UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1994
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission File Number 1-10665
U.S. INTEC, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2118350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1212 Brai Drive 77643
Port Arthur, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (409)724-7024
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, par value $.02 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K______.
Aggregate market value of the 1,259,650 shares of Common Stock held by
non-affiliates of the registrant at the closing sales price on March 27,
1995: $8,502,638.
Number of shares of Common Stock outstanding as of the close of business
on March 27, 1995: 3,018,411.
Documents incorporated by reference:
Portions of the definitive proxy statement relating to the 1995 Annual
Meeting of Shareholders of U. S. Intec, Inc., which will be filed within 120
days of December 31, 1994, are incorporated by reference in Part III of this
report.
<PAGE>
TABLE OF CONTENTS
PART I
Page
Item 1. Business................................................... 1
Item 2. Properties................................................. 8
Item 3. Legal Proceedings.......................................... 8
Item 4. Submission of Matters to a Vote of Security Holders........ 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 9
Item 6. Selected Financial Data.................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 11
Item 8. Financial Statements and Supplementary Data................ 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 14
PART III
Item 10. Directors and Executive Officers of the Registrant......... 14
Item 11. Executive Compensation..................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 14
Item 13. Certain Relationships and Related Transactions............. 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 15
<PAGE>
PART I
Item 1. Business.
General
The Company manufactures and sells roofing materials used primarily in
commercial re-roofing projects. These materials are also used in new
construction projects. The Company was organized in 1980 and imported
roofing materials from Europe until it opened its first manufacturing
facility in Port Arthur, Texas in April 1982. The Company has subsequently
built or acquired manufacturing facilities in North Branch, New Jersey;
Stockton, California; Corvallis, Oregon; and Monroe, Georgia.
The Company's operating and marketing philosophy emphasizes a quality
product with available warranty, application training and support services
for wholesale distributors and roofing contractors. As of December 31, 1994,
the Company sold domestically to approximately 650 independent distributors,
for resale to an estimated 5,500 roofing contractors who install the
Company's roofing products for their customers. Sales to its largest
customer, ABC Supply Co., Inc., accounted for approximately 15.5% of the
Company's total 1994 sales.
The Company is one of the leading domestic producers of modified bitumen
roofing products. Based upon industry information supplied by Ducker
Research Co., Inc., United States sales of modified bitumen roofing
materials, measured in square feet, accounts for an estimated 25% of the
total low-slope roofing market.
The Company also engages in the manufacture and sale of roll products
utilized in the built-up roofing (``BUR'') business. According to
information furnished by Ducker Research Co., Inc., BUR accounts for
approximately 45% of the total low-slope roofing market. The Company's BUR
roofing activities are conducted through its Intec/Permaglas Division which
utilizes the same sales and distribution network used to market the
Company's other products.
The Company holds a 40% interest in Thermo Manufacturing Company, L.P.
(the "Partnership"). The Partnership purchases products manufactured by the
Company, and the Company purchases products manufactured by the Partnership.
During the first quarter of 1994, the Partnership purchased assets to
manufacture roof coating products and will focus its marketing and
manufacturing efforts principally in this area, although it will continue to
market a complete line of roofing products. To date, incremental sales by
the Partnership have not been significant.
In 1993, the Company purchased a manufacturing facility and related
assets in Houston, Texas where the Company has installed a residential
shingle manufacturing line. The Company began shingle production at this
location during the first quarter of 1995. This represents the Company's
entry into the residential roofing segment of the roofing products market.
1
<PAGE>
According to information furnished by Ducker Research Co., Inc. the pitched
(primarily residential) roofing market, measured in square feet, is
approximately 75% of the total roofing market, or about three times the size
of the total low-slope roofing market.
Products
The Company's atactic polypropylene (``APP'') modified bitumen roofing
membrane is sold in rolls, each consisting of a sheet approximately 33 feet
long and 40 inches wide. To apply the material, the installer applies heat
to the underside of the roll, usually with a hand held propane torch, as the
material is unrolled onto the roof. The material's flexibility allows proper
forming around vent openings and other protrusions.
The Company also manufactures granulated surface APP products. The
embedded granules provide solar reflectivity and ultraviolet-ray protection
to the roof membrane surface, thereby promoting energy efficiency and longer
roof life.
The Company also manufactures styrene butadiene styrene(``SBS'') modified
bitumen membrane. SBS modified bitumen membrane is sold in rolls of
approximately the same length and width as APP modified bitumen membrane and
is applied to the roof with hot asphalt or cold adhesive. SBS modified
bitumen membrane has a granulated surface of minerals to provide solar
reflectivity and ultraviolet-ray protection. This product provides the
contractor who has made a large capital investment in BUR roofing equipment
and application technology with the opportunity to install modified bitumen
membrane roofing systems as well.
Through the Intec/Permaglas Division, the Company also manufactures and
sells base and inter-ply sheets. Base sheet is used as the primary layer in
modified bitumen and built-up roofing systems, while inter-ply sheets are
used as secondary layers in built-up systems as well as multiple-ply
modified bitumen systems.
During the first quarter of 1995, the Company began manufacturing
residential shingle products. Initially the Company will focus most of its
shingle marketing efforts on conventional asphalt laminate shingles, but
with time, hopes to move most of its Houston production capacity over to an
APP modified laminate product.
Through a wholly-owned subsidiary, the Company manufactures and sells
roofing accessories designed to improve labor efficiency in the installation
process. These include a perimeter edge metal roof flashing with modified
bitumen membrane attached; prefabricated aluminum roof drains, pitch pans,
and adjustable and standard vent covers with modified bitumen membrane
attached to assist the roofing contractor with application. The Company also
provides application training, roof inspection, consulting, and diagnostic
services.
2
<PAGE>
The Market
The commercial roofing market is divided into three major product
segments: built-up roofing, single-ply roofing, and modified bitumen
roofing. A built-up roof is constructed by using a vapor barrier and
insulation topped with three to five layers of fiberglass sheets which are
attached and waterproofed using layers of hot asphalt. Built-up roofing has
been the traditional commercial roofing technology used in the United
States. Advantages of built-up systems include proven technology, a large
body of trained applicators, and excellent durability resulting from
multiple material layers. A single-ply roof is constructed by adhering to
the roof a single-ply membrane system (which is principally rubber or
plastic-based) through mechanical means or through the use of various
adhesive methods. The Company does not compete in the single-ply
roofing segment. Modified bitumen roofs are applied by heating the membrane,
or by applying hot asphalt or cold adhesive, as it is unrolled on the roof.
Modified bitumen systems offer excellent waterproofing characteristics,
durability, flexibility and relative ease of application. The Company has
also introduced to the market the concept of the hybrid multiple-ply
modified bitumen system, utilizing built-up roofing techniques with modified
bitumen materials.
The residential shingle market is divided into two major product
segments: the commodity market and the premium market. In the commodity
market, the three-tab shingle is the dominant product. Commodity three-tab
shingles are constructed of a single-ply and are usually lighter in weight
than premium shingles. The premium shingle market consists of five major
product groups: premium asphalt shingles, laminated asphalt shingles, wood
shingles, concrete roof tile and metal roofing products. Premium and
laminated shingles are thicker and heavier in weight than the typical
commodity shingle, and usually provide a high fire resistance rating. In
addition, laminated shingles are double-ply and have a higher profile
appearance than other asphalt shingles. Typically, asphalt shingles are
lower in cost than the other premium shingle market products. The Company
manufactures premium and laminated asphalt shingles.
Competition
The Company competes with a large number of concerns which manufacture
materials used in commercial roofing and re-roofing projects, many of which
have significantly greater financial resources than does the Company. At
December 31, 1994, there were approximately 15 domestic producers of
modified bitumen roofing membranes and a significantly greater number of BUR
and shingle manufacturers. Management believes that the Company accounted
for approximately 23% of 1994 sales (in square feet) of modified bitumen
roofing membranes and approximately 6% of BUR materials.
For the foreseeable future, the Company does not expect to be a major
factor in the market for shingle roofing products.
3
<PAGE>
Manufacturing
The Company's APP modified bitumen membrane is composed primarily of
three raw materials: asphalt, polyester fabric, and APP. After testing,
asphalt and APP are blended together in heated tanks. Once blending is
complete, the compound is sampled by the Company's quality control
laboratory and, if within specification, is pumped into a holding tank.
From the holding tank, the compound is pumped into a vat through which a
polyester fabric passes and is saturated with the compound. The saturated
mat then goes through sizing rollers that regulate membrane thickness. On
granular surfaced materials, the granules are applied just after exiting the
sizing rollers and the second cooling tank is bypassed. The Company
manufactures material in thicknesses of two, three, and four millimeters.
The material then passes through a cooling tray to solidify the bottom
surface. At the end of the first cooling tray, a plastic film is applied to
the still-molten top surface and the material is then submerged into a
second cooling tank, completely solidified and dried with a fan. The
material is then coated with talc to prevent sticking, wound into rolls
and prepared for shipment.
The SBS modified bitumen membrane manufactured by the Company is composed
of asphalt, reinforcement fabric, and SBS. The manufacturing process is
similar to that used to produce APP modified bitumen membrane except that
certain changes are made in the method of blending the SBS and asphalt and
in the method of cooling the membrane.
The built-up roofing products manufactured by the Company's
Intec/Permaglas Division are composed of an asphalt saturated fiberglass
mat. The manufacturing process is similar to that used to produce modified
bitumen products.
The Company began production of asphalt shingle products in the first
quarter of 1995. Asphalt shingles are composed primarily of asphalt,
fiberglass mat, mineral filler and granules. The manufacturing process is
similar to that used to produce built-up roofing products.
Quality Control
The Company's quality control department monitors production to insure
product quality. There is separate testing and evaluation of raw materials,
compound and finished product. Raw materials are evaluated for basic
physical characteristics such as viscosity, flexibility, flash point and
volatility. Compound evaluation ensures that formulation is acceptable and
provides batch analysis information prior to manufacturing. To ensure
consistency, batches are then transferred to holding tanks and blended with
previously transferred material. Finally, samples of the finished product
are inspected to assure proper roll length, weight, width, thickness and
general appearance.
4
<PAGE>
Raw Materials
The principal raw materials used by the Company in the manufacture of its
roofing products are asphalt, APP, SBS, polyester fabric and fiberglass mat,
granules, and mineral filler. These raw materials are purchased by the
Company under short-term or spot-market arrangements, or alternatively under
longer term contracts when management believes such contracts to be
advantageous to the Company. The Company utilizes or has available multiple
sources for each of its raw materials. The prices and availability of raw
materials have generally reflected the price and availability of crude oil
and other petrochemical feedstocks.
Distribution and Marketing
The Company sells its products nationwide to wholesale distributors of
building products and roofing materials. No significant backlog of orders
exists. As of December 31, 1994, the Company had approximately 60 sales and
independent representatives who contact architects, distributors and
contractors.
The Company has historically focused its marketing efforts on re-roofing,
which is believed by management to have represented approximately 75% of
total U.S. commercial roofing sales during 1994. This market has been
relatively stable, growing at approximately 2-3% per year.
The Company concentrates its marketing efforts on developing a quality
distribution network and educating contractors on the advantages of using
its products. Also, the Company devotes substantial effort to educating
architects, consultants and large property managers on the benefits of using
its products.
The Company plans to market its shingle products through its existing
distribution network.
Warranty
Under certain circumstances, the Company warrants that its modified
bitumen membrane will be free from manufacturing defects and will not fail
due to ordinary wear and tear from exposure to the elements or under certain
other specified conditions. Through December 31, 1994, the Company's
warranty had been issued for approximately 25% of its total production. The
limited warranty, which is offered at no additional cost to the purchaser,
is for a period of 10 to 12 years. The Company also offers 15 and 20 year
warranties at additional cost.
The Company also offers, at additional cost, a pro-rated guarantee on its
built-up roofing products.
The Company offers, at no additional cost, a pro-rated 20 to 40 year
warranty on certain of its shingle products.
5
<PAGE>
The Company maintains a reserve for warranty claims, which is in an
amount management believes is adequate to cover such claims. As of December
31, 1994, such reserve amounted to $6,139,000. The amounts of warranty
claims paid by the Company during 1994 and 1993 were $1,266,000 and
$1,330,000, respectively.
Licensing and Trademark Matters
The Company produces certain of its APP modified bitumen membranes
pursuant to an agreement with Asfalti Breitner S.p.A., an Italian company,
under which the Company is granted the non-transferable right to produce and
sell in the United States modified bitumen roofing membranes utilizing
technology developed by Asfalti Breitner. The BRAI name under which certain
of the Company's products are sold is registered by Asfalti Breitner with
the United States Patent and Trademark Office, and Asfalti Breitner has
granted the Company all rights it possesses to use the BRAI name in the
United States through 1995. The Company pays Asfalti Breitner an annual
royalty based on the amount of APP modified bitumen membrane of a certain
thickness or weight sold by the Company. The Company's right to use the
BRAI name after 1995 is subject to negotiation of a new, mutually acceptable
royalty agreement. The inability to conclude a mutually acceptable
agreement, in management's opinion, would not have a material impact on the
Company's operating results or financial condition.
Government Regulation
The application of federal, state and local laws, particularly those
concerning occupational safety (Occupational Safety and Health Act) and
environmental matters (Federal Clean Air Act), involves or may involve
review, certification or issuance of permits with respect to construction,
modification and operation of the Company's manufacturing facilities. The
Company believes that it is in substantial compliance with all presently
applicable requirements. The cost of compliance with such laws and with the
regulations promulgated thereunder has not been a major factor in the
Company's operating costs or the costs of its capital projects.
Employees
As of December 31, 1994, the Company had 356 employees. Employees are
provided competitive wages and fringe benefits. None of the employees is
represented by unions, and management believes that its relations with
employees are satisfactory.
6
<PAGE>
Executive Officers of the Company
Set forth below is certain information with respect to the executive
officers of the Company:
Positions and Offices
Name Age with Company
Danny J. Adair. . . . . . . 50 President and Chief Executive Officer
J. Roane Ruddy . . . . . . 41 Chief Financial Officer
Ken D. Latiolais. . . . . . 48 Vice President-Production
S. Craig Noble. . . . . . . 49 Vice President-Technical Services
No family relationships exist among any of the officers of the Company,
and there are or were no arrangements or understandings between any of the
officers and any other person pursuant to which any officer was selected as
an officer.
Mr. Adair has served as President and Chief Executive Officer and a
Director of the Company since its founding in 1980.
Mr. Ruddy was elected Chief Financial Officer of the Company in November
1992 and became a Director in May of 1993. He has been with the Company
since 1986 and served as the Company's Controller prior to assuming his
present position.
Mr. Latiolais has been with the Company since 1982. He was Plant Manager
of the Company's Port Arthur, Texas facility prior to assuming his present
position as Vice President in 1984 and became a Director in 1985.
Mr. Noble has been with the Company since 1982. Prior to becoming Vice
President in 1984, he served as Manager of Technical Services. He became a
Director of the Company in 1987.
7
<PAGE>
Item 2. Properties.
The Company operates five manufacturing facilities for the production of
its roofing products. The table below presents certain information regarding
the facilities.
<TABLE>
<CAPTION>
Location
<S> <C> <C> <C> <C> <C>
TX NJ CA OR GA
Total acres owned ....................... 25 11 8 8 10
Improvements (square feet):
Office space........................... 16,000 7,000 2,400 2,500 3,500
Manufacturing space.................... 30,000 29,000 30,000 30,000 15,000
Warehouse.............................. 28,000 20,000 10,000 16,500 15,000
Laboratory............................. 4,200 1,400 600 300 300
Storage pads (1)....................... 40,000 15,000 15,000 52,000 32,000
Production capacity (rolls per year)
(000's)(2):............................. 1,500 766 1,500 1,250 1,250
Average production (rolls per day) for
the year ended December 31, 1994(3):.... 2,880 2,328 2,322 2,116 2,165
Average production (as a percentage of
capacity) for the year ended
December 31, 1994(3):................... 48% 83% 40% 32% 34%
<FN>
____________________
(1) Includes parking and driveways.
(2) Assumes full production from all lines for 333 days per year.
(3) The Texas, New Jersey, California, Oregon and Georgia facilities
operated for 251, 276, 258, 190, and 197 days, respectively, in 1994.
</TABLE>
The Company also owns a manufacturing facility in Houston, Texas,
situated on six acres. The facility has 3,750 square feet of office space,
87,000 square feet of manufacturing space and a 700 square foot laboratory.
The Company began production of shingles for residential roofing
applications at this facility during the first quarter of 1995.
Substantially all of the assets of the Company are pledged to secure
indebtedness. See Note B of ``Notes to the Consolidated Financial
Statements'' under Item 14.
Item 3. Legal Proceedings.
Not applicable.
8
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is traded on the American Stock Exchange
under the symbol USI. The high and low quarterly closing prices for the
Common Stock as reported on the American Stock Exchange, are shown below.
1994 High Low
First Quarter........................................ 9 1/4 6 1/8
Second Quarter....................................... 6 3/4 5 1/2
Third Quarter........................................ 6 1/8 4 7/8
Fourth Quarter....................................... 7 5/8 5 1/4
1993 High Low
First Quarter........................................ 6 3/8 3 3/4
Second Quarter....................................... 5 3/8 4 5/8
Third Quarter........................................ 7 7/8 4 1/2
Fourth Quarter....................................... 7 6 1/8
The number of record holders of the Company's Common Stock as of March
27, 1995, was 116.
Since its inception, the Company has not paid cash dividends on its
Common Stock. The Company has no present plans to pay any cash dividends.
The Company intends to continue a policy of retaining earnings for use in
its business. Any payments of cash dividends in the future will depend upon
the Company's earnings, financial condition, capital requirements and other
factors that the Board of Directors deems relevant.
Item 6. Selected Financial Data.
The following table sets forth selected financial data of the Company.
This data should be read in conjunction with the Company's financial
statements and the notes thereto and ``Management's Discussion and Analysis
of Financial Condition and Results of Operations'' included elsewhere
herein.
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Sales........................... $95,622 $83,311 $73,856 $65,899 $70,579
Earnings (loss) before income
taxes and cumulative effect of
accounting change............. 1,679 3,605 473 (4,606) 3,459
Net earnings (loss)............. 991 2,203 779(1) (2,986)(2) 2,097
Net earnings (loss) per share... .33 .74 .26 (1.01) .71
Balance Sheet Data
Total assets.................... 77,973 56,324 45,668 42,976 42,653
Long-term debt.................. 28,182 15,820 7,789 6,406 9,673
<FN>
(1) Net earnings for 1992 reflect the adoption of Financial Accounting
Standards Board Statement of Financial Standards No. 109. The cumulative
effect of the change was to increase net earnings by $500,000 ($.17 per
share). See Note C of "Notes to Consolidated Financial Statements" under
Item 14.
(2) Includes $2,112,000 ($.71 per share) charge (net of applicable income
taxes) as a result of an increase in estimate related to the warranty
reserve.
</TABLE>
10
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Years ended December 31, 1993 and 1994. Sales increased 14.8% from
$83,311,000 in 1993 to $95,622,000 in 1994. The increase is due principally
to increased roll sales, initiated in part by aggressive spring promotional
programs during the second quarter, and to increased relabeled product
sales, which are products manufactured by outside suppliers. The increase
in the number of rolls sold was somewhat offset by lower pricing introduced
in certain regions to improve product positioning.
Gross profit increased from $20,608,000 in 1993 to $21,198,000 in 1994.
Gross profit as a percentage of sales decreased from 24.7% in 1993 to 22.2%
in 1994. The decrease in profit margin percentage is due principally to the
combined effect of generally lower selling prices and a shift in product
sales mix. Roll product prices were adversely impacted by severe winter
weather in the first quarter and by aggressive pricing used throughout the
year to maintain and gain market share. This along with strong sales gains
in both relabeled and built-up roofing products, both of which have lower
margins, combined to lower the 1994 overall margin percentage. Also during
1994 the Company absorbed certain costs associated with its new Houston
manufacturing facility.
Selling, general and administrative expenses increased from $16,390,000,
or 19.7% of sales in 1993, to $18,694,000, or 19.6% of sales in 1994. The
increase in expense primarily relates to the increase in sales volume.
Interest expense increased $281,000 from $919,000 in 1993 to $1,200,000
in 1994. The increase is largely the result of increased debt associated
with increased sales and related accounts receivable. Construction period
interest of $1,079,000 associated with the Houston facility was capitalized
during 1994.
Net earnings were $991,000 or $.33 per share in 1994 compared with
$2,203,000 or $.74 per share in 1993.
With the start of production at the new Houston manufacturing facility in
February 1995, the Company will cease capitalizing certain construction
period costs, including interest costs, incurred to acquire and build out
the facility. Initially the Company plans to focus shingle marketing
efforts on conventional laminate shingles, and with time, hopes to move most
of the Houston production capacity over to the Company's new modified
laminate product. The Company expects downward pressure on earnings from
the Houston facility until a large percentage of the production capacity is
moved to the new modified product, which is expected to be a gradual process
that will be completed after 1995.
11
<PAGE>
Years ended December 31, 1992 and 1993. Sales increased 12.8% from
$73,856,000 in 1992 to $83,311,000 in 1993. The Company achieved sales
increases in basically all of its sales regions, but the principal increase
was along the West Coast. The Company continued to expand into the built-up
roofing market and significantly increased its sales of relabeled products
manufactured by outside suppliers.
Gross profit as a percentage of sales increased from 23.8% or $17,550,000
in 1992 to 24.7% or $20,608,000 in 1993. The increase in profit margin, in
terms of total dollars, was primarily attributable to the sales increase for
1993, while the increase in profit margin, as a percentage of sales, was
reflective of the Company's continued focus on reducing production costs
through increased manufacturing efficiencies.
Selling, general and administrative expenses, as a percentage of sales,
decreased 2.3% from 22.0% or $16,265,000 in 1992 to 19.7% or $16,390,000 in
1993. The percentage decrease relate primarily to the increased sales
volume.
Net earnings increased $1,424,000 in 1993, from $779,000 or $.26 per
share in 1992 to $2,203,000 or $.74 per share in 1993. Net earnings for
1992 reflect the adoption of the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 109, which requires an asset
and liability approach in accounting for income taxes. Under this new
method, the deferred tax liability is calculated by applying the provisions
and rates of current tax law to determine the amount of taxes payable. The
cumulative effect of the change was to increase net income by $500,000 or
$.17 per share.
The following table sets forth, for the time periods indicated, the
percentage of certain income and expense items as they relate to total
sales:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Sales............................................. 100.0% 100.0% 100.0%
Cost and expense:
Cost of sales.................................. 77.8 75.3 76.2
Selling, general and administrative............ 19.6 19.7 22.0
Earnings from operations........................... 2.6 5.0 1.7
Other income (expense):
Interest expense............................... (1.3) (1.1) (1.4)
Other income................................... 0.4 0.4 0.3
Earnings before income taxes and cumulative
effect of accounting change....................... 1.7 4.3 0.6
Income tax provision............................... ( .7) (1.7) (0.3)
Cumulative effect of accounting change............. 0.7
Net earnings....................................... 1.0 2.6 1.1
</TABLE> 12
<PAGE>
Liquidity and Capital Resources
Working capital as of December 31, 1994 was $8,562,000 compared with
$13,035,000 as of December 31, 1993, a decrease of $4,473,000. Accounts
receivable increased $2,378,000 primarily as a result of increased 1994
fourth quarter sales. Accounts payable increased $7,631,000 because of
increased production volumes and because of construction costs incurred at
the new shingle manufacturing facility in Houston.
Property, plant and equipment increased $21,243,000 and long-term debt
increased $12,362,000, both primarily as a result of the Houston facility
construction costs. As of December 31, 1994, the Company has expended
$25,748,000 relating to the Houston facility, and during the first quarter
of 1995, the Company expects additional capital expenditures of $1,000,000
relating to this facility. The Company does not anticipate any significant
capital expenditures after construction at the Houston facility is
completed.
The Company's $25 million credit facility is subject to an available
borrowing base determined by certain manufacturing equipment and levels of
trade receivables and inventories. The credit facility expires in 1999 and
bears interest at prime rate. The credit agreement for the credit facility
contains various restrictive covenants which, among other things, requires
that the Company maintain a certain minimum tangible net worth. During
February 1995, the loan balance exceeded the available borrowing base limit
by approximately $4.7 million. As a result, the Company obtained a grace
period in which to cure the over-extension. This over-extension of the
credit facility is attributable to capital expenditures relating to the new
Houston manufacturing facility, which amounted to approximately $19 million
in 1994, and to a delay in obtaining term loans for that facility.
During March 1995, the over-extension was substantially reduced. The
Company also obtained commitments for approximately $4.2 million of secured
loans from other lenders to cure the over-extension position. The Company
anticipates that the funds required to meet its seasonal increase in working
capital needs will be available through the existing credit facility.
Inflation and Seasonality
Inflation has not been a significant factor in the Company's sales
growth. The Company's sales of its roofing materials follow usual seasonal
construction patterns and are highest in the third quarter and lowest in the
first quarter. Borrowings tend to follow this trend.
Environmental Matters
The Company has made a commitment to protect the health and welfare of
its employees, the public, and our environment. The Company's staff
continuously reviews regulations and regularly interfaces with state and
13
<PAGE>
federal environmental agencies to maintain a thorough knowledge of current
requirements, and to ensure cost effective compliance with agency
regulations. The Company expects the trend toward more stringent
environmental regulations to continue, and uses this general philosophy when
making capital expenditures for environmental purposes. The Company believes
it is in compliance with all presently applicable requirements (primarily as
they relate to the Environmental Protection Agency and comparable state
agencies) and does not anticipate any significant expenditures to maintain
its compliance.
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Company and its subsidiary required to be
included in this Item 8 are set forth in Item 14 of this Report. The
quarterly results of operations are included in the "Notes to the
Consolidated Financial Statements" under Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.(*)
Item 11. Executive Compensation.(*)
Item 12. Security Ownership of Certain Beneficial Owners and Management.(*)
Item 13. Certain Relationships and Related Transactions.(*)
_________
* The information called for by Items 10, 11, 12 and 13, to the extent not
set forth under Item 1. ``Executive Officers of the Company,'' is or will
be set forth in the definitive proxy statement relating to the 1995
Annual Meeting of Shareholders of U. S. Intec, Inc. pursuant to the
Commission's Regulation 14A (File No. 1-10665). Such definitive proxy
statement relates to a meeting of shareholders involving the election of
directors and the portions therefrom called for by Items 10, 11, 12 and
13 (excluding, in the case of Item 11, the information required by
paragraphs (i), (k), and (l) of Item 402 of Regulation S-K) are
incorporated herein by reference pursuant to Instruction G to Form 10-K.
14
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements and Financial Statement Schedules.
(1) Financial Statements-
Page
Report of Independent Auditors....................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993 ........ F-3
Consolidated Statements of Earnings for the Three Years Ended
December 31, 1994................................................. F-5
Consolidated Statements of Shareholders' Equity for the Three
Years Ended December 31,1994..................................... F-6
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1994........................................... F-7
Notes to the Consolidated Financial Statements....................... F-9
(2) Schedules Supporting Financial Statements-
Schedule VIII-Valuation and Qualifying
Accounts............................................................. F-19
Other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either not
required under the related instructions or inapplicable.
(3) Listing of Exhibits-See Item 14(c).
(b) Current Reports on Form 8-K.
None
(c) Exhibits.
*10(a) - Lease agreement, effective as of February 1, 1993, by and between
U.S. Intec, Inc., as Lessor, and Thunderhawk Manufacturing
Company, L.P., as Lessee, pertaining to the Company's Georgia plant
facility located in Walton County, Georgia, together with purchase
option. (See form 10-K for 1992 filed March 1993).
*10(b) - Amendment to the security agreement between U.S. Intec, Inc. and
LaSalle National Bank of Chicago, formerly Exchange National Bank
of Chicago, dated February 8, 1994. (See form 10-K for 1993 filed
March 1994).
*10(c) - Promissory Note and related Letter Agreement between U.S. Intec,
Inc. and Danny J. Adair effective December 31, 1993. (See form
10-K for 1993 filed March 1994).
15
<PAGE>
*10(d) - Asset Purchase Agreement between U.S. Intec, Inc. and Betontex,
Inc. dated as of September 8, 1993. (See form 10-K for 1993 filed
March 1994).
*21 - List of Subsidiaries of U.S. Intec, Inc (see Form 10-K for 1990
filed in March 1991).
23(a) - Consent of Independent Auditors.
* Incorporated herein by reference as indicated.
(d) Not applicable.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Port Arthur, Texas, on March 29, 1995.
U.S. Intec, Inc.
By Danny J. Adair
-----------------------------
Danny J. Adair
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed on March 29, 1995 by the following persons in the
capacities indicated.
Signature Title
Danny J. Adair President, Chief Executive
-------------------------------
Danny J. Adair Officer and Director
J. Roane Ruddy Chief Financial Officer
-------------------------------
J. Roane Ruddy and Director
Ken D. Latiolais Vice President
------------------------------
Ken D. Latiolais and Director
S. Craig Noble Vice President
------------------------------
S. Craig Noble and Director
Albert E. Brammer Director
------------------------------
Albert E. Brammer
Austin W. Gonsoulin Director
------------------------------
Austin W. Gonsoulin
<PAGE>
Robert G. Hoag Director
-----------------------------
Robert G. Hoag
Richard Earl Purkey, Sr. Director
------------------------------
Richard Earl Purkey, Sr.
18
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors ..................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993........ F-3
Consolidated Statements of Earnings for the Three Years
Ended December 31, 1994........................................... F-5
Consolidated Statements of Shareholders' Equity for the
Three Years Ended December 31, 1994............................... F-6
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1994........................................... F-7
Notes to the Consolidated Financial Statements...................... F-9
Schedule VIII-Valuation and Qualifying Accounts..................... F-19
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
U.S. Intec, Inc.
We have audited the accompanying consolidated balance sheets of U. S.
Intec, Inc. as of December 31, 1994 and 1993, and the related consolidated
statements of earnings, shareholders equity, and cash flows for each of the
three years in the period ended December 31, 1994. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of U. S. Intec, Inc. at December 31, 1994 and 1993, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note C to the consolidated financial statements, in 1992
the Company changed its method of accounting for income taxes.
Ernst & Young LLP
Houston, Texas
February 17, 1995,
Except Note B as to which
the date is March 24, 1995
F-2
<PAGE>
<TABLE>
<CAPTION>
U.S. INTEC, INC.
CONSOLIDATED BALANCE SHEETS
December 31
---------------------------
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash.......................................... $ 867,701 $ 666,496
Accounts receivable-trade (net of allowances
of $515,461 in 1994, and $519,361 in 1993)... 13,281,014 10,903,443
Other receivables ............................ 954,878 1,057,570
Inventories - raw materials................... 8,555,546 7,591,188
Inventories - finished goods.................. 4,232,325 4,733,615
Prepaid expenses.............................. 408,874 218,401
Due from affiliate............................ 949,927 643,034
----------- -----------
TOTAL CURRENT ASSETS....................... 29,250,265 25,813,747
PROPERTY, PLANT AND EQUIPMENT
Land.......................................... 1,441,712 1,435,803
Buildings and leasehold improvements.......... 9,743,369 9,657,863
Manufacturing equipment....................... 32,557,939 26,961,199
Furniture and fixtures........................ 1,841,032 1,648,579
Automotive equipment.......................... 576,987 522,736
Construction in progress...................... 22,512,932 7,204,775
----------- ----------
68,673,971 47,430,955
Less accumulated depreciation................. (25,470,696) (22,944,866)
----------- -----------
43,203,275 24,486,089
OTHER ASSETS
Note receivable from officer - Note D......... 2,803,000 2,803,000
Deferred charges and other.................... 368,230 259,828
Goodwill and intangibles (net of accumulated
amortization of ($1,581,314 in 1994 and
$1,252,740 in 1993).......................... 2,348,359 2,961,546
----------- ----------
TOTAL OTHER ASSETS......................... 5,519,589 6,024,374
----------- ----------
$ 77,973,129 $ 56,324,210
============ ============
F-3
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable and bank overdrafts.... $ 15,589,471 $ 7,958,040
Current portion of long-term debt............. 867,299 557,000
Other accrued liabilities - Note E............ 3,131,607 3,164,145
Current portion of reserve for warranty claims 1,100,000 1,100,000
------------ ------------
TOTAL CURRENT LIABILITIES.................. 20,688,377 12,779,185
LONG-TERM DEBT - Note B......................... 28,181,726 15,819,836
DEFERRED INCOME TAXES - Note C.................. 1,273,578 569,923
RESERVE FOR WARRANTY CLAIMS..................... 5,039,013 5,507,277
COMMITMENTS AND CONTINGENCIES - Note E..........
SHAREHOLDERS' EQUITY
Preferred Stock ($1 par value, 1,000,000
shares authorized, none issued).............
Common Stock ($.02 par value, 10,000,000
shares authorized, 3,030,911 shares issued
in 1994 and 2,984,661 issued in 1993) 60,619 59,694
Additional paid-in capital.................... 7,368,127 7,217,489
Retained earnings ............................ 15,361,689 14,370,806
------------ ------------
TOTAL SHAREHOLDERS' EQUITY................. 22,790,435 21,647,989
------------ ------------
$ 77,973,129 $ 56,324,210
============ ============
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
U. S. INTEC, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31
---------------------------------------
1994 1993 1992
----------- ---------- ------------
<S> <C> <C> <C>
Sales........................................ $95,621,644 $83,310,861 $73,856,449
Cost of sales................................ 74,423,981 62,703,277 56,306,618
----------- ----------- -----------
GROSS PROFIT............................ 21,197,663 20,607,584 17,549,831
Selling, general and administrative expenses 18,694,468 16,389,908 16,265,203
----------- ----------- -----------
EARNINGS FROM OPERATIONS................ 2,503,195 4,217,676 1,284,628
Other income................................. 376,068 305,625 240,190
Interest expense............................. 1,199,801 918,623 1,051,616
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES............. 1,679,462 3,604,678 473,202
Provision for income taxes - Note C 688,579 1,401,516 194,013
----------- ----------- -----------
EARNINGS BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR
INCOME TAXES............................ $ 990,883 $ 2,203,162 $ 279,189
Cumulative effect of change in accounting
for income taxes - Note C................. 500,000
----------- ----------- -----------
NET EARNINGS............................ $ 990,883 $ 2,203,162 $ 779,189
Earnings per share - Note A ----------- ----------- -----------
Before cumulative effect of accounting
change.................................... $ .33 $ .74 $ .09
Cumulative effect of accounting change -
Note C.................................... .17
----------- ----------- -----------
NET EARNINGS PER SHARE.................. $ .33 $ .74 $ .26
=========== =========== ===========
</TABLE>
See notes to the consolidated financial statements
F-5
<PAGE>
U.S. INTEC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Paid-In Retained
Stock Capital Earnings Total
------- ---------- ---------- -----------
Balance at December 31, 1991 $59,384 $7,143,399 $11,388,455 $18,591,238
Net earnings for 1992..... 779,189 779,189
------- ---------- ----------- -----------
Balance at December 31, 1992 $59,384 $7,143,399 $12,167,644 $19,370,427
Stock options exercised in
1993.................... 310 74,090 74,400
Net earnings for 1993..... 2,203,162 2,203,162
------- ---------- ----------- -----------
Balance at December 31, 1993 $59,694 $7,217,489 $14,370,806 $21,647,989
Stock options exercised in
1994.................... 325 103,425 103,750
Restricted stock issuance
and amortization........ 600 47,213 47,813
Net earnings for 1994..... 990,883 990,883
------- ---------- ----------- -----------
Balance at December 31, 1994 $60,619 $7,368,127 $15,361,689 $22,790,435
======= ========== =========== ===========
See notes to the consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
U.S. INTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------------
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings................................... $ 990,883 $ 2,203,162 $ 779,189
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation............................... 2,547,703 2,743,591 3,153,862
Amortization............................... 352,646 361,286 352,646
Provision for losses on accounts receivable 146,971 150,942 146,445
Provision for deferred taxes............... 703,655 (120,943) (360,505)
Cumulative effect of change in accounting
for income taxes......................... (500,000)
Other...................................... (119,901) 161,310 (56,175)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable................... (2,524,542) (918,144) (3,262,982)
Due from affiliate.................... (306,893) (643,034)
Inventories........................... (463,068) (648,832) (1,305,168)
Prepaid expenses...................... (190,473) 232,778 374,590
Other receivables..................... 102,692 (417,915) (82,991)
Increase (decrease) in:
Accounts payable...................... 7,631,431 (242,548) 793,019
Accrued expenses...................... (32,538) 399,740 631,134
Reserve for warranty claims........... (468,264) (181,997) (34,324)
----------- ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...... 8,370,302 3,079,396 628,740
INVESTING ACTIVITIES
Purchase of property, plant and equipment.... (21,267,484) (6,951,842) (2,102,496)
Acquisition of manufacturing facility........ (4,165,000)
Other........................................ 37,835 6,366 81,703
----------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES.......... (21,229,649) (11,110,476) (2,020,793)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
long-term borrowings......................... 18,863,600 10,725,408 8,607,327
Principal payments on revolving line of credit
and long-term borrowings..................... (5,906,798) (2,200,789) (7,223,883)
Proceeds from exercise of stock options........ 103,750 74,400
----------- ----------- ---------
F-7
<PAGE>
NET CASH PROVIDED BY FINANCING
ACTIVITIES................................... 13,060,552 8,599,019 1,383,444
----------- ----------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 201,205 567,939 (8,609)
Cash and cash equivalents at
beginning of period.......................... 666,496 98,557 107,166
----------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR......... $ 867,701 $ 666,496 $ 98,557
=========== =========== =========
</TABLE>
See notes to the consolidated financial statements
F-8
<PAGE>
U.S. INTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiary. The Company's 40% interest in
a partnership is accounted on the equity method. Because the Company has
provided substantially all start-up funding for the partnership, the Company
recorded 100% of the partnership earnings (losses) for 1994 and 1993 which,
after elimination of intercompany transactions, were approximately $100,000
and ($200,000), respectively. All material intercompany amounts and
transactions have been eliminated.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment, including
capitalized interest, is stated on the basis of cost. Interest of $1,079,204
and $143,027 was capitalized in 1994 and 1993, respectively. No interest
was capitalized in 1992. Depreciation is computed by the straight-line
method using the following estimated useful lives:
Asset Class Years
Buildings and leasehold improvements. . . . . 15
Manufacturing equipment . . . . . . . . . . . 10
Furniture and fixtures. . . . . . . . . . . . 5
Automotive equipment. . . . . . . . . . . . . 3
Goodwill and Intangibles: Goodwill and intangibles are recorded at cost
and are amortized using the straight-line method over their respective
useful lives of 40 and 5 years. The Company periodically assesses and
measures for impairment of goodwill and intangibles using projected net
earnings (attributable to goodwill and intangibles) over the remaining
amortization period.
Income Taxes: Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Deferred income taxes arise principally
from timing differences related to depreciation expense, warranty expense
and safe harbor lease transactions.
Product Warranty: The Company offers a limited warranty covering up to
twenty years on some of its products. The Company accrues for estimated
warranty costs at the time of sale of warranted products. As of December
31, 1994, the reserve for warranty claims was $6,139,013. The Company feels
that this reserve is adequate to provide for future warranty obligations.
F-9
<PAGE>
U.S. INTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1994
Net Earnings Per Share: Net earnings per share is based on the weighted
average number of shares of common stock outstanding during each period -
2,999,425 in 1994, 2,974,703 in 1993 and 2,969,161 in 1992. Stock options
are not included in the computation of the weighted average number of common
shares outstanding since their effect is not significant. Fully diluted
earnings per share is not presented because the stock options are not
materially dilutive.
Supplemental Cash Flow Information: The Company paid interest (net of
amounts capitalized) of approximately $1,199,800 in 1994, $919,000 in 1993
and $1,052,000 in 1992. The Company paid income taxes, net of refunds, of
$450,000, $1,973,000 and $71,000 in 1994, 1993 and 1992, respectively.
Cash and Cash Equivalents: For purposes of the statements of cash flows,
the Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-10
<PAGE>
<TABLE>
<CAPTION>
U.S. INTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1994
NOTE B-NOTES PAYABLE
As of December 31
----------------------------
1994 1993
------------ -----------
<S> <C> <C>
Promissory note due through December 2001, interest
rate at 1% above prime............................... $ 745,500 $ 808,500
Promissory note due through December 1998, interest
rate at prime........................................ 2,974,658
Promissory note due through March 1999, interest
rate at 7%........................................... 2,133,288
Promissory note due through August 1999, interest
rate at 2.35% above 30-day commercial paper rate..... 1,895,771
Promissory note due through February 1999, interest
rate at 7% (term equipment loan)..................... 3,996,667
Bank revolving credit agreement, providing for up to
$25 million in funds, interest rate at prime......... 20,277,799 12,593,678
Current Maturities..................................... ( 867,299) ( 557,000)
------------ -----------
LONG-TERM DEBT..................................... $ 28,181,726 $15,819,836
============ ===========
</TABLE>
Debt Maturities:
Aggregate maturities of long-term debt during the next five years, are
as follows:
1995 . . . . . . . . . . . . . 867,299
1996 . . . . . . . . . . . . . 925,783
1997 . . . . . . . . . . . . . 988,519
1998 . . . . . . . . . . . . . 1,055,818
1999 . . . . . . . . . . . . . 24,781,105
Revolving Credit Facility: The facility, which expires in 1999, is
subject to an available borrowing base determined by certain manufacturing
equipment and levels of trade accounts receivable and inventory. During
F-11
<PAGE>
U.S. INTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1994
February 1995, the loan balance exceeded the available borrowing base limit
by approximtely $4.7 million. As a result, the Company obtained a grace
period in which to cure the over-extension. During March 1995, the
over-extension was substantially reduced. The Company also obtained
commitments for approximately $4.2 million of secured loans from other
lenders to cure the over-extension position. Accordingly, the credit
facility is classified as long-term.
Restrictive Covenants: The Company's credit agreements contain various
restrictive covenants which, among other things, require that the Company
maintain a minimum tangible net worth.
Collateral: Substantially all of the assets of the Company are pledged
under the terms of the lending agreements.
NOTE C-INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Federal:
Current................................ $ (43,551) $ 1,367,226 $ 547,946
Deferred............................... 703,655 (120,943) (360,505)
------------ ------------ ----------
660,104 1,246,283 187,441
State.................................... 28,475 155,233 6,572
------------ ------------ ------------
$ 688,579 $ 1,401,516 $ 194,013
============ ============ ============
</TABLE>
F-12
<PAGE>
U.S. INTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1994
NOTE C-INCOME TAXES (CONTINUED)
The income tax effect of the factors accounting for the difference
between the statutory federal income tax rates and the actual provision for
taxes on income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1994 1993 1992
-------------- ------------ ---------
<S> <C> <C> <C>
Tax provision on income at
statutory rate......................... $ 571,017 $ 1,225,591 $ 160,889
State income tax provision............... 28,475 155,233 6,572
All others (net)......................... 89,087 20,692 26,552
-------------- ------------ ---------
$ 688,579 $ 1,401,516 $ 194,013
============== ============ =========
</TABLE>
The components of the net deferred tax liability as of December 31, 1994,
1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- ----------
<S> <C> <C> <C>
Deferred tax liabilities
Safe harbor lease................... $ 1,497,027 $ 1,765,930 $1,998,724
Fixed assets........................ 1,993,562 1,443,536 1,438,344
Capitalized interest................ 321,238 48,629
Other................................ 263,525 231,860 224,709
-------------- -------------- ----------
$ 4,075,352 $ 3,489,955 $3,661,777
Deferred tax assets
Warranty reserve.................... $ 2,134,362 $ 2,246,476 $2,308,353
Bad debt reserve.................... 175,257 175,564 162,423
Claims accrual...................... 407,375 342,360 190,559
Minimum tax credit carry forward.... 113,518
Other............................... 84,780 155,632 196,058
-------------- -------------- ----------
$ 2,801,774 $ 2,920,032 $2,970,911
-------------- -------------- ----------
Net deferred tax liability............. $ 1,273,578 $ 569,923 $ 690,866
============== ============== ==========
</TABLE> F-13
<PAGE>
U.S. INTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1994
In 1992, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS
No. 109 requires the adjustment of previously deferred taxes for changes in
tax rates under the liability method. The Company chose to reflect the
cumulative effect of adopting the pronouncement as a change in accounting
principle at the beginning of 1992. The effect of the change increased 1992
net earnings by $500,000, or $.17 per share, and is reported separately in
the consolidated statement of operations. This benefit represents the
writedown of net deferred tax assets and liabilities from tax rates in
effect when they arose to current statutory tax rates.
NOTE D-RELATED PARTY TRANSACTIONS
During 1990, the Company accepted a note from its President for $2,803,000
bearing interest at the rate paid by the Company for funds borrowed under
its senior credit facility. In December 1993, the Company renegotiated the
note by extending the due date of principal payments and the note's maturity
to December 31, 1996. Accrued interest on the note has been paid through
December 31, 1994. The note is secured by 814,521 shares of the Company's
Common Stock and certain real estate. The President has agreed that in the
event the Company elects to raise capital through an underwritten public
offering of its Common Stock prior to maturity of the renegotiated note, he
will sell in such public offering a sufficient number of pledged shares in
order to enable him to prepay the note in full. The President has also
agreed that until the renegotiated note is paid in full, he will not be
eligible to participate in any long-term incentive plans or programs based
on the Company's Common Stock.
During the years ended December 31, 1994, 1993 and 1992, the Company
purchased approximately $32,000, $32,000 and $33,000, respectively, of goods
and services from the President of the Company or entities in which the
President owns a controlling interest. These amounts were charged to expense
in the respective periods and relate primarily to rental payments.
NOTE E-COMMITMENTS AND CONTINGENCIES
The Company is committed to pay an annual royalty of not less than $200,000
nor more than $500,000 for the use of the BRAI brand name in the United
States through 1995.
The Company is installing a residential shingle manufacturing line in its
newly acquired Houston facility. The Company expects capital expenditures
of $1,000,000 during the first quarter of 1995 relating to this facility.
F-14
<PAGE>
U.S. INTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1994
Various claims are pending against the Company arising in the ordinary
course of business. The Company maintains insurance, which serves to
minimize exposure to claim losses. Beginning in 1992 through 1993, the
Company's general liability coverage includes self-insured obligations of
$250,000 per occurrence and $1,000,000 in the aggregate. In 1994 the per
occurrence self-insured obligation was reduced to $100,000. For the period
beginning in 1982 through August 1988, the Company purchased comprehensive
general liability coverage from Employers Casualty Company ("Employers").
In 1994, Employers was placed in receivership which could potentially
affect the direct indemnity obligations of Employers under the policies
issued to the Company. However, the receivership is not expected to result
in any material loss or deprivation of coverage to the Company due to other
available insurance coverage and insurance guarantee pools maintained by the
various states.
Additionally, for the period August 5, 1983 through March 17, 1985, the
Company purchased excess liability coverage from an insurance company
("Mission National Insurance Company") which subsequently was placed in
liquidation, such coverage being in addition to the Company's comprehensive
general liability coverage. For the period referred to above, there is one
lawsuit pending alleging total damages which, if awarded, would exceed
coverage provided by the underlying comprehensive general liability policy.
However, it is expected that additional funds for the satisfaction of this
claim will be available through state insurance guarantee pools and from the
liquidation of the assets of the bankrupt excess liability carrier.
The Company's claim liability has been determined based on an evaluation of
claims incurred. The estimated liability of $1,034,000 at December 31, 1994
is included in other accrued liabilities in the consolidated balance sheet.
The Company does not possess sufficient information to evaluate certain
claims. However, after taking into consideration legal counsel's evaluation
and insurance coverage maintained by the Company, management believes that
recoveries by claimants, if any, will not be material to the consolidated
financial statements of the Company.
F-15
<PAGE>
U.S. INTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1994
NOTE F-RETIREMENT PLANS
The Company has a 401(k) Plan, which covers substantially all employees. The
Company matches the first $500 the employee contributes to the Plan.
Additionally, profit sharing contributions are made by the Company at the
discretion of the Board of Directors. The Board approved contributions of
$150,000 for 1994, 1993 and 1992. Total expense for the Plan was $300,000,
$275,000 and $277,000 in 1994, 1993 and 1992, respectively.
During 1994, the Company terminated its Non-Qualified Deferred Compensation
Plan for designated key employees. Plan assets of approximately $400,000
were transferred to Plan participants subsequent to year-end.
NOTE G-STOCK OPTION PLANS
Effective May 1994, the shareholders of the Company adopted the 1994 Long
Term Incentive Plan of the Company (the "Incentive Plan"), which provides
for the grant of stock options, stock appreciation rights, restricted stock,
performance cash awards, performance stock awards, dividends equivalent
rights, or any combination thereof. The Incentive Plan replaced the
Company's 1985 Employee Stock Option Plan; however, stock options granted
under the 1985 Plan which were outstanding at the time of adoption of the
Incentive Plan are counted in determining the shares available for issuance
under the Incentive Plan. The total number of shares of the Company's Common
Stock available for issuance under the Incentive Plan is 450,000.
F-16
<PAGE>
U.S. INTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1994
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------------------------------
Option Option Option
Shares Price Shares Price Shares Price
------- ------- ------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, $ 4.80- $ 4.80- $4.80-
January 1.................... 264,500 9.75 290,000 9.75 290,000 9.75
Options granted................. 20,000 4.81
Options exercised............... (16,250) 4.80- (15,500) 4.80
7.375 6.00-
Options cancelled or expired.... (20,000) 4.81 (30,000) 7.50
------- ------- --------
Options outstanding, 4.80- 4.80- 4.80-
December 31.................. 228,250 9.75 264,500 9.75 290,000 9.75
======= ======= =======
Options exercisable,
December 31.................. 228,250 244,500 270,000
======= ======= =======
</TABLE>
All outstanding options are for terms of 5 to 10 years from date of grant.
The Non-Employee Director Stock Option Plan (the "Outside Director Plan")
adopted in 1988 was terminated upon approval of the Incentive Plan.
Accordingly, outstanding options to purchase 20,000 shares of Common Stock
under the Outside Director Plan were cancelled. Pursuant to the Incentive
Plan, the independent directors are each granted 10,000 shares of restricted
stock, vesting 25% for each full year of service as an independent director.
As of December 31, 1994, 30,000 restricted shares had been issued, of which
7,500 shares had vested.
NOTE H-MAJOR CUSTOMERS AND CREDIT CONCENTRATION
The Company's customers are not concentrated in any specific geographic
region, but are concentrated in the building materials industry. The Company
derived 15.5% of total revenue from a single customer in 1994.
The Company reviews a customer's credit history before extending credit. The
Company establishes an allowance for doubtful accounts based upon factors
affecting the creditworthiness of specific customers, historical trends and
other information.
F-17
<PAGE>
U.S. INTEC, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1994
NOTE I-SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly financial results for the years ended December 31, 1994
and 1993 are summarized below:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(in thousands, except earnings per share)
<S> <C> <C> <C> <C>
1994
Net sales............................... $16,716 $25,326 $28,311 $25,269
Gross profit............................ 3,984 6,052 6,095 5,066
Net earnings............................ (173) 575 534 55
Net earnings per share.................. (.06) .19 .18 .02
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(in thousands, except earnings per share)
<S> <C> <C> <C> <C>
1993
Net sales............................... $16,439 $22,165 $23,352 $21,354
Gross profit............................ 4,320 6,037 5,506 4,745
Net earnings............................ 218 992 623 370
Net earnings per share (1).............. .07 .33 .21 .12
<FN>
-------------------------------------------
(1) The sum of the quarterly per share amounts does not equal the annual
reported, as per share amounts are computed independently for each
quarter and for the full year.
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
U. S. INTEC, INC. AND SUBSIDIARIES
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
============================================================================================
Col. A Col. B Col. C Col. D Col. E
--------------------------------------------------------------------------------------------
Additions
Charged to
Balance at Charged to Other Balance
Beginning Costs and Accounts- Deductions- at End
Description of Period Expenses Describe Describe of Period
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts.................. $ 469,361 $ 146,971 $ -0- $150,871 (A) $465,461
Reserve for cash discounts.. 50,000 1,446,519 1,446,519 (B) 50,000
---------- ---------- -------- --------- ----------
$ 519,361 $1,593,490 $ -0- $1,597,390 $515,461
---------- ---------- -------- ---------- ----------
Reserve for warranty claims. $6,607,277 $ 797,604 $ -0- $1,265,868 (C) $6,139,013
========== ========== ======== ========== ==========
Year ended December 31, 1993:
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts.................. $ 427,715 $ 150,942 $ -0- $ 109,296 (A) $469,361
Reserve for cash discounts.. 50,000 1,335,320 1,335,320 (B) 50,000
---------- ---------- -------- ---------- ----------
$ 477,715 $1,486,262 $ -0- $1,444,616 $519,361
========== ========== ======== ========== ==========
Reserve for warranty claims. $6,789,274 $1,147,741 $ -0- $1,329,738 (C) $6,607,277
========== ========== ======== ========== ==========
F-19
<PAGE>
Year ended December 31, 1992:
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts.................. $ 401,429 $ 146,445 $ -0- $ 120,159 (A) $427,715
Reserve for cash discounts.. 50,000 1,068,073 1,068,073 (B) 50,000
---------- ---------- -------- ---------- ----------
$ 451,429 $1,214,518 $ -0- $1,188,232 $477,715
========== ========== ========= ========== ==========
Reserve for warranty claims. $6,823,598 $1,068,764 $ -0- $1,103,088 (C) $6,789,274
========== ========== ========= ========== ==========
<FN>
----------------------
(A) Uncollectible accounts written off, net of recoveries.
(B) Cash discounts earned during year.
(C) Warranty claims paid during year.
</TABLE>
F-20
<PAGE>
EXHIBIT 23(a)
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-35861)pertaining to the 1985 Stock Option Plan of U.S.
Intec, Inc. and in the related Prospectus and in the Registration Statement
(Form S-3 No. 33-88528) and in the related Prospectus pertaining to the
registration of 545,290 shares of common stock of our report dated February
17, 1995, with respect to the consolidated financial statements and
schedules of U.S. Intec, Inc. included in the Annual Report (Form 10-K) for
the year ended December 31, 1994.
Ernst & Young LLP
March 28, 1995
Houston, Texas
