UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
Commission file number 000-21133
SPURLOCK INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Virginia 84-1018956
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
209 West Main Street 23890
Waverly, Virginia (Zip Code)
(Address of Principal Executive Offices)
(804) 834-8980
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the 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 past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained in this form, 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. _X_
The aggregate market value of the voting stock of the registrant held
by non-affiliates computed by reference to the average bid and asked prices of
such stock, as of March 12, 1997, was $1,564,462.13.
The number of shares outstanding of Common Stock as of March 31, 1997,
was 6,572,066.
Documents Incorporated by Reference:
The Company's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders (to be filed) is incorporated by reference into Part III of this
Form 10-K.
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TABLE OF CONTENTS
PART I
Page
Item 1. Business....................................................................................... 4
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings.............................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............................................ 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................................... 11
Item 6. Selected Financial Data........................................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation....................................................................... 13
Item 8. Financial Statements and Supplementary Data.................................................... 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 41
Item 11. Executive Compensation......................................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 41
Item 13. Certain Relationships and Related Transactions................................................. 41
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 42
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PART I
Item 1. Business
General
Spurlock Industries, Inc. ("Spurlock Industries", the "Company" or the
"Registrant") is a Virginia corporation organized in 1996. The Company is the
successor to Air Resources Corporation ("Air Resources"), a Colorado corporation
organized in 1986. At a special meeting of the shareholders of Air Resources
held on June 11, 1996, the shareholders of Air Resources approved the merger of
Air Resources into the Registrant, in order, among other things, to change the
domicile of Air Resources from Colorado to Virginia. Such merger was consummated
on July 26, 1996. References herein to the "Company" or the "Registrant" shall
include Air Resources as predecessor to Spurlock Industries.
Through its wholly owned subsidiary, Spurlock Adhesives, Inc.
("Spurlock Adhesives"), the Company develops, manufactures and markets specialty
thermo-setting resins and formaldehyde for the forest products, building
products and furniture industries. The Company also produces, on a limited
basis, fertilizer products for the agricultural and lawn and garden supply
industries. It operates two manufacturing facilities in the southeastern United
States, one in Waverly, Virginia and the other in Malvern, Arkansas. Products of
Spurlock Adhesives are sold throughout the east, southeast and midwest regions
of the United States.
Spurlock Industries' principal executive offices are located at 209
West Main Street, Waverly, Virginia 23890, and its telephone number is (804)
834-8980.
Operating History and Acquisition Strategy
Development of Gas Technology Businesses. Air Resources formed Landfill
Energy Systems, Inc. and ARC Engineering Fabrications, Inc. in 1991 for the
purpose of developing the equipment and technology necessary to pursue certain
contracts relating to landfill gas recovery that were acquired from Phillip D.
Tracy, a shareholder and former director of Air Resources. The equipment and
technology to be developed by Air Resources was intended to collect raw gases at
landfill sites and process them into commercially usable natural gas for resale.
Air Resources entered into production agreements with two landfill sites in 1991
and conducted feasibility tests in 1992 and 1993. After sustaining substantial
expenses and operating losses associated with the development of this technology
during the period from August 1991 through 1993, Air Resources discontinued
certain of its gas recovery development operations in 1993 and the remainder in
March, 1994.
Acquisition of Spurlock Adhesives. On August 5, 1992, Air Resources
acquired Spurlock Adhesives, a Virginia corporation, as a wholly-owned
subsidiary. Spurlock Adhesives was founded in 1973 by Harold N. Spurlock, as
sole proprietor, and was incorporated in the Commonwealth of Virginia in 1989.
The early years of operation consisted solely of the production of urea resins
and liquid fertilizer products. The business evolved primarily around the needs
of the growing composite wood products industry. Mr. Spurlock developed a number
of innovative products for the particleboard and medium
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density fiberboard industries, including the first single component resin. This
new resin replaced an expensive four component system that was being used in the
medium density fiberboard industry. Also, Spurlock Adhesives developed one of
the first lower formaldehyde resins for the particleboard industry in response
to concerns expressed by the environmental community in the early 1980's. The
process for producing this product was one of the first processes patented in
this area. See "Patents and Trademarks" below. The Company has maintained its
market leadership in the development of resins with lower levels of formaldehyde
for the particleboard and medium density fiberboard industries.
Over the years, Spurlock Adhesives has continued to diversify its
customer and market base as well as upgrade its manufacturing facilities. In
1980, Spurlock Adhesives serviced less than ten (10) customers and produced
approximately seventy (70) million pounds of resins at its Waverly plant, as
compared to fifty-five (55) customers and 248 million pounds of resins and
formaldehyde in 1996. In 1987, Spurlock Adhesives built a new resin production
plant adjacent to its existing one in Waverly, which increased its resin
capacity four hundred percent (400%). In a move to vertically integrate the
Waverly facility, Spurlock Adhesives built its first formaldehyde production
plant in Waverly in 1988. This plant allowed Spurlock Adhesives to internally
supply approximately eighty percent (80%) of its formaldehyde needs for resin
production, thus enabling it to become less dependent on outside supply and to
better control its raw material costs. In 1992, Spurlock Adhesives acquired a
resin and formaldehyde production facility in Malvern, Arkansas from BTL
Specialty Resins Corp. of Toronto, Ontario (Canada) ("BTL") at the time that it
became a wholly owned subsidiary of Air Resources. This acquisition gave
Spurlock Adhesives a larger distribution area, thus allowing it to compete for
business in the midwest region of the United States. In 1993, Spurlock Adhesives
completed a state-of-the-art formaldehyde plant in Waverly, which it leased from
D.B. Western, Inc., until July 1996, when Spurlock Adhesives purchased the
plant. This plant fulfills all of the current formaldehyde needs of the Waverly
resin operations, and offers Spurlock Adhesives the flexibility of being able to
produce additional marketable product. Additional information regarding Spurlock
Adhesives' two manufacturing facilities is set forth under Item 2.,
"Properties," below.
Spurlock Adhesives is presently the sole operating asset of Spurlock
Industries. On the strength of significantly improved earnings at Spurlock
Adhesives, coupled with reduced costs associated with the discontinued gas
recovery operations, Air Resources in 1995 recorded its first profitable year
since the Company's inception. For additional information, see Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," below.
Present Acquisition Strategy. Present management of Spurlock
Industries believes that the Company's future profitability will be enhanced by
de-emphasizing the acquisition of unrelated businesses and experimental
technologies and instead concentrating on the expansion of the businesses
conducted by Spurlock Adhesives. In this regard, management of the Company will
from time to time consider acquisitions of carefully selected complementary
businesses designed to enhance sales, profitability, market coverage or other
aspects of the businesses currently conducted by Spurlock Adhesives.
In the fourth quarter of 1996, the Company entered into a contract of sale
with Niagara Mohawk Power Company for the purchase of certain real property and
facilities near Albany, New York, to construct
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thereon certain manufacturing facilities for the production of formaldehyde and
resins. The total estimated cost of such proposed New York facility is
$8,300,000, including environmental remediation costs estimated by an outside
consultant at approximately $860,000. Management believes that financing for the
project, adequate in amount and on reasonable terms, can be obtained by the
Company, via a conventional loan or funding from industrial revenue bonds.
In fourth quarter 1996, an application was made by the Company to the
Department of Environmental Control of the State of New York for permits
necessary to operate the plant. The Company is unable to predict at this time,
when and if, the necessary permits for the New York project can be obtained. It
continues to examine alternative sites for the proposed project.
Products and Services
The major products produced by Spurlock Adhesives consist of
formaldehyde and two types of thermosetting resins generally classified as
Urea-Formaldehyde Resins ("Urea Resins") and Phenol-Formaldehyde Resins
("Phenolic Resins"). Within these two general resin types are specifically
designed resins developed for the specific needs of certain industries and
individual customers. Spurlock Adhesives also produces fertilizer products for a
limited number of customers.
Urea Resins. These resins are used as the binder system for interior
grade products such as particleboard, medium density fiberboard, plywood and
coated papers. These products are then used in furniture, cabinets, wall panels
and cabinet components. Spurlock Adhesives also produces Urea Resin binder
systems for roof mat that later is processed into asphalt roofing shingles. Urea
Resins are thermosetting which means they cure and adhere with the aid of heat
and sometimes pressure. They are characterized as having a Type II bond, which
indicates they are strong and have a moderate amount of resistance to moisture
and humidity. The major materials involved in the production of Urea Resins are
formaldehyde, urea, triethanolamine, sodium hydroxide, sodium chloride and other
proprietary ingredients. Spurlock Adhesives currently manufactures and sells
approximately thirty-six (36) different Urea Resins to the particleboard, medium
density fiberboard, interior plywood, treated and coated papers and fiberglass
roof mat/filter media segments of the forest products, building products and
furniture industries. Sales of Urea Resins accounted for 73.6%, 67.6% and 77.1%
of net sales for the three years ended December 31, 1996, 1995 and 1994,
respectively.
Phenolic Resins. These resins are used as the binder system for
exterior grade construction materials such as oriented strandboard, exterior
plywood and hardboard, as well as the binder for fiberglass and mineral wool
insulation. Further, these resins are also used in paper impregnating for high
pressure laminates, such as counter tops. Phenolic Resins are also
thermosetting, but are classified as having a Type I bond, indicating that they
provide better resistance to moisture and humidity than Urea Resins. Phenolic
Resins typically are slower curing and more expensive. The major materials
involved in the production of these resins are formaldehyde, phenol, urea,
sodium hydroxide, potassium hydroxide and sulfuric acid. Spurlock Adhesives
presently manufactures and sells approximately eleven (11) different Phenolic
Resins to the oriented strandboard, hardboard, fiberglass insulation and mineral
wool insulation segments of the forest products, building products and furniture
industries. Sales of Phenolic Resins accounted for 5.7%, 9.0% and 9.8% of net
sales for the three years ended December 31, 1996, 1995 and 1994, respectively.
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Formaldehyde. Spurlock Adhesives produces formaldehyde for its own
internal consumption, but also selectively markets this product to industrial
accounts and other users. The major material involved in the production of
formaldehyde is methanol. Sales of formaldehyde accounted for 19.2%, 22% and
12.9% of net sales for the three years ended December 31, 1996, 1995 and 1994,
respectively.
Fertilizer. Spurlock Adhesives produces both liquid fertilizers and
intermediate fertilizer products which are purchased and further processed by
customers engaged in the manufacture and sale of fertilizers for agricultural
and lawn and gardening uses. Spurlock Adhesives' production of fertilizer is
similar to the production of Urea Resins produced by Spurlock Adhesives. There
are no significant barriers to entry into this business for other resin
producers; however, it serves to diversify Spurlock Adhesives' product mix in a
manner that may reduce financial exposure stemming from downturns in the
business cycle of the forest products, building products and furniture
industries. Sales of fertilizers accounted for 1.5%, 2.1% and 2.6% of net sales
for the three years ended December 31, 1996, 1995 and 1994, respectively.
Future Products. Spurlock Adhesives conducts experimental research to
develop new and better Urea and Phenolic resins for its existing markets. Future
research will seek, among other things, to reduce further the potential
environmental impact of such resins. In addition, Spurlock Adhesives is
developing several resins for new markets in which it does not materially
participate, such as Urea Resins for the fiberglass roofing mat and fiberglass
filter media industries, and Phenolic Resins for the hardboard and high pressure
laminates industries.
Sales and Marketing
Spurlock Adhesives sells its resin products to commercial manufacturers
in the forest products, building products and furniture industries. The
customers of Spurlock Adhesives include small, medium and large thermosetting
resin users located principally in the east, southeast and midwest regions of
the United States.
Spurlock Adhesives seeks to attract medium to large users of
thermosetting resins by offering a varied selection of high quality resins at
competitive prices, coupled with the willingness and ability to tailor its
products to the customer's individual needs and specifications. Spurlock
Adhesives emphasizes customer service and the continual improvement and
development of new resins to meet the changing needs of the marketplace,
including resins with lower levels of formaldehyde, phenol and methanol to
reduce their potential environmental impact.
Urea Resins are marketed to manufacturers in the particleboard, medium
density fiberboard and interior plywood segments of the forest products,
building products and furniture industries. In addition, Spurlock Adhesives is
seeking to expand its presence in the fiberglass roof mat and fiberglass filter
media segments of these industries. Phenolic Resins are marketed to different
industry segments, including the fiberglass insulation and oriented strandboard
segments with recent emphasis on development of the hardboard segment.
Spurlock Adhesives has a sales and marketing staff consisting of two
full-time Sales Managers. The Sales Managers call on existing customers and
targeted prospective
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customers in their individual geographic territories. In circumstances where the
company seeks to qualify new or existing products in a particular industry
segment, the Sales Managers submit samples to prospective customers for
evaluation and testing. The plant managers of the Waverly facility and the
Malvern facility service accounts and assist in the development of new business.
Spurlock Adhesives also employs two independent sales agents to service specific
markets and accounts. In addition, the Corporate Technical Director interacts
with customers and prepares monthly Quality Control Reports for customers who
request them.
Spurlock Adhesives also markets itself and its products through
advertising and participation in industry associations. Advertising is usually
limited to the placement of special features in trade publications and to
general listings of resin producers in trade publications, annual buyers guides
and other individual directories. Employees of Spurlock Adhesives participate in
various industry trade associations and conferences, including the
Particleboard/Medium Density Fiberboard Institute, the Technical Association of
Pulp and Paper Industries, the Forest Products Research Society, the
International Particleboard/Composite Materials Symposium, the International
Woodworkers Fair and the Amino, Phenolic Wood Adhesive Association. H. Norman
Spurlock, Jr., a director and executive officer of the Company, serves on the
Board of Directors of the aforementioned Institute and the Amino, Phenolic Wood
Adhesive Association, and is a past Chairman of the Institute's Public Relations
Committee.
Customers
The principal customers of Spurlock Adhesives as of December 31, 1996
were Willamette Industries (Malvern, Arkansas), Schenectady International
(Schenectady, New York), Union Camp (Franklin, Virginia) and International Paper
(Waverly and Stuart, Virginia; Spring Hope and Statesville, North Carolina; and
Jefferson and Nacogadoches, Texas). Sales to each of these customers represented
at least 12%, but not more than 26%, of Spurlock Adhesives' total consolidated
net sales for 1996. The loss of any one of these customers could have a material
adverse effect on the financial condition of Spurlock Adhesives.
Raw Materials and Suppliers
The principal raw materials used in the production of resins and
formaldehyde are methanol, urea and phenol. These materials are generally
available at present, and Spurlock Adhesives does not rely on a single producer
for any of its raw materials. Methanol, urea and phenol are commodity chemicals.
In order to assure a continuous supply of these materials, Spurlock Adhesives
enters into multi-year purchase contracts with certain producers for a minimum
supply of these commodities. Purchase orders for commodities are placed several
weeks or months in advance of delivery. Although prices for these commodities
may fluctuate, Spurlock Adhesives seeks to minimize the risk of such price
fluctuations by including provisions in customer agreements that adjust product
sales prices to reflect changes in Spurlock Adhesives' raw material costs. The
amount of any change in raw material costs for purposes of these price
adjustment provisions is determined by reference to market indices for specific
commodities. By matching increases and decreases in raw material costs with
corresponding increases and decreases in the sales prices for its products,
Spurlock Adhesives is better able to maintain profit margins.
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Competition
The business of developing and manufacturing liquid thermosetting
resins is highly competitive. The principal products of Spurlock Adhesives
compete against similar and different products manufactured and sold by numerous
other companies, some of which are substantially larger and have greater
resources than Spurlock Adhesives. The principal competitors of Spurlock
Adhesives are three large well-established manufacturers: Georgia-Pacific
Resins, a division of Georgia-Pacific Corporation; Borden Chemical, a division
of Borden, Inc.; and Neste Resins, a Finnish Company. Spurlock Adhesives
competes on the basis of price, quality, product consistency, service, method of
distribution, marketing prowess and the ability to tailor products to meet
customer needs.
Patents and Trademarks
Spurlock Adhesives is the owner of a United States patent, no.
4,381,368, on a process for the production of Urea Resins. The patent was
obtained by Harold N. Spurlock on April 26, 1983, and was formally assigned to
Spurlock Adhesives in January, 1996 for no consideration. The process described
in the patent has been used as the foundation for several other products
developed by Spurlock Adhesives.
Management of Spurlock Adhesives believes that it has a proprietary
interest in certain processes for the production of resins and that the
competitive advantage provided by maintaining the confidentiality of these
processes outweighs any benefits which might be derived from obtaining patent
protection for the processes. Consequently, Spurlock Adhesives has no plans at
the present time to seek patent protection for any such processes. Spurlock
Adhesives is not aware of and has not received any notice or claim that any of
its manufacturing processes infringe the proprietary rights of any third party
in any manner that could materially affect its business or that would prevent
Spurlock Adhesives from using its processes.
Seasonality and Backlog
Sales volume in the thermosetting resins business is closely related to
overall levels of activity in the forest products, building products and
furniture industries. Historically, Spurlock Adhesives' business has been
generally slower in the winter months and more vigorous in the spring and fall
months. In addition, the resins business is cyclical due to the effect of
fluctuations in the economy and overall levels of building and construction
activity. Periods of recession or high interest rates adversely affect building
and construction activity and therefore sales revenues.
Spurlock Adhesives typically has no significant backlog as customers
generally place monthly purchase orders that require delivery as of a specified
date as a condition to placing the order. Spurlock Adhesives from time to time
must turn down orders if necessary to assure that existing orders are timely
delivered.
Employees
As of December 31, 1996, Spurlock Adhesives had 66 full time employees
and 1 part time employee. Spurlock Industries does not employ any personnel.
Spurlock Adhesives' relationship with its employees is good. Approximately
sixteen employees located at the Malvern, Arkansas plant are covered
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by a three year collective bargaining agreement between Spurlock Adhesives and
the United Steel Workers of America that expires June 30, 1999.
Government Regulation
The Company is subject to various federal, state and local
environmental laws and regulations which limit the discharge, storage, handling
and disposal of a variety of substances. The Company's operations are also
governed by laws and regulations relating to work-place safety and worker
health, principally the Occupational Safety and Health Administration Act and
accompanying regulations and various state laws and regulations. Spurlock
Adhesives believes it presently complies in all material respects with the
foregoing laws and regulations and does not believe that future compliance with
such laws and regulations will have a material adverse effect on its financial
condition or results of operations. See Note 1 to the Consolidated Financial
Statements. Expenditures for environmental compliance -- which are considered by
the Company to be a customary and recurring cost of doing business in its
industry -- averaged approximately $250,000 for each of the three fiscal years
ended December 31, 1996. See "Management's Discussion and Analysis of Financial
Corporation and Results of Operations - Compliance with Environmental
Regulations." No capital expenditures for environmental control facilities are
anticipated for 1996 other than remediation costs for the proposed Albany, NY
facility estimated at $860,000. See "Item 1. Business - Operating History and
Acquisition Strategy."
Item 2. Properties
Air Resources conducts its business operations primarily from two
manufacturing facilities located in Waverly, Virginia and Malvern, Arkansas. The
Company's headquarters and chief executive offices are located in leased office
space in Waverly, Virginia. Management of Air Resources believes the properties
are in good condition and suitable for the Company's purposes. The Company's two
manufacturing facilities are encumbered under existing credit arrangements.
Executive Offices. Spurlock Adhesives is leasing on a month to month
basis office space in the James River Bank building in the Town of Waverly. This
space consists of 5 offices and a reception area and is approximately 2,000
square feet.
Waverly Facility. Spurlock Adhesives owns and operates a facility on a
13 acre industrial site located about 3 miles northwest of the intersection of
state highways 40 and 460 near Waverly, Virginia. The facility consists of two
resin plants and two formaldehyde plants. The plants produce Urea Resins,
Phenolic Resins and formaldehyde. In 1996, the resin plants were operated at
approximately 55% of capacity and the formaldehyde plants were operated at
approximately 83% of capacity.
Malvern Facility. The Company owns and operates a facility on 67
acres of land in Gillford, Arkansas, approximately five miles northeast of
Malvern, Arkansas. The facility consists of a resin plant, a formaldehyde plant,
two administrative offices and a research facility. The plants produce Urea
Resins, Phenolic Resins and formaldehyde. In 1996, the resin plant was operated
at approximately 65% of capacity and the formaldehyde plant was operated at
approximately 84% of capacity. The Company's major research activities are
conducted at the Malvern facility.
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Formaldehyde Plant Lease. On December 19, 1991, Spurlock Adhesives
entered into a Formaldehyde Plant Lease with D.B. Western, Inc., of North Bend,
Oregon, whereby D.B. Western, Inc. agreed to construct a fully operational
formaldehyde plant at Waverly, Virginia and lease the facility to Spurlock
Adhesives for ten years at $55,000 per month, commencing at such time as the
plant became mechanically complete and ready for start up. The lease commenced
in February, 1993. The proposed plant was to meet the requirements of the
Occupational Safety and Health Act of 1970, the National Fire Protection
Association, the National Electric Code for Class 1, Division II, the Uniform
Building Code, and the rules and regulations which have been adopted by the
Environmental Protection Agency.
D.B. Western, Inc. guaranteed in the Formaldehyde Plant Lease that the
plant would produce formaldehyde at specified daily rates based upon certain
conditions. During the fourth quarter of 1993, Spurlock Adhesives began
deferring certain payments on the plant lease due to operational problems with
the plant. Spurlock Adhesives maintained that the plant did not produce the
quantities of formaldehyde specified in the lease. The amounts deferred through
the fiscal years ended December 31, 1995 and 1994 were $510,070 and $480,000,
respectively. However, beginning in August 1994, Spurlock Adhesives paid for
plant usage at the rate of $15,000 per week, or approximately $5,000 per month
more than the lease rate. The $5,000 per month increase in payments represented
an informal settlement between the parties that served to reduce the amount of
deferred rent until a formal and more permanent settlement could be achieved.
The increase in the amount of deferred rent between December 31, 1994 and
December 31, 1995 reflected the booking of certain costs associated with
recatalization of the plant as deferred rent.
In July, 1996, the Company consummated an agreement with D. B. Western,
Inc., whereby the Company purchased the plant, terminated the lease and settled
all claims with respect to the facility for $3,675,000.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, or any proceedings known to be
contemplated by governmental authorities, to which Spurlock Industries or
Spurlock Adhesives is a party or of which any of their property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
The Registrant sold no equity securities of the Registrant, which were
not registered under the Securities Act of 1933, as amended, during the period
covered by this report.
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Item 6. Selected Financial Data
The information set forth below should be read in conjunction with Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto.
The selected consolidated financial information presented below for,
and as of the end of, each of the years in the five-year period ended December
31, 1996, is derived from the consolidated financial statements of Spurlock
Industries. The financial statements as of December 31, 1996, and for the five
years ended December 31, 1996, have been audited by Winter, Schiefley &
Associates, P.C., independent auditors.
Years Ended December 31,
--------------------------------------------------------------------------------
1996 1995 (2) 1994 1993 1992(1)
---- ---- ---- ---- -------
Income Statement Data:
Net Sales ..................................... $ 28,643,415 $ 33,243,677 30,512,704 $ 23,475,249 $ 9,032,153
Cost of sales ................................. 21,129,265 26,092,053 26,269,016 20,268,532 8,031,692
Gross profit .................................. 7,514,150 7,151,624 4,243,688 3,206,717 1,000,461
Selling, general and administrative
expenses .................................... 4,429,906 3,903,371 3,456,356 3,808,775 1,725,337
------------ ------------ ------------ ------------ ------------
Income (Loss) from operations ................. 3,084,244 3,248,253 787,332 (602,058) (724,876)
Other income and expenses ..................... (427,508)
Interest income ............................... 72,204 12,007 2,513 12,849 3,649
Interest expense .............................. (667,942) (663,662) (828,261) (668,670) (127,978)
------------ ------------ ------------ ------------ ------------
Income (Loss)from continuing
operations .................................. 2,488,506 2,596,598 (38,416) (1,685,387) (1,061,205)
Provision for income taxes .................... 1,021,487 115,600
------------ ------------
Net Income (Loss) ............................. 1,467,019 2,480,998 (38,416) (1,685,387) (1,061,205)
============ ============ ============ ============ ============
Net Income (Loss) per common share:
From continuing operations ................... $ 0.22 $ 0.37 ($ 0.01) ($ 0.42) ($ 0.30)
------------ ------------ ------------ ------------ ------------
Years Ended December 31,
--------------------------------------------------------------------------------
1996 1995 (2) 1994 1993 1992(1)
---- ---- ---- ---- -------
Balance Sheet Data:
Current assets ................................ $ 2,288,914 $ 3,099,414 $ 3,715,917 $ ,748,663 $ 1,857,682
Current liabilities ........................... 4,388,860 5,330,308 8,133,204 5,978,068 5,070,012
Total assets .................................. 12,243,751 9,342,968 9,996,870 8,305,184 8,190,056
Long-term debt ................................ 3,402,621 983,652 1,354,556 1,779,592 427,433
Shareholders' equity(3) ....................... 4,266,127 2,919,108 509,110 547,524 2,082,911
Number of common shareholders ................. 242 249 245 240 240
Weighted average number of common shares
outstanding ................................ 6,678,983 6,717,667 4,266,066 3,999,566 3,519,369
Cash dividends declared ....................... 0 0 0 0 0
Book value per share (4) ...................... $ 0.64 $ 0.43 $ 0.08 $ 0.08 $ 0.34
(1) The 1992 increases in sales, assets and equity reflect the acquisition of
Spurlock Adhesives on August 5, 1992.
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(2) Assumes the conversion of 1,200,000 preferred shares into 2,400,000 common
shares, which conversion was subsequently effected on January 5, 1996.
Absent the pro forma addition of 2,400,000 common shares, the historical
number of weighted average shares outstanding for the fiscal year ended
December 31, 1995 was 4,317,667.
(3) For the four fiscal years ended December 31, 1995, stockholders equity
included 1,200,000 shares of preferred stock, par value $2 per share,
totalling $2,400,000.
(4) Assuming the conversion of 1,200,000 preferred shares into 2,400,000 common
shares, which conversion was subsequently effected on January 5, 1996, the
weighted average shares outstanding for the five fiscal years ending
December 31, 1996 were: 6,678,983, 6,717,667, 6,626,066, 6,399,566 and
4,519,369.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis provides information which
management believes is relevant to understanding Spurlock Industries' operations
and financial condition. This discussion should be read in conjunction with the
financial statements and accompanying notes. The financial statements of the
Company have been prepared in conformity with generally accepted accounting
principles.
Forward-Looking Statements
The following discussion contains certain forward-looking statements,
generally identified by phrases such as "the Company expects" or "Management
believes" or words of similar effect. The Company wishes to caution readers that
certain important factors set forth within such discussion, among others, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual results for 1997 and beyond to
differ materially from those expressed in any forward-looking statements made
herein. For a further discussion of such factors and forward-looking statements,
please see "Forward-Looking and Cautionary Statements" below.
General
Overview. The Company's operating results have shown substantial
improvement in the fiscal years ended December 31, 1996, 1995 and 1994. The
Company achieved nearly break-even results in 1994, reported record profits of
$2,480,998 in 1995 and reported profits of $1,435,176 in 1996. Management
attributes this improvement to the refocusing of the Company on its core
resin/adhesives business and the termination of non-profitable gas generation
operations, the implementation of a cost reduction program in early 1994,
increased control over raw materials prices and improved product margins. The
lower net profit in 1996 is due mainly to the effect of income taxes, as loss
carryforwards were substantially utilized in 1995.
Discontinued Operations. In the first quarter of 1994, the Board of
Directors of the Company decided to discontinue its Colorado gas recovery
engineering and consulting business and to close its Denver office. Such actions
were completed by the end of the year. Operating results for 1995 and 1996
reflect only those of the Company's primary subsidiary, Spurlock Adhesives.
Dependence on Construction and Related Industries. Demand for Spurlock
Industries' products and the Company's financial performance are closely tied to
the fortunes of the construction, forest
-13-
products and related industries. See "Item 1. Business - Seasonality and
Backlog." Accordingly, the recent period of relatively low interest rates
(including mortgage loan rates) and the stability of the housing, construction
and related industries, have favorably impacted the Company's recent financial
performance.
Gross Margins and Commodity Prices. Raw materials costs comprised
approximately 57%, 62% and 68% of net sales in 1996, 1995, and 1994,
respectively. Raw materials are by far the largest component of cost of goods
sold. Therefore, the Company's operating performance is sensitive to price
movements in its basic raw materials, particularly methanol and urea. Management
strives to ameliorate these commodity risks by maintaining diverse supply
relationships and by closely matching increases and decreases in product prices
to increases and decreases in raw material costs. During the first part of 1996,
the Company was able to pass on increases or decreases in raw material prices,
which was the primary reason for the improved margins in fiscal 1996. Margins
were squeezed during the last quarter of that year due to competition and excess
capacity in certain markets. See "Item 1. Business - Raw Materials and
Suppliers."
Freight Costs. A substantial portion of Spurlock Industries' products
are priced on an "as delivered basis". For 1996, 1995, and 1994, freight costs
relating to delivery of the Company's products comprised approximately 3.9%,
4.2%, and 4.5%, respectively, of net sales. Accordingly, the Company's operating
performance is sensitive to movements in freight costs. In a June 1994
cost-reduction move, the Company discontinued the majority of its own trucking
operations and began contracting with third parties for most of these services.
As a result, combined savings of approximately $117,000 or 0.4% of sales were
achieved in the salary and wages component of cost of goods sold and in
insurance expenses in 1995. The further decrease of $276,028 in 1996 is
attributable to changes in customer processes that decreased shipments, as well
as one customer changing terms to freight collect.
New Credit Facilities. In July 1996, in order to reduce interest costs
and increase credit availability, the Company terminated a $3,500,000 line of
credit with its primary working capital lender and obtained a $3,500,000 line of
credit with a new lender. Such new credit facility is secured by accounts
receivable and inventory, among other assets, and provides for credit
availability based upon the level of accounts receivable and inventory. In
conjunction with this new line of credit, the Company borrowed an additional
$3,600,000 under a term loan to purchase the leased formaldehyde plant, which
term loan is secured by all assets.
Purchase of Waverly Formaldehyde Plant. On December 19, 1991, Spurlock
Adhesives entered into a Formaldehyde Plant Lease with D. B. Western, Inc. of
Northbend, Oregon, whereby D. B. Western, Inc. agreed to construct a fully
operational formaldehyde plant at Waverly, Virginia and lease the facility to
Spurlock Adhesives for ten (10) years at $55,000 per month, commencing at such
time as the plant became mechanically complete and ready for startup. The lease
commenced in February, 1993. Because of a dispute relating to the operational
performance of the plant, during the fourth quarter of 1993, the Company began
deferring certain payments on the plant lease. The amounts deferred through the
fiscal years ended December 31, 1995 and 1994 were $510,070 and $480,000
respectively. Beginning in August 1994, the Company paid for plant usage at the
rate of $15,000 per week, or approximately $5,000 per month more than the lease
rate as part of an informal accommodation of such dispute.
-14-
In July 1996, the Company consummated an agreement with D. B. Western,
Inc. whereby the Company purchased the plant, terminated the lease and settled
all claims with respect to the facility for $3,675,000.
Compliance with Environmental Regulations. Environmental costs charged
to operations aggregated $202,076, $277,349 and $261,932 for the years ended
December 31, 1996, 1995 and 1994, respectively. As a percentage of net sales,
such expenditures totaled .71%, .83% and .86%, respectively over such three
years. In all three years, over 80% of such expenditures related to testing at
the Company's manufacturing facilities to ensure compliance with environmental
laws and regulations. Other expenditures included obtaining required permits,
purchase and maintenance of safety equipment, trash and waste removal and
training. All such expenses are viewed by the Company as customary, recurring
costs of doing business in its industry. No capital expenditures for
environmental control facilities are anticipated for 1997 other than $860,000
for remediation in connection with its planned acquisition of property and
industrial facilities near Albany, NY, as described under "Liquidity and Capital
Resources" below.
Capacity Utilization. In 1996, the Waverly, Virginia formaldehyde plant
ran at approximately 83% of capacity as compared to 85% in 1995. The decrease
was due to lower volumes of resin being produced. The Malvern, Arkansas
formaldehyde plant ran at approximately 84% in 1996 as compared to 90% in 1995.
The decrease was due to excess capacity in that market area. In 1996, resin
capacity utilization at the Waverly facility was 55% compared to 60% in 1995.
This change was due to a customer's order patterns and process changes to better
utilize the products. The Malvern facility maintained its resin capacity
utilization at 65% for 1996 and 1995. In the future, management intends to
continue to adjust the Company's production and product mix to meet market
conditions in order to maximize profits.
New York Facility. In the fourth quarter of 1996, the Company entered
a contract of sale with Niagara Mohawk Power Company for the purchase of certain
real property and facilities near Albany, New York, to construct thereon certain
manufacturing facilities for the production of formaldehyde and resins. The
total estimated cost of such proposed New York facility is $8,300,000, including
environmental remediation costs estimated by an outside consultant at
approximately $860,000. Management believes that financing for the project,
adequate in amount and on reasonable terms, can be obtained by the Company, via
a conventional loan or funding from industrial revenue bonds.
The Company is unable to predict at this time, when and if, the
necessary permits for the New York project can be obtained. It continues
to examine alternative sites for the proposed project.
Conversion of Convertible Preferred Stock. In January, 1996, the holder
of 1,200,000 convertible preferred shares, Harold N. Spurlock, Chairman,
President and Chief Executive Officer of the Company, converted these shares
pursuant to their terms into 2,400,000 shares of the Company's common stock. For
the fiscal years ended December 31, 1995 and 1994, the Company had outstanding
1,200,000 shares of convertible preferred stock, $2.00 par value per share,
aggregating $2,400,000. In "Results of Operations" below, earnings per share
ratios assume the conversion of all such preferred shares except in 1994 when
the effect was anti-dilutive.
-15-
Inflation. Although Spurlock Industries' operations are influenced by
general economic trends, the Company does not believe that inflation had a
material impact on its operations during the three-year period ended December
31, 1996.
Results of Operations
Fiscal 1996 Compared to 1995. Spurlock Industries' net sales for the
year ended December 31, 1996 were $28,643,415, a decrease of 13.8% compared to
$33,243,677 in 1995. This decrease resulted from lower average selling prices on
all of Spurlock Adhesives' resin and formaldehyde products due to: (i) lower
prices for raw materials, and (ii) several customers' decreased demand for the
Company's products due to a change to a more efficient manufacturing process.
Shipments of resin/adhesive products - which comprised approximately 67% of all
1996 shipments - declined by 4.3% from 1995. All sales in 1996 were generated by
Spurlock Adhesives.
Cost of goods sold for 1996 totaled $21,129,265 or 73.8% of net sales
versus $26,092,053 or 78.5% in 1995. The decrease was mainly in raw material
costs which represented 57.1% of net sales in 1996 versus 62.36% in 1995.
Management was successful in holding most categories of other costs of goods
sold to 1995 levels. Accordingly, the gross margin improved in 1996 to 26.2%
from 21.5% in 1995, on gross profit of $7,514,150 versus $7,151,624 in 1995.
Selling, general and administrative expenses totalled $4,429,906 or
15.47% of net sales in 1996 as compared to $3,903,371 or 11.74% of sales in
1995. The dollar increase in this category in 1996 resulted from salary and wage
increases to middle management and increased professional fees associated with
the merger that took place July 26, 1996. The lower volume of net sales
significantly contributed to the increase as a percentage of net sales.
Interest expense in 1996, although increasing as a percentage of net
sales to 2.33% from 2.00% in 1995, increased only .6% in absolute terms to
$667,942 from $663,662 in 1995. This increase resulted from the term loan
borrowing for the purchase of the leased formaldehyde plant and lower interest
rates on the line of credit.
Pretax earnings in 1996 of $2,488,506 substantially mirrored the
$2,596,598 reported in 1995, despite lower sales. This was due to an improvement
in the pretax margin, which was 8.7% in 1996 versus 7.8% in 1995.
The provision for income taxes totalled $1,021,487 for 1996 as compared
to $115,600 for 1995. The provision for income tax in 1996 consisted of $149,415
in state income tax and $846,091 in federal income tax, as compared to $104,000
and $11,400, respectively, for 1995. The 1995 figures are net of loss
carryforwards aggregating $801,532. Absent such carryforwards in 1996, net
earnings after taxes for 1996 of $1,467,019 or $.22 per share of common stock
(on a fully diluted basis) declined from $2,480,998 or $.37 per share in 1995.
Fiscal 1995 Compared to 1994. For the year ended December 31, 1995, the
Company reported net sales of $33,243,677, an increase of 8.95% compared to net
sales of $30,512,704 for 1994. All sales related to sales of resin, formaldehyde
and fertilizer materials by the Company's wholly owed subsidiary,
-16-
Spurlock Adhesives. Shipments of resin/adhesive products - which comprised 68.3%
of all shipments in 1995 - declined 18.1% from 1994. This drop in volume - due
to the concerted effort by management to adjust the product sales mix to take
full advantage of superior margins realizable in the formaldehyde markets - was
effectively offset by a 74.8% increase in formaldehyde shipments owing largely
to sales to a new customer procured in 1994. Overall product shipments dropped
approximately 3.3% from 1994. Accordingly, the increase in net sales for 1995
resulted from increased average selling prices for the entire year for Spurlock
Industries' products.
Cost of goods sold totaled $26,092,053 or 78.49% of net sales, compared
to $26,269,016 or 86.09% of net sales for 1994. The decrease in costs of goods
sold as a percentage of net sales resulted from the Company's success in holding
both raw material costs and other costs of goods sold (such as freight and
energy costs) to 1994 levels while simultaneously increasing net sales. The
Company's gross profit and gross margin improved substantially in 1995 to
$7,151,624 and 21.51%, respectively, from $4,243,688 and 13.91%, respectively,
in 1994. The improved gross margin was primarily the result of improved mark-ups
in selling prices, due in large part to the success of the Company in passing
raw material costs along to its customers.
Selling, general and administrative expenses for 1995 were $3,903,371
or 11.74% of net sales, compared to $3,456,356 or 11.33% of net sales for the
same period in 1994. The increase in operating expenses resulted primarily from
an increase of $536,568 or 35.1% in human resources expense, owing largely to
increases in salaries for key executive and middle management personnel. The
salaries of such personnel had been frozen for the previous three years.
Interest expense in 1995 totaled $663,662 or 2.00% of net sales, versus
$828,261 or 2.71% of net sales in 1994. The decrease was due to a reduction in
average outstandings of interest accruing debt of approximately $250,000 or 6.8%
from the prior year, and reduced borrowing costs attributable to the more
attractive rates offered under the previous working capital facility entered
into in February 1995.
The provisions for income taxes totaled $115,600 for 1995, consisting
of $104,000 in state income tax and $11,600 in federal income tax, the latter of
which largely resulted from to the utilization of loss carry-forwards in the
amount of $801,532. Due to a net loss, no federal or state income taxes were
accrued for 1994. Net earnings after taxes for 1995 increased dramatically over
the prior year, totaling $2,480,998 or $.37 per share of common stock (on a
fully diluted basis) compared to a loss of ($38,416) or ($.01) per share in
1994.
Liquidity and Capital Resources
General. In fiscal 1996, 1995 and 1994, the Company relied heavily on
its institutional working capital lenders and its trade creditors to finance its
working capital requirements. The Company traditionally has operated, and
continues to operate, with a negative working capital position, as Spurlock
Industries takes advantage of supplier payment terms which exceed those granted
to the Company's customers. Although the Company continued to rely on these
funds sources in 1996 and 1995, strong earnings and cash flow allowed it to
substantially reduce its dependence on accounts payable and to strengthen its
working capital and cash positions.
-17-
Fiscal 1996 Compared to 1995. In 1996, Spurlock Industries reported a
cash flow from net income and depreciation and amortization of $2,225,384
compared to the $3,181,238 reported in 1995. This cash flow, supplemented by
reductions in receivables and inventory of $366,845 and $54,133, respectively,
permitted the Company to reduce accounts payable by $380,584, fund fixed asset
additions of $1,184,369 and reduce notes and loans by $1,351,511. Working
capital increased $130,948 or approximately 5.9% to ($2,099,946) from
($2,230,894) in 1995.
As described above, in July 1996 the Company entered into a new
$3,500,000 revolving credit facility with a new lender, which facility matures
in July 1999. On December 31, 1996, outstanding loans under the facility totaled
$1,420,801, which was the total amount available at such time based on levels of
accounts receivable and inventory on which borrowing availability is based.
Borrowings during the entire fiscal year averaged approximately $1,450,000. The
new credit facility provides the Company with an important source of liquidity
in addition to its cash account and cash generated from operations. Management
believes that cash generated from operations, together with amounts available
under the Company's revolving credit facility, will be sufficient to meet the
Company's anticipated working capital and liquidity requirements during 1997 and
1998.
In addition to borrowings under its revolving credit facility, the
Company had outstanding at year end 1996 long term debt totaling $4,431,711,
including current maturities of $1,029,090. Such debt extends through 2004, with
current maturities thereof dropping to $996,087 in 1998 and significantly
thereafter. In 1995, long term debt totaled $1,977,242 with current maturities
of $993,590. The increase in long term debt is attributable to the new
borrowings to purchase the formerly leased formaldehyde plant. The total term
facility is $3,639,000, with $3,436,832 outstanding at year end.
The 1996 net earnings strengthened the Company's capital position, as
its retained earnings deficit was reduced by $1,467,019 from year end 1995, and
total equity increased 46.1% to $4,266,127 from $2,919,108 at year end 1995.
Because the equity increase outpaced the increase in total liabilities, the
ratio of total liabilities to total net worth, a measure of leverage, improved
to 1.87 at year end 1996 from 2.2 at year end 1995.
As described in "General - New York Facility" above, the Company has
plans to construct manufacturing facilities for the production of formaldehyde
and resins in the State of New York. The estimated cost of such proposed
facility would approximate $8,300,000, including environmental remediation costs
estimated by an outside consultant at approximately $860,000. Management
believes that financing for the project, adequate in amount and on reasonable
terms, can be obtained by the Company via a conventional loan or funding from
industrial revenue bonds.
Fiscal 1995 Compared to 1994. In 1995, the Company reported a strong
cash flow from net income and depreciation and amortization of $3,181,238, an
improvement of $2,659,055 or 509% over the $522,183 reported in 1994. This
strong cash flow, supplemented by significant reductions in receivables and
inventory of $546,277 and $566,152, respectively, permitted the Company to
reduce accounts payable by $3,063,008, fund fixed asset additions of $425,769
and reduce notes and loans by $1,012,309.
-18-
Working capital increased $2,186,393 or approximately 49% to ($2,230,894) from
($4,417,287) in 1994, as the Company drastically reduced its level of payables,
cut payment time to trade creditors by approximately half and began paying
within standard thirty (30) day terms. Despite an increase in cash and trading
securities of $373,767 to $450,751, current assets actually fell by 16.6%. This
drop was due in large part to the lofty levels of product sales prices and
accordingly trading assets at December 31, 1994. In addition, the Company was
able to quicken collection of its accounts receivable.
In February 1995 the Company entered into a $3,500,000 revolving credit
facility with a new lender. On December 31, 1995, outstanding loans under the
facility, which has now been replaced, totaled $1,329,096, leaving $109,000 in
unused loan availability at such time based on levels of accounts receivable and
inventory on which borrowing availability is based. Borrowings during the entire
fiscal year averaged approximately $1,600,000.
The 1995 revolving credit facility contained a number of financial and
restrictive covenants limiting, among other things, the redemption of capital
stock, the payment of dividends, the incurrence of additional indebtedness,
certain mergers and acquisitions, and the acquisition of fixed assets. During
1995, technical violations of certain such covenants resulted, for which the
Company received a waiver from the lender.
In addition to borrowings under its 1995 revolving credit facility, the
Company had outstanding at year end 1995 "notes payable-other" of $82,447 due in
1996, which represented the remaining obligations under various private
placement notes to investors. Principal payments of $423,218 were made on such
notes in 1995. The Company also had $1,977,242 in long term debt at year end
1995, including current maturities of $993,590. Approximately half of total long
term debt consisted of notes payable to two former vendors and suppliers.
Deferred rent increased to $510,070 from $480,000 at year end 1994, and
related to the lease for a formaldehyde plant located in Waverly, Virginia from
D.B. Western, which lease was then in dispute. Such dispute was settled and the
plant was purchased by the Company in July 1996. See "General - Purchase of
Waverly Formaldahyde Plant" above. Lease payments of $15,000 a week - which
approximated $5,000 per month more than the required monthly rental of $55,000
- -would have served to repay most of such deferred rent by the expiration of the
lease in February 2003. Such additional rental payments paid during 1995 would
have actually reduced deferred rent from the 1994 level to $360,000 but for the
addition to deferred rent of $120,000 relating to an account payable to D.B.
Western, Inc. for catalyst relating to the operation of the leased facility.
The strong 1995 net earnings strengthened the Company's capital
position, as its retained earnings deficit was reduced by $2,480,998 from year
end 1994, and total equity increased 473% to $2,919,108 from $509,110 at year
end 1994. Because of the equity increase and substantially reduced total
liabilities, the ratio of total liabilities to total net worth, a measure of
leverage, decreased significantly to 2.2 from 18.6 at year end 1994.
Forward-Looking And Cautionary Statements
The Company and its representatives may from time to time make written
or oral forward-looking statements, including statements contained in the
Company's filings with the Securities and
-19-
Exchange Commission in its reports to shareholders. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company is hereby identifying important factors that could cause actual results
to differ materially from those contained in any forward-looking statement made
by or on behalf of the Company. Any such statement is qualified by reference to
the following cautionary statements.
The Company's formaldehyde and resin business is closely tied to the
construction and forest products industries, and is influenced by housing starts
and construction activity generally. The Company's operating performance is
sensitive to price movements in its basic raw materials, particularly methanol
and urea. The Company's operating performance is also sensitive to movements in
freight costs. The Company's raw materials, products and manufacturing processes
are subject to environmental laws and regulations and the costs associated
therewith. The availability of credit from institutional asset based lenders and
suppliers is very important to the Company. Developments in any of these areas,
which are more fully described elsewhere in Parts I and II hereof, each of which
is incorporated into this section by reference, could cause the Company's
results to differ materially from the results that have been or may be projected
by or on behalf of the Company. The Company cautions that the foregoing list of
important factors is not exclusive. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
-20-
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Spurlock Industries, Inc.
We have audited the accompanying consolidated balance sheets of Spurlock
Industries, Inc. (formerly Air Resources Corporation) as of December 31, 1996,
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Spurlock Industries, Inc.
(formerly Air Resources Corporation) as of December 31, 1996, and 1995, and the
results of its operations, and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Winter, Scheifley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
January 17, 1997
-21-
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Balance Sheets
As of December 31, 1996 and 1995
Assets
1996 1995
Current Assets:
Cash and cash equivalents $106,702 $250,751
Trading securities - 200,000
Accounts receivable - trade 1,446,930 1,813,775
Other accounts receivable 8,718 62,179
Accounts and notes receivable
- officers current portion 38,595 40,520
Inventories 541,632 595,765
Prepaid income taxes 72,477 -
Deferred tax asset - 98,300
Prepaid expenses 74,490 38,124
----------- ----------
Total current assets 2,288,914 3,099,414
Property, plant and equipment, net of
accumulated depreciation of $4,313,075 and
$3,559,436 9,444,057 5,712,885
Other Assets:
Accounts and notes receivable
- officers 101,044 118,119
Investments 150,000 150,000
Other 259,736 262,550
----------- ----------
510,780 530,669
----------- ----------
Total assets $12,243,751 $9,342,968
=========== ==========
The accompanying notes are an integral part of the financial statements.
-22-
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Balance Sheets
As of December 31, 1996 and 1995
(Continued)
Liabilities and Stockholders' Equity
1996 1995
Current Liabilities:
Notes payable - line of credit $ 1,420,801 $ 1,329,096
Notes payable - other - 82,447
Current portion of long-term debt 1,029,090 993,590
Accounts payable - trade 1,678,442 2,069,561
Accrued expenses 260,527 249,922
Amounts due stockholders and
and related parties - 95,622
Deferred rent - 510,070
----------- -----------
Total current liabilities 4,388,860 5,330,308
Long-term debt 3,402,621 983,652
Deferred tax liability 143,476 109,900
Post retirement benefit liability 42,667 -
Commitments and contingencies
Stockholders' Equity:
Preferred stock, convertible,
$2 par value, 5,000,000 shares
authorized, 1,200,000 shares
issued and outstanding - 2,400,000
Common stock, no par value
500,000,000 shares authorized
6,572,066, and 4,325,066
shares issued and outstanding 4,808,814 2,528,814
Accumulated deficit (542,687) (2,009,706)
----------- -----------
4,266,127 2,919,108
----------- -----------
Total liabilities and
stockholders' equity $12,243,751 $ 9,342,968
=========== ===========
-23-
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Revenues:
Net sales $28,643,415 $33,243,677 $30,512,704
Cost of sales 21,129,265 26,092,053 26,269,016
----------- ----------- ------------
7,514,150 7,151,624 4,243,688
Selling, general and
administrative expenses 4,429,906 3,903,371 3,456,356
----------- ----------- -----------
3,084,244 3,248,253 787,332
Other income and (expense):
Other income 72,204 12,007 2,513
Interest expense (667,942) (663,662) (828,261)
----------- ----------- -----------
(595,738) (651,655) (825,748)
Net income before income taxes 2,488,506 2,596,598 (38,416)
Provision for income taxes 1,021,487 115,600 -
----------- ----------- -----------
Net income (loss) $ 1,467,019 $ 2,480,998 $ (38,416)
=========== =========== ============
Earnings per share $0.22 $0.37 $(0.01)
===== ===== =======
Weighted average shares outstanding 6,678,983 6,717,666 4,226,066
========= ========= =========
The accompanying notes are an integral part of the financial statements.
-24-
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Operating activities:
Net income (loss) $ 1,467,019 $ 2,480,998 $ (38,416)
Adjustments to reconcile net income
(loss) to net cash:
Depreciation and amortization 758,365 700,240 560,599
Issuance of common stock for services - 5,000 -
Write off of intangible assets - - 23,372
Abandonment of fixed assets - - 9,958
(Increase) decrease in receivables 420,306 546,277 (371,281)
(Increase) decrease in trading securities 200,000 (200,000) -
(Increase) decrease in inventory 54,133 566,152 (320,578)
(Increase) decrease in prepaid expenses (108,843) 6,001 1,695
(Increase) in other assets 2,814 (79,381) (15,181)
Increase in deferred taxes 131,946 11,600 -
Increase (decrease) in accounts payable
and accrued expenses (380,584) (2,188,581) 775,959
Increase in post retirement benefit liability 42,667
--------- --------- ---------
Total adjustments 1,120,804 (632,692) 664,543
--------- --------- ---------
Net cash provided by (used in)
operating activities 2,587,823 1,848,306 626,127
Investing activities:
Purchase of fixed assets (1,184,369) (425,769) (316,265)
Advances to officers (11,000) (136,733) -
Repayment of officer advances 30,000
--------- --------- ---------
Net cash provided by (used in)
investing activities (1,165,369) (425,769) (316,265)
Financing activities:
Acquisition of common shares (120,000) (1,000) -
Proceeds of new borrowings - - 60,665
Repayment of related party loans (95,622) (99,728) -
Repayment of notes and loans (1,351,511) (1,012,309) (318,261)
--------- --------- ---------
-25-
Net cash provided by (used in)
financing activities (1,567,133) (1,112,037) (257,596)
Net increase in cash and cash equivalents (144,679) 310,500 52,266
Beginning cash 250,751 76,984 24,718
--------- --------- ---------
Ending cash $ 106,072 $ 387,484 $ 76,984
=========== =========== ===========
-26-
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
(Continued)
1996 1995 1994
Supplemental cash flow information:
Cash paid for: Interest $ 667,942 $ 605,825 $ 391,054
Income taxes $ 658,577 $ 104,000 $ -
Non-cash financing and investing activities:
Acquisition of equipment with notes payable $ 3,305,168 $ 50,818 $ -
Conversion of accounts payables to note $ - $ 839,500 $ -
The accompanying notes are an integral part of the financial statements.
-27-
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994
Common Shares Preferred Accumulated
Amount Shares Amount Deficit
Balance December 31, 1993 4,226,066 $ 2,599,814 $ 1,200,000 $ 2,400,000 $(4,452,288)
Net loss for the year - - - - (38,416)
--------- ------------ ----------- ------------ ------------
Balance December 31, 1994 4,226,066 2,599,814 1,200,000 2,400,000 (4,490,704)
Issuance of common shares for
services 100,000 5,000 - - -
Share repurchase agreement (1,000) (76,000) - - -
Net income for the year - - - - 2,480,998
--------- ------------ ----------- ------------ ------------
Balance December 31, 1995 4,325,066 2,528,814 1,200,000 2,400,000 (2,009,706)
Conversion of preferred shares 2,400,000 2,400,000 (1,200,000) (2,400,000) -
Acquisition and cancellation
of shares (153,000) (120,000) - - -
Net income for the year - - - - 1,467,019
--------- ------------ ----------- ------------ ------------
Balance December 31, 1996 6,572,066 4,808,814 - - (542,687)
=========== =========== =========== =========== ============
The accompanying notes are an integral part of the financial statements.
-28-
Spurlock Industries, Inc.
(formerly Air Resources Corporation)
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
A. Organization and Operations
Spurlock Industries, Inc. (formerly Air Resources Corporation) was originally
incorporated on March 17, 1986 in Colorado. On January 27, 1996, Spurlock
Industries, Inc. was formed in Virginia. A merger of the two corporations was
completed on July 26, 1996. The merger was accounted for as a recapitalization
and no adjustments were made to the carrying amounts of assets and liabilities
of the combined companies. Shares of the combining companies were exchanged on a
one for one basis. The Company is engaged in the development, production, and
distribution of resins, liquid fertilizers and formaldehyde.
B. Principles of Consolidation
The Company engages in the development, production, and distribution of resins,
liquid fertilizers and formaldehyde through its wholly owned subsidiary Spurlock
Adhesives, Inc. All inter-company transactions have been eliminated.
Substantially all of the Company's revenues have been derived from the
operations of Spurlock Adhesives.
C. Inventories
Inventory is stated at the lower of cost or market using the first in, first out
method. Finished goods include raw materials, direct labor and overhead. Raw
materials include purchase and delivery costs. Inventory consists of the
following at December 31,
1996 1995
Raw materials $397,511 $403,273
Work in process 9,493 8,677
Finished goods 134,628 183,815
-------- --------
$541,632 $595,765
======== ========
D. Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. When assets
are retired or otherwise disposed of, the cost and the related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in operations for the period. The cost of repairs and maintenance is
charged to operations as incurred and significant renewals or betterments are
capitalized.
-29-
Useful lives for property and equipment are as follows:
Buildings 20 - 30 years
Machinery and equipment 5 - 25 years
Office equipment 7 years
Vehicles 4 - 8 years
E. Intangible Assets
The cost of intangible assets are amortized using the straight-line method over
their estimated useful economic lives. They are stated at cost less accumulated
amortization. The Company reviews for the impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Under FAS
121, an impairment loss would be recognized when estimated future cash flows
expected to result from the use of the asset and its eventual disposition is
less than its carrying amount. No such impairment losses have been identified by
the Company for the 1996 and 1995 fiscal years. During 1994 $23,372, of
intangibles considered to be non-recoverable were charged to operations.
F. Revenue Recognition
The Company recognizes revenue on the sales of its products at the time of
shipment.
G. Cash
Cash and cash equivalents, consist of deposits and highly liquid debt
instruments with original maturities of less than 90 days.
H. Environmental Costs
The Company's business activities are monitored by state and federal
environmental agencies and the Company is required to obtain permits for the
operation of its facilities. Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate. Liabilities are recorded
when environmental assessments and or remedial efforts are probable, and the
costs can be reasonably estimated. Generally, the timing of these accruals
coincides with the completion of a feasibility study or commitment to a formal
plan of action. Environmental costs charged to operations aggregated $202,076,
$277,349 and $261,932 for the years ended December 31, 1996, 1995 and 1994.
I. Advertising
Advertising expenses are charged to expense upon first showing. Amounts charged
to expense were $28,101, $27,880 and $648 for the years ended December 31, 1996,
1995 and 1994, respectively.
-30-
J. Estimates
The preparation of the Company's financial statements requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
K. Earnings Per Share
Earnings per share for periods presented has been computed using the weighted
average number of shares of common stock outstanding during the periods
presented. Common stock equivalents, as determined using the treasury stock
method, are excluded from the computation during loss years as their effect
would be anti-dilutive.
L. Concentration of Credit Risk
The Company's short-term financial instruments consist of cash and cash
equivalents, accounts and loans receivable, and payables and accruals. The
carrying amounts of these financial instruments approximates fair value because
of their short-term maturities. Financial instruments that potentially subject
the Company to a concentration of credit risk consist principally of cash and
accounts receivable, trade. During the year the Company did not maintain cash
deposits at financial institutions in excess of the $100,000 limit covered by
the Federal Deposit Insurance Corporation. The Company has several major
customers, (see Note 12) the loss of any one of which could have a material
negative impact upon the Company. Additionally, the Company maintains a line of
credit and a significant portion of its long-term debt with one financial
institution. The maintenance of a satisfactory relationship with this
institution is of significant importance to the Company. The Company does not
hold or issue financial instruments for trading purposes nor does it hold or
issue interest rate or leveraged derivative financial instruments
M. Stock-based Compensation
The Company adopted Statement of Financial Accounting Standard No. 123 (FAS
123), Accounting for Stock-Based Compensation beginning with the Company's first
quarter of 1996. Upon adoption of FAS 123, the Company continued to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by APB No. 25, Accounting for Stock Issued to
Employees, and has provided in Note 11 pro forma disclosures of the effect on
net income and earnings per share as if the fair value-based method prescribed
by FAS 123 had been applied in measuring compensation expense.
N. Recent Pronouncements
In 1996 Financial Accounting Standards No. 125 (FAS 125) Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities was issued.
FAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The Company
will adopt FAS 125 in 1997. Adoption of FAS 125 is not expected to have a
material effect on the Company's consolidated financial position or operating
results.
Note 2. Accounts Receivable
During January, 1994 the Company entered into a factoring agreement with a
financial institution whereby the factor agreed to advance the Company up to
$1,200,000 with recourse by purchasing accounts receivable less than 90 days
old. The advanced amount was computed on 80% of acceptable receivables. The
Company
-31-
agreed to pay the factor a percentage of the face amount of the receivable for
the advances as follows: 2% for items collected within 30 days; 4% for items
collected between 31 and 60 days; and 6% for items collected after 61 days.
Factoring fees charged to expense pursuant to this arrangement for 1995 and 1994
amounted to $94,156 and $425,684, respectively.
During February, 1995 the Company replaced its accounts receivable factoring
agreement with a line of credit. The line of credit is secured by the Company's
accounts receivable and inventory. Under the terms of the credit line the
Company may borrow up to 85% of accounts receivable up to 90 days old and 50% of
inventory up to a maximum of $3,500,000. The line of credit was replaced in July
1996 with a new line of credit (see Note 6).
Note 3. Investments
The Company's securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities. Trading
securities are recorded at fair value as a current asset with the change in fair
value during the period included in earnings.
At December 31, 1995 the Company held debt securities bearing interest at 6%
with a fair value and cost basis of $200,000. The Company had no sales proceeds
from trading securities during the year ended December 31, 1995.
The Company purchased additional trading securities during the year ended
December 31, 1996 for cash aggregating $397,500. The Company had sales proceeds
from trading securities during the year ended December 31, 1996 amounting to
$581,167 and realized a (loss) for this period amounting to $(16,333).
Note 4. Property and Equipment.
Property and equipment consist of the following:
1996 1995
Land $ 69,233 $ 69,233
Buildings 547,041 543,601
Machinery and equipment 12,399,116 8,315,648
Construction in progress 305,913 107,133
Vehicles 285,189 132,437
Furniture and fixtures 150,640 104,269
----------- -----------
13,757,132 9,272,321
Accumulated depreciation and amortization 4,313,075 3,559,436
----------- -----------
$ 9,444,057 $ 5,712,885
=========== ===========
Depreciation charged to operations was $758,365 $700,240 and $560,599 for the
years ended December 31, 1996, 1995 and 1994, respectively.
-32-
Substantially all of the Company's fixed assets secure debt described in Note 7.
The Company owns vacant land adjacent to its Waverly VA facility which is
suitable for plant expansion. The cost of the land $150,000 is included in other
investments in the accompanying balance sheet.
Note 5. Accounts and Notes Receivable - Officers
Accounts and notes receivable officers consisted of the following at December
31,
1996 1995
Notes receivable, with interest at
9% due in annual payments
of $38,595 through 1999 $139,639 $158,639
Less: current portion 38,595 40,520
-------- --------
$101,044 $118,119
======== ========
Note 6. Notes Payable.
Notes payable - line of credit at December 31, 1995 consisted of outstanding
indebtedness pursuant to an accounts receivable financing agreement as described
in Note 2. At December 31, 1995 the outstanding balance was $1,329,096 bearing
interest at prime plus 2.5% (11% at December 31, 1995) per annum. The line was
repaid in July 1996 pursuant to a new credit facility with a bank which includes
an accounts receivable and inventory line of credit and long-term financing
secured by plant and equipment. The new credit line is secured by the Company's
accounts receivable and inventory and contains certain financial covenants which
the Company is currently in compliance with. At December 31, 1996, borrowings
outstanding amounted to $1,420,801 at a year end interest rate of 8.25%.
The year end balance is equal to the maximum amount of borrowing based on
available accounts receivable and inventory.
Notes payable - other at December 31, 1995 consists of following:
Promissory notes, with interest at 12% per annum, originally due in March, 1993
with a balance due of $82,447 at December 31, 1995, repaid in 1996.
Note 7. Long-term Debt
Long-term debt consists of the following at December 31,
1996 1995
Note payable bank, payable in monthly
installments of $8,621 plus interest
at 10%, repaid in July 1996 $ -- $ 206,897
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Note payable bank, payable in monthly
installments of $8,924 with interest
at 8%, repaid in June 1996 -- 77,362
Note payable to a bank payable
$50,542 monthly including interest
at prime + .5% or LIBOR rate + 2.75%
(8.25% at December 31, 1996)
secured by plant and equipment
due July, 2002 3,436,832 509,138
Note payable to a bank with
interest at 12% payable $1,832
monthly secured by real property
due in August, 2004 109,295 117,583
Note payable vendor, payable in monthly
installments of $23,320 with interest
at Prime + 1.5% (10% at December 31,
1995) due March, 1998 349,780 629,620
Note payable supplier, payable in
monthly installments of $12,861, with
interest at 8%, repaid in June 1996 -- 379,831
Note payable supplier, payable in
monthly installments of $14,814, with
interest at 8.25%, through August 1999 400,504 --
Various notes payable, payable in
monthly installments of $4,634
with interest from 8% to 10% due
December 1997 to November 1999
secured by personal property 135,300 56,811
--------- ---------
4,431,711 1,977,242
Less: current portion 1,029,090 993,590
--------- ---------
$3,402,621 $ 983,652
========== =========
-34-
Maturities of long-term debt are as follows:
December 31, 1997 $1,029,090
December 31, 1998 $ 966,087
December 31, 1999 $ 740,822
December 31, 2000 $ 619,942
December 31, 2001 $ 621,647
Thereafter $ 454,123
Note 8. Related Party Transactions.
Through 1993 certain directors and shareholders made advances to the Company
bearing interest at 10% per annum aggregating $195,350. These advances were
unpaid at December 31, 1994. During 1995 $99,728 of these advances were repaid
and the remaining balance was repaid in full in 1996.
During 1994 the Company purchased raw materials used at the Malvern, AR plant
from a company that owned 533,333 shares of the $2 par value preferred stock
issued by the Company to effect the purchase of the Malvern facility. The
purchases are considered to be at arms length and at prices and terms available
from other suppliers of the material. Purchases aggregated $527,073 for the year
ended December 31, 1994.
During September, 1994 a shareholder of the Company entered into an agreement to
repurchase the 533,333 shares described above for $250,000 payable in quarterly
payments through September, 1995. During January, 1996 this shareholder
converted these shares and the 666,667 shares of preferred stock which he
previously owned into common stock (see Note 12).
In July 1996, the Company entered into an employment contract with its founder
and former chief executive officer to serve as its vice president for product
development through August 31, 1999. The contract provides for an annual salary
of $180,000 during the contract term. The contract also provides for post
retirement benefit payments of $100,000 per year for a five year period
beginning August 31, 1999. The Company intends to fund the post retirement
payments currently by depositing monthly payments of approximately $12,000 into
an interest bearing account.
The estimated payment assumes an earned interest rate of 5% per year on the
deposit amounts and a discount rate of 8% per year to arrive at the net present
value of the annual retirement benefit due at August 31, 1999. The Company has
recorded $42,667 of expense for post retirement benefits for the year ended
December 31, 1996 and estimates that its net commitment for the period from
January 1, 1997 to August 31, 1999 pursuant to this contract will be
approximately $864,000 for both salary and post retirement benefits.
Note 9. Description of Leasing Arrangements
The Company leased rail cars, trucking equipment, and a formaldehyde plant under
operating leases expiring in various years through 2003. The lease for the
formaldehyde plant ($660,000 per year) commenced upon successful start up, which
was in February, 1993. The Company had an option to purchase the plant at the
expiration of the initial 10 year lease for the greater of fair market value or
$3,580,000, or to renew the lease for an additional 10 years. During July 1996,
the plant was purchased for $3,200,000.
During the fourth quarter of 1993 the Company began deferring certain payments
on the plant lease due to operational problems with the plant. The Company
maintained that the plant did not produce the quantities of formaldehyde
specified in the lease and that a renegotiation of the lease terms was
appropriate. The amount
-35-
deferred at December 31, 1995 amounted to $510,070. This amount was converted to
a long-term note payable as described above in connection with the purchase of
the plant.
The Company has remaining operating leases for trucking and rail car equipment
which have fixed annual payments as follows: $100,802 in 1997, $34,824 in 1998,
$33,000 in each year thereafter through 2001.
Rent expense was $395,627, $761,997 and $931,242 for the years ended December
31, 1996, 1995 and 1994.
Note 10. Income Taxes
Deferred income taxes arise from temporary differences resulting from income and
expense items (principally accelerated depreciation) reported for financial
accounting and tax purposes in different periods. Deferred taxes are classified
as current or non-current, depending on the classification of assets and
liabilities to which they relate. Deferred taxes arising from temporary
differences that are not related to an asset or liability are classified as
current or non-current depending on the periods in which the temporary
differences are expected to reverse.
Deferred tax assets and liabilities at December 31, 1996 and 1995 resulted from
the following:
1996 1995
Deferred Tax assets:
Operating loss carryforward $ - $ 98,300
Post retirement liability $ 14,507 $ -
Deferred tax liabilities:
Accelerated depreciation $157,983 $109,900
-36-
The provision for income taxes at December 31, 1996 and 1995 consists of the
following:
1996 1995
Current $987,910 $81,600
Deferred 26,323 34,000
---------- --------
$1,021,487 $115,600
A reconciliation of the federal taxes at statutory rates to the tax provision
for the year ended December 31, 1996 and 1995 is as follows:
1996 1995
Federal statutory rate $846,091 $882,843
State income taxes 149,415 104,000
Utilization of loss carryforward (13,912) (801,532)
Surtax exemption - (11,750
Book/tax depreciation difference (48,083) (34,000)
Post retirement benefits 14,507 -
Other 73,469 (23,961)
---------- --------
Provision for income taxes $1,021,487 $115,600
The Company did not record income tax expense for the year ended December 31,
1994 due to the loss incurred in that year. The Company has fully utilized its
net operating loss carryforward in the current year.
Note 11. Stockholders' Equity
During 1990, the Board authorized 5,000,000 shares of preferred stock. The
preferred stock will be callable at the discretion of the Company at par ($2)
plus accrued dividends. The stock is convertible into two shares of common stock
after one year. The conversion rights will expire after five years. Dividends
are payable at 200% of any dividends paid on common stock per annum. The
preferred stock has preference in liquidation to the common shares and has two
votes per share at shareholder meetings.
During February, 1995 the Company issued 100,000 shares of common stock to
certain officers for services valued at $5,000.
During 1995 the Company adopted a stock option plan for the benefit of certain
employees, officers and directors. The number of restricted common shares
reserved under the plan is 500,000. The option price on the grant date shall not
be less than the fair market value on such date provided that an owner of more
than 10% of the common stock shall not have an option granted at a price less
than 110% of the fair market value on the date of the grant. During 1995 the
Company issued 210,000 options exercisable at $.50 per share under the plan
which expire 100,000 in 2000 and 110,000 in 2005. During June 1996, the Company
granted additional options under the plan for 75,000 shares exercisable at $.55
for a ten year period.
-37-
Following is a summary of the transactions in the plan:
Weighted
Shares Average Price
Balance December 31, 1994 -
Granted 210,000 $.50
Canceled -
Exercised -
---------
Balance December 31, 1995 210,000 $.50
Granted 75,000 $.55
Canceled -
Exercised -
---------
Balance December 31, 1996 285,000 $.51
Options available at
December 31, 1996 215,000
At December 31, 1996, the Company also had the following other stock options
granted in prior years outstanding:
Description Shares Exercise Price Expiration Date
Shareholder 225,000 $.75 01/21/97
Shareholder 230,000 $1.00 02/28/97
As of the date of the financial statements none of the options had been
exercised.
The weighted average fair value at the date of grant for options granted during
1996 was $.25 per option. The fair value of the options at the date of grant was
estimated using the Black-Scholes model with assumptions as follows:
Market value $.51
Expected life 10
Interest rate 6.96%
Volatility 19.56%
Dividend yield 0.00%
No stock based compensation costs would be recorded by the Company as a result
of the foregoing.
During January, 1996 the holder of the 1,200,000 preferred shares described in
Note 8 converted these shares into 2,400,000 shares of common stock. In
connection with the recapitalization described in Note 1, the Company agreed to
reacquire 80,000 shares of the Air Resources Corp. common stock from a
dissenting shareholder for $120,000 in cash. Also during 1996, the Company
acquired 73,000 shares of common stock of Air Resources from a former officer as
described in Note 13.
-38-
Note 12. Sales to Major Customers and Concentration of Credit Risk
The Company, whose customers produce raw materials used in the construction
industry made sales in excess of 10% of its gross revenues for the year ended
December 31, 1996, 1995 and 1994 as follows:
Customer Sales/% Receivable at
12/31
1996:
International Paper $4,537,102 16% $108,000
Union Camp $3,865,062 13% $162,000
Schenectady $3,521,857 12% $57,000
Willamette $7,478,831 26% $424,000
1995:
International Paper $4,964,000 15% $124,000
Union Camp $3,900,000 12% $166,000
Schenectady $5,124,000 15% $41,000
Willamette $7,454,000 22% $636,000
1994:
International Paper $5,147,000 17% $156,000
Union Camp $3,759,000 12% $175,000
Norbord $2,233,000 7% $161,000
Willamette $7,198,000 24% $678,000
Note 13. Commitments and Contingencies
On September 16, 1996 the Company contracted to purchase land, plant and
equipment owned by Niagara Mohawk Power Corporation (NMPC) located in the Town
of Bethlehem, New York. The Company intends to use the site to construct a third
processing plant for the manufacture of adhesive resins and formaldehyde. The
contract specifies a purchase price of $775,000 for the premises and $65,000 for
equipment. The contract also provides that the purchase price for the premises
will be reduced to $1 should the Company promise to remediate the premises under
the direction of the New York State Department of Environmental Conservation.
The Company has placed a $50,000 purchase deposit in escrow which will become
the property of NMPC should the Company not use its best efforts to effectuate
closing of the purchase by April 1, 1997. The Company has undertaken discussions
with the state conservation agency and has prepared an estimate of the
remediation costs associated with the project, which estimate projects total
costs not in excess of the contract purchase price.
In connection with the plant acquisition described above, the Company has
entered into a turnkey plant construction agreement with DB Western, Inc.
whereby the Company will pay an aggregate of $6,568,100 of construction costs.
The Company paid a deposit of $66,000 at October 1, 1996 to initiate the
contract. Construction will not begin until the Company has completed the NMPC
purchase or has secured another acceptable plant location.
Should the Company be unable to complete the contract, the deposit would be
forfeit and any additional costs incurred by DB Western in connection with the
project would become due by the Company.
-39-
The Company purchases substantially all of its three raw material components for
its resin, formaldehyde, and fertilizer operations from four suppliers. The
Company purchased $15,158,111, $19,232,831 and $20,136,843 from these suppliers
during 1996, 1995 and 1994 and had a balance due to them of $1,089,433 and
$1,522,204 at December 31, 1996 and 1995.
During 1993, the Company was made aware of a claim by two former directors
requesting that the Company repurchase 381,000 shares of its common stock from
said directors pursuant to a reorganization agreement entered into during 1992.
Subsequently, one of these former directors sold his holdings of 233,000 common
shares. The purchase agreement set the repurchase price at $2.81 per share or an
aggregate of $418,280 after considering the above described disposition of
shares by the former director. The Company settled these claims by paying these
individuals $84,690 in cash in 1995 and by repurchasing 73,000 common shares
from one of the individuals for $75,000 in 1996. The Company had accrued the
potential maximum liability of $75,000 at December 31, 1995. In addition, the
Company repurchased and retired 1,000 shares of common stock from this
individual for $1,000.
Note 14. Pension Plan
The Company has a 401(k) retirement plan for the benefit of eligible employees.
Contributions are funded by the Company and established by the Board of
directors annually. Contributions for 1996, 1995 and 1994 were $132,476,
$113,114 and $128,376, respectively.
-40-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Spurlock Industries, and its predecessor, Air Resources, during the
three most recent fiscal years or any subsequent interim period, have not
dismissed an independent accountant nor has one resigned based on any
disagreement regarding accounting and financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders, under the headings "Security Ownership of Certain Beneficial
Owners and Management" and "Management" to be filed within 120 days of the end
of the 1996 fiscal year.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders, under the heading "Management" to be filed within 120 days of the
end of the 1996 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders, under the heading "Security Ownership of Certain Beneficial Owners
and Management" to be filed within 120 days of the end of the 1996 fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders, under the heading "Management" to be filed within 120 days of the
end of the 1996 fiscal year.
-41-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements:
(i) Report of Independent Auditors
(ii) Consolidated Balance Sheets as of December
31, 1996 and 1995
(iii) Consolidated Statements of Operations for
the years ended December 31, 1996, 1995 and
1994
(iv) Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1996, 1995 and 1994
(v) Consolidated Statements of Cash Flows for
the years ended December 31, 1996, 1995 and
1994
(vi) Notes to Consolidated Financial Statements
(2) Financial Statement Schedules: None
(3) Exhibits
Exhibit No. Document
2 Agreement and Plan of Merger dated February 15, 1996,
between Air Resources Corporation and Spurlock Industries,
Inc., incorporated by reference to Exhibit 2 to the Form
S-4 of the Registrant filed with the Securities and
Exchange Commission on February 20, 1996, as amended by
Amendment No. 1 and No. 2 thereto, Registration No.
33-01448 (as amended, the "Form S-4").
3.1 Articles of Incorporation of Spurlock Industries, Inc.,
incorporated by reference to Exhibit 3.1 to the Form S-4.
3.2 Bylaws of Spurlock Industries, Inc., incorporated by
reference to Exhibit 3.2 to the Form S-4.
10.1 Agreement and Plan of Reorganization, dated April 22,
1992, between Air Resources Corporation and Spurlock
Adhesives, Inc., incorporated by reference to Exhibit 10.1
to the Form S-4.
10.2 Employment and Retirement Benefit Agreement dated August
21, 1996 by and between
Spurlock Adhesives, Inc. and Harold N. Spurlock, as
amended by First Amendment thereto dated February 24, 1997
by and between such parties.
10.3 Air Resources Corporation 1995 Stock Incentive Plan,
incorporated by reference to Exhibit 10.3 to the Form S-4.
10.4 Incentive Stock Option Agreement, dated February 22, 1995,
between Air Resources Corporation and Irvine R. Spurlock,
incorporated by reference to Exhibit 10.4 to the Form S-4.
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10.5 Incentive Stock Option Agreement, dated February 22, 1995,
between Air Resources Corporation and H. Norman Spurlock,
Jr. , incorporated by reference to Exhibit 10.5 to the
Form S-4.
10.6 Incentive Stock Option Agreement, dated May 15, 1995,
between Air Resources Corporation and Warren E. Beam,
incorporated by reference to Exhibit 10.6 to the Form S-4.
10.7 Indemnification Agreement, dated January 30, 1997, between
Spurlock Industries, Inc. and Phillip S. Sumpter.
10.8 Promissory Note made by H. Norman Spurlock, Jr. in favor
of Spurlock Adhesives, Inc. as of January 10, 1996,
incorporated by reference to Exhibit 10.8 to the Form S-4.
10.9 Letter Agreement dated September 7, 1993, between Air
Resources Corporation and Lloyd B. Putman, incorporated by
reference to Exhibit 10.9 to the Form S-4.
10.10 Collateral Promissory Note made by Harold N. Spurlock in
favor of Spurlock Adhesives, Inc. as of June 30, 1995,
incorporated by reference to Exhibit 10.10 to the Form
S-4.
10.11 Indemnification Agreement, dated September 19, 1996,
between Spurlock Industries, Inc. and Glen S. Whitwer.
10.12 Indemnification Agreement, dated January 30, 1997 between
Spurlock Industries, Inc. and Raymond G. Tuttle.
10.13 Loan and Security Agreement, dated July 1, 1996, between
Spurlock Adhesives, Inc. and National Canada Finance
Corporation, incorporated by reference to Exhibit 10 to
the Registrant's Form 10-Q for the quarter ended June 30,
1996, filed with the Securities and Exchange Commission on
August 15, 1996.
10.14 Spurlock Industries, Inc. 1995 Stock Incentive Plan,
incorporated by reference to Exhibit 4.3 of the
Registrant's Registration Statement on Form S-8, File No.
333-09659.
10.15 Form of Spurlock Industries, Inc., Incentive Stock Option
Agreement, incorporated by reference to Exhibit 10.2 to
the Registrant's Form 10-Q for the quarter ended September
30, 1996, filed with the Securities and Exchange
Commission on November 14, 1996.
10.16 Form of Spurlock Industries, Inc. Non-Qualified Stock
Option Agreement, incorporated by reference to Exhibit
10.3 to the Registrant's Form 10-Q for the quarter ended
September 30, 1996, filed with the Securities and Exchange
Commission on November 14, 1996.
21 Subsidiaries of the Registrant.
23.1 Consent of Winter, Scheifley & Associates, P.C.
27 Financial Data Schedule.
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(b) Reports on Form 8-K.
None.
(c) The exhibits required by Item 601 of Regulation S-K are filed
as exhibits to this Form 10-K.
(d) There are no financial statements of the Registrant required
by Regulation S-X which were excluded from the Annual Report to Shareholders by
Rule 14a-3(b).
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPURLOCK INDUSTRIES, INC.
Date: March 26, 1997 By: /s/ Irvine R. Spurlock
----------------------------------------------
Irvine R. Spurlock
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Irvine R. Spurlock Chairman, President, Chief Executive March 26, 1997
-------------------------------------
Irvine R. Spurlock Officer and Director
(Principal Executive Officer)
/s/ Phillip S. Sumpter Executive Vice President, Chief Financial March 26, 1997
-------------------------------------
Phillip S. Sumpter Officer and Director
(Principal Financial Officer)
/s/ Warren E. Beam, Jr. Treasurer and Controller March 26, 1997
-------------------------------------
Warren E. Beam, Jr. (Principal Accounting Officer)
/s/ H. Norman Spurlock, Jr. Director March 26, 1997
-------------------------------------
H. Norman Spurlock, Jr.
/s/ Glen S. Whitwer Director March 26, 1997
-------------------------------------
Glen S. Whitwer
/s/ Harold N. Spurlock Director March 26, 1997
-------------------------------------
Harold N. Spurlock
/s/ Raymond G. Tuttle Director March 26, 1997
-------------------------------------
Raymond G. Tuttle
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INDEX TO EXHIBITS
Exhibit No. Document
----------- --------
2 Agreement and Plan of Merger dated February 15, 1996,
between Air Resources Corporation and Spurlock Industries,
Inc., incorporated by reference to Exhibit 2 to the Form
S-4 of the Registrant filed with the Securities and
Exchange Commission on February 20, 1996, as amended by
Amendment No. 1 and No. 2 thereto, Registration No.
33-01448 (as amended, the "Form S-4").
3.1 Articles of Incorporation of Spurlock Industries, Inc.,
incorporated by reference to Exhibit 3.1 to the Form S-4.
3.2 Bylaws of Spurlock Industries, Inc., incorporated by
reference to Exhibit 3.2 to the Form S-4.
10.1 Agreement and Plan of Reorganization, dated April 22,
1992, between Air Resources Corporation and Spurlock
Adhesives, Inc., incorporated by reference to Exhibit 10.1
to the Form S-4.
10.2 Employment and Retirement Benefit Agreement dated August
21,1996 by and between Spurlock Adhesives, Inc. and Harold
N. Spurlock, as amended by First Amendment thereto dated
February 24, 1997 by and between such parties.
10.3 Air Resources Corporation 1995 Stock Incentive Plan,
incorporated by reference to Exhibit 10.3 to the Form S-4.
10.4 Incentive Stock Option Agreement, dated February 22, 1995,
between Air Resources Corporation and Irvine R. Spurlock,
incorporated by reference to Exhibit 10.4 to the Form S-4.
10.5 Incentive Stock Option Agreement, dated February 22, 1995,
between Air Resources Corporation and H. Norman Spurlock,
Jr., incorporated by reference to Exhibit 10.5 to the Form
S-4.
10.6 Incentive Stock Option Agreement, dated May 15, 1995,
between Air Resources Corporation and Warren E. Beam,
incorporated by reference to Exhibit 10.6 to the Form S-4.
10.7 Indemnification Agreement, dated January 30, 1997 between
Spurlock Industries, Inc. and Phillip S. Sumpter.
10.8 Promissory Note made by H. Norman Spurlock, Jr. in favor
of Spurlock Adhesives, Inc. as of January 10, 1996,
incorporated by reference to Exhibit 10.8 to the Form S-4.
10.9 Letter Agreement dated September 7, 1993, between Air
Resources Corporation and Lloyd B. Putman, incorporated by
reference to Exhibit 10.9 to the Form S-4.
10.10 Collateral Promissory Note made by Harold N. Spurlock in
favor of Spurlock Adhesives, Inc. as of June 30, 1995,
incorporated by reference to Exhibit 10.10 to the Form
S-4.
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Exhibit No. Document
----------- --------
10.11 Indemnification Agreement, dated September 19, 1996,
between Spurlock Industries, Inc. and Glen S. Whitwer.
10.12 Indemnification Agreement, dated January 30, 1997, between
Spurlock Industries, Inc. and Raymond G. Tuttle.
10.13 Loan and Security Agreement, dated July 1, 1996, between
Spurlock Adhesives, Inc. and National Canada Finance
Corporation, incorporated by reference to Exhibit 10 to
the Registrant's Form 10-Q for the quarter ended June 30,
1996, filed with the Securities and Exchange Commission on
August 15, 1996.
10.14 Spurlock Industries, Inc. 1995 Stock Incentive Plan,
incorporated by reference to Exhibit 4.3 of the
Registrant's Registration Statement on Form S-8, File No.
333-09659.
10.15 Form of Spurlock Industries, Inc., Incentive Stock Option
Agreement, incorporated by reference to Exhibit 10.2 to
the Registrant's Form 10-Q for the quarter ended September
30, 1996, filed with the Securities and Exchange
Commission on November 14, 1996.
10.16 Form of Spurlock Industries, Inc. Non-Qualified Stock
Option Agreement, incorporated by reference to Exhibit
10.3 to the Registrant's Form 10-Q for the quarter ended
September 30, 1996, filed with the Securities and Exchange
Commission on November 14, 1996.
21 Subsidiaries of the Registrant.
23.1 Consent of Winter, Scheifley & Associates, P.C.
27 Financial Data Schedule.
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