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: September 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 September 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)
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 420,161 $ 106,072
Accounts receivable - trade 1,449,603 1,446,930
Other accounts receivable 0 8,718
Accounts and notes receivable
- officers current portion 21,625 38,595
Inventories 520,706 541,632
Prepaid income taxes 157,213 72,477
Prepaid expenses 186,876 74,490
----------- -----------
Total current assets 2,756,184 2,288,914
Property, plant and equipment, net
of accumulated depreciation of
$4,459,997 and $4,430,833 10,777,036 9,444,057
Other assets:
Accounts and notes receivable -
officers 87,401 101,044
Investments 150,000 150,000
Other 213,560 259,736
----------- -----------
450,961 510,780
----------- -----------
Total assets $13,984,181 $12,243,751
=========== ===========
SPURLOCK INDUSTRIES, INC.
Consolidated Balance Sheet
(Unaudited)
September 30, 1997 December 31, 1996
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit $ 1,424,717 $ 1,420,801
Current portion of long-term debt 1,009,716 1,029,090
Accounts payable 1,832,260 1,678,442
Accrued expenses 437,078 260,527
------------ ------------
Total current liabilities 4,703,771 4,388,860
Long-term debt 4,197,977 3,402,621
Deferred tax liability 143,476 143,476
Income tax liability 210,088 0
Post retirement benefit liability 124,155 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 (204,100) (542,687)
------------ ------------
Total equity 4,604,714 4,266,127
------------ ------------
Total liabilities and stockholders' equity $ 13,984,181 $ 12,243,751
============ ============
See accompanying notes to unaudited consolidated financial statements
SPURLOCK INDUSTRIES, INC.
Consolidated Statements of Operations
For the Three and Nine Months Ended
September 30, 1997 and 1996
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Net sales $ 5,559,514 $ 6,693,069 $ 18,805,463 $ 22,080,512
Cost of sales 4,065,501 4,995,558 13,977,598 16,163,482
------------ ------------ ------------ ------------
Gross profit 1,494,013 1,697,511 4,827,865 5,917,030
Selling, general and
administrative expenses 1,238,988 1,166,518 3,707,063 3,192,337
------------ ------------ ------------ ------------
Income(loss) from operations 255,025 530,993 1,120,802 2,724,693
Other income and (expense):
Other income 2,290 15,959 11,626 50,779
Other expense (77,859) (9,412) (152,064) (14,412)
Interest expense (171,502) (202,793) (431,689) (457,911)
------------ ------------ ------------ ------------
Net income before income
taxes 7,954 334,747 548,675 2,303,149
Provision for income taxes 3,046 128,175 210,088 881,876
------------ ------------ ------------ ------------
Net income (loss) $ 4,908 $ 206,572 $ 338,587 $ 1,421,273
============ ============ ============ ============
Net income (loss) per share 0.001 0.031 0.052 0.211
============ ============ ============ ============
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 Nine Months Ended September 30, 1997 and 1996
Nine Months Ended
September 30,
1997 1996
---- ----
Net income (loss) $ 338,587 $ 1,421,273
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 735,000 492,720
(Increase) decrease in accounts receivable 6,045 148,653
(Increase) decrease in inventories 20,926 (66,584)
(Increase) decrease in prepaid expenses (112,386) (192,535)
(Increase) decrease in other assets (38,560) (665,673)
Increase (decrease) in accounts payable
and accrued expenses 330,369 (134,403)
Increase (decrease) in deferred tax liability 210,088 771,976
Increase (decrease) in other liabilities 81,488 0
----------- -----------
Total adjustments 1,232,970 354,154
----------- -----------
Net cash provided by (used in) operating
activities 1,571,557 1,775,427
Investing Activities:
Purchase of fixed assets (2,067,979) (4,115,711)
Repayment of officer advances 30,613 0
----------- -----------
Net cash provided by (used in) investing
activities (2,037,366) (4,115,711)
Financing activies:
Proceeds of new borrowings 1,603,910 3,600,000
Repayment of notes and loans (824,018) (1,650,512)
----------- -----------
Net cash provided by (used in) financing
activities 779,898 1,949,488
Net increase in cash and cash equivalents 314,089 (390,796)
Beginning Cash 106,072 450,751
----------- -----------
Ending cash $ 420,161 $ 59,955
----------- -----------
See accompanying notes to unaudited consolidated financial statements
SPURLOCK INDUSTRIES, INC.
Notes to Consolidated Financial Statements
September 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 September 30, 1997 and December 31, 1996, inventories consisted of the
following:
September 30, 1997 December 31, 1996
------------------ -----------------
Raw materials $ 411,962 $ 397,511
Work in process 8,165 9,493
Finished goods 100,579 134,628
--------- ---------
$ 520,706 $ 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 nine months ended September 30, 1997, the Company generated net income
after tax of $338,587 or $0.052 per share ($0.049 on a fully diluted basis) as
compared to net income of $1,421,273 or $0.211 per share ($0.203 on a fully
diluted basis), for the same period last year. Net income for the third quarter
was $4,908 or $0.001 per share ($0.001 on a fully diluted basis) as compared to
net income of $206,572 or $0.031 per share ($0.029 on a fully diluted basis),
for the same period last year.
The Company's net sales for the quarter ended September 30, 1997 totalled
$5,559,514 as compared to $6,693,069 for the same period for 1996, a decrease of
16.9%. Net sales for the nine months ended September 30, 1997 were $18,805,463
or 14.8% lower as compared to $22,080,512 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. ("Spurlock Adhesives"). The
aforementioned decreases in sales from the comparable 1996 periods resulted in
part from lower average selling prices and reduced product volume shipments of
7.2% for the three month period and 10.4% for the nine month period due to price
cutting by certain competitors in the face of reduced market demand generally.
Management believes this situation will continue through the end of the year.
Cost of sales for the third quarter was $4,065,501 or 73.1% of net sales as
compared to $4,995,558 or 74.6% for the same period in 1996. Cost of sales for
the nine month period was $13,977,598 or 74.3% as compared to $16,163,482 or
73.2% for the same period in 1996. The decrease in cost of sales as a percentage
of net sales is primarily a result of lower raw material prices. The gross
margin increased to 26.9% from 25.4% for the third quarter compared to 1996 and
decreased to 25.7% from 26.8% for the nine month period compared to the same
prior year period, reflecting the above-described competitive pressures in the
marketplace and decreases in raw material prices.
Operating expenses (sales, general & administrative expenses) for the third
quarter were $1,238,988 or 22.3% of net sales as compared to $1,166,518 or 17.4%
of net sales for the same period in 1996. The operating expenses for the nine
month period were $3,707,063 or 19.7% as compared to $3,192,337 or 14.5% for the
same period in 1996. These increases are 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 nine month period of 1996. Also, wages paid to
employees in general were higher due to salary and wage increases effective July
1996, and benefits paid on behalf of the employees were higher. The large
percentage change is due to lower sales.
Interest expense was $171,502 or 3.1% of net sales in the third quarter of 1997
as compared to $202,793 or 3.0% of net sales in third quarter 1996. Interest
expense was $431,689 or 2.3% of net sales for the nine months ended September
30, 1997, as compared to $457,911 or 2.1% for the comparable 1996 period.
Although average borrowings under the Registrant's line of credit were somewhat
lower in the third 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 Spurlock's new New York facility discussd under
"Liquidity and Capital Revenues - Liquidity" below. However, significantly
reduced borrowing rates under the new credit facilities entered into by the
Registrant in July 1996 resulted in lower interest expense overall.
Other expense was $77,859 or 1.4% of net sales in the 1997 third quarter as
compared to $9,412 or 0.1% of net sales in third quarter 1996. For the first
nine months of 1997, other expense was $152,064 or 0.8% of net sales as compared
to $14,412 or 0.06% of net sales for the 1996 nine month period. This increase
was due primarily to the write off of costs relating to the first manufacturing
site selected in New York. These expenses, which include legal and environmental
expenses, are being written off due to the selection of an alternate site in New
York.
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 third quarter of
1997 was $3,046 as compared to $128,175 for the third quarter of 1996. The tax
accrual for the nine month period ending September 30, 1997 was $210,088 as
compared to $881,876 for the comparable 1996 period. In both cases, the
reduction was due to reduced taxable income.
Liquidity and Capital Resources
Working Capital
At September 30, 1997, working capital was ($1,947,587), an increase of $152,359
from December 31, 1996. Higher balances in the cash account and prepaid expense
accounts, primarily as a result of increases in long term debt, caused the
increase in working capital.
Cash Flow
Net cash provided by operating activities was $1,571,557 and $1,775,427 for the
nine months ended September 30, 1997 and 1996, respectively. The decreased cash
flow from operations during the 1997 period resulted from lower net income.
Depreciation accounted for $735,000 of such 1997 cash flow, a substantial
increase from the $492,720 in the 1996 period, as a result of increased
depreciation expense relating to the purchase of the Waverly formaldehyde plant.
Prepaid expenses increased by $112,386, which is comprised of prepayment of
health insurance claims funds, as well as fire, liability and workmen's
compensation insurance premiums. Accounts payable increased at month end due to
timing of bills and normal payment procedures.
Cash from operations was supplemented by a net increase in financing activities
of $779,898, comprised primarily of increases in new loans of approximately
$1,600,000. Cash was invested in fixed assets of $2,067,979. The increase in
fixed assets was attributable to payments made for the New York facility.
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 September 30, 1997, outstanding loans under the facility
totalled $1,424,717, which amount represented 99% 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.
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 obtained the necessary approvals for the New York project and for on-site
construction of the project to be initiated. Subsequent to the end of the
quarter, the Registrant closed on a $6,000,000 Industrial Revenue Bond repayable
over 10 years at 4.74% interest as well as a $1,500,000 term loan repayable over
10 years at prime plus 0.5% or LIBOR plus 2.75% interest to finance the project.
Assuming construction proceeds on a timely basis, 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. Additional amounts necessary to complete the project will be funded
through operations.
SPURLOCK INDUSTRIES, INC.
PART II - OTHER INFORMATION
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
10.1 Letter agreement between Spurlock
Adhesives, Inc. ("Spurlock
Adhesives") and KeyBank of New
York ("KeyBank") dated August 4,
1997.
10.2 Promissory Note dated August 13,
1997 from Spurlock Adhesives
payable to KeyBank of New York.
10.3 HCHO/UFC Turnkey Plant "B" Sale
Contract - Design, Engineer,
Equipment Supply, Construct, and
Install Contract dated September
30, 1997 between Spurlock
Adhesives and D.B. Western, Inc.
10.4 HCHO/UFC Plant "A" - Lease dated
September 30, 1997 between
Spurlock Adhesives and D.B.
Western, Inc.
10.5 Guaranty dated September 1, 1997
of Spurlock Industries, Inc. in
favor of D.B. Western, Inc.
10.6 Guaranty dated September 1, 1997
of Spurlock Industries, Inc. in
favor of D.B. Western, Inc.
10.7 Guaranty of Payment dated
September 30, 1997 of Irvine R.
Spurlock for the benefit of D.B.
Western, Inc.
10.8 Indenture dated August 13, 1997
between Town of Moreau, New York
as grantor and Spurlock Adhesives
as grantee.
10.9 Indenture dated August 13, 1997
between Town of Moreau, New York,
as grantor and Spurlock Adhesives
as grantee.
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: November 14 , 1997 By: /s/ Irvine R. Spurlock.
------------------ -----------------------------
Irvine R. Spurlock.
President and Chairman
Chief Executive Officer
Dated: November 14 , 1997 By: /s/ Phillip S. Sumpter
------------------ -----------------------------
Phillip S. Sumpter
Executive Vice-President
Chief Financial Officer
Dated: November 14 , 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
10.1 Letter agreement between Spurlock Adhesives,
Inc. ("Spurlock Adhesives") and KeyBank of
New York ("KeyBank") dated August 4, 1997.
10.2 Promissory Note dated August 13, 1997 from
Spurlock Adhesives payable to KeyBank of New
York.
10.3 HCHO/UFC Turnkey Plant "B" Sale Contract -
Design, Engineer, Equipment Supply,
Construct, and Install Contract dated
September 30, 1997 between Spurlock
Adhesives and D.B. Western, Inc.
10.4 HCHO/UFC Plant "A" - Lease dated September
30, 1997 between Spurlock Adhesives and D.B.
Western, Inc.
10.5 Guaranty dated September 1, 1997 of Spurlock
Industries, Inc. in favor of D.B. Western,
Inc.
10.6 Guaranty dated September 1, 1997 of Spurlock
Industries, Inc. in favor of D.B. Western,
Inc.
10.7 Guaranty of Payment dated September 30, 1997
of Irvine R. Spurlock for the benefit of
D.B. Western, Inc.
10.8 Indenture dated August 13, 1997 between Town
of Moreau, New York as grantor and Spurlock
Adhesives as grantee.
10.9 Indenture dated August 13, 1997 between Town
of Moreau, New York, as grantor and Spurlock
Adhesives.
11 Statement re: Computation of Per Share
Earnings.
27 Financial Data Schedule