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, 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 September 30, 1998
Common Stock, no par value 6,573,639
<PAGE>
SPURLOCK INDUSTRIES, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPURLOCK INDUSTRIES, INC.
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 109,843 $ 362,685
Accounts receivable, trade, net 2,787,669 1,222,277
State income tax receivable 45,877 40,713
Federal income tax receivable 104,000 151,000
Accounts and notes receivable - officers
current portion - 101,944
Inventories 769,460 530,183
Deferred tax asset - 92,908
Prepaid expenses 151,524 144,457
----------- -----------
Total current assets 3,968,373 2,646,167
----------- -----------
Property, plant and equipment, net
of accumulated depreciation of
$5,697,839 and $4,890,414 16,526,453 12,043,300
----------- -----------
Other assets:
Cash restricted 785,245 3,889,567
Accounts and notes receivable -
officers - 59,122
Cash value of annuity 286,820 171,995
Other 388,049 591,280
----------- -----------
Total other assets 1,460,114 4,711,964
----------- -----------
Total assets $21,954,940 $19,401,431
Liabilities and Stockholders' Equity
Current liabilities
Notes payable, line-of-credit $ 2,395,495 $ 1,341,622
Current portion of long-term debt 750,000 1,279,188
Accounts payable, trade 3,435,541 2,378,597
Accrued expenses 823,205 281,629
Accrued taxes 84,080 84,080
----------- -----------
Total current liabilities 7,488,321 5,365,116
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Long-term liabilities
Long-term debt 9,659,662 9,598,315
Post retirement benefit liability 295,196 166,956
Other liabilities 4,003 3,001
----------- -----------
Total long-term liabilities 9,958,861 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 - -
Paid in capital 4,808,814 4,808,814
Accumulated deficit (301,056) (540,771)
----------- -----------
4,507,758 4,268,043
----------- -----------
Total liabilities and stockholders'
equity $21,954,940 $19,401,431
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
SPURLOCK INDUSTRIES, INC.
Consolidated Statements of Operations
For the Three and Nine Months Ended
September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
Revenue
<S> <C> <C> <C> <C>
Net sales $ 7,512,500 $ 5,559,514 $21,115,979 $18,805,463
Cost of sales 5,565,814 4,065,501 15,992,075 13,977,598
----------- ----------- ----------- -----------
Gross Profit 1,946,686 1,494,013 5,123,904 4,827,865
Selling, general and administrative expenses 1,549,018 1,238,988 4,525,002 3,707,063
----------- ----------- ----------- -----------
Income (loss) from operations 397,668 255,025 598,902 1,120,802
Other income and (expense)
Other income 106,831 4,329 199,266 28,916
Other expense (103,736) (77,859) (105,981) (136,580)
Interest expense (194,476) (171,502) (425,594) (431,689)
----------- ----------- ----------- -----------
Income (loss) before taxes 206,287 9,993 266,593 581,449
----------- ----------- ----------- -----------
Income tax expense (benefit) 5,878 3,046 26,878 210,088
----------- ----------- ----------- -----------
Net income (loss) $ 200,409 $ 6,947 $ 239,715 $ 371,361
=========== =========== =========== ===========
Per share information:
Basic earnings per share $ 0.03 $ 0.01 $ 0.04 $ 0.06
=========== =========== =========== ===========
Diluted earnings per share $ 0.03 $ 0.01 $ 0.04 $ 0.06
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
SPURLOCK INDUSTRIES, INC.
Statements of Cash Flows
For the Nine Months Ended
September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 239,715 $ 371,361
Adjustment to reconcile net income to net cash:
Depreciation and amortization 807,425 735,000
(Increase) decrease in trade receivables (1,565,392) 6,045
(Increase) decrease in inventories (239,277) 20,926
(Increase) decrease in prepaid expenses (7,067) (112,386)
Increase (decrease) in accounts payable and accrued expenses 1,598,520 330,369
Increase (decrease) in other liabilities 1,002 -
Increase (decrease) in post retirement benefits 128,240 81,488
Increase (decrease) in deferred tax liability - 210,088
------------ ------------
Total adjustments 723,451 1,271,530
Net cash provided by (used in) operating activities 963,166 1,642,891
------------ ------------
Investing activities:
Purchase fixed assets (5,290,578) (2,100,747)
(Increase) decrease in cash restricted for capital expenditures 3,104,322 -
Repayment - Officer Advances and Notes 59,122 30,613
------------ ------------
Net cash provided by (used in) investing activities (2,127,134) (2,070,134)
Financing activities:
(Increase) decrease in other assets 325,094 (38,560)
Proceeds of new borrowings 1,597,550 1,603,910
Repayment of notes and loans (1,011,518) (824,018)
Repayment of loans to principal holders of equity securities - -
------------ ------------
Net cash provided by (used in) financing activities 911,126 741,332
------------ ------------
Net increase (decrease) in cash and cash equivalents (252,842) 314,089
Beginning cash and cash equivalents 362,685 106,072
------------ ------------
Ending cash and cash equivalents $ 109,843 $ 420,161
============ ============
Supplemental cash flow information:
Cash paid for: Interest expense $ 425,594 $ 431,689
============ ============
Income taxes $ 26,878 $ 210,088
============ ============
</TABLE>
5
<PAGE>
SPURLOCK INDUSTRIES, INC.
Notes to Consolidated Financial Statements
September 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.
As of September 30, 1998 and December 31, 1997, inventories consisted of the
following:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw materials $600,056 $502,342
Work in process 7,698 9,422
Finished goods 161,706 181,586
-------- --------
$769,460 $693,350
======== ========
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
Effective January 1, 1998, Spurock 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
<PAGE>
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 third quarter, the Company generated net income after tax
of $200,409, a substantial increase over third quarter 1997 net income of
$6,947. For the nine months ended September 30, 1998, net income totalled
$239,715, a decrease of 35.45% versus net income of $371,361 for the comparable
1997 period.
The Company's net sales for the quarter and nine months ended September
30, 1998 totalled $7,512,500 and $21,115,979, respectively. All of the sales
were from shipments of resin and formaldehyde by the Company's wholly owned
subsidiary, Spurlock Adhesives, Inc. The significant increases of 35.13% and
12.29% for the third quarter and the nine months ended September 30, 1998,
respectively, reflect the addition of the Company's new facility at Moreau, New
York, which began production in late July.
In the third quarter of 1998, cost of sales increased 36.90% to
$5,565,814, from $4,065,501 in the third quarter of 1997. The gross margin for
the quarter declined to 25.91% from 26.87% as the result of costs relating to
the startup of the Moreau facility. For the nine months ended September 30,
1998, cost of sales increased 14.41%, to $15,992,075 from $13,977,598 in the
1997 period. The gross margin declined to 24.27% from 25.67% for the first nine
months of 1977, reflecting the third quarter 1998 gross margin decline and
management's decision to enter into agreements with, and begin supplying product
from Waverly, Virginia to, customers in the northeast beginning in February 1998
prior to the scheduled startup in July 1998 of the Moreau facility. This was
done in order to lock in customers for a significant portion of the output of
such plant. As a result of this advanced planning, the Company incurred greater
than typical freight costs aggregating an estimated $400,000 in the second
quarter and early third quarter of 1998. Such shipments from Waverly, Virginia
were discontinued upon the initiation of production at the New York facility.
7
<PAGE>
Operating expenses (sales, general and administrative expenses)
increased by 25.02% in the 1998 third quarter, to $1,549,018 or 20.62% of sales
from $1,238,988 or 22.29% of sales in the 1997 third quarter. The dollar
increase in operating expenses reflects the Moreau facility entering production
and related startup costs. The decrease as a percentage of sales in the 1998
quarter reflects sales growth outstripping growth of operating expenses. For the
nine months ended September 30, 1998, operating expenses increased by 22.06%, to
$4,525,002 or 21.43% of sales, from $3,707,063 or 19.71% of sales. The dollar
increase and increase as a percentage of sales resulted from the inclusion of
the Moreau plant and related startup costs, as well as increased legal and
accounting expenses relating to a previously disclosed shareholder derivative
suit and related matters totalling approximately $515,000 for the first nine
months of 1998. The bulk of such legal and accounting costs fell in the first
six months of 1998.
Interest expense rose 13.40% in the third quarter of 1998 compared to
the comparable 1997 period, to $194,476 from $171,502, as a result of the
Company beginning to accrue interest on approximately $7.5 million of debt
related to the Moreau, New York facility upon it entering service. Prior to the
startup of the New York plant in July 1998, interest on such project debt was
capitalized. For the nine months, interest expense expense fell 1.4% to $425,594
from $431,689 in the comparable 1997 period despite increased borrowings, due to
somewhat lower average interest rates during 1998 and the capitalization of
project interest during the first seven months of 1998. Other income increased
during the third quarter of 1998 to $106,831 from $4,329 in third quarter 1997.
For the nine months, other income increased to $199,266 from $28,916 for the
nine months ended September 30, 1997. These increases reflect gains on the
disposal of certain excess fixed assets and interest income.
The Company accrues for income taxes at an effective rate of 34%
inclusive of the deduction for state income tax. During the first nine months of
1998, $26,878 of income tax expense was accrued due to the use of net operating
loss carryforwards.
Liquidity and Capital Resources
Working Capital
At September 30, 1998, working capital totalled ($3,519,948), a
decrease of $800,999 from December 31, 1997. This reflected the Company's use of
increased short term bank borrowings and trade credit to fund fixed asset
expenditures and working capital requirements relating to the Moreau facility.
Trade receivables increased significantly, by $1,565,392 to $2,787,669, and
inventories increased by $239,277, also related to shipments from the Moreau
facility. Line of credit borrowings increased by $1,053,873 and trade payables
by $1,056,944. Accrued expenses increased by $541,576 due to the accrual of
startup expenses for the New York facility.
Cash Flow
For the nine months ended September 30, 1998, cash provided by net
income and depreciation and amortization totalling $1,047,140 remained
relatively unchanged compared to the $1,106,361 reported in the prior year's
period. However, net cash provided by operations declined significantly, from
$1,642,891 for the first nine months of 1997 to $963,166 for the comparable 1998
period. This reduced cash flow from operations resulted primarily from the
approximately $1.6 million build up in trade receivables, the $239,277 increase
in inventory related to the new Moreau facility, and increased accruals for post
retirement benefits, which were
8
<PAGE>
offset in part by the approximately $1.6 million expansion of accounts payable
and accured expenses.
The Company invested approximately $5.3 million of cash in additional
fixed assets relating to Moreau, which investment was funded predominantly by a
drawdown of approximately $3.1 million in restricted cash relating to the
proceeds from the Company's $6.0 million Industrial Revenue Bond financing. New
borrowings aggregating approximately $1.6 million supplemented such restricted
cash in funding the significant fixed asset purchases and funding loan
repayments of approximately $1.0 million. Net cash declined by approximately
$310,000 for the nine months ended September 30, 1998.
Liquidity
As previously reported, the Company has a $3.5 million revolving credit
facility with two lenders, which facility matures in July 1999. On September 30,
1998, outstanding loans under the facility totalled $2,395,495, which amount
represented substantially all of the total amount available at such time based
on levels of accounts receivable and inventory on which borrowing availability
is based. The credit facility provides the Company with an important source of
liquidity in addition to cash generated from operations.
Startup costs, expenditures for fixed assets and working capital
requirements related to the Moreau facility placed additional burdens on the
Company's liquidity position in the third quarter of 1998. These additional
requirements were met by cash generated from net income and depreciation and
amortization, as well as significantly increased use of trade credit. Also, in
October 1998, the Company received an overline of $150,000 from its two bank
lenders. Management believes the increased working capital requirements
associated with Moreau, as well as increased legal and accounting expenses
associated with the Colorado shareholders' derivative action and the Company's
continued examination of previously disclosed indications of interest from third
parties with respect to a purchase of the Company, will continue to strain the
liquidity position of the Company into the fourth quarter of 1998 and into early
1999. However, management believes that the Company's existing credit facilities
and core cash flow from earnings and depreciation and amortization will be
adequate to fund the Company's short term liquidity and working capital needs.
Year 2000
In recent months, there has been increasing public awareness and
attention paid to the Year 2000 (or "Y2K") problem, which stems from the
inability of certain computerized devices (hardware, software and equipment) to
process year-dates properly after 1999 (in addition to related problems
processing leap years and other dates). Affected devices may fail or malfunction
unless repaired or replaced. Although the actual magnitude and effect of the
issue cannot be reasonably determined in advance, the Company has given it
priority. In February 1998, the Company began an analysis of the possible
implications to the Company of the Year 2000 problem and the development of a
plan to prevent the problem from adversely affecting its operations.
The Company's plan can be divided into two principal areas:
(1) Resolution of the internal aspects of the Year 2000 problem.
This area includes the effects of the Year 2000 problem on the
Company's technology, including computer hardware and software
systems, as well as computerized equipment
9
<PAGE>
containing programmable logic controllers or other embedded
chips ("PLCs" or "chips"). The Company's internal technology
Year 2000 plan includes:
(i) Locating, listing and prioritizing the specific
technology that is potentially subject to the Year
2000 problem (referred to as the "inventory" phase),
(ii) Assessing the actual exposure of such technology to
the Year 2000 problem by inquiry, research, testing
and other means (the "assessment" phase),
(iii) Selecting the method necessary to resolve the Year
2000 problems that were identified, including
replacement, upgrade, repair or abandonment, and
implementing the selected resolution method (the
"remediation" phase), and
(iv) Testing the remediated or converted technology to
determine the efficacy of the resolutions (the
"testing" phase).
(2) Determination and control of the external aspects of the Year
2000 problem. This area includes:
(i) Assessing the risk posed by possible business
interruption or production difficulties affecting
important customers and suppliers of goods, services
and essential utilities due to Year 2000 problems
affecting their technology or business, and
(ii) Developing contingency plans to address failures by
external parties to remediate fully any Year 2000
problems that are material to the Company. Assessment
of external parties is accomplished by written and
verbal inquiry, and by research to the extent that
reliable information is available.
To date, the Company has made progress on the internal aspects of the
plan. The majority of the Company's business operations have completed the
inventory and assessment phases. Also, management believes that approximately
40% of required remediation has been achieved, primarily through the replacement
of certain equipment and systems. Remediation is expected to be completed by
July 1, 1999, with testing of remediated or converted internal systems to
continue through calendar year 1999. The sequence and extent of testing will be
prioritized by the importance of the technology, with initial focus on two
areas:
(i) Critical computer hardware and software systems, and
(ii) PLCs embedded in key machinery and equipment.
The Company has assessed its internal operational exposure to the
failure of PLCs. Information provided by the manufacturers of the PLCs within
the Company's machinery and equipment indicates that there do not appear to be
any PLCs that will cause material Year 2000 problems. The Company is currently
seeking technical assistance in order to test certain PLCs to confirm
manufacturers' representations regarding the absence of material Year 2000
problems. Testing of PLCs is not a routine practice, and there can be no
assurances that the Company will be able to conduct such test on PLCs or that
the tests will lead to reliable conclusions. In addition, there can be no
assurances that the Company will be able to conduct tests on all of its
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<PAGE>
internal technology, or that the tests will be fully successful in detecting Y2K
problems within the internal technology.
An evaluation of external parties will be initiated early next year,
and will continue throughout 1999. Determining the Year 2000 readiness of
external parties requires collection and appraisal of voluntary statements made
or provided by those parties, if available, together with independent factual
research. Although the Company has cooperated in the Y2K efforts of its
customers and suppliers, and will take reasonable efforts to gather information
to determine the readiness of external parties, often such information is not
provided voluntarily, is not otherwise available, or is not reliable.
In assessing the risks to the Company's business arising from the Year
2000 problem, the Company recognizes that it is subject to operational risks
relating to the readiness of public utilities, transportation facilities,
financial services providers and government operated services. The loss of
services from one or more of these entities could interrupt or disrupt business
unit operations. Furthermore, with respect to certain fundamental services such
as electricity and telecommunications, it may be impractical to develop
contingency plans (such as alternative power generation or telecommunication
methods) to mitigate the potential adverse effects. The Year 2000 readiness of
external parties is substantially beyond the Company's knowledge and control,
and there can be no assurances that the Company will not be adversely effected
by the failure of an external party to adequately address the Year 2000 problem.
At this time, the Company believes the most likely worst case year 2000
scenario would not have a material effect on the Company's results of
operations, liquidity and financial condition for the year ending December 31,
2000. The Company does not foresee a material loss of revenue due to the Year
2000 issue. However, this estimate is based on management's assessments of the
likelihood of occurrence of possible scenarios; the Company believes that no
entity can address the virtually unlimited possible circumstances related to
Year 2000 issues, including risks outside of the Company's market area. While
unlikely, it is acknowledged that failure by the Company to successfully
implement its Year 2000 plan, its modifications and conversions, or to
adequately access the likelihood of various events relating to the Year 2000
issue, could have a material impact on the Company's operations. Therefore, this
could potentially result in a material adverse effect on the Company's results
of operations and financial conditions.
Prior to June 30, 1999, the Company expects to develop initial
contingency plans to address situations wherein the readiness of the internal
technology or external parties is not sufficiently assured, and practical
alternative products, services or methods are available. Thereafter, as the Year
2000 approaches, the Company will monitor and update such contingency plans as
are appropriate to address any changes in the Company's year 2000 risks. The
Company currently estimates the total cost for addressing the Y2K problem will
be approximately $80,000. These costs do not include the Company's internal
costs incurred for the Y2K project, such costs being principally payroll costs
for personnel assigned to such project, as the Company does not have a tracking
system to capture these items. However, management does not believe that such
internal costs are or will be material. Also, the estimated amounts do not
include estimated costs associated with the implementation of any contingency
plans that may be developed by the Company during fiscal year 1999. The costs
associated with preparing for the Y2K problem are expensed as incurred and are
being funded with cash from operations. As of September 30, 1998, the Company
had spent approximately $30,000. The Company does not expect the total cost of
addressing the Y2K problem with respect to its internal technology to be
material to its consolidated financial condition or results of operations.
11
<PAGE>
The above projections of total costs to implement the Company's Year
2000 plan and estimated timetable for completion are based on management's best
estimates, which are necessarily based in part on assumptions of future events
including the continued availability of adequate resources and completion of
third party modification plans. There can be no guarantee that these estimates
will be achieved; actual results could differ from the Company's current
estimates. Specific risk factors that might cause material differences include,
but are not limited to, the availability and cost of personnel with adequate
programming skills, the availability of replacement equipment and components and
the ability to locate and correct all relevant computer codes. The inability to
control the actions and plans of vendors and suppliers, customers, government
entities and other third parties with respect to Year 2000 issues are associated
risks.
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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 ("NCFC") whereby (i) such lender
provides the Company with a line of credit of up to $3.5 million (excluding a
$150,000 overline extended effective October 1998) based on eligible accounts
receivable and inventory, with outstanding advances totalling $2,395,495 at
September 30, 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 $2,375,450 was outstanding as of
September 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 ("KeyBank") relating to the
Company's new manufacturing facility located in Moreau, N.Y., of which
$7,137,500 was outstanding at September 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. At December 31, 1997, March 31, 1998 and June 30, 1998, the Company
was 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. As of November 1998, the
Company had received waivers of all such violations. Also, the NCFC and KeyBank
credit facilities were amended to liberalize certain financial covenants
effective as of September 30, 1998. As a result, based on the Company's
financial performance in the third quarter of 1998, the Company was in material
compliance with its loan covenants as of such date.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 12, 1998, the Registrant held its annual meeting of
shareholders. Glen A. Whitwer was elected as a director of the Registrant, for a
term expiring in 2001. The following is a list of the remaining directors and
the year their terms expire: Harold N. Spurlock (1999), Phillip S. Sumpter
(1999), Raymond G. Tuttle (2000), Lance K. Hoboy (1999) and Kirk J. Passopulo
(1999).
The only other matter considered at the 1998 annual meeting was the
ratification of the appointment of Cherry, Bekaert & Holland, L.L.P. as
independent auditors for the Registrant for the fiscal year ending December 31,
1998, 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 appointment of the independent auditors:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
1. Glen A. Whitwer 4,811,923 189,616 -
2. Ratification of Independent
Auditors 5,213,136 187,655 8,461
</TABLE>
There were no broker non-votes on the ratification of independent auditors.
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 dated March 4, 1998 from the
Registrant to Larry Birkholz
10.2 Letter dated March 4, 1998 from the
Registrant to Kirk Passopulo
10.3 Letter dated March 4, 1998 from the
Registrant to John Fitzgerald, Jr.
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.
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(b) Reports on Form 8-K:
None
15
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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 13, 1998 By: /s/ Lawrence C. Birkholz
------------------------------
Lawrence C. Birkholz
Controller
(Principal Accounting Officer)
16
<PAGE>
SPURLOCK INDUSTRIES, INC.
Exhibit Index
Exhibit No. Description
10.1 Letter dated March 4, 1998 from the Registrant to
Larry Birkholz
10.2 Letter dated March 4, 1998 from the Registrant to
Kirk Passopulo
10.3 Letter dated March 4, 1998 from the Registrant to
John Fitzgerald, Jr.
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 July 20,
1998, under the caption "Certain Legal
Proceedings," which is incorporated herein by
reference.
17
EXHIBIT 10.1
[SPURLOCK INDUSTRIES, INC. LETTERHEAD]
March 4, 1998
To: Larry Birkholz
From: Phil Sumpter
Dear Larry,
The purpose of this memorandum is to document our agreement relative to
severance compensation should the company decide to terminate your employment.
This arrangement is in recognition of the circumstances under which you joined
the company and the critical nature of your position.
If the company chooses to end your employment you will be entitled to salary and
benefits continuation, at your current rate of compensation, for a period of six
months from the date of termination.
Regards,
/s/ Phillip S. Sumpter
Chairman & CEO
EXHIBIT 10.2
[SPURLOCK INDUSTRIES, INC. LETTERHEAD]
March 4, 1998
To: Kirk Passopulo
From: Phil Sumpter
Dear Kirk,
The purpose of this memorandum is to document our agreement relative to
severance compensation should the company decide to terminate your employment.
This arrangement is in recognition of twenty four years of service with Spurlock
Adhesives in a number of responsible positions and for your willingness to make
a transition from a plant operations environment into a corporate role.
If the company chooses to end your employment you will be entitled to salary and
benefits continuation, at your current rate of compensation, for a period of
twelve months from the date of termination. The use of a company vehicle will
end coincident with your date of termination.
Regards,
/s/ Phillip S. Sumpter
Chairman & CEO
EXHIBIT 10.3
[SPURLOCK INDUSTRIES, INC. LETTERHEAD]
March 4, 1998
Mr. John "Jack" Fitzgerald, Jr.
405 North College Drive
Franklin, Virginia 23851
Dear Jack,
Thank you very much for making time available for another discussion. A
conversation with you is always a pleasure. Thank you also for taking time to
visit with Glen Whitwer.
We are prepared to offer you the position of Director of Marketing for Spurlock
Adhesives, Inc., head quartered in Waverly, Virginia. The position reports
directly to me will be responsible for the sales and marketing functions for all
three divisions. The Divisional Sales Managers will report functionally to you.
This offer of employment as outlined below presumes a start date of April 1,
1998.
Your base salary will be $83,000 per annum, paid weekly. Coincident with your
first paid weekly salary, you will receive a one time gross payment of Five
Thousand Dollars ($5,000), as partial compensation toward your loss of vacation
pay from your current employer. You will be entitled to participate in all
existing employee benefit programs including, but not limited to, group health
insurance coverage and the company 401K plan. If the ninety day wait can be
waived, you insurance coverage will begin immediately, if not, the Company will
reimburse you for COBRA payments which you are required to make during the wait
period. Your initial participation date in the 401K plan will be January 1,
1999. You will be entitled to three weeks vacation after the first year of
employment and eligible immediately for stock options when available. While I
cannot be specific relative to options, there is a qualified stock option plan
in place which is administered by the Audit Committee. You will receive maximum
consideration. You will be provided with a company vehicle for use in carrying
out your responsibilities. Fuel for personal mileage will be your
responsibility, in addition to, the payment of any income taxes due, which
results from personal use of the vehicle. Lastly, in the event that the Company
elects to terminate your employment, you will be entitled to continuation of
salary and benefits for six months beyond the date of termination, with the
exception of the use of the company vehicle. The vehicle will be surrendered on
the date of termination.
<PAGE>
Page 2
On a more positive note, we believe strongly that you will bring desirable
skills and experience to our company which will result in a mutually beneficial
relationship and we all look forward to working with you. Please acknowledge
your acceptance of this offer in the space provided below.
Sincerely Yours, Acknowledged and accepted by:
/s/ Phillip S. Sumpter
/s/ John Fitzgerald, Jr. Date 3-4-98
Phillip S. Sumpter ------------------------------ ------
Chairman & CEO John Fitzgerald, Jr.
EXHIBIT 11
SPURLOCK INDUSTRIES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The following table sets forth the reconciliation of the numerators and
denominators of the basic and diluted earnings per share ("EPS") computations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
(a) Net income (loss) available to shareholders $ 200,409 $ 6,947 $ 239,715 $ 371,361
Denominator:
Weighted average shares outstanding 6,573,639 6,573,639 6,573,639 6,573,639
---------- ---------- ---------- ----------
(b) Basic EPS weighted average shares outstanding 6,573,639 6,573,639 6,573,639 6,573,639
Effect of dilutive securities:
Incremental shares attributable to the
Stock Option Plan 10,509 10,509 10,509 10,509
---------- ---------- ---------- ----------
(c) Diluted EPS weighted shares outstanding 6,584,148 6,584,148 6,584,148 6,584,148
Basic earnings per share (a/b) $ 0.03 $ 0.01 $ 0.04 $ 0.06
---------- ---------- ---------- ----------
Diluted earnings per share (a/c) $ 0.03 $ 0.01 $ 0.04 $ 0.06
---------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 109,843
<SECURITIES> 0
<RECEIVABLES> 2,791,258
<ALLOWANCES> 3,589
<INVENTORY> 769,460
<CURRENT-ASSETS> 3,968,373
<PP&E> 22,224,292
<DEPRECIATION> 5,697,839
<TOTAL-ASSETS> 21,954,940
<CURRENT-LIABILITIES> 7,488,321
<BONDS> 9,659,662
0
0
<COMMON> 0
<OTHER-SE> 4,507,758
<TOTAL-LIABILITY-AND-EQUITY> 21,954,940
<SALES> 21,115,979
<TOTAL-REVENUES> 21,115,979
<CGS> 15,992,075
<TOTAL-COSTS> 15,992,075
<OTHER-EXPENSES> 4,525,002
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 425,594
<INCOME-PRETAX> 266,593
<INCOME-TAX> 26,878
<INCOME-CONTINUING> 239,715
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 239,715
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
