SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: June 30, 1997
Commission file Number: 000-21133
SPURLOCK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Virginia 84-1019856
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
209 W. Main St., Waverly, VA 23890
(Address and zip code of principal executive offices)
(804) 834-8980
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to the filing requirements for
at least the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:
Number of Shares Outstanding
Class as of June 30, 1997
Common Stock, no par value 6,527,066
SPURLOCK INDUSTRIES, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPURLOCK INDUSTRIES, INC.
Consolidated Balance Sheets
(Unaudited)
June 30, 1997 December 31, 1996
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 148,827 $ 106,072
Accounts receivable - trade 1,497,014 1,446,930
Other accounts receivable 0 8,718
Accounts and notes receivable
- officers current portion 38,595 38,595
Inventories 680,988 541,632
Prepaid income taxes 149,969 72,477
Prepaid expenses 278,747 74,490
----------- -----------
Total current assets 2,794,140 2,288,914
Property, plant and equipment, net
of accumulated depreciation of
$4,459,997 and $4,430,833 10,759,001 9,444,057
Other assets:
Accounts and notes receivable -
officers 87,402 101,044
Investments 150,000 150,000
Other 209,784 259,736
----------- -----------
447,186 510,780
----------- -----------
Total assets $14,000,327 $12,243,751
=========== ===========
SPURLOCK INDUSTRIES, INC.
Consolidated Balance Sheet
(Unaudited)
June 30, 1997 December 31, 1996
------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit $ 1,448,843 $ 1,420,801
Current portion of long-term debt 1,010,633 1,029,090
Accounts payable 1,630,713 1,678,442
Accrued expenses 380,317 260,527
----------- -----------
Total current liabilities 4,470,506 4,388,860
Long-term debt 4,472,829 3,402,621
Deferred tax liability 143,476 143,476
Income tax liability 207,042 0
Post retirement benefit liability 106,668 42,667
Stockholders' equity
Common stock, no par value, 50,000,000 shares
authorized, 6,572,066 shares issued and
outstanding 4,808,814 4,808,814
Retained earnings (209,008) (542,687)
----------- -----------
Total equity 4,599,806 4,266,127
----------- -----------
Total liabilities and stockholders $14,000,327 $12,243,751
See accompanying notes to unaudited consolidated financial statements.
SPURLOCK INDUSTRIES, INC.
Consolidated Statements of Operations
For the Three and Six Months Ended
June 30, 1997 and 1996
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Net sales $7,284,661 $7,914,276 $13,245,949 $15,387,443
Cost of sales 5,399,182 5,696,702 9,912,097 11,167,924
---------- --------- --------- ----------
Gross profit 1,885,479 2,217,574 3,333,852 4,219,519
Selling, general and
administrative expenses 1,285,993 1,008,090 2,468,075 2,025,819
--------- ---------- ---------- ---------
Income(loss) from operations 599,486 1,209,484 865,777 2,193,700
Other income and (expense):
Other income 8,556 25,216 9,336 34,820
Other expense (74,205) (5,000) (74,205) (5,000)
Interest expense (189,506) (145,781) (260,187) (255,118)
--------- ------- --------- ---------
Net income before income taxes 344,330 1,083,919 540,721 1,968,402
Provision for income taxes 140,269 399,908 207,042 753,701
------- -------- -------- --------
Net income (loss) $204,061 $684,011 $333,679 $1,214,701
======== ========= ========= ===========
Net income (loss) per share 0.03 0.10 0.05 0.18
==== ===== ===== ====
Average shares outstanding 6,572,066 6,725,066 6,572,066 6,725,066
========= ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
SPURLOCK INDUSTRIES, INC.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
Six Months Ended
June 30,
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ 333,679 $ 1,214,701
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 492,000 293,210
----------- -----------
Total from operations 825,679 1,507,911
Change in assets and liabilities:
(increase) decrease in assets:
Accounts receivable (41,366) (267,754)
Inventories (139,356) 93,848
Prepaid expenses (281,749) (275,716)
Fixed assets (1,806,944) (544,753)
Other assets 63,594 (304,913)
(Decrease) increase in liabilities:
Accounts payable and accrued expenses 72,061 (440,844)
Notes and loans payable 1,079,793 (390,124)
Deferred tax liability 207,042 643,801
Other liabilities 64,001 0
----------- --
Total adjustments (782,924) (1,486,455)
----------- -----------
Net cash provided by (used in) operating
activities 42,755 21,456
Cash and cash equivalents, beginning of
period 106,072 450,751
----------- -----------
Cash and cash equivalents, end of period $148,827 $472,207
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
SPURLOCK INDUSTRIES, INC.
Notes to Consolidated Financial Statements
June 30, 1997
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
Income taxes were computed using a statutory rate of 34% net of the effects of
federal surtax exemptions and deductions for state income taxes.
Income (loss) per share was computed using the weighted average number of common
shares outstanding of 6,572,066 shares.
As of June 30, 1997 and December 31, 1996, inventories consisted of the
following:
June 30, 1997 December 31, 1996
------------- -----------------
Raw materials $523,014 $397,511
Work in process 8,138 9,493
Finished goods 149,836 134,628
--------- ---------
$680,988 $541,632
SPURLOCK INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion contains certain forward-looking statements,
generally identified by phrases such as "the Registrant expects" or "Management
believes" or words of similar effect. The Registrant 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 Registrant's
actual results and could cause the Registrant's actual results for 1997 and
beyond to differ materially from those expressed in any forward-looking
statements made herein.
Also, certain factors which could cause actual results to differ from
those contained in any such forward-looking statements are contained in the
Registrant's annual report on Form 10-K for the fiscal year ended December 31,
1996 under the heading "Forward-Looking and Cautionary Statements," and are
hereby incorporated herein by reference.
Results of Operations
For the six months ended June 30, 1997, the Company generated net income after
tax of $333,679 or $0.049 per share (on a fully diluted basis) as compared to
net income of $1,214,701 or $0.181 per share of common stock, for the same
period last year. Net income for the second quarter was $204,061 or $0.030 per
share (on a fully diluted basis) as compared to net income of $684,011 or $0.099
per share of common stock, for the same period last year.
The Company's net sales for the quarter ended June 30, 1997 totalled $7,284,661
as compared to $7,914,276 for the same period for 1996, a decrease of 7.96%. Net
sales for the six months ended June 30, 1997 were $13,245,949 or 13.9% lower as
compared to $15,387,443 for the same period for 1996. All the sales were from
shipments of resin and formaldehyde by the Registrant's wholly owned subsidiary,
Spurlock Adhesives, Inc. The aforementioned decreases in sales as compared to
the same period in 1996 resulted in part from lower average selling prices and
reduced product volume shipments of 9.7% for the three month period and 11.8%
for the six month period due to price cutting by certain competitors in the face
of reduced market demand generally. The Registrant effected downward adjustments
in its product prices to maintain its current product volume shipments.
Management believes this situation will continue through the end of the year.
Cost of sales for the second quarter were $5,399,182 or 74.1% of net sales as
compared to $5,696,702 or 72.0% for the same period in 1996. Cost of sales for
the six month period were $9,912,097 or 74.8% as compared to $11,167,924 or
72.6% for the same period in 1996. The increase in cost of sales sold as a
percentage of net sales is primarily a result of reduced sales. The gross margin
decreased to 25.9% from 28.2% for the second quarter compared to 1996 and to
25.2% from 27.4% for the six month period compared to the same prior year
period, reflecting the above-described competitive pressures in the marketplace.
Operating expenses (sales, general & administrative expenses) for the second
quarter were $1,285,993 or 17.7% of net sales as compared to $1,008,090 or 12.7%
of net sales for the same period in 1996. The operating expenses for the six
month period were $2,468,075 or 18.6% as compared to $2,025,819 or 13.2% for the
same period in 1996. This increase is attributable to higher depreciation and
personal property taxes due to the purchase by the Registrant of the
formaldehyde plant located in Waverly, Virginia, which plant was subject to an
operating lease during the second quarter and six month period of 1996. Also,
wages paid to employees in general were higher due to salary and wage increases
effective July 1996. The large percentage change is due to lower sales.
Interest expense was $189,506 or 2.6% of net sales as compared to $145,781 or
1.8% of net sales in second quarter 1996. Interest expense was $260,187 or 2.0%
of net sales as compared to $255,118 or 1.7% for the six month period. Although
average borrowings under the Registrant's line of credit were somewhat lower in
the second quarter of 1997 versus the comparable period in 1996, total average
outstandings were approximately $3,500,000 higher due to additional term
borrowings relating to the Registrant's purchase of the Waverly, Virginia
formaldehyde plant and the new New York facility. However, significantly reduced
borrowing rates under the new credit facilities entered into by the Registrant
in July 1996 resulted in significantly lower interest expense overall.
Other expense was $74,205 or 1% of net sales in the quarter and six month period
ending June 30, 1997 as compared to $5,000 or 0.6% of net sales for the
comparable 1996 periods. This increase was due primarily to the settlement of a
contract dispute from 1991 related to the dissolved aircraft business.
The Company accrues for income taxes at an effective rate of 34% inclusive of
the deduction for state income tax. The tax accrual for the second quarter of
1997 is $140,269 as compared to $399,908 for the same period last year, owing to
reduced taxable income.
Liquidity and Capital Resources
Working Capital
At June 30, 1997 working capital was ($1,676,366), an increase of $423,580 from
the prior year's period. Increased product shipments and orders at quarter end
caused accounts receivable and inventories to increase $50,084 and $139,356,
respectively, from December 31, 1996.
Cash Flow
Net cash provided by operating activities was $825,679 and $1,507,911 for the
six months ended June 30, 1997 and 1996, respectively. The reduced cash flow
from operations during the 1997 period resulted from lower net income.
Depreciation accounted for $492,000 of such cash flow, a substantial increase
from the $293,210 in the 1996 period, as a result of increased depreciation
expense relating to the purchase of the Waverly formaldehyde plant.
Cash from operations was supplemented by a net increase in liabilities of
$1,422,897, comprised primarily of increases of $1,079,793 in long term debt,
$72,061 in accounts payable and accrued expenses, and $207,042 in income tax
liability. Cash was invested in the above-described increase in accounts
receivable, inventories, and an increase in fixed assets of approximately
$1,800,000. The increase in fixed assets was attributable to payments made for
the New York facility. See "New York Expansion" below. Prepaids also increased
by $281,749, which was comprised of prepayment of health insurance claims funds
and, as well as, fire, liability and workmen's compensation insurance premiums.
Liquidity
As previously reported, in July 1996 the Registrant entered into a new
$3,500,000 revolving credit facility with a new lender, which facility matures
in July 1999. On June 30, 1997, outstanding loans under the facility totalled
$1,448,843, which amount represented 86% of the total amount available at such
time based on the levels of accounts receivable and inventory on which borrowing
availability is based. The credit facility provides the Registrant with an
important source of liquidity in addition to cash generated from operations.
Management believes that cash generated from operations, together with amounts
available under the revolving credit facility, will be sufficient to meet the
Registrant's anticipated working capital and liquidity requirements during 1997
and 1998.
New York Expansion
As previously reported, the Registrant located a site to construct manufacturing
facilities for the production of formaldehyde and resins in the Moreau
Industrial Park in the town of Moreau, Saratoga County, New York. The Registrant
has made application to the local planning board and state environmental
authorities, which approvals are required prior to the initiation of
construction. The Registrant expects the necessary approvals for the New York
project to be obtained in the next month and for on-site contruction of the
project to be initiated. Assuming prompt receipt of such approvals, timely
closing on necessary financing and timely prosecution of construction, among
other factors, management believes the complex can begin operations in early
1998.
The Registrant estimates that the costs of the New York project will total
$8,300,000. Management believes that financing for the project adequate in
amount and on reasonable terms, can be obtained by the Registrant, via
conventional loans or funds from industrial revenue bonds. The Registrant has
obtained a preliminary commitment with respect to such financing from its
current primary lender and a local New York bank.
SPURLOCK INDUSTRIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A shareholder's derivative suit has been filed without advance notice
to the Registrant by seven shareholders against the Registrant and certain
current and former officers and directors in state District Court in Denver,
Colorado. The suit, which was filed on or about April 28, 1997, alleges that the
defendants engaged in various activities which breached their fiduciary duties
to the plaintiffs and/or violated provisions of Colorado law applicable to
domestic corporations. The alleged activities include wrongfull payment and
wrongful guaranty of debts of one or more defendants, unlawful loans and
distributions to defendants, unfair dealings with one or more defendants,
overcompensation of defendants and other employees, wrongful depression of the
Registrant's stock price, misrepresentations to shareholders, and improper
approval of the merger of Air Resources Corporation into the Registrant.
Plaintiffs seek a declaratory judgment with respect to the acts complained of,
repayment of certain monies to the Registrant, an accounting of all financial
transactions of the Registrant from 1992 to the present, a constructive trust of
shares of Common Stock held by certain of the defendants, injunctive relief and
damages.
In response to the suit, the Board of Directors has appointed a Special
Litigation Committee, composed of two outside directors not named as defendants,
to investigate the allegations and determine whether maintenance of the
derivative proceeding is in the best interests of the Registrant. The Special
Litigation Committee is expected to deliver a report before the end of August.
The defendant officers of Registrant deny any breach of their fiduciary duty and
state that they expect that the Special Litigation Committee will conclude that
the allegations are meritless.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1997, the Registrant held its annual meeting of
shareholders. H. Norman Spurlock, Jr. and Raymond G. Tuttle were elected as
directors of the Registrant, for terms expiring in 2000. The following is a list
of the remaining directors and the year their terms expire: Irvine R. Spurlock
(1998), Glen A. Whitwer (1998), Harold N. Spurlock (1999) and Philip S. Sumpter
(1999).
The only other matter considered at the 1997 annual meeting was the
ratification of the appointment of Winter, Scheifley & Associates, P.C. as
independent auditors for the Registrant for the fiscal year ending December 31,
1997, which was approved by shareholders.
The chart below sets forth the vote totals for each director and on the
matter of the ratification of the appotment of the independent auditors:
Broker Non-
For Against Votes
--- ------- -----
1. H. Norman Spurlock, Jr. 4,678,707 505,274 148,110
2. Raymond G. Tuttle 4,678,707 505,274 148,110
3. Ratification of Independent Auditors 4,616,137 567,844 148,110
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The Registrant has included the following exhibits pursuant
to Item 601 of Regulation S-K.
Exhibit No. Description
----------- -----------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K: None
SPURLOCK INDUSTRIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPURLOCK INDUSTRIES, INC.
(Registrant)
Dated: August 13, 1997 By: /s/ Irvine R. Spurlock.
--------------- ------------------------
Irvine R. Spurlock.
President and Chairman
Chief Executive Officer
Dated: August 13, 1997 By: /s/ Phillip S. Sumpter
--------------- ----------------------
Phillip S. Sumpter
Executive Vice-President
Chief Financial Officer
Dated: August 13, 1997 By: /s/ Warren E. Beam, Jr.
--------------- ------------------------
Warren E. Beam, Jr.
Treasurer and Controller
Chief Accounting Officer
SPURLOCK INDUSTRIES, INC.
Exhibit Index
Exhibit No. Description
----------- -----------
11 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule