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, 1998
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)
125 Bank 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, 1998
Common Stock, no par value 6,573,639
SPURLOCK INDUSTRIES, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPURLOCK INDUSTRIES, INC.
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(Unaudited)
June 30, 1998 December 31, 1997
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 310,593 $ 362,685
Accounts receivable, trade, net 2,561,211 1,222,277
State income tax receivable 56,500 40,713
Federal income tax receivable 104,500 151,000
Accounts and notes receivable - officers
current portion 42,905 101,944
Inventories 508,281 530,183
Deferred tax asset 92,908 92,908
Prepaid expenses 240,609 144,457
------------ ------------
Total current assets 3,917,507 2,646,167
------------ ------------
Property, plant and equipment, net
of accumulated depreciation of
$5,342,682 and $4,890,414 14,947,495 12,043,300
----------- -----------
Other assets:
Cash restricted 1,374,106 3,889,567
Accounts and notes receivable -
officers 20,641 59,122
Cash value of annuity 231,995 171,995
Other 581,414 591,280
------------ ------------
Total other assets 2,208,156 4,711,964
------------- -------------
Total assets $21,073,158 $19,401,431
Liabilities and Stockholders' Equity
Current liabilities
Notes payable, line-of-credit $ 2,365,045 $ 1,341,622
Current portion of long-term debt 1,580,171 1,279,188
Accounts payable, trade 2,897,040 2,378,597
Accrued expenses 524,334 281,629
Accrued taxes 211,605 84,080
------------- -------------
Total current liabilities 7,578,195 5,365,116
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Long-term liabilities
Long-term debt 8,931,992 9,598,315
Post retirement benefit liability 252,395 166,956
Other liabilities 3,227 3,001
------------ ------------
Total long-term liabilities 9,187,614 9,768,272
------------ ------------
Stockholders' equity
Preferred stock, no par value
5,000,000 shares authorized - -
no shares issued and outstanding
Common stock, no par value
500,000,000 shares authorized - -
6,573,639 shares issued and outstanding 4,808,814 4,808,814
Paid in capital (501,465) (540,771)
------------ ------------
Accumulated deficit 4,307,349 4,268,043
------------ ------------
Total liabilities and stockholders' $21,073,158 $19,401,431
equity
See Notes to Consolidated Financial Statements.
3
SPURLOCK INDUSTRIES, INC.
Consolidated Statements of Operations
For the Three and Six Months Ended
June 30, 1998 and 1997
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Revenue
$7,549,786 $7,284,661 $13,603,479 $13,245,949
Net sales
Cost of sales 5,904,228 5,399,182 10,426,261 9,912,097
----------- ----------- ------------ -----------
Gross Profit 1,645,558 1,885,479 3,177,218 3,333,852
Selling, general and administrative expenses 1,678,160 1,285,993 2,975,984 2,468,075
----------- ----------- ----------- -----------
Income (loss) from operations (32,602) 599,486 201,234 865,777
Other income and (expense)
Other income 44,750 10,596 92,435 24,587
Other expense (2,049) (58,721) (2,245) (58,721)
Interest Expense (130,897) (204,990) (231,118) (260,187)
----------- ----------- ----------- -----------
Income (loss) before taxes (120,798) 346,371 60,306 571,456
----------- ----------- ----------- -----------
Income tax expense (benefit) 21,000 140,269 21,000 207,042
----------- ----------- ----------- -----------
Net income (loss) $ (141,798) $ 206,102 $ 39,306 $ 364,414
========== ============ ========== ==========
Per share information:
Basic earnings per share $ (0.022) $ 0.031 $ 0.006 $ 0.055
========== ========== ========== ==========
Diluted earnings per share $ (0.022) $ 0.031 $ 0.006 $ 0.055
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
4
SPURLOCK INDUSTRIES, INC.
Statements of Cash Flows
For the Six Months Ended
June 30, 1998 and 1997
(Unaudited)
Six Months Ended
June 30,
1998 1997
---- ----
Cash flows from operating activities:
Net Income $ 39,306 $ 364,414
Adjustment to reconcile net income to net cash:
Depreciation and amortization 452,268 492,000
(Increase) decrease in trade receivables (1,338,934) (41,366)
(Increase) decrease in inventories 21,902 (139,356)
(Increase) decrease in prepaid expenses (118,054) (281,749)
Increase (decrease) in accounts payable and accrued expenses 761,148 72,061
Increase (decrease) in other liabilities 127,751 -
Increase (decrease) in post retirement benefits 85,439 64,001
Increase (decrease) in deferred tax liability - 207,042
----------- ---------
Total adjustments (8,480) 372,633
Net cash provided by (used in) operating activities 30,826 737,047
----------- ---------
Investing activities:
Purchase fixed assets (3,356,463) (1,741,176)
(Increase) decrease in cash restricted for capital expenditures 2,515,461 -
----------- ---------
Net cash provided by (used in) investing activities (841,002) (1,741,176)
Financing activities:
(Increase) decrease in other assets 2,481 (32,909)
Proceeds of new borrowings 808,083 1,079,793
Repayment of notes and loans (150,000) -
Repayment of loans to principal holders of equity securities 97,520 -
----------- ---------
Net cash provided by (used in) financing activities 758,084 1,046,884
----------- ---------
Net increase (decrease) in cash and cash equivalents (52,092) 42,755
Beginning cash and cash equivalents 362,685 106,072
----------- ----------
Ending cash and cash equivalents $ 310,593 $ 148,827
=========== ==========
Supplemental cash flow information:
Cash paid for: Interest expense $ 231,118 $ 260,187
=========== ==========
Income taxes $ 21,000 $ 207,042
=========== ==========
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SPURLOCK INDUSTRIES, INC.
Notes to Consolidated Financial Statements
June 30, 1998
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. There was no
provision for income taxes based upon sufficient net operating loss
carryforwards for the first quarter earnings.
As of June 30, 1998 and December 31, 1997, inventories consisted of the
following:
June 30, 1998 December 31, 1997
------------- -----------------
Raw materials $394,346 $502,342
Work in process 7,698 9,422
Finished goods 106,237 181,586
-------- --------
$508,281 $693,350
======== ========
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
Effective January 1, 1998, Spurlock Industries, Inc. ("the Company") adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." There is no material difference in the
financial statements of the Company between reporting income on a comprehensive
basis under SFAS 130, and the current operating basis. The Company has no
separate reporting segment under SFAS 131.
6
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 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 1998 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,
1997 under the heading "Forward-Looking and Cautionary Statements," and are
hereby incorporated herein by reference.
Results of Operations
For the 1998 second quarter, the Company generated a net loss after tax
of ($141,798), compared to net income of $206,102 for the prior year's period.
For the six months ended June 30, 1998, net income totalled $39,306, a decrease
of 89.2% versus net income of $364,414 for the comparable 1998 period.
The Company's net sales for the quarter and six months ended June 30,
1998 totalled $7,549,786 and $13,603,479, respectively. All of the sales were
from shipments of resin and formaldehyde by the Company's wholly owned
subsidiary, Spurlock Adhesives, Inc. These modest increases of 3.6% and 2.7% for
the second quarter and the six months ended June 30, 1998, respectively, reflect
increased shipments of product, the effect of which was abated by a decline in
selling prices relating to lower raw material costs.
In the second quarter of 1998, cost of sales increased 9.4% to
$5,904,228, from $5,399,182 in the second quarter of 1997. The gross margin fell
to 21.8% from 25.9%. This shrinkage of the gross margin in the second quarter of
1998 compared to the comparable prior year's quarter reflects a decision by
management to enter into agreements with, and begin supplying product from
Waverly, Virginia to, customers in the northeast prior to the scheduled startup
in July 1998 of the Company's new facility in Moreau, New York. Management
believed it important to lock in customers for a significant portion of the
output of such plant in order to provide in advance for coverage of a
significant portion of the new plant's fixed costs. As a result of this advanced
planning, the Company incurred greater than typical freight costs aggregating an
estimated $350,000. On July 31, 1998, the Company made its first deliveries from
the Moreau facility, and management does not anticipate that further shipments
to the northeast from the more distant Waverly, Virginia plant will be
necessary. For the six months ended June 30, 1998, cost of sales increased 5.2%,
to $10,426,261 from $9,912,097 in the 1997 period. The gross margin declined to
23.4% from 25.2%, reflecting the impact of the Moreau-related shipments in
second quarter 1998 following a significant gross profit of just over $1.5
million in the 1998 first quarter.
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Operating expenses (sales, general and administrative expenses)
increased by 30.5% in the 1998 second quarter, to $1,678,160 or 22.2% of sales
from $1,285,993 or 17.7% of sales in the 1997 second quarter. Likewise, for the
six months ended June 30, 1998, operating expenses increased by 20.6%, to
$2,975,984 or 21.9% of sales, from $2,468,075 or 18.6% of sales. The primary
reason for these increases is increased legal and accounting expenses relating
to a previously disclosed shareholder derivative suit and related matters,
totalling approximately $450,000 for the first six months of 1998. Also, during
such period, the Company incurred approximately $400,000 of startup costs
relating to the Moreau facility, with the majority of such startup expenses
falling in the second quarter of 1998 prior to the plant beginning operation in
July of this year.
Interest expense fell significantly in the second quarter of 1998
compared to the comparable 1997 period, by 36.1%, to $130,897 from $204,990. For
the six months, interest expense fell to a lesser degree, by 11.2%, to $231,118
from $260,187 in the 1997 six months period. These decreases resulted from
capitalization of project interest during the period of construction of the
Moreau, New York facility. Other income increased during the second quarter of
1998 to $44,750 from $10,596 in second quarter 1997. For the six months, other
income increased to $92,435 from $24,587 for the six months ended June 30, 1997.
These increases reflect gains on the disposal of certain excess fixed assets.
The Company accrues for income taxes at an effective rate of 34%
inclusive of the deduction for state income tax. During the first quarter of
1998, there was no tax accrual owing to the use of net operating loss
carryforwards. In the second quarter of 1998, the Company incurred income tax
expense of $21,000.
Liquidity and Capital Resources
Working Capital
At June 30, 1998, working capital totalled ($3,660,688), a decrease of
$941,739 from December 31, 1997. This decrease reflects an increase of
$1,338,934 in accounts receivable to $2,561,211 at June 30, 1998 from fiscal
year end 1997. The signficant expansion of accounts receivable resulted from
increased sales and a change in terms to a major customer. Also, prepaid
expenses increased by $96,152, reflecting insurance renewals. With respect to
current liabilities, notes payable under the Company's line of credit increased
by $1,023,423 to $2,365,045 at June 30, 1998 from the end of the previous fiscal
year. Accounts payable increased by $518,443 and accrued expenses increased
$242,705 as compared to December 31, 1997, as a result of pre-startup operations
in Moreau, New York
Cash Flow
For the six months ended June 30, 1998, net cash provided by operations
was $30,826, a significant decline from the $737,047 reported in the prior
year's period. The reduced cash flow from operations during the 1998 period
resulted primarily from lower net income, and the approximate $1.3 million
increase in receivables. Depreciation and amortization accounted for $452,268 of
such cash flow. The Company invested in $3,356,463 of additional fixed assets,
which investment was predominantly funded by a draw down of $2,515,461 of
restricted cash relating to the proceeds from the Company's $6 million
Industrial Revenue Bond financing. Borrowings under the Company's line of credit
supplemented such restricted cash in funding the significant fixed asset
purchases relating to the Moreau facility. Net cash declined by approximately
$52,000 for the six months ended June 30, 1998.
8
Liquidity
As previously reported, the Company has a $3,500,000 revolving credit
facility with two lenders, which facility matures in July 1999. On June 30,
1998, outstanding loans under the facility totalled $2,365,045, which amount
represented substantially all 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 Company with an
important source of liqudity in addition to cash generated from operations.
Management believes that the cash generated from operations, together with
amounts available under the revolving credit facility and restricted cash
relating to its Industrial Revenue Bond financing, will be adequate to fund the
Company's working capital needs and fixed asset purchases relating to the new
Moreau facility in 1998.
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SPURLOCK INDUSTRIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
With respect to certain shareholder's derivative litigation and related
matters previously disclosed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, reference is made to that portion of the
Company's Proxy Statement for its Annual Meeting of Shareholders held on August
12, 1998, filed with the Securities and Exchange Commission (the "Commission")
on July 20, 1998, under the caption "Certain Legal Proceedings," which portion
of such Proxy Statement is incorporated by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is a party to and a borrower under certain credit
arrangements, including the following (collectively, the "Credit Facilities"):
(a) A Loan and Security Agreement dated July 1, 1996 between the
Company and National Canada Finance Corporation whereby (i) such lender provides
the Company with a line of credit of up to $3.5 million based on eligible
accounts receivable and inventory, with outstanding advances totalling
$1,747,135 at March 31, 1998 and (ii) such lender provided the Company with a
term loan in the original principal amount of $3,639,000 to buy out a lease on
the Waverly, Virginia formaldehyde plant and of which $2,628,160 was outstanding
as of June 30, 1998; and
(b) $6,000,000 of Industrial Reveue Bonds through the County of
Saratoga Industrial Development Agency, and a related Letter of Credit
Reimbursement Agreement, $1,500,000 term loan and other related credit
agreements with KeyBank National Association relating to the Company's new
manufacturing facility located in Moreau, N.Y., of which $7,475,000 was
outstanding at June 30, 1998.
The Credit Facilities are secured by substantially all of the Company's
assets, and are subject to substantially similar financial and restrictive
covenants. During the first quarter of 1998 and up to the date of this report,
the Company has been in technical violation of certain of these covenants, as a
result of unauthorized advances to officers, which have been previously
reported, and the Company's failure to meet certain financial covenants relating
primarily to net worth, leverage, net profit and capital expenditures. After
discussion with its lenders, the Company does not believe that such violations
are material and expects to receive waivers from its lenders with respect
thereto.
ITEM 5. OTHER INFORMATION.
Startup of Moreau Plant
On July 30, 1998, the Company announced the opening of its Moreau, New
York facility. Production of commercial grade formaldehyde began on July 27,
1998. The plant made initial deliveries of product to its New York customers on
July 31, 1998.
The state of the art D.B. Western designed and built unit is capable of
producing 135 million pounds of 37% formaldehyde per year. A second identical
formaldehyde unit at the same facility is scheduled to begin production in early
August 1998. In connection with this event,
10
Phillip S. Sumpter, Chief Executive Officer, stated: "We are very pleased to see
all of our hard work come to fruition with the startup of the Moreau facility
and are excited about doing business in the northeast. We are grateful to all
our employees and supporters of this project."
Spurlock Industries, Inc., through its wholly owned subsidiary,
Spurlock Adhesives, Inc., currently develops, manufactures and markets specialty
thermosetting resins and formaldehyde for the forest products, building products
and furniture industries. The company operates two other production facilities
located in Waverly, Virginia and Malvern, Arkansas. The addition of the Moreau
facility will double the Company's formaldehyde production capacity and increase
resin production capacity by 30%.
Strategic Business Opportunities
As previously disclosed, on June 24, 1998 the Company announced that it
had received inquiries from several unaffiliated companies regarding possible
acquisitions of its business operations. To assist in exploring those and other
potential business opportunities, the Company engaged Davenport & Company LLC, a
Richmond, Virginia based investment banking firm, as its financial advisor. At
the Company's Annual Meeting of Shareholders held on August 12, 1998, Phillip S.
Sumpter, Chief Executive Officer, indicated that the Company had received
additional expressions of interest from third parties. He also reported that
information on the Company had recently been sent out by Davenport to selected
parties who may have an interest in acquiring certain business operations of the
Company. He indicated that all discussions with any such parties are very
preliminary, and that the Board of Directors intends to carefully evaluate all
such strategic opportunities in order to maximize shareholder value.
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
99 That portion of the Registrant's Proxy
Statement for its Annual Meeting of
Shareholders held on August 12, 1998, filed
with the Commission on July 20, 1998, under
the caption "Certain Legal Proceedings,"
which is incorporated herein by reference.
(b) Reports on Form 8-K:
In a Form 8-K dated June 24, 1998 and filed with the
Commission on June 25, 1998, the Registrant announced that it
had received inquiries from several unaffiliated companies
regarding possible acquisitions of its business operations,
that the Registrant was engaged in preliminary discussions
with such parties and that it had engaged Davenport & Company,
LLC, a Richmond, Virginia based investment banking firm, as
its financial advisor.
11
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 14, 1998 By: /s/ Phillip S. Sumpter
------------------ -------------------------------------------
Phillip S. Sumpter
Chairman and Chief Executive Officer
(Principal Executive and Financial Officer)
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SPURLOCK INDUSTRIES, INC.
Exhibit Index
Exhibit No. Description
----------- -----------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
99 That portion of the Registrant's Proxy Statement
for its Annual Meeting of Shareholders on August 12,
1998, filed with the Commission July 20, 1998, under
the caption "Certain Legal Proceedings," which is
incorporated herein by reference.
13