UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO
[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
<PAGE>
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.
-2-
<PAGE>
AMENDMENT
The Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 is hereby amended as follows:
<PAGE>
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
<PAGE>
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Balance Sheets
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets
1996 1995
<S> <C> <C>
Current Assets:
Cash and cash equivalents $106,072 $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
=========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Balance Sheets
As of December 31, 1996 and 1995
(Continued)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
1996 1995
<S> <C> <C>
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
=========== ===========
</TABLE>
<PAGE>
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
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)
--------- --------- ---------
<PAGE>
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
=========== =========== ===========
</TABLE>
<PAGE>
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
(Continued)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
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 $ -
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Spurlock Industries, Inc.
(Formerly Air Resources Corporation)
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Shares Preferred Accumulated
Amount Shares Amount Deficit
<S> <C> <C> <C> <C> <C>
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)
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
========== =========
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 heading "ELECTION OF DIRECTORS" 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 headings "ELECTION OF DIRECTORS," "EXECUTIVE
COMPENSATION" and "TRANSACTIONS WITH 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 headings "ELECTION OF DIRECTORS," "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "TRANSACTIONS WITH MANAGEMENT" to
be filed within 120 days of the end of the 1996 fiscal year.
<PAGE>
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: April 29, 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Irvine R. Spurlock Chairman, President, Chief Executive April 29, 1997
-------------------------------------
Irvine R. Spurlock Officer and Director
(Principal Executive Officer)
/s/ Phillip S. Sumpter Executive Vice President, Chief Financial April 29, 1997
-------------------------------------
Phillip S. Sumpter Officer and Director
(Principal Financial Officer)
/s/ Warren E. Beam, Jr. Treasurer and Controller April 29, 1997
-------------------------------------
Warren E. Beam, Jr. (Principal Accounting Officer)
/s/ H. Norman Spurlock, Jr. Director April 29, 1997
-------------------------------------
H. Norman Spurlock, Jr.
Director
-------------------------------------
Glen S. Whitwer
/s/ Harold N. Spurlock Director April 29, 1997
-------------------------------------
Harold N. Spurlock
Director
-------------------------------------
Raymond G. Tuttle
</TABLE>
