Preferred Stock with some of the institutional investors, which among other amended terms provides for the ability, at our option, to accrue dividends until the underlying documents are amended, at which time we could at our option pay the dividend in kind. The Forbearance Agreement terminates January 2, 2008. As a result of the foregoing transactions, we are incurring significant interest expense and accruing significant dividend liabilities. The degree to which we are leveraged could have significant consequences, including the following:

The CapitalSource Revolving Credit Facility contains financial covenants that require our subsidiaries which comprise our electronic security services division to meet a number of financial ratios and tests, and imposes restrictions on our electronic security services division’s ability to, among other things:

Failure to comply with the obligations in the CapitalSource Revolving Credit Facility could result in an event of default, which, if not cured or waived, could permit acceleration of this indebtedness or of other indebtedness, allowing our senior lenders to foreclose on our electronic security services assets.

In addition, the Series A Convertible Preferred Stock contain a financial covenant imposing a restriction on our ability to incur additional indebtedness. As a result, so long as any shares of Series A Convertible Preferred Stock remain outstanding, we will not

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be able to allow our indebtedness ratio to exceed a specified maximum leverage amount. Our failure to comply with this indebtedness ratio covenant could result in an event of default, which, if not cured or waived, could permit holders of the Series A Convertible Preferred Stock to require us to redeem all, or a portion of, the outstanding principal amount of the Series A Convertible Preferred Stock and pay all accrued but unpaid dividends.

As of December 31, 2006, our current debt service obligation and Series A Convertible Preferred Stock dividend expenses are summarized in the chart below (000’s). The chart takes into account the proposed amendments set forth in the Forbearance Agreements described above, including an increase in the dividend rate of the Series A Convertible Preferred Stock to 10% and the ability to accrue dividends by adding the amounts to the stated value of the Series A Convertible Preferred Stock:

If we do not successfully implement our business strategy, we may not be able to repay or refinance our senior debt or comply with the terms of the Series A Convertible Preferred Stock.

We may not be able to successfully implement our business strategy or realize our anticipated financial results. Accordingly, our cash flows and capital resources may not be sufficient to pay the interest charges and principal payments on our senior debt or comply with redemption provisions of the Series A Convertible Preferred Stock. Failure to pay our interest expense, make our principal payments, or effect a redemption would result in a default. If this occurs, our substantial indebtedness and the redemption amount for the Series A Convertible Preferred Stock could have important consequences to us and may, among other things:

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In the event that we are unable to do so, we may be left without sufficient liquidity and may not be able to repay our senior debt. In that case, the senior lenders would be able to foreclose on our assets. Even if new financing is available, it may not be on terms that are acceptable to us.

Similarly, if we are not able to successfully implement our business strategy or realize our anticipated financial results, we may not be able to comply with the terms of the Series A Convertible Preferred Stock requiring us to redeem, for cash, all outstanding shares of Series A Convertible Preferred Stock, in equal installments, on the fourth, fifth and sixth anniversary of completion of the private placement. If we fail to effect any required redemption of the Series A Convertible Preferred Stock, the applicable redemption amount per unredeemed share of Series A Convertible Preferred Stock will bear interest at the rate of 1.5% per month until paid in full and the investors will have the option to require us to convert any of those unredeemed shares into shares of our common stock substituting market prices for the conversion price, which market prices may be lower than the conversion price resulting in a larger number of shares of our common stock being issued, resulting in greater dilution to our existing shareholders.

Our stock is thinly traded.

While our stock trades on Nasdaq, our stock is thinly traded and you may have difficulty in reselling your shares quickly. The low trading volume of our common stock is outside of our control and we cannot guarantee that the trading volume will increase in the near future or that, even if it does increase in the future, it will be maintained. Without a large float, our common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile. In addition, in the absence of an active public trading market, an investor may be unable to liquidate his investment in us. Trading of a relatively small volume of our common stock may have a greater impact on the trading price of our stock than would be the case if our public float was larger. We cannot predict the prices at which our common stock will trade in the future.

We do not currently pay any dividends on our common stock.

We have not paid any dividends on our common stock in the last fourteen years. We anticipate that for the foreseeable future we will continue to retain any earnings for use in the operation of our business, except as we may elect to pay dividends on the Series A Convertible Preferred Stock. Any future determination to pay cash dividends will be at the discretion of our board of directors, after consideration of any restrictions on cash dividends as defined by our credit and preferred stock agreements, and will depend on our earnings, capital requirements, financial condition and other factors deemed relevant by our board of directors.

The common stock warrants and shares of Series A convertible preferred stock are deemed under generally accepted accounting principles to contain embedded derivative financial instruments, the periodic valuation of which may result in us recognizing charges due to changes in the market value of these derivative financial instruments.

In accordance with FASB 133 “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock” the common stock warrants and

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embedded derivatives in the Series A Convertible Preferred Stock are classified as derivative liabilities and, therefore, their fair values are recorded as derivative liabilities on our balance sheet. Changes in the fair value of the warrants and derivatives will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss will be recorded in our statement of operations. We are required to assess these fair values of derivative liabilities each quarter and as the value of the warrants and derivatives is quite sensitive to changes in the market price of our stock, among other things, fluctuations in such value could be substantial and could cause our results to not meet the expectations of securities analysts and investors. These fluctuations will continue to impact our results of operations as described above for as long as the warrants and derivatives are outstanding. For the year ended December 31, 2006, we recognized income of $4.6 million related to the change in the fair value of these derivatives. See Note 12, Derivative Instruments.

We have identified material weaknesses in our internal control over financial reporting that may prevent us from being able to accurately report our financial results or prevent fraud, which could harm our business and operating results, the trading price of our stock and our access to capital.

In connection with the completion of its audit of, and the issuance of an unqualified report on, the Company’s consolidated financial statements for the fiscal year ended December 31, 2006, our independent registered public accounting firm, Berenfeld, Spritzer, Shechter & Sheer (“BSS&S”), communicated to the Company’s management and Audit Committee that certain matters involving the Company’s internal controls were considered to be “material weaknesses”, as defined under the standards established by the Public Company Accounting Oversight Board, or PCAOB. These matters pertained to (i) inadequate policies and procedures with respect to review and oversight of financial results to ensure that accurate consolidated financial statements were prepared and reviewed on a timely basis, (ii) inadequate number of individuals with U.S. GAAP experience and (iii) inadequate review of account reconciliations, analyses and journal entries.

An evaluation of our disclosure controls and procedures as of December 31, 2006, was performed by our Chief Executive Officer and Chief Financial Officer, who is also acting as our Principal Financial and Accounting Officer. Based on that evaluation, these officers concluded that, as of December 31, 2006, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission. Accordingly, the material weaknesses noted at December 31, 2005 still existed at December 31, 2006. See “Item 9A - Controls and Procedures” for further discussion.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and assess on an on-going basis the design and operating effectiveness of our internal control structure and procedures for financial reporting. We are committed to continuously improving our internal controls and financial reporting, and are working towards meeting the formalized requirements of Section 404 of the Sarbanes-Oxley Act.

However, to the extent our independent registered public accounting firm is required to provide an opinion as to the effectiveness of our internal controls, even if we are able to take remedial actions to correct the identified material weaknesses described above and any other material weaknesses identified as the evaluation and testing process is completed, there may be insufficient time for the remediated controls to be in operation to permit our independent registered public accounting firm to conclude that the remediated controls are effective. Thus, our independent registered public accounting firm would possibly provide an adverse opinion to the effect that our internal controls are ineffective as of the date of such evaluation, or may decline to issue an opinion as to the effectiveness of our internal controls.

Under current regulations, we must be able to comply with the provision of Section 404 of the Sarbanes-Oxley Act of 2002 by our reporting period ending December 31, 2007. If we are unable to conclude that our internal controls over financial reporting are effective at such time that we will be required to attest to them our ability to obtain additional financing on favorable terms could be materially and adversely affected, which, in turn, could materially and adversely affect our business, our financial condition and the market value of our securities. In addition, if we are unable to conclude our internal controls or disclosure controls are effective at December 31, 2007, the date that we will be required to attest to them, current and potential shareholders could lose confidence in our financial reporting and our stock price could be negatively impacted.

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We have incurred and will continue to incur increased costs as a result of securities laws and regulations relating to corporate governance matters and public disclosures.

The Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission’s rules implementing that Act have required changes in some of our corporate governance practices and may require further changes. These rules and regulations have increased our legal and financial compliance costs and have made some activities more difficult, time-consuming or costly. These rules and regulations could also make it more difficult for us to attract and retain qualified independent members of our board of directors and qualified members of our management team.

We are taking steps to comply with the laws and regulations in accordance with the deadlines by which compliance is required, however, our estimate of the amount or timing of additional costs that we may incur to respond by these deadlines may not be accurate.

We are subject to a financial covenant under the Series A Convertible Preferred Stock which restricts our ability to incur indebtedness and could have an adverse effect on our results of operations.

We are subject to a financial covenant under the Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock contains a financial covenant imposing a restriction on our ability to incur additional indebtedness. As a result, so long as any shares of Series A Convertible Preferred Stock remain outstanding, we will not be able to allow our indebtedness ratio to exceed a specified maximum leverage amount. Our failure to comply with this indebtedness ratio covenant could result in an event of default, which, if not cured or waived, could permit holders of the Series A Convertible Preferred Stock to require us to redeem all, or a portion of, the outstanding principal amount of the Series A Convertible Preferred Stock and pay all accrued but unpaid dividends.

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Risk Factors Relating to our Electronic Security Services Division

We intend to continue our strategy of developing a strong regional presence and, as a result, experience significant growth, some of which may adversely affect our operating results, financial condition and existing business.

To date, we have acquired Security Equipment Company, Starpoint, Coastal and Guardian and plan to continue to acquire additional electronic security service companies. Acquisitions can divert management’s attention and result in greater administrative burdens and operating costs and, to the extent financed with debt, additional interest costs. We may not be able to manage or integrate acquired companies or businesses successfully. The success of our acquisition strategy will depend on, among other things:

Financing for the acquisitions may come from several sources, including our existing cash on hand, the proceeds from the exercise of outstanding warrants, the incurrence of indebtedness or the issuance of additional common stock, preferred stock, debt (whether convertible or not) or other securities. The issuance of any additional securities could, among other things:

Our inability to continue to acquire businesses in the electronic security services industry could have adverse consequences on our results of operations.

Due to the continuing consolidation of the electronic security systems industry and the acquisition by us and other electronic security systems companies of a number of large portfolios of subscriber accounts, there may in the future be fewer large portfolios of subscriber accounts available for acquisition. We face competition for the acquisition of portfolios of subscriber accounts, and we may be required to offer higher prices for subscriber accounts we acquire in the future than we have offered in the past. A core component of our regional strategy is the acquisition of electronic security services businesses which will enable us to develop a leading regional presence in certain targeted markets and benefit from the increased brand recognition, maximization of market share and improved operating efficiencies that we believe will accompany this position. If we are unable to continue our acquisition program, we may be unable to achieve this regional presence in some or all of the markets we have targeted, which would have an adverse effect on our results of operations.

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Integrating our acquired businesses may be disruptive to or cause an interruption of our business which could have a material adverse effect on our operating results and financial condition.

The process of integrating our acquired businesses may be disruptive to our business and may cause an interruption or a loss of momentum in our business as a result of the following factors, among others:

These disruptions and difficulties, if they occur, may cause us to fail to realize the cost savings, revenue enhancements and other benefits from that integration and may cause material adverse short and long-term effects on our operating results and financial condition.

We have encountered and may continue to encounter difficulties implementing our business plan.

These challenges and difficulties relate to our ability to do the following:

Attract new customers and retain existing customers. Within the electronic security services division, customers, particularly residential customers, move from the locations at which our security systems were installed. This creates expected and ongoing attrition. There are no guarantees that persons or businesses moving into these locations will use our company, or any company, for security services. In the event of a slow down in the real estate or new home construction in our key market in Florida, we could experience periods in which we are not able to replace the natural attrition of residential customers.

Generate sufficient cash flow from operations or through additional debt or equity financings to support our regional growth strategy. Our security operations face significant competition and pricing pressure from other national and regional service providers in our industry. If we are unable to compete successfully with these companies, our sales and profitability could be adversely affected. Our rates of customer attrition may affect our ability to remain in compliance with certain covenants in our debt agreements and the capital needed to replace the customers lost through attrition is reliant on availability of operating cash flow after servicing our debt agreements and availability from existing credit facilities.

Install and implement new financial and other operating systems, procedures and controls to support our regional growth strategy with minimal delays. Our growth plans have relied and continue to rely on the acquisition of smaller security companies and obtaining operating cost efficiencies by servicing more customers through a single more efficient infrastructure.

If we fail to generate sufficient cash flow from operations, it may be necessary to take additional actions, which could divert management’s attention and strain our operational and financial resources. We may not successfully address any or all of these challenges, and our failure to do so would adversely affect our business plan and results of operations, our ability to raise additional capital and our ability to achieve enhanced profitability.

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We have a history of losses, which are likely to continue.

We incurred net losses from continuing operations of $29.7 million for the year ended December 31, 2006, and $15.4 million for the year ended December 31, 2005.

These losses reflect the following, among other factors:

We will continue to incur a substantial amount of interest expense and amortization of customer accounts and we do not expect to attain profitability in the near future.

Our electronic security services operations are geographically concentrated making us vulnerable to economic and environmental risks inherent to those locations.

Our subscriber base is geographically concentrated in Florida and New York. Accordingly, our performance may be adversely affected by regional or local economic and environmental conditions, including weather conditions, particularly in Florida, which is susceptible to the impact of hurricanes, lightning and tornadoes. Local environmental conditions such as hurricanes making landfall in Florida have caused damage to infrastructure such as electric power and telecommunications, both of which are required to provide service to our security customers. If electric power is not available for an extended period of time, we would be unable to provide our services and would therefore be unable to bill our customers. If the hurricanes destroy or cause severe damage to homes, then we are at risk of losing our customer base.

Our electronic security services division operates in a highly competitive environment and we may not be able to compete effectively for customers, causing us to lose all or a portion of our market share.

The electronic security services business in the United States is highly competitive. New competitors are continually entering the field. Competition is based primarily on price in relation to quality of service. Sources of competition in the electronic security services industry are other providers of central monitoring services, local electronic security systems and other methods of protection, such as manned guarding.

Our electronic security services division competes with other major firms which have substantial resources, including ADT Security Services, Inc. (a subsidiary of Tyco International Limited), Brinks Home Security, a division of The Brinks Company, Protection One and HSM Electronic Protection Services, a division of the StanleyWorks, as well as many regional and local companies. Many of these competitors are larger and have significantly greater resources than we do and may possess greater local market knowledge as well. We may not be able to continue to compete effectively for existing or potential customers, causing us to lose all or a portion of our market share.

Increased adoption of “false alarm” ordinances by local governments may adversely affect our business.

An increasing number of local governmental authorities have adopted, or are considering the adoption of, laws, regulations or policies aimed at reducing the perceived costs to municipalities of responding to false alarm signals. Such measures could include:

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Enactment of these measures could adversely affect our future business and operations. In addition, concern over false alarms in communities adopting these ordinances could cause a decrease in the timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain alarm monitoring services.

Future government regulations or other standards could have an adverse effect on our operations.

Our operations are subject to a variety of laws, regulations and licensing requirements of federal, state and local authorities. In certain jurisdictions, we are required to obtain licenses or permits, to comply with standards governing employee selection and training and to meet certain standards in the conduct of our business. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have an adverse effect on us. In the event that these laws, regulations and/or licensing requirements change, we may be required to modify our operations or to utilize resources to maintain compliance with such rules and regulations. In addition, new regulations may be enacted that could have an adverse effect on us.

Increased adoption of statutes and governmental policies purporting to void automatic renewal provisions in our customer contracts, or purporting to characterize certain of our charges as unlawful, may adversely affect our business.

Our customer contracts typically contain provisions automatically renewing the term of the contract at the end of the initial term, unless cancellation notice is delivered in accordance with the terms of the contract. If the customer cancels prior to the end of the contract term, other than in accordance with the contract, we may charge the customer the charges that would have been paid over the remaining term of the contract, or charge an early cancellation fee.

Several states have adopted, or are considering the adoption of statutes, consumer protection policies or legal precedents which purport to void the automatic renewal provisions of our customer contracts, or otherwise restrict the charges we can impose upon contract cancellation. Such initiatives could compel us to increase the length of the initial term of our contracts, and increase our charges during the initial term, and consequently lead to less demand for our services and increase our attrition. Adverse judicial determinations regarding these matters could cause us to incur legal exposure to customers against whom such charges have been imposed, and the risk that certain of our customers may seek to recover such charges through litigation. In addition, the costs of defending such litigation and enforcement actions could have an adverse effect on us.

Cyclical industry and economic conditions have affected and may continue to adversely affect the financial condition and results of operations of our electronic security services division.

The operating results of our electronic security services division may be adversely affected by the general cyclical pattern of the electronic security services industry. Demand for electronic security services is significantly affected by levels of commercial construction and consumer and business discretionary spending. The market for new construction and the real estate market in general are cyclical and, in the event of a decline in the market for new developments, it is likely that demand for our electronic security monitoring services would also decline, which could negatively impact our results of operations.

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Our electronic security services division’s business is subject to attrition of subscriber accounts.

Our electronic security services division experiences attrition of subscriber accounts as a result of, among other factors, relocation of subscribers, adverse financial and economic conditions, and competition from other electronic security system companies. In addition, our electronic security services division experiences attrition of newly acquired accounts to the extent that we do not integrate these accounts or do not adequately service the accounts or because of dissatisfaction with prior service. Attrition and an increase in attrition rates could have a material adverse effect on our revenues and earnings, and our ability to maintain compliance with various covenants in our credit facilities.

Lower crime rates could have an adverse effect on our results of operations.

For the past several years crime rates have been dropping in the United States, particularly in the State of Florida. According to the Florida Department of Law Enforcement’s 2005 Annual Uniform Crime Report, Florida’s index crime rate has reached a 35-year low dropping by 3.7 percent in 2005, compared to 2004. Particularly relevant to our business is the decrease in the number of burglaries. While the number of homes and businesses with installed electronic security systems has continued to increase even as crime rates have decreased, this may not continue to be the case. Any significant decrease in the number of homes and businesses installing new electronic security systems could have a material adverse effect on our business.

We rely on technology that may become obsolete, which could require significant capital expenditures.

Our monitoring services depend upon the technology (hardware and software) of security alarm systems. In order to maintain our customer base that currently uses security alarm components that are or could become obsolete, we will likely be required to upgrade or implement new technologies that could require significant capital expenditures. We may not be able to successfully implement new technologies or adapt existing technologies to changing market demands. If we are unable to adapt in response to changing technologies, market conditions or customer requirements in a timely manner, such inability could adversely affect our business.

Shifts in our current and future customers’ selection of telecommunications services could increase customer attrition and could adversely impact our earnings and cash flow.

Certain elements of our operating model rely on our customers’ selection and continued use of traditional, land-line telecommunications services, which we use to communicate with our monitoring operations. In recent years, many customers have shown a preference for subscribing only to cellular technology and have discontinued use of land-line telephone services. In order to continue to service existing customers who cancel their land-line telecommunications services and service new customers who do not subscribe to land-line telecommunications services, customers must upgrade to alternative and typically more expensive wireless or internet based technologies. . Continued shifts in customers’ preferences regarding telecommunications services could continue to adversely impact attrition and our earnings and cash flow.

The loss of our Underwriter Laboratories listing could negatively impact our competitive position.

All of our alarm monitoring centers are UL listed. To obtain and maintain a UL listing, an alarm monitoring center must be located in a building meeting UL’s structural requirements, have back-up and uninterruptible power supplies, have secure telephone lines and maintain redundant computer systems. UL conducts periodic reviews of alarm monitoring centers to ensure compliance with their regulations. Non-compliance could result in a suspension of our UL listing. The loss of our UL listing could negatively impact our

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competitive position

We are exposed to greater risks of liability for employee acts or omissions, or system failure, than may be inherent in other businesses.

The nature of the services we provide potentially exposes us to greater risks of liability for employee acts or omissions or system failures than may be inherent in other businesses. In an attempt to reduce this risk, substantially all of our alarm monitoring agreements and other agreements pursuant to which we sell our products and services contain provisions limiting our liability to customers and third parties. However, in the event of litigation with respect to such matters, these limitations may not be enforced. In addition, the costs of such litigation could have an adverse effect on us.

The Company carries insurance of various types, including general liability and professional liability insurance in amounts management considers adequate and customary for the industry. Some of the Company’s insurance policies, and the laws of some states, may limit or prohibit insurance coverage for punitive or certain other types of damages, or liability arising from gross negligence. If the Company incurs increased losses related to employee acts or omissions, or system failure, or if the Company is unable to obtain adequate insurance coverage at reasonable rates, or if the Company is unable to receive reimbursements from insurance carriers, the Company’s financial condition and results of operations could be materially and adversely affected.

Risk Factors Relating to our Materials Division and Construction Division

Petit, a vendor and landlord of ours in St. Martin, continues to indicate that he believes court intervention will be required to compel compliance by us with respect to the terms of the settlement agreement settling a previous dispute we had with Petit.

We have an ongoing dispute with Petit, a vendor and landlord, which dates back to 2004, related to a materials supply agreement. In March 2007, Petit blocked access to our ready-mix batch plant and quarry in St. Martin. We have temporarily shut down operations and no revenue is being realized. Under French law, we remain liable for a portion of our employees’ wages. Accordingly, until we can enforce what we believe to be valid easements to the parcels on which we conduct our operations, or until we can reach a satisfactory settlement, we will incur operating losses which at this time are not estimable. Petit has also challenged the validity of our September 2006 exercise of an option to acquire the parcel of land on which substantially all remaining aggregate reserves are located. The extension of a land lease, beyond December 31, 2006, for a parcel on which the quarry’s crushing equipment and the ready-mix batch plant are located is contingent upon the aforementioned option being validly exercised. In addition, there is a further dispute with respect to the location of a 6,000 square meter parcel referenced in the aforementioned land lease and which is critical to the quarry operations.

If we cannot successfully enforce our easements and resolve our disputes with respect to the option and land lease, our operations will remain shut down and we may be forced to liquidate our operations in St. Martin. See Item 3 “Legal Proceedings”.

We have entered into transactions with our affiliates which result in conflicts of interests.

We have entered into a number of transactions with our affiliates, including but not limited to an investment in the Caribbean involving companies in which certain of our current and former officers and directors have an interest. Material transactions are disclosed in our audited consolidated financial statements and the periodic reports we file with the Securities and Exchange Commission. See “Item 13 — Certain Relationships and Related Transactions”. These transactions result in conflicts of interests. Our Audit Committee reviews and approves transactions between us and our affiliates, including our officers and directors. Our policy is that all of these transactions be reviewed and approved by the audit committee prior to completion. In addition, our Articles of Incorporation provide that no contract or other transaction between us and any other corporation shall in any way be invalidated by the fact that any of our directors are interested in or are directors or officers of the other party to the transaction.

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We are subject to some risks due to the nature of our foreign operations.

The majority of our continuing operations in 2006 were conducted in foreign countries located in the Caribbean, primarily Antigua and Barbuda, Sint Maarten, St. Martin and the Bahamas. For the fiscal year ended December 31, 2006, 38% of our revenue was derived from foreign geographic areas. The risks of doing business in foreign areas include potential adverse changes in U.S. diplomatic relations with foreign countries, changes in the relative purchasing power of the U.S. dollar, hostility from local populations, adverse effects of exchange controls, changes in either import or export tariffs, nationalization, interest rate fluctuations, restrictions on the withdrawal of foreign investment and earnings, government policies against businesses owned by non-nationals, expropriations of property, the instability of foreign governments, any civil unrest or insurrection that could result in uninsured losses and other political, economic and regulatory conditions, risks or difficulties. Adverse changes in currency exchange rates or raw material commodity prices, both in absolute terms and relative to competitors’ risk profiles, could adversely impact our operations. We are not subject to these risks in the U.S. Virgin Islands, since the Virgin Islands is a United States territory. We believe our most significant foreign currency exposure is the Euro. We are also subject to U.S. federal income tax upon the distribution of certain offshore earnings. Although we have not encountered significant difficulties in our foreign operations, we could encounter difficulties in the future.

Some of our construction contracts have fixed price terms which do not take into account unanticipated changes in production costs, which we would not be able to pass on to the customer.

We generally enter into either fixed-price contracts that provide for an established price that does not vary during the term of the contract or unit-price contracts under which our fee is based on the quantity of work performed. Fixed-price and unit-price contracts involve inherent risks, such as unanticipated increases in the cost of labor and/or materials, subcontracts that were unexpected at the time of bidding, bidding errors, unexpected field conditions, adverse weather conditions, the inability of subcontractors to perform, work stoppages and other events beyond our control. Although our attempts to minimize the risks inherent in our contracts by, among other things, obtaining subcontracts from reliable subcontractors, anticipating labor and material cost increases, anticipating contingencies, utilizing our cost control system and obtaining certain cost escalation clauses, we cannot provide assurance that we will be able to complete our current or future contracts at a profit. In addition, the longer the term of fixed-price and unit-price contracts, the greater the risks associated with that contract.

We may incur specified penalties or losses under some of the clauses in the contracts governing our projects.

Some of our contracts provide for significant penalties (liquidating damages) for not completing the projects by specified substantial completion dates. The original substantial completion dates may be extended by change orders under circumstances provided in the contracts. However, we have experienced delays on some projects caused by circumstances which do not permit and extension of the substantial completion date. In 2005, we accrued for $0.8 million of liquidating damages with respect to our marina project in the U.S. Virgin Islands.

General economic conditions in the markets in which we conduct business could have a material impact upon our operations.

Our construction division has been and our materials division is materially dependent upon economic conditions in general, including recession, inflation, deflation, general weakness in construction and housing markets, changes in infrastructure requirements and, in particular, upon the level of development and construction activities in the Caribbean. A general downturn in the economy in this region would adversely affect the housing and construction industry and, therefore, would adversely affect our contracting and concrete and related products businesses.

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Our materials division operates in a highly competitive environment and we may not be able to compete effectively for customers, causing us to lose all or a portion of our market share.

We have competitors in the materials business in the locations where we conduct business. The competition includes local ready-mix concrete, and importers of aggregates and concrete blocks. We also encounter competition from the producers of asphalt, which is an alternative material to concrete for road construction. Most competitors have a disadvantage to us with respect to our material costs, but have an advantage over us with respect to lower overhead costs.

We are highly dependent on supplies of cement, concrete block, aggregates and sand and a failure to maintain adequate supplies would adversely affect our operations.

Our operations are highly dependent upon our ability to acquire adequate supplies of cement, concrete block, aggregates and sand. We have experienced in the past, and could experience in the future, short term shortages of both cement and sand, which would adversely affect our operations.

Some of our significant customers are governmental agencies of islands in the Caribbean which may constitute a credit risk.

We operate on several islands in the Caribbean. The governmental agencies of these islands are significant customers. Many of the island governments with which we conduct business have high levels of public debt relative to their revenue base. Accordingly, we may experience difficulty in collecting amounts due from these governmental agencies.

We are highly dependent on the availability of barging and towing services in the Caribbean.

Our materials division is highly dependent upon the availability of barging services to import sand, aggregate, cement and block. We have experienced in the past, and could experience in the future, a short-term shortage of barging capacity which would have an adverse affect on our operations.

We are in the process of relocating our ready-mix concrete operation on Sint Maarten from a parcel of land being leased on a month-to-month basis pursuant to a verbal agreement and we have not received all the necessary permits to operate a ready-mix batch plant on the leased parcel to which we are relocating.

Should we be required to vacate the parcel of land, being leased on a verbal month-to-month basis, on which our ready-mix batch plant is presently operating before we commission our new ready-mix batch plant on our parcel under lease through 8/2006, we would be unable to produce any ready-mix concrete, which is our primary source of revenue in Sint Maarten. An inability to produce ready-mix concrete would have a material adverse effect upon the results of operations for our materials division.

On March 21, 2007, we sold substantially all of our construction division assets and we believe we have the following risks related to the sale.

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