UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Amendment No. 4
to
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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
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
Waverly, Virginia 23890
(Address of Principal Executive Offices) (Zip Code)
(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
<PAGE>
definitive 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 6,573,639.
Documents Incorporated by Reference:
The Company's Proxy definitive Statement for its 1997 Annual Meeting of
Shareholders (to be filed) is incorporated by reference into Part III of this
Form 10-K.
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<PAGE>
AMENDMENT
The Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 is hereby amended as follows:
Reasons for Amendment
Summary
In late January and early February 1998, the Company discovered that
two of its officers and directors, Irvine R. Spurlock and H. Norman Spurlock,
Jr., had diverted corporate funds for personal use and that, according to a
report of a Special Litigation Committee of the Company's Board of Directors, a
third officer, Warren E. Beam, had colluded in the diversions by Norman
Spurlock. Following these discoveries, Norman Spurlock and Mr. Beam resigned as
officers and employees of the Company and Spurlock Adhesives, Inc. ("Spurlock
Adhesives"), the Company's sole operating subsidiary, and Norman Spurlock also
resigned as a director of both companies. Irvine Spurlock resigned as Chairman
of the Board, Chief Executive Officer and a director of both the Company and
Spurlock Adhesives, but was retained by the Board of Directors with the title of
President of both companies because of his current importance to their
operations, but without any check writing or other financial authority. Irvine
Spurlock made restitution for his defalcation, and, effective April 8, 1998,
Norman Spurlock entered into a settlement agreement to make restitution for his
defalcation. An investigation by the Special Litigation Committee and the
Company's new independent accounting firm concluded that no other officers or
directors of either the Company or Spurlock Adhesives were involved in the
defalcations. As a result of these events, which are more particularly described
below, the Company's financial statements for the fiscal year ended December 31,
1996, as presented herein below, have been restated. The restatement primarily
involved reclassification of expenses, with limited impact on previously
reported earnings. See Note 2 of the Notes to Consolidated Financial Statements
in Item 8 below, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7.
Shareholders' Derivative Suit
On April 28, 1997, seven shareholders of Spurlock Industries, Inc. (the
"Company" or the "Registrant") filed a shareholders' derivative suit against the
Company and certain current and former officers and directors of the Company in
Colorado state court. The lawsuit was subsequently removed to the United States
District Court for the District of Colorado (the "District Court"). The Company
has previously disclosed the lawsuit to the Securities and Exchange Commission
(the "Commission") in the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1997.
The shareholders' derivative suit, Rasmussen et al. v. Spurlock
Industries, Inc., et al. (Civil Action No. 97-D-2214), alleges that the
defendants named therein engaged in various activities that breached their
fiduciary duties to the plaintiffs and/or violated provisions of Colorado law
applicable to domestic corporations. The activities so alleged include wrongful
payment and wrongful guarantee of debts of one or more defendants, unlawful
loans and distributions to defendants, unfair dealings with one or more
defendants, overcompensation of defendants and other employees, wrongful
depression of the Company's stock price, misrepresentation as to shareholders,
and improper approval of the merger of Air Resources Corporation (the Company's
predecessor) into the Company. The plaintiffs seek a declaratory judgment with
respect to the acts complained of, repayment of certain monies to the Company,
an accounting of all financial transactions of the Company from 1992 to the
present, a constructive trust of shares of common stock held by certain
defendants, injunctive relief and damages.
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<PAGE>
In May 1997, the Company's Board of Directors, in response to the
lawsuit, appointed a Special Litigation Committee to investigate the allegations
and to determine whether maintenance of the derivative proceeding was in the
best interests of the Company. The members of the Special Litigation Committee
are Raymond G. Tuttle and Glen S. Whitwer, the Company's two outside directors,
neither of whom is named as a defendant in the lawsuit nor was a member of the
Board of Directors during the time period of the activities alleged in the
lawsuit. The Special Litigation Committee engaged independent outside counsel to
advise it in its investigation, and performed an extensive investigation
including the collection and review of a large number of relevant corporate and
related documents, and interviews of current and former officers and directors,
the Company's independent auditor and its outside legal counsel. In a report
delivered to the District Court in October 1997, the Special Litigation
Committee determined that maintenance of the lawsuit was not in the best
interests of the Company. Based on the findings of the Special Litigation
Committee, the Company filed a Motion for Summary Judgment against the
plaintiffs on November 12, 1997.
As a result of the events summarized under "Summary" above and more
particularly described below, on February 9, 1998 and March 26, 1998, the
Special Litigation Committee requested that the District Court delay ruling on
the Motion for Summary Judgment to allow the Special Litigation Committee to
investigate the facts surrounding these events. The Special Litigation Committee
filed a supplemental report with the District Court on April 13, 1998 (the "SLC
Supplement"), and the Motion for Summary Judgment remains pending.
Creation of Audit Committee
In November 1997, at the request of the Special Litigation Committee,
the Board of Directors created an Audit Committee, which consists of Messrs.
Tuttle and Whitwer. The initial responsibility of the Audit Committee was to
identify a new auditor for the Company. The Company wished to appoint a new
auditor primarily because the auditor at that time, James E. Scheifley &
Associates, P.C. (formerly Winter, Scheifley & Associates, P.C.) ("Scheifley"),
was located in Colorado and recently had one of its two partners leave its
practice. As the Audit Committee considered proposals from other firms, Mr.
Whitwer asked Phillip S. Sumpter, then Executive Vice President and Chief
Financial Officer of the Company, to request that Scheifley examine, in the
course of the audit of the 1997 fiscal year, insider transactions, and
specifically loans to officers, to ensure that such loans were current.
Discovery of Diversion of Corporate Funds by Officers and Directors
On January 9, 1998, Catharine Spurlock, the Company's Administrative
Assistant and wife of Irvine Spurlock, then Chairman of the Board of Directors,
President and Chief Executive Officer of the Company, addressed Irvine Spurlock
with concerns over unusually high charges on the Company's credit card by Norman
Spurlock, then Executive Vice President and Secretary of the Company. Irvine
Spurlock consulted with Mr. Sumpter, who examined the credit card records and
concluded that these charges were a problem. When confronted, Norman Spurlock
admitted to charging personal expenses on the Company's credit card over the
previous two months. Norman Spurlock also revealed that he was in default on an
authorized loan with the Company and asserted that he was pursuing a home equity
loan in order to make restitution for both the unauthorized personal expenses
and the outstanding loan payments.
On January 14, 1998, Scheifley began the 1997 audit at the Company's
principal executive offices. Scheifley met with Mr. Sumpter to discuss the
issues surrounding Norman Spurlock's loan default, but did not receive notice of
any concerns regarding unauthorized credit card transactions by Norman Spurlock,
and was unable to procure certain information requested of Warren Beam,
Controller, with respect to charges on one of the Company's primary corporate
credit cards. Scheifley did not identify any additional problems.
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<PAGE>
On January 21, 1998, Mr. Whitwer met with Irvine Spurlock, Mr. Sumpter
and the Company's corporate legal counsel to discuss what actions the Board of
Directors should take with respect to Norman Spurlock, and the implications for
the Special Litigation Committee's report. It was decided that, before such
decisions could be made, Mr. Sumpter would review records to ensure an
understanding of the status of officer loans to Norman Spurlock. Mr. Whitwer
expressed the opinion that it would be necessary to conduct a special audit of
officer loans and officer expenses to ensure that the Company reached the bottom
of the problem.
On January 22, 1998, Mr. Sumpter discovered $11,000 of unauthorized
advances to Norman Spurlock in 1996 and additional advances in 1995. When
confronted with these findings on January 23, 1998, Norman Spurlock admitted to
the unauthorized advances and, at the demand of Harold Spurlock, Sr., a director
and the founder of the Company and the father of Irvine Spurlock and Norman
Spurlock, resigned as an officer, director and employee of the Company and
Spurlock Adhesives. Further internal investigations by Mr. Sumpter uncovered, in
addition to the unauthorized advances and loan defaults, substantial credit card
abuse by Norman Spurlock, with a total defalcation estimated at $150,000.
In light of the discoveries involving Norman Spurlock, Warren Beam
resigned as Controller-Treasurer of the Company and Spurlock Adhesives on
January 26, 1998. As set forth in the SLC Supplement, the Special Litigation
Committee investigation indicated that, while there was no evidence that Mr.
Beam personally received any of the diverted funds, Mr. Beam had colluded with
Norman Spurlock.
By February 5, 1998, the Audit Committee had engaged Cherry, Bekaert &
Holland, L.L.P. ("Cherry, Bekaert") to conduct a full investigation of all
officer salaries, perquisites, loans and advances and to assess the impact of
any and all misuse of the Company's funds. In addition, the Company determined
to request a postponement in the District Court's ruling on the Motion for
Summary Judgment in order that the Special Litigation Committee could
investigate the newly discovered information and supplement its previous report,
as necessary.
On February 8, 1998, after Cherry, Bekaert's investigation had
commenced, Irvine Spurlock, through his counsel, disclosed to the Company's
outside legal counsel that he had received two unauthorized advances in the
amounts of $42,500 and $9,200, both of which had been fully repaid, and an
additional unauthorized advance in the amount of $73,075.86, which had not been
repaid. Upon this admission, Irvine Spurlock provided the Company with a check
in the amount of $73,075.86 and offered to resign if requested to do so. On
February 9, 1998, Irvine Spurlock disclosed further to Mr. Sumpter that he had
made personal charges on the Company's credit card in an estimated amount of
$7,000 to $8,000.
The Board of Directors met on February 11, 1998 to take action on the
information that had been uncovered to date, including recent disclosures by
Irvine Spurlock. At the meeting, the Board of Directors asked Irvine Spurlock to
resign as Chairman and a member of the Board of Directors and as Chief Executive
Officer of both the Company and Spurlock Adhesives. Following the tendering of
these resignations, the Board of Directors elected Mr. Sumpter to replace Irvine
Spurlock as Chairman of the Board and Chief Executive Officer of the Company and
Spurlock Adhesives.
The Board of Directors decided, nevertheless, to retain Irvine Spurlock
with the title of President of both the Company and Spurlock Adhesives. In
reaching such a decision, the Board of Directors weighed the gravity of his
actions against the possible impact to the Company of his departure. Among
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<PAGE>
other considerations, the Board of Directors acknowledged the importance of
Irvine Spurlock's role in the critical area of purchasing of raw materials used
in the Company's production process, his long-standing relationships with the
Company's customers and lenders, and his extensive background in the Company's
manufacturing operations where he acts as the Company's final technical
authority. The Board also took into account the strain placed on remaining
management by the recent resignations of two other executive officers, given the
Company's small executive staff. The Board of Directors concluded that, due to
the skills provided by Irvine Spurlock, his departure at that time could result
in substantial adverse consequences to the Company. In connection with his
retention, however, the Board of Directors revoked all of his check-signing and
related financial authority.
Conclusion of Investigation
On February 17, 1998, the Board of Directors approved the replacement
of Scheifley as the independent accountant chosen to audit the Company's
financial statements and approved the appointment of Cherry, Bekaert as the
Company's independent accountant for the 1997 fiscal year. The Company has
previously disclosed the appointment to the Commission on a Current Report on
Form 8-K dated February 17, 1998. Cherry, Bekaert is the largest regional CPA
firm in the Southeast, with over 300 people in 23 offices. It is headquartered
in Richmond, Virginia.
By the end of February 1998, Cherry, Bekaert had concluded much of the
investigation of management-related defalcations, and, by March 18, 1998, had
completed most follow-up tasks in conjunction with the 1997 audit of the
Company. Having performed investigatory procedures on relevant available records
from August 1992 through January 1998, Cherry, Bekaert found diversion of funds
in two areas - unauthorized advances and personal credit card charges paid by
the Company. The following table presents the results of Cherry, Bekaert's
investigation, net of all repayments through January 1998, by the named
individuals, excluding accrued interest:
<TABLE>
<CAPTION>
Unauthorized Personal Charges to
Officer/Director Advances Credit Card Total
<S> <C> <C> <C>
Irvine R. Spurlock $ 73,075.86 $ 8,176.03 $ 81,251.89
H. Norman Spurlock, Jr. $112,401.78 $154,779.37 $267,181.15
</TABLE>
Advances and loans to Harold N. Spurlock, Sr. and Irvine Spurlock were also
evaluated. Nothing was noted that required additional investigation. Cherry,
Bekaert found no evidence that either Mr. Sumpter or Harold Spurlock or any
corporate officer or director other than Norman Spurlock, Irvine Spurlock or
Warren Beam was involved in any misuse of the Company's funds.
The SLC Supplement reported that Cherry, Bekaert's investigation had
revealed that the diversion of corporate funds was concealed by the
falsification of records and collusion and that the discovery of such diversion
by the Company's auditors and management would have been difficult. Further, the
SLC Supplement reported that the unauthorized advances to Norman Spurlock were
hidden by false workpapers prepared by Mr. Beam and furnished to Scheifley, as
well as the collusion of Norman Spurlock and Mr. Beam. Pursuant to Cherry,
Bekaert's investigation, these workpapers
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<PAGE>
presented only those loans to officers that had been approved by the Board of
Directors, together with a complex series of entries indicating that such loans
were being repaid, when, in fact, they were not.
According to the SLC Supplement, with respect to the personal charges
on the Company's credit card, Norman Spurlock was the officer who approved
travel and entertainment expenses for all employees. Cherry, Bekaert discovered
that these charges were allocated to various expense accounts in different cost
centers, at Norman Spurlock's direction, by Catharine Spurlock, who issued the
checks for approved expenses. Cherry, Bekaert believes that Catharine Spurlock
did not see the details of the credit card bills, which were allocated over many
general ledger accounts. Mr. Beam was the individual ultimately responsible for
posting these expenses. Based on Cherry, Bekaert's investigation, the Special
Litigation Committee could not confirm whether or not Mr. Beam was aware of
Norman Spurlock's credit card abuse, but it appeared that the combination of the
amounts involved and the wide array of ledger accounts should have led to Mr.
Beam's discovery of these abuses. According to the SLC Supplement, Mr. Beam
colluded with Norman Spurlock in the diversion of corporate funds, but there was
no indication that Mr. Beam personally received any such funds.
Furthermore, the SLC Supplement concluded, based on Cherry, Bekaert's
investigation, that Irvine Spurlock diverted corporate funds by having the
Company purchase boat motors and charging the amounts to another capital item of
the Company (forklifts). Catharine Spurlock issued two of the three checks
involved, totaling $25,000. While the Special Litigation Committee found
indications that she knew what the checks were for, as the payee was not a
vendor of the Company, Cherry, Bekaert found no evidence of any further
wrongdoing by Catharine Spurlock. Ms. Spurlock was relieved of any check writing
and related financial authority, and is being reassigned from the Company's
corporate offices to a non-financial administrative assistant position in
Spurlock Adhesives' manufacturing plant, located in Waverly, Virginia. According
to the SLC Supplement, the personal charges to the Company's credit card by
Irvine Spurlock, amounting to approximately $8,200, were in numerous travel and
entertainment accounts.
Restitution by Officers and Directors
Upon disclosing on February 8, 1998 the unauthorized advances paid to
him, Irvine Spurlock paid the Company $73,075.86 as restitution. By March 18,
1998, Irvine Spurlock had paid $28,867.83 as additional restitution for the
$8,176.03 in personal charges to the Company's credit card, and interest at the
Company's borrowing rate accrued on the unauthorized advances and personal
charges. Irvine Spurlock also provided an additional $1,000 to help defray a
portion of the estimated legal expenses incurred by the Company.
The Special Litigation Committee was informed, however, that Norman
Spurlock probably was financially incapable of making immediate full
restitution. In a settlement between the Company and Norman Spurlock, dated
April 8, 1998, Norman Spurlock agreed to restitution of $385,000, $10,000 of
which has been repaid to Spurlock Adhesives. As a part of such settlement,
Spurlock Family Partnership, which holds the shares of the Company's common
stock owned by Harold, Irvine and Norman Spurlock, has delivered a promissory
note for $375,000, approximately $50,000 of which represents legal and auditing
costs associated with the investigation. Payments on the promissory note of
interest only are due monthly, at 9% per annum, for three years with a balloon
payment for the full amount at the end of the three years. The promissory note
is secured by 2,325,000 unencumbered shares of common stock of the Company held
by the Partnership and is personally guaranteed by Harold Spurlock. Norman
Spurlock has also confessed judgment for $375,000 docketed in the Circuit Court
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<PAGE>
of Sussex County, Virginia, which, under the terms of the settlement, will not
be enforced or domesticated in other jurisdictions by Spurlock Adhesives so long
as the promissory note is paid as agreed.
In response to the events described above, the Audit Committee and the
Company have taken immediate action to strengthen the Company's internal
accounting controls. Immediately following the discovery of the diversion of
corporate funds, the Company obtained the resignations of the two officers
(Norman Spurlock and Warren Beam) and the two directors (Norman Spurlock and
Irvine Spurlock) involved in such diversion. In addition, all expense reports,
including both reimbursements for expenses and employee advances of salary, were
submitted to Mr. Sumpter for approval. Furthermore, the Company has prepared and
implemented formal procedures with respect to the review and approval of travel
and related expense reimbursement requests. Specifically, all such requests are
now forwarded to Lawrence C. Birkholz, the Company's Controller, for review and
then to Mr. Sumpter for approval. In addition, no advances may be made to any
officers of the Company without satisfactory business justification. Finally,
the Company has changed and limited the signatories on its checking accounts.
Supplemental Report of Special Litigation Committee
On April 13, 1998, the Special Litigation Committee filed with the
District Court a supplement to the report that it had filed in October 1997. The
SLC Supplement presented to the District Court the conclusions of the Special
Litigation Committee as to whether or not maintenance of the shareholders'
derivative suit is in the best interests of the Company in light of the events
described above. First, the Committee stated that the SLC Supplement addressed
only Claim Three of the plaintiffs' complaint, which generally alleged
unauthorized loans to directors and officers. The Committee reiterated its
conclusions and recommendations regarding all claims other than Claim Three
stated in its original report, i.e., that pursuit of such claims would not be in
the best interests of the shareholders of the Company.
Second, the Special Litigation Committee concluded that pursuit of
Claim Three was not in the best interests of the Company given that (i) the
Company has received restitution from Irvine Spurlock and a legally binding
restitution agreement from Norman Spurlock, (ii) the Company immediately
implemented major changes in management, including the resignations of two
officers (Norman Spurlock and Warren Beam) and two directors (Norman Spurlock
and Irvine Spurlock) involved in the diversion of corporate funds, and (iii) the
Company has implemented changes in internal controls to guard against future
diversion of corporate funds. The Special Litigation Committee further
identified certain risks to the Company if the shareholders' derivative suit
were maintained. As a small company with limited resources, the Company is
subject to a high level of scrutiny by, for example, prospective business
partners and lenders and could experience loss of corporate opportunities. In
addition to these risks identified by the Special Litigation Committee,
management believes that continuation of the lawsuit would result in the
Company's incurrence of additional legal and related expenses, which could
adversely affect the profitability of the Company, and would provide
distractions to management's day-to-day operations of the Company.
Restatement of Financial Statements
As indicated above, certain of the Company's accounting records, and
the records of its predecessor companies, had been falsified commencing as early
as 1992. Accordingly, the Company's financial statements for the fiscal year
ended December 31, 1996, as presented herein, have been restated to reflect the
correction of these fraudulent acts. The restatement primarily involves the
reclassification of expenses, with limited impact on previously reported
earnings. As disclosed in the restatement, net
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<PAGE>
income was previously reported to be $1,467,019, or $0.22 per share, for the
year ended December 31, 1996, and is now restated to be $1,493,675, or $0.22 per
share, for the year ended December 31, 1996. For additional information
regarding the fraudulent accounting entries, reference is made to Note 2 of the
Notes to Consolidated Financial Statements in Item 8 below and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7.
PART II
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto.
The selected consolidated financial information presented below for,
and as of the end of, each of the years in the five-year period ended December
31, 1996, is derived from the consolidated financial statements of Spurlock
Industries. The financial statements as of December 31, 1996, as restated, and
for the five years ended December 31, 1996, have been audited by Winter,
Schiefley & Associates, P.C., independent auditors.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1996 1995 (2) 1994 1993 1992(1)
---- -------- ---- ---- -------
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net Sales............................................ $28,643,415 $33,243,677 $ 30,512,704 $23,475,249 $9,032,153
Cost of sales........................................ 21,129,265 26,092,053 26,269,016 20,268,532 8,031,692
Gross profit......................................... 7,514,150 7,151,624 4,243,688 3,206,717 1,000,461
Selling, general and administrative expenses......... 4,414,422 3,903,371 3,456,356 3,808,775 1,725,337
--------- --------- --------- --------- ---------
Income (Loss) from operations........................ 3,099,728 3,248,253 787,332 (602,058) (724,876)
Other income and expenses
Interest income...................................... 83,376 12,007 2,513 12,849 3,649
Interest expense..................................... (667,942) (663,662) (828,261) (668,670) (127,978)
--------- --------- --------- --------- ---------
Income (Loss) from continuing operations............. 2,515,162 2,596,598 (38,416) (1,685,387) (1,061,205)
Provision for income taxes........................... 1,021,487 115,600 - - -
--------- ---------- --------- --------- ---------
Net Income (Loss).................................... 1,493,675 2,480,998 (38,416) (1,685,387) (1,061,205)
========= ========== ======= =========== ===========
Net Income (Loss) per common share:
From continuing operations........................ $0.22 $0.37 ($0.01) ($0.42) ($0.30)
----- ---------- -------- ----------- -----------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992(1)
---- ---- ---- ---- -------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Current assets....................................... $2,288,914 $3,099,414 $3,715,917 $1,748,663 $1,857,682
Current liabilities.................................. 4,388,860 5,330,308 8,133,204 5,978,068 5,070,012
Total assets......................................... 12,270,407 9,342,968 9,996,870 8,305,184 8,190,056
Long-term debt....................................... 3,402,621 983,652 1,354,556 1,779,592 427,433
Stockholders' equity(3).............................. 4,292,783 2,919,108 509,110 547,524 2,082,911
Number of common shareholders........................ 242 249 245 240 240
Weighted average number of common shares
outstanding.......................................
6,711,733 6,717,667 4,266,066 3,999,566 3,519,369
Cash dividends declared ............................. 0 0 0 0 0
Book value per share (4)............................. $0.64 $0.43 $0.08 $0.08 $0.34
</TABLE>
(1) The 1992 increases in sales, assets and equity reflect the acquisition of
Spurlock Adhesives on August 5, 1992.
(2) Assumes the conversion of 1,200,000 preferred shares into 2,400,000 common
shares, which conversion was subsequently effected on January 5, 1996.
Absent the pro forma addition of 2,400,000 common shares, the historical
number of weighted average shares outstanding for the fiscal year ended
December 31, 1995 was 4,317,667.
(3) For the four fiscal years ended December 31, 1995, stockholders equity
included 1,200,000 shares of preferred stock, par value $2 per share,
totaling $2,400,000.
(4) Assuming the conversion of 1,200,000 preferred shares into 2,400,000 common
shares, which conversion was subsequently effected on January 5, 1996, the
weighted average shares outstanding for the five years ending December 31,
1996 were: 6,711,733, 6,717,667, 6,626,066, 6,399,566 and 4,519,369.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis provides information which
management believes is relevant to understanding Spurlock Industries' operations
and financial condition. This discussion should be read in conjunction with the
financial statements and accompanying notes. The financial statements of the
Company have been prepared in conformity with generally accepted accounting
principles.
Accounting Irregularities and Restatement of Financial Statements
As described in "Reasons for Amendment" at the beginning of this Report
and Note 2 of the Notes to Consolidated Financial Statements, in January 1998,
the Company discovered that financial information regarding payments on a note
receivable from H. Norman Spurlock, Jr., an executive officer and director of
the Company, and the payment of travel and related expenses of H. Norman
Spurlock, Jr. had been falsified to intentionally mislead management concerning
their propriety. Subsequent to this discovery, another executive officer and
director, Irvine R. Spurlock, admitted to the payment of personal expenses by
the Company recorded as equipment and to personal use of the Company's credit
card. As reported in the SLC Supplement, an independent investigation by the
Special Litigation Committee confirmed that certain of the above acts had
transpired through the collusion of another officer of the Company, Warren E.
Beam. Accounting records of the Company, and its predecessor companies, were
falsified commencing as early as 1992. Since learning of the fraudulent
accounting entries, the Company has taken actions to achieve restitution of the
diverted funds and to prevent a recurrence of these situations.
The Company's financial statements for the fiscal year ended December
31, 1996 have been restated to reflect the correction of the fraudulent
accounting entries. Prior to 1996, the fraudulent
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<PAGE>
accounting entries were confined to reclassification within Selling and General
Administrative Expenses. As a result, there was no material effect on the net
income of the Company for those years. The personal expenses recorded as
equipment were reclassified as a Note Receivable - Officer effective January
1996. This treatment resulted from the restitution made by Irvine Spurlock
immediately upon disclosure. Income aggregating $11,172 resulting from accrued
interest receivable on the Note Receivable - Officer and the reversal of
depreciation expense for the personal expenses recorded originally as equipment
was not deemed material. After restatement, the pretax effect of the total
misappropriation of assets amounted to $26,656 in additional income resulting
from accrued interest receivable on the Note Receivable-Officer and the reversal
of depreciation expense for the personal expenses recorded originally as
equipment.
The information in the discussion that follows is presented after
restatement of the financial statements.
General
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 1997 and beyond to
differ materially from those expressed in any forward-looking statements made
herein. For a further discussion of such factors and forward-looking statements,
please see "Forward-Looking and Cautionary Statements" below.
Overview. The Company's operating results have shown substantial
improvement in the fiscal years ended December 31, 1996, 1995 and 1994. The
Company achieved nearly break-even results in 1994, reported record profits of
$2,480,998 in 1995 and reported profits of $1,493,675 in 1996. Management
attributes this improvement to the refocusing of the Company on its core
resin/adhesives business and the termination of non-profitable gas generation
operations, the implementation of a cost reduction program in early 1994,
increased control over raw materials prices and improved product margins. The
lower net profit in 1996 is due mainly to the effect of income taxes, as loss
carryforwards were substantially utilized in 1995.
Discontinued Operations. In the first quarter of 1994, the Board of
Directors of the Company decided to discontinue its Colorado gas recovery
engineering and consulting business and to close its Denver office. Such actions
were completed by the end of the year. Operating results for 1995 and 1996
reflect only those of the Company's primary subsidiary, Spurlock Adhesives.
Dependence on Construction and Related Industries. Demand for Spurlock
Industries' products and the Company's financial performance are closely tied to
the fortunes of the construction, forest products and related industries. See
"Item 1. Business - Seasonality and Backlog." Accordingly, the recent period of
relatively low interest rates (including mortgage loan rates) and the stability
of the housing, construction and related industries, have favorably impacted the
Company's recent financial performance.
Gross Margins and Commodity Prices. Raw materials costs comprised
approximately 57%, 62% and 68% of net sales in 1996, 1995, and 1994,
respectively. Raw materials are by far the largest component of cost of goods
sold. Therefore, the Company's operating performance is sensitive to price
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<PAGE>
movements in its basic raw materials, particularly methanol and urea. Management
strives to ameliorate these commodity risks by maintaining diverse supply
relationships and by closely matching increases and decreases in product prices
to increases and decreases in raw material costs. During the first part of 1996,
the Company was able to pass on increases or decreases in raw material prices,
which was the primary reason for the improved margins in fiscal 1996. Margins
were squeezed during the last quarter of that year due to competition and excess
capacity in certain markets. See "Item 1. Business - Raw Materials and
Suppliers."
Freight Costs. A substantial portion of Spurlock Industries' products
are priced on an "as delivered basis." For 1996, 1995, and 1994, freight costs
relating to delivery of the Company's products comprised approximately 3.9%,
4.2%, and 4.5%, respectively, of net sales. Accordingly, the Company's operating
performance is sensitive to movements in freight costs. In a June 1994
cost-reduction move, the Company discontinued the majority of its own trucking
operations and began contracting with third parties for most of these services.
As a result, combined savings of approximately $117,000 or 0.4% of sales were
achieved in the salary and wages component of cost of goods sold and in
insurance expenses in 1995. The further decrease of $276,028 in 1996 is
attributable to changes in customer processes that decreased shipments, as well
as one customer changing terms to freight collect.
New Credit Facilities. In July 1996, in order to reduce interest costs
and increase credit availability, the Company terminated a $3,500,000 line of
credit with its primary working capital lender and obtained a $3,500,000 line of
credit with a new lender. Such new credit facility is secured by accounts
receivable and inventory, among other assets, and provides for credit
availability based upon the level of accounts receivable and inventory. In
conjunction with this new line of credit, the Company borrowed an additional
$3,600,000 under a term loan to purchase the formerly leased formaldehyde plant,
which term loan is secured by all assets.
Purchase of Waverly Formaldehyde Plant. On December 19, 1991, Spurlock
Adhesives entered into a Formaldehyde Plant Lease with D. B. Western, Inc. of
Northbend, Oregon, whereby D. B. Western, Inc. agreed to construct a fully
operational formaldehyde plant at Waverly, Virginia and lease the facility to
Spurlock Adhesives for ten (10) years at $55,000 per month, commencing at such
time as the plant became mechanically complete and ready for startup. The lease
commenced in February, 1993. Because of a dispute relating to the operational
performance of the plant, during the fourth quarter of 1993, the Company begin
deferring certain payments on the plant lease. The amounts deferred through the
fiscal years ended December 31, 1995 and 1994 were $510,070 and $480,000
respectively. Beginning in August 1994, the Company paid for plant usage at the
rate of $15,000 per week, or approximately $5,000 per month more than the lease
rate as part of an informal accommodation of such dispute.
In July 1996, the Company consummated an agreement with D. B. Western,
Inc. whereby the Company purchased the plant, terminated the lease and settled
all claims with respect to the facility for $3,675,000.
Compliance with Environmental Regulations. Environmental costs charged
to operations aggregated $202,076, $277,349 and $261,932 for the years ended
December 31, 1996, 1995 and 1994, respectively. As a percentage of net sales,
such expenditures totaled .71%, .83% and .86%, respectively over such three
years. In all three years, over 80% of such expenditures related to testing at
the Company's manufacturing facilities to ensure compliance with environmental
laws and regulations. Other expenditures included obtaining required permits,
purchase and maintenance of safety equipment, trash and waste removal and
training. All such expenses are viewed by the Company as customary,
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<PAGE>
recurring costs of doing business in its industry. No capital expenditures for
environmental control facilities are anticipated for 1997 other than $860,000
for remediation in connection with its planned acquisition of property and
industrial facilities near Albany, NY, as described under "Liquidity and Capital
Resources" below.
Capacity Utilization. In 1996, the Waverly, Virginia formaldehyde plant
ran at approximately 83% of capacity as compared to 85% in 1995. The decrease
was due to lower volumes of resin being produced. The Malvern, Arkansas
formaldehyde plant ran at approximately 84% in 1996 as compared to 90% in 1995.
The decrease was due to excess capacity in that market area. In 1996, resin
capacity utilization at the Waverly facility was 55% compared to 60% in 1995.
This change was due to a customer's order patterns and process changes to better
utilize the products. The Malvern facility maintained its resin capacity
utilization at 65% for 1996 and 1995. In the future, management intends to
continue to adjust the Company's production and product mix to meet market
conditions in order to maximize profits.
In the fourth quarter of 1996, the Company entered a contract of sale
with Niagara Mohawk Power Company for the purchase of certain real property and
facilities near Albany, New York, to construct thereon certain manufacturing
facilities for the production of formaldehyde and resins. The total estimated
cost of such proposed New York facility would approximate $8,300,000, including
environmental remediation costs estimated by an outside consultant at
approximately $860,000. Management believes that financing for the project,
adequate in amount and on reasonable terms, can be obtained by the Company, via
a conventional loan or funding from industrial revenue bonds.
The Company is unable to predict at this time, when and if, the
necessary permits for the New York project can be obtained. It has, and
continues to, examine alternative sites for the proposed project.
Conversion of Convertible Preferred Stock. In January, 1996, the holder
of 1,200,000 convertible preferred shares, Harold N. Spurlock, Chairman,
President and Chief Executive Officer of the Company, converted these shares
pursuant to their terms into 2,400,000 shares of the Company's common stock. For
the fiscal years ended December 31, 1995 and 1994, the Company had outstanding
1,200,000 shares of convertible preferred stock, $2.00 par value per share,
aggregating $2,400,000. In "Results of Operations" below, earnings per share
ratios assume the conversion of all such preferred shares except in 1994 when
the effect was anti-dilutive.
Inflation. Although Spurlock Industries' operations are influenced by
general economic trends, the Company does not believe that inflation had a
material impact on its operations during the three-year period ended December
31, 1996.
Results of Operations
Fiscal 1996 Compared to 1995. Spurlock Industries' net sales for the
year ended December 31, 1996 were $28,643,415, a decrease of 13.8% compared to
$33,243,677 in 1995. This decrease resulted from lower average selling prices on
all of Spurlock Adhesives' resin and formaldehyde products due to: (i) lower
prices for raw materials, and (ii) several customers' decreased demand for the
Company's products due to a change to a more efficient manufacturing process.
Shipments of resin/adhesive products - which comprised approximately 67% of all
1996 shipments - declined by 4.3% from 1995. All sales in 1996 were generated by
Spurlock Adhesives.
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<PAGE>
Cost of goods sold for 1996 totaled $21,129,265 or 73.8% of net sales
versus $26,092,053 or 78.5% in 1995. The decrease was mainly in raw material
costs which represented 57.1% of net sales in 1996 versus 62.36% in 1995.
Management was successful in holding most categories of other costs of goods
sold to 1995 levels. Accordingly, the gross margin improved in 1996 to 26.2%
from 21.5% in 1995, on gross profit of $7,514,150 versus $7,151,624 in 1995.
Selling, general and administrative expenses totaled $4,414,422 or
15.41% of net sales in 1996 as compared to $3,903,371 or 11.74% of sales in
1995. The dollar increase in this category in 1996 resulted from salary and wage
increases to middle management and increased professional fees associated with
the merger that took place July 26, 1996. The lower volume of net sales
significantly contributed to the increase as a percentage of net sales.
Interest expense in 1996, although increasing as a percentage of net
sales to 2.33% from 2.00% in 1995, increased only .6% in absolute terms to
$667,942 from $663,662 in 1995. This increase resulted from the term loan
borrowing for the purchase of the leased formaldehyde plant and lower interest
rates on the line of credit.
Pretax earnings in 1996 of $2,515,162 substantially mirrored the
$2,596,598 reported in 1995, despite lower sales. This was due to an improvement
in the pretax margin, which was 8.7% in 1996 versus 7.8% in 1995.
The provision for income taxes totaled $1,021,487 for 1996 as compared
to $115,600 for 1995. The provision for income tax in 1996 consisted of $149,415
in state income tax and $846,091 in federal income tax, as compared to $104,000
and $11,400, respectively, for 1995. The 1995 figures are net of loss
carryforwards aggregating $801,532. Absent such carryforwards in 1996, net
earnings after taxes for 1996 of $1,493,675 or $.22 per share of common stock
(on a fully diluted basis) declined from $2,480,998 or $.37 per share in 1995.
Fiscal 1995 Compared to 1994. For the year ended December 31, 1995, the
Company reported net sales of $33,243,677, an increase of 8.95% compared to net
sales of $30,512,704 for 1994. All sales related to sales of resin, formaldehyde
and fertilizer materials by the Company's wholly owed subsidiary, Spurlock
Adhesives. Shipments of resin/adhesive products - which comprised 68.3% of all
shipments in 1995 - declined 18.1% from 1994. This drop in volume - due to the
concerted effort by management to adjust the product sales mix to take full
advantage of superior margins realizable in the formaldehyde markets - was
effectively offset by a 74.8% increase in formaldehyde shipments owing largely
to sales to a new customer procured in 1994. Overall product shipments dropped
approximately 3.3% from 1994. Accordingly, the increase in net sales for 1995
resulted from increased average selling prices for the entire year for Spurlock
Industries' products.
Cost of goods sold totaled $26,092,053 or 78.49% of net sales, compared
to $26,269,016 or 86.09% of net sales for 1994. The decrease in costs of goods
sold as a percentage of net sales resulted from the Company's success in holding
both raw material costs and other costs of goods sold (such as freight and
energy costs) to 1994 levels while simultaneously increasing net sales. The
Company's gross profit and gross margin improved substantially in 1995 to
$7,151,624 and 21.51%, respectively, from $4,243,688 and 13.91%, respectively,
in 1994. The improved gross margin was primarily the result of improved mark-ups
in selling prices, due in large part to the success of the Company in passing
raw material costs along to its customers.
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<PAGE>
Selling, general and administrative expenses for 1995 were $3,903,371
or 11.74% of net sales, compared to $3,456,356 or 11.33% of net sales for the
same period in 1994. The increase in operating expenses resulted primarily from
an increase of $536,568 or 35.1% in human resources expense, owing largely to
increases in salaries for key executive and middle management personnel. The
salaries of such personnel had been frozen for the previous three years. (In
late January and early February 1998, however, the Company discovered that two
of its officers and directors had diverted corporate funds for personal use and
that, according to the Special Litigation Committee, a third officer had
colluded in certain of such diversions. For further information with respect to
these defalcations, see "Reasons for Amendment" above.)
Interest expense in 1995 totaled $663,662 or 2.00% of net sales, versus
$828,261 or 2.71% of net sales in 1994. The decrease was due to a reduction in
average outstandings of interest accruing debt of approximately $250,000 or 6.8%
from the prior year, and reduced borrowing costs attributable to the more
attractive rates offered under the previous working capital facility entered
into in February 1995.
The provisions for income taxes totaled $115,600 for 1995, consisting
of $104,000 in state income tax and $11,600 in federal income tax, the latter of
which largely resulted from to the utilization of loss carry-forwards in the
amount of $801,532. Due to a net loss, no federal or state income taxes were
accrued for 1994. Net earnings after taxes for 1995 increased dramatically over
the prior year, totaling $2,480,998 or $.37 per share of common stock (on a
fully diluted basis) compared to a loss of ($38,416) or ($.01) per share in
1994.
Liquidity and Capital Resources
General. In fiscal 1996, 1995 and 1994, the Company relied heavily on
its institutional working capital lenders and its trade creditors to finance its
working capital requirements. The Company traditionally has operated, and
continues to operate, with a negative working capital position, as Spurlock
Industries takes advantage of supplier payment terms which exceed those granted
to the Company's customers. Although the Company continued to rely on these
funds sources in 1996 and 1995, strong earnings and cash flow allowed it to
substantially reduce its dependence on accounts payable and to strengthen its
working capital and cash positions.
Fiscal 1996 Compared to 1995. In 1996, Spurlock Industries reported a
cash flow from net income and depreciation and amortization of $2,244,732
compared to the $3,181,238 reported in 1995. This cash flow, supplemented by
reductions in receivables and inventory of $420,306 and $54,133, respectively,
permitted the Company to reduce accounts payable by $380,584, fund fixed asset
additions of $1,184,369 and reduce notes and loans by $1,351,511. Working
capital increased $130,948 or approximately 5.9% to ($2,099,946) from
($2,230,894) in 1995.
As described above, in July 1996 the Company entered into a new
$3,500,000 revolving credit facility with a new lender, which facility matures
in July 1999. On December 31, 1996, outstanding loans under the facility totaled
$1,420,801, which was the total amount available at such time based on levels of
accounts receivable and inventory on which borrowing availability is based.
Borrowings during the entire fiscal year averaged approximately $1,450,000. The
new credit facility provides the Company with an important source of liquidity
in addition to its cash account and cash generated from operations. Management
believes that cash generated from operations, together with amounts available
under the Company's revolving credit facility, will be sufficient to meet the
Company's anticipated working capital and liquidity requirements during 1997 and
1998.
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<PAGE>
In addition to borrowings under its revolving credit facility, the
Company had outstanding at year end 1996 debt totaling $4,431,711, including
current maturities of $1,029,090. Such debt extends through 2004, with current
maturities thereof dropping to $996,087 in 1998 and significantly thereafter. In
1995, debt totaled $1,977,242 with current maturities of $993,590. The increase
in total debt is attributable to the new borrowings to purchase the formerly
leased formaldehyde plant. The new long term facility described above initially
totaled $3,639,000, with $3,436,832 outstanding at year end.
The 1996 net earnings strengthened the Company's capital position, as
its retained earnings deficit was reduced by $1,493,675 from year end 1995, and
total equity increased 47.1% to $4,292,783 from $2,919,108 at year end 1995.
Because the equity increase outpaced the increase in total liabilities, the
ratio of total liabilities to total net worth, a measure of leverage, improved
to 1.87 at year end 1996 from 2.2 at year end 1995.
As described in "General - New York Facility" above, the Company has
plans to construct manufacturing facilities for the production of formaldehyde
and resins in the State of New York. The estimated cost of such proposed
facility would approximate $8,300,000, including environmental remediation costs
estimated by an outside consultant at approximately $860,000. Management
believes that financing for the project, adequate in amount and on reasonable
terms, can be obtained by the Company via a conventional loan or funding from
industrial revenue bonds.
The Company is unable to predict at this time, when and if, the
necessary permits for the New York project can be obtained. It has, and
continues to, examine alternative sites for the proposed project.
Fiscal 1995 Compared to 1994. In 1995, the Company reported a strong
cash flow from net income and depreciation and amortization of $3,181,238, an
improvement of $2,659,055 or 509% over the $522,183 reported in 1994. This
strong cash flow, supplemented by significant reductions in receivables and
inventory of $546,277 and $566,152, respectively, permitted the Company to
reduce accounts payable by $3,063,008, fund fixed asset additions of $425,769
and reduce notes and loans by $1,012,309. Working capital increased $2,186,393
or approximately 49% to ($2,230,894) from ($4,417,287) in 1994, as the Company
drastically reduced its level of payables, cut payment time to trade creditors
by approximately half and began paying within standard thirty (30) day terms.
Despite an increase in cash and trading securities of $373,767 to $450,751,
current assets actually fell by 16.6%. This drop was due in large part to the
lofty levels of product sales prices and accordingly trading assets at December
31, 1994. In addition, the Company was able to quicken collection of its
accounts receivable.
In February 1995 the Company entered into a $3,500,000 revolving credit
facility with a new lender. On December 31, 1995, outstanding loans under the
facility, which has now been replaced, totaled $1,329,096, leaving $109,000 in
unused loan availability at such time based on levels of accounts receivable and
inventory on which borrowing availability is based. Borrowings during the entire
fiscal year averaged approximately $1,600,000.
The 1995 revolving credit facility contained a number of financial and
restrictive covenants limiting, among other things, the redemption of capital
stock, the payment of dividends, the incurrence of additional indebtedness,
certain mergers and acquisitions, and the acquisition of fixed assets. During
1995, technical violations of certain such covenants resulted, for which the
Company received a waiver from the lender.
In addition to borrowings under its 1995 revolving credit facility, the
Company had outstanding at year end 1995 "notes payable-other" of $82,447 due in
1996, which represented the remaining
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<PAGE>
obligations under various private placement notes to investors. Principal
payments of $423,218 were made on such notes in 1995. The Company also had
$1,977,242 in long term debt at year end 1995, including current maturities of
$993,590. Approximately half of total long term debt consisted of notes payable
to two former vendors and suppliers.
Deferred rent increased to $510,070 from $480,000 at year end 1994, and
related to the lease for a formaldehyde plant located in Waverly, Virginia from
D.B. Western, which lease was then in dispute. Such dispute was settled and the
plant was purchased by the Company in July 1996. See "General - Purchase of
Waverly Formaldehyde Plant" above. Lease payments of $15,000 a week - which
approximated $5,000 per month more than the required monthly rental of $55,000
- -would have served to repay most of such deferred rent by the expiration of the
lease in February 2003. Such additional rental payments paid during 1995 would
have actually reduced deferred rent from the 1994 level to $360,000 but for the
addition to deferred rent of $120,000 relating to an account payable to D.B.
Western, Inc. for catalyst relating to the operation of the leased facility.
The strong 1995 net earnings strengthened the Company's capital
position, as its retained earnings deficit was reduced by $2,480,998 from year
end 1994, and total equity increased 473% to $2,919,108 from $509,110 at year
end 1994. Because of the equity increase and substantially reduced total
liabilities, the ratio of total liabilities to total net worth, a measure of
leverage, decreased significantly to 2.2 from 18.6 at year end 1994.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written
or oral forward-looking statements, including statements contained in the
Company's filings with the Securities and Exchange Commission in its reports to
shareholders. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company. Any such statement is qualified by reference to the following
cautionary statements.
The Company's formaldehyde and resin business is closely tied to the
construction and forest products industries, and is influenced by housing starts
and construction activity generally. The Company's operating performance is
sensitive to price movements in its basic raw materials, particularly methanol
and urea. The Company's operating performance is also sensitive to movements in
freight costs. The Company's raw materials, products and manufacturing processes
are subject to environmental laws and regulations and the costs associated
therewith. The availability of credit from institutional asset based lenders and
suppliers is very important to the Company. Developments in any of these areas,
which are more fully described elsewhere in Parts I and II hereof, each of which
is incorporated into this section by reference, could cause the Company's
results to differ materially from the results that have been or may be projected
by or on behalf of the Company. The Company cautions that the foregoing list of
important factors is not exclusive. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
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<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.
/s/ Winter, Scheifley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
January 17, 1997
March 13, 1998
with respect to Note 2
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<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 $4,305,767 and
$3,559,436 9,378,290 5,639,810
Other Assets:
Accounts and notes receivable
- officers 193,467 191,194
Investments 150,000 150,000
Other 259,736 262,550
------------- ------------
603,203 603,744
------------- ------------
Total assets $ 12,270,407 $ 9,342,968
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<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 7,977,624 6,423,860
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
6,573,639, and 4,325,066
shares issued and outstanding 4,808,814 2,528,814
Accumulated deficit (516,031) (2,009,706)
-------------- --------------
4,292,783 2,919,108
-------------- --------------
Total liabilities and
stockholders' equity $ 12,270,407 $ 9,342,968
============== ==============
</TABLE>
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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 4,414,422 3,903,371 3,456,356
----------- ----------- -----------
3,099,728 3,248,253 787,332
Other income and (expense):
Other income 83,376 12,007 2,513
Interest expense (667,942) (663,662) (828,261)
----------- ----------- -----------
(584,566) (651,655) (825,748)
Net income before income taxes 2,515,162 2,596,598 (38,416)
Provision for income taxes 1,021,487 115,600 -
----------- ----------- -----------
Net income (loss) $ 1,493,675 $2,480,998 $ (38,416)
=========== =========== ===========
Earnings per share $0.22 $0.37 $(0.01)
=========== =========== ===========
Weighted average shares outstanding 6,711,733 6,717,666 4,226,066
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<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) $ 1,493,675 $ 2,480,998 $ (38,416)
Adjustments to reconcile net income
(loss) to net cash:
Depreciation and amortization 751,057 700,240 560,599
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 420,306 473,202 (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) (2,187,581) 775,959
Increase in post retirement benefit liability 42,667
----------- ----------- -----------
Total adjustments 1,113,496 (704,767) 664,543
----------- ----------- -----------
Net cash provided by (used in)
operating activities 2,607,171 1,848,306 626,127
Investing activities:
Purchase of fixed assets (1,184,369) (352,694) (316,265)
Advances to officers (30,348) (136,733) -
Repayment of officer advances 30,000
----------- ----------- -----------
Net cash provided by (used in)
investing activities (1,184,717) (489,427) (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)
----------- ----------- -----------
Net cash provided by (used in)
financing activities (1,567,133) (1,113,037) (257,596)
Net increase in cash and cash equivalents (144,679) 173,767 52,266
Beginning cash 250,751 76,984 24,718
----------- ----------- -----------
Ending cash $ 106,072 $ 250,751 $ 76,984
=========== =========== ===========
</TABLE>
-22-
<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.
-23-
<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 (151,427) (120,000) - - -
Net income for the year - - - - 1,493,675
------------ ------------ ----------- ------------ ------------
Balance December 31, 1996 6,573,639 4,808,814 - - (516,031)
============ ============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-24-
<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.
-25-
<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.
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.
-26-
<PAGE>
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. Misappropriation of Assets and Restatement of Financial Statements
In January, 1998, the Company discovered that financial information regarding
payments on a note receivable from an executive officer and director of the
Company and the payment of travel and related expenses of this individual had
been falsified to intentionally mislead management concerning their propriety.
Subsequent to this discovery, another executive officer and director admitted
that expenses recorded as equipment and other expenses charged on the Company
credit card were personal in nature. An independent investigation confirmed that
these acts were conducted through apparent collusion with another officer of the
Company. Accounting records of the Company, and its predecessor companies, were
falsified commencing as early as 1992. After restatement, the pretax effect of
the overstatement of selling,
-27-
<PAGE>
general and administrative expenses related to the misappropriation amounted to
$15,484, and the understatement of interest income of $11,182, all of which is
deemed immaterial. Since learning of the misappropriation, the Company has taken
actions intended to prevent a recurrence of this situation
The Company's fiscal 1996 financial statements have been restated to reflect the
correction of the misappropriations. The effect of the restatement of fiscal
1996 results of operations is as follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1996
Previously
Reported Restated
<S> <C> <C>
Net Sales $28,643,415 $28,643,415
COGS 21,129,265 21,129,265
Gross Profit 7,514,150 7,514,150
SG&A Expenses 4,429,906 4,414,422
Income from Operations 3,084,244 3,099,728
Other Income 72,204 72,204
Other Expenses (667,942) (667,942)
Net Income before Tax Provision 2,488,506 2,515,162
Tax Provision 1,021,487 1,021,487
Net Income 1,467,019 1,493,675
Net Income Per Share 0.22 0.22
</TABLE>
The effect of the restatement on the December 31, 1996 Consolidated Balance
Sheet resulted in a decrease of $73,075 in Fixed Assets, with a corresponding
increase to Notes Receivable, and an increase of $26,656 in Retained Earnings
compared to December 31, 1996 amounts previously reported.
Note 3. 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 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 4. 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.
-28-
<PAGE>
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 5. Property and Equipment.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $69,233 $69,233
Buildings 547,041 543,601
Machinery and equipment 12,326,040 8,242,573
Construction in progress 305,913 107,133
Vehicles 285,189 132,437
Furniture and fixtures 150,640 104,269
--------------- ---------------
13,684,056 9,199,246
Accumulated depreciation and amortization 4,305,767 3,559,436
--------------- ---------------
$ 9,358,289 $ 5,639,810
=============== ===============
</TABLE>
Depreciation charged to operations was $751,057, $700,240, and $560,599 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Substantially all of the Company's fixed assets secure debt described in Note 8.
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 6. Accounts and Notes Receivable - Officers
Accounts and notes receivable officers consisted of the following at December
31,
1996 1995
Notes receivables, at various rates $232,062 $231,714
Less: current portion 38,595 40,520
----------- -----------
$193,467 $191,194
=========== ===========
-29-
<PAGE>
Note 7. 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 8. Long-term Debt
Long-term debt consists of the following at December 31,
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note payable bank, payable in monthly
installments of $8,621 plus interest
at 10%, repaid in July 1996 - $ 206,897
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
-30-
<PAGE>
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
============= =============
</TABLE>
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 9. 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 13).
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
-31-
<PAGE>
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.
On February 9, 1998, the Company was informed by an executive officer and
director of the Company of his unauthorized uses of Company funds. There were
personal expenses in the amount of $8,176 that were charged on the Company's
credit card, and falsely recorded in various general ledger expense accounts.
There were also personal equipment purchases with Company checks, which were
recorded on the fixed asset listing for $73,075. These amounts have been
reclassified to Notes Receivable - Officer, and interest has been accrued using
the Company's cost of funds through December 31, 1996. The balance reported on
the fiscal 1996 financial statements is $92,423.
Note 10. 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 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 11. 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.
-32-
<PAGE>
Deferred tax assets and liabilities at December 31, 1996 and 1995 resulted from
the following:
1996 1995
Deferred Tax Assets:
Net operating loss $ - $ 98,300
Postretirement benefit liability 14,507 -
Deferred Tax Liabilities:
Accelerated depreciation 157,983 109,900
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 12. 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.
-33-
<PAGE>
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 50,000 in 1998, 50,000 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.
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:
-34-
<PAGE>
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 9 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 71,427 shares of common stock of Air Resources from a former officer as
described in Note 14.
Note 13. 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:
<TABLE>
<CAPTION>
Customer Sales/% Receivable at 12/31
<S> <C> <C>
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
</TABLE>
Note 14. 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
-35-
<PAGE>
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.
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 71,427 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 15. 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.
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<PAGE>
PART III
Item 11. Executive Compensation
Executive Compensation. The following table summarizes the compensation
paid or accrued to the Chief Executive Officer of the Company and its other most
highly paid executive officers (the "Named Executive Officers") for the last
fiscal year in all capacities in which they served the Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Award
------------------- -----
Securities
Name and Other Annual Underlying
Principal Position Year Salary Bonus Compensation Options
------------------ ---- ------ ----- ------------ -------
<S> <C> <C> <C> <C> <C>
Irvine R. Spurlock, Chairman of the 1996 $179,880 -- (1) --
Board, President and Chief 1995 $186,725 $ 9,060(2) (1) 50,000(3)
Executive Officer
Harold N. Spurlock, Vice President 1996 $170,130 50,000 (1) --
of Spurlock Adhesives 1995 $194,500 -- (1) --
Phillip S. Sumpter, Executive Vice 1996 $141,942 -- (1) 50,000(3)
President and Chief Financial 1995 -- -- -- --
Officer(4)
H. Norman Spurlock, Jr. 1996 $178,835 -- (1) --
Executive Vice President and 1995 $181,966 9,060(2) (1) 50,000(3)
Secretary
</TABLE>
- ------------------
(1) The value of perquisites and other personal benefits did not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus shown in the
table.
(2) Award of 50,000 shares of Air Resources' common stock, the per share fair
market value of which was $.1812 based on the average of the average bid
and asked prices on the National Daily Quotation Sheets on the date of
award.
(3) Represents shares of Air Resources' common stock. As of July 26, 1996,
these options were automatically converted to options to purchase shares
of Common Stock.
(4) Represents compensation for Mr. Sumpter's employment with the Company
beginning April 1, 1996.
The executive officers of the Company participate in other benefit
plans provided to all full-time employees of the Company who meet eligibility
requirements, including group life insurance, hospitalization and major medical
insurance.
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<PAGE>
(Unauthorized Advances to Former Officers and Director. In early
January and early February 1998, the Company discovered that two of its officers
and directors, Irvine R. Spurlock and H. Norman Spurlock, Jr., had diverted
corporate funds for personal use and that, according to the Company's Special
Litigation Committee, a third officer, Warren E. Beam, had colluded in the
diversions by Norman Spurlock. For further information on the diversions of
corporate funds and the subsequent resignations of these officers and directors,
see "Reasons for Amendment" above.)
Option Grants, Exercises and Holdings. The following table sets forth
information with respect to the grant of options made in 1996 to executive
officers of the Company named in the Summary Compensation Table.
Stock Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
----------------- Potential Realizable
Value at Assumed
Percent of Annual Rates of
Number of Total Stock Price
Securities Options Exercise Appreciation for
Underlying Granted to or Base Option Term
Options Employees Price Per Expiration -----------
Name Granted in 1996 Share Date 5% 10%
- ---- ------- ------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Phillip S. Sumpter 50,000 66% $.55 July 11, 2006 $0 $0
</TABLE>
No options were exercised by any of the Named Executive Officers of the
Company during the fiscal year ended December 31, 1996. The following table sets
forth information with respect to unexercised options held by them as of the end
of the fiscal year:
<TABLE>
<CAPTION>
Fiscal Year End Options
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Fiscal Year End at Fiscal Year End (1)
--------------- ----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Irvine R. Spurlock 50,000 _ $0 _
Phillip S. Sumpter 50,000 _ $0 _
H. Norman Spurlock, Jr. 50,000 _ $0 _
</TABLE>
- ------------
(1) The value of unexercised in-the-money options at fiscal year end was
calculated by determining the difference between the fair market value of
the Company's Common Stock underlying the options on December 31, 1996 per
share and the exercise price of the options ($0.50 for Messrs. Spurlock
and Spurlock and $0.55 for Mr. Sumpter).
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<PAGE>
Employment Agreements. Pursuant to an Agreement and Plan of
Reorganization dated April 22, 1992 (the "Spurlock Adhesives Agreement"), Air
Resources, among other things, acquired all of the capital stock of Spurlock
Adhesives from Harold Spurlock. The Spurlock Adhesives Agreement required Air
Resources to purchase all of Harold Spurlock's shares of Air Resources' common
stock at his request upon the termination of his employment by Air Resources.
The per share purchase price set by the Spurlock Adhesives Agreement was the
highest market bid price at which such shares have traded in the preceding
twelve months. The Spurlock Adhesives Agreement also provided for Air Resources
to purchase all of Harold Spurlock's shares of Air Resources' common stock upon
his death at the request of his heirs upon mutually agreeable terms. These
provisions of the Spurlock Adhesives Agreement relating to Air Resources'
obligations to purchase Harold Spurlock's shares were terminated by mutual
agreement effective April 15, 1996, without compensation to Harold Spurlock.
On August 21, 1996, Harold Spurlock and the Company entered into a
certain Employment and Retirement Benefit Agreement (the "Employment Agreement")
which provides, among other things, for Harold Spurlock's employment and certain
retirement benefits. Pursuant to the Employment Agreement, Harold Spurlock has
agreed to serve as vice president for product development, and as a member of
the Company's Board of Directors, until August 31, 1999.
For his services, Harold Spurlock will receive under the Employment
Agreement a base salary of $180,000 per year, reimbursement of expenses in
accordance with the general policies of Spurlock Adhesives, and such additional
or special compensation as the Board of Directors of Spurlock Adhesives may
determine from time to time. Harold Spurlock will not receive any additional
compensation for service on the Company's Board of Directors.
The Employment Agreement provides that Harold Spurlock's employment
with Spurlock Adhesives will be terminated by reason of his death or permanent
disability, by Harold Spurlock upon 30 days notice in writing, or by Spurlock
Adhesives with cause. "Cause" is deemed to exist under the Employment Agreement
if Harold Spurlock (i) willfully refuses to perform services thereunder, (ii)
materially breaches the provisions thereof relating to trade secrets, and
confidential information, retention of documents, and noncompetition, (iii)
engages in acts of dishonesty or fraud, or (iv) engages in other serious
misconduct. If Harold Spurlock's employment with Spurlock Adhesives terminates
for cause, or due to death, permanent disability or voluntary termination, any
portion of his fixed salary, which is earned but unpaid as of the date of such
termination shall be paid to him, or his designated beneficiary in the event of
death.
The Employment Agreement provides for a retirement benefit equal to
$100,000 per year to be received by Harold Spurlock upon his retirement from
employment at or after August 31, 1999, or permanent disability prior to such
date, for a period of five years. In the event of Harold Spurlock's death prior
to or after such date, Harold Spurlock's wife would receive such benefit during
such five year period. Any benefit payable to Harold Spurlock's wife would cease
upon her death. Neither Harold Spurlock nor his wife would be entitled to any
retirement or death benefit under the Employment Agreement in the event that he
voluntarily terminated his employment with Spurlock Adhesives prior to August
31, 1999 without "good reason." Under the Employment Agreement, "good reason" is
deemed to exist if, and only if:
(a) Spurlock Adhesives generally fails to timely pay the amounts
and benefits provided to Harold Spurlock under the Employment Agreement;
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<PAGE>
(b) the assignment to Harold Spurlock of duties materially
inconsistent with and inferior to Harold Spurlock's position, duties and
responsibilities and status as a vice president; or
(c) the transfer of Harold Spurlock's place of employment further
than 30 miles beyond the limits of Petersburg, Virginia without his prior
consent.
The Employment Agreement requires Harold Spurlock to keep in confidence
certain trade secrets and confidential information of Spurlock Adhesives during
the term of his employment and for a period of five years thereafter. Harold
Spurlock has further agreed not to remove or retain any documents of Spurlock
Adhesives. Also, for so long as Harold Spurlock is employed by Spurlock
Adhesives and as long as he is receiving retirement benefits, he has agreed not
to compete with Spurlock Adhesives. In connection therewith, Harold Spurlock has
also agreed in the Employment Agreement not to solicit employees of Spurlock
Adhesives for a period of 12 months following termination of his employment for
any reason.
In addition, the Company, Air Resources and Spurlock Adhesives and Mr.
Sumpter have entered into an employment agreement that provides for his
employment as Executive Vice President. The term of the agreement commenced on
March 11, 1996 and will end on March 31, 1998. Under the agreement, Mr. Sumpter
is entitled to receive annual base compensation of $180,000 and is eligible for
additional compensation in the form of bonuses. Mr. Sumpter may terminate his
employment at any time by giving 30 days' written notice of such termination.
Bonus. On June 11, 1996, the Board of Directors of Spurlock Adhesives
resolved to pay a bonus to Harold Spurlock in the amount of $150,000 to reward
his past performance to Spurlock Adhesives, including its favorable operating
performance in 1995 and year-to-date 1996. Such bonus was to be paid upon the
effectiveness of a new employment contract (described above), September 1, 1996.
Subsequently, Spurlock Adhesives and Harold Spurlock agreed, in order to assist
the Company in managing its liquidity position, that such bonus be paid over the
next three years at $50,000 per year. The 1996 payment was made in December
1996, as reflected in the Summary Compensation Table above. The 1997 payment is
being paid to Harold Spurlock periodically as an addition to his salary under
the Employment Agreement described above.
Indemnification Agreements. On December 21, 1995, Air Resources entered
into an Indemnification Agreement with Phillip S. Sumpter upon his appointment
to the Board of Directors. The Company succeeded to and assumed all the rights
and obligations of Air Resources under the Indemnification Agreement, which was
subsequently superseded by a new Indemnification Agreement between such parties
dated January 30, 1997. Similar Indemnification Agreements were entered into
between the Company and Glen S. Whitwer and Raymond G. Tuttle on September 19,
1996 and January 30, 1997, respectively. Such agreements provide for the
indemnification of such directors against claims, losses, liabilities, damages,
costs and expenses that each may suffer as a result of his service as a director
of the Company, to the full extent that such indemnification is permitted and
not prohibited by applicable federal or state law, including securities law, or
the Articles of Incorporation of the Company.
Report of the Board of Directors on Executive Compensation. The
Company's compensation policies applicable to its executive officers are
administered by the Board of Directors, two of whom are non-employee directors.
The goal of the policies is to attract, motivate, reward and retain the
management talent required to achieve the Company's business objectives, at
compensation levels which are fair and equitable and competitive with those of
comparable companies. This goal is furthered by the Board of Directors' policy
of linking compensation to individual and corporate performance and by
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<PAGE>
encouraging significant stock ownership by management in order to align the
financial interests of management with those of the shareholders.
The three main components of executive compensation are base salary,
annual cash or stock bonus awards, and equity participation in the form of stock
options under the Company's 1995 Stock Incentive Plan. Each year the Board of
Directors reviews the total compensation package of each executive officer to
ensure that it meets the above described goal. As part of this review, the Board
of Directors considers corporate performance information, compensation survey
data and the recommendations of management.
Base Salary. Base salaries for executive officers are reviewed annually
to determine whether adjustments may be necessary. Factors considered by the
Board of Directors in determining base salaries for executive officers include
personal performance of the executive officer in light of individual levels of
responsibility, the overall performance and profitability of the Company during
the preceding year, economic trends that may be affecting the Company, and the
competitiveness of the executive officer's salary with the salaries of executive
officers in comparable positions at companies of comparable size or operational
characteristics.
Irvine R. Spurlock became the President and Chairman of the Board of
Directors of the Company in 1996. Irvine Spurlock's base salary for the fiscal
year ended December 31, 1996 was $179,880. The salary was set following a
thorough review and evaluation by the Board of Directors of Irvine Spurlock's
personal performance in light of his management responsibilities, the level of
profitability of the Company during the fiscal year ended December 31, 1996, and
the competitiveness of Irvine Spurlock's salary to those of other chief
executive officers in comparable companies.
Bonus Awards. The Company from time to time will award to its executive
officers bonuses in the form of cash and/or shares of Common Stock. The
determination of such bonus awards is made by the Board of Directors and is
generally based on the same factors used to determine base salary, as described
above. Particular attention is given to those executive officers who contribute
in a substantial degree to the success of the Company.
1995 Stock Incentive Plan. The incentive plan provides for
administration by a committee, which shall include at least two outside
directors, or, if no committee is designated by the Board of Directors, by the
Board of Directors. As of December 31, 1996, no committee has been designated by
the Board of Directors to administer the plan.
The shareholder-approved incentive plan is designed to provide current
and deferred incentive compensation to officers, directors and key employees of
the Company who contribute in a substantial degree to the success of the
Company. The incentive plan affords these selected individuals a means of
participating in, and an incentive to contribute further to, such success.
Grants are made to executive officers based on salary, responsibility and
performance of the individual officer, director or employee.
The exercise price per share for options granted under the incentive
plan is determined by the Board of Directors on the date of grant. Under certain
circumstances, the exercise price shall not be less than the fair market value
of Common Stock on the date of grant. Accordingly, if there is no appreciation
in the market price for Common Stock, the options are valueless. The term of any
option granted under the incentive plan is fixed by the Board of Directors on
the date of grant.
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<PAGE>
Deductibility of Executive Compensation. Section 162(m) of the Internal
Revenue Code of 1986, as amended, applicable for 1995 and thereafter, generally
disallows a tax deduction to public companies for compensation over $1 million
paid in any year (not including amounts deferred) to a company's chief executive
officer and to the four other most highly compensated officers. Qualifying
performance-based compensation will not be subject to the deduction limit if
certain requirements are met. The Company believes that all compensation paid in
1995 to such officers is deductible under Section 162(m) because such
compensation is less than the threshold amount and is structured in a manner
believed to qualify as performance-based compensation not subject to the
deduction limit.
Board of Directors
Irvine R. Spurlock, Chairman
Harold N. Spurlock
H. Norman Spurlock, Jr.
Phillip S. Sumpter
Raymond G. Tuttle
Glen S. Whitwer
Compensation Committee Interlocks and Insider Participation. The Board
of Directors does not have a compensation committee. Executive compensation is
examined and approved by the entire Board of Directors. For the fiscal year
ended December 31, 1996, the Board of Directors included the following officers
and employees of the Company and/or Air Resources and/or Spurlock Adhesives, who
participated in deliberations of the Board of Directors concerning executive
officer compensation: Harold N. Spurlock, H. Norman Spurlock, Jr., Irvine R.
Spurlock and Phillip S. Sumpter.
Performance Graph. Set forth below is a line graph comparing the yearly
percentage change in the Company's cumulative total shareholder return
(including reinvestment of dividends) on the Common Stock with (a) the S&P's
SmallCap 600 Index, representing a broad equity market index assuming
reinvestment of dividends, and (b) a cumulative total return, assuming
reinvestment of dividends, of a peer group selected by the Company on an
industry and line-of-business basis (the "Peer Group"), in each case assuming
that $100 is invested on December 31, 1991.
[The Performance Graph is a line graph which displays the indexed returns (in
dollars) set forth in the second table below entitled "Indexed Returns($)."]
Set forth below are the annual return percentages and index returns for
the S&P SmallCap 600 Index, the Peer Group and for the Company, as presented in
the Performance Graph above. The shareholder returns shown in the graph and the
table are not necessarily indicative of future performance.
-42-
<PAGE>
Total Shareholder Returns (Dividends Reinvested)
- ------------------------------------------------
ANNUAL RETURN PERCENTAGE
Years Ending December 31
<TABLE>
<CAPTION>
Company Name/Index 1992 1993 1994 1995 1996
- ------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
S&P SmallCap 600 Index 21.04% 18.79% - 4.77% 29.96% 21.32%
Peer Group -2.32% 46.05% 39.84% 31.66% - 8.56%
Spurlock Industries, Inc. 83.33% -93.18% 0.00% 333.39% - 0.83%
</TABLE>
INDEXED RETURNS ($)
Years Ending December 31
<TABLE>
<CAPTION>
Base
Period
Company Name/Index 1991 1992 1993 1994 1995 1996
- ------------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
S&P SmallCap 600 Index 100 121.04 143.78 136.92 177.95 215.89
Peer Group 100 97.68 142.66 199.50 262.66 240.18
Spurlock Industries, Inc. 100 183.33 12.50 12.50 54.17 53.72
</TABLE>
The Peer Group companies include ChemFirst Inc., Geon Company (included
from 1994 forward) and Mississippi Chemical Corp. (included from 1994 forward).
These companies were selected by the Company because they are generally in the
same industry and line of business as the Company.
Item 13. Certain Relationships and Related Transactions
Certain Related Transactions. Described below are obligations of the
Company which have been personally guaranteed by certain executive officers,
directors and shareholders of the Company. All such personal guarantees were
released during 1996 due to the repayment of all such obligations by the
Company.
Pursuant to the Spurlock Adhesives Agreement, Air Resources acquired
all of the stock of Spurlock Adhesives. At the time of the acquisition, Harold
N. Spurlock, formerly Chairman of the Board, President and Chief Executive
Officer of Air Resources and the Company, personally guaranteed a large portion
of Spurlock Adhesives' debt, including all debt then secured by real property
and/or equipment and debt owed to its largest trade creditor. Creditors at the
time agreed to allow the debt to remain outstanding after the acquisition of
Spurlock Adhesives on the condition that Mr. Spurlock continue to guarantee the
debt, that he remain as Chairman of the Board of Spurlock Adhesives, and that he
be appointed Chairman of the Board of Air Resources. Due to the repayment of
amounts due to such creditors in 1996, Mr. Spurlock's personal guarantee has
been released and the requirement that Mr. Spurlock serve as Chairman of the
Board of the Company and Spurlock Adhesives is no longer applicable.
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<PAGE>
In addition to Harold N. Spurlock's personal guarantee of the
above-described debt, Irvine R. Spurlock and H. Norman Spurlock, Jr., the
Company's current Chairman, President, and Chief Executive Officer, and
Executive Vice President and Secretary, respectively, and Harold N. Spurlock
also had personally guaranteed various other debts of the Company, which has
succeeded to and assumed all the rights and obligations of Air Resources, and of
Spurlock Adhesives. In May 1995, Irvine R. Spurlock and H. Norman Spurlock, Jr.
replaced a past director, Lloyd B. Putman, and a then serving director, Jesse A.
Adams, as guarantors on a note with an Arkansas bank. The loan in the original
principal amount of $500,000 was taken out in August 1992 to provide working
capital needed to operate the Company's facility in Malvern, Arkansas. The note
was secured by certain real property and equipment. On or about June 30, 1996,
the note was repaid in full and each of the personal guarantors were released
from any further obligation on the loan.
Both Harold N. Spurlock and his wife, Daphne R. Spurlock, had
guaranteed a loan from the Bank of Waverly (Virginia) secured by certain real
property and equipment relating to the construction of the Company's
formaldehyde plant in Waverly, Virginia. Mr. and Mrs. Spurlock also had
guaranteed a loan from First Union National Bank relating to the construction of
resin and formaldehyde production facilities in Waverly, Virginia. Both of these
loans were repaid in full as of July 9, 1996 and June 30, 1996, respectively,
and Mr. and Mrs. Spurlock were each released from their personal guaranties of
the loans upon such repayment.
Harold N. Spurlock, Daphne R. Spurlock and Irvine R. Spurlock had
guaranteed a loan from a trade creditor, Hydro Agri Tampa, Inc., that
represented trade debt converted to a note in 1991. The note was secured by
certain real property and equipment of Spurlock Adhesives. As of June 24, 1996,
the note was repaid in full and each of the personal guarantors were released
from any further obligation on the loan. Hydro Agri Tampa, Inc. was previously a
major supplier of urea to Spurlock Adhesives, but discontinued supply of such
raw material into the United States in 1991.
Each of Harold N. Spurlock, Irvine R. Spurlock and H. Norman Spurlock,
Jr. also guaranteed payments due under a lease with D.B. Western, Inc. for the
Waverly, Virginia formaldehyde plant. On December 19, 1991, Spurlock Adhesives
entered into a Formaldehyde Plant Lease with D.B. Western, under which D.B.
Western agreed to construct a fully operational formaldehyde plant at Waverly,
Virginia and lease the facility to Spurlock Adhesives for ten years at $55,000
per month, commencing at such time as the plant became mechanically complete and
ready for start up. The lease commenced in February, 1993. In July, 1996,
Spurlock Adhesives exercised its option to purchase the formaldehyde plant from
D.B. Western and terminate the D.B. Western lease. As a part of Spurlock
Adhesives' acquisition of the formaldehyde plant and the termination of the
lease, Spurlock Adhesives obtained the release of each of the personal
guarantors from any obligation for lease payments due under the D.B. Western
lease. As of July 9, 1996, the amount of unpaid lease payments totaled $471,000.
In connection with the Company's revolving credit line instituted in
February 1995, Harold N. Spurlock provided a personal guarantee as additional
security for all amounts borrowed under the facility, and Irvine R. Spurlock and
H. Norman Spurlock, Jr. provided limited guarantees in the amount of $250,000
each. As of June 28, 1996, the credit line was repaid in full and each of the
personal guarantors were released from any further obligation on the loan. The
Company's current credit facility with the National Canada Finance Corporation,
Richmond, Virginia, does not require the personal guaranties of the Company's
officers and directors.
Loan From Former Director and Officer. During 1992 and 1993, Lloyd B.
Putman, a former executive officer of Air Resources who resigned from the Board
of Directors in September 1994, loaned
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<PAGE>
Air Resources $116,000. The loan, the largest balance of which during 1996 was
$65,958, bore an interest rate of 8% per annum, payable with principal
quarterly, and matured in December 1996. The loan related to monies advanced by
Mr. Putman to Air Resources' gas recovery operations to help cover ongoing
expenses for the development and production of gas recovery technology. The loan
was repaid in full as agreed on December 31, 1996.
Indebtedness of Management. On June 30, 1995, Harold N. Spurlock, then
Chairman of the Board, President and Chief Executive Officer of the Company,
received a loan in the amount of $112,500 from Spurlock Adhesives. Principal and
interest at 9.0% per annum are payable in five equal annual installments
commencing in July 1996, the first of which was paid as agreed. The largest
aggregate amount of such debt outstanding during 1996 was $112,500. The balance
as of December 31, 1996 was $82,500. The loan relates to the purchase by Mr.
Spurlock of certain manufacturing assets in Malvern, Arkansas that were
contributed by Mr. Spurlock to Air Resources pursuant to the Spurlock Adhesives
Agreement.
In 1993, Harold N. Spurlock received advances in the aggregate
principal amount of $126,000 from Spurlock Adhesives. On December 21, 1993, the
Board of Directors of Spurlock Adhesives approved the purchase by Spurlock
Adhesives of a parcel of land owned by Harold Spurlock that adjoins its Waverly,
Virginia plant, at a price equal to the total amount of the advances ($126,000).
Such property was purchased by Mr. Spurlock on June 14, 1989 in a transaction
from Lone Star, Inc. for $150,000.
Subsequently, on March 15, 1994, the purchase transaction was modified
because the property was found to be subject to a $130,000 mortgage. The
modified transaction entailed the assignment of all of Mr. Spurlock's right,
title and interest in the property to Spurlock Adhesives in exchange for the
assumption by Spurlock Adhesives of the $130,000 mortgage loan, plus a $20,000
reduction in the $126,000 of advances made to Mr. Spurlock. At this point, the
balance of the advances totalled approximately $106,000.
Subsequent to December 31, 1993, the financial records of the Company
do not reflect the advances to Mr. Spurlock, or any payments made or interest
charged thereon. In October, 1997, these advances were discovered as unpaid and
unrecognized. The advances were then recognized in the amount of $97,633, Mr.
Spurlock was notified and such remaining amount was repaid by Mr. Spurlock on
October 15, 1997.
(Unauthorized Advances to Former Officers and Director. In early
January and early February 1998, the Company discovered that two of its officers
and directors, Irvine R. Spurlock and H. Norman Spurlock, Jr., had diverted
corporate funds for personal use and that, according to the Company's Special
Litigation Committee, a third officer, Warren E. Beam, had colluded in the
diversions by Norman Spurlock. For further information on the diversions of
corporate funds and the subsequent resignations of these officers and directors,
see "Reasons for Amendment" above.)
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements:
(i) Report of Independent Auditors
(ii) Consolidated Balance Sheets as of December 31,
1996 and 1995
(iii) Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994
(iv) Consolidated Statements of Stockholders'
Equity for the years ended December 31, 1996,
1995 and 1994
(v) Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994
(vi) Notes to Consolidated Financial Statements
(2) Financial Statement Schedules: None.
(3) Exhibits
Exhibit No. Document
- ----------- --------
2 Agreement and Plan of Merger dated February 15, 1996, between
Air Resources Corporation and Spurlock Industries, Inc.,
incorporated by reference to Exhibit 2 to the Form S-4 of the
Registrant filed with the Securities and Exchange Commission on
February 20, 1996, as amended by Amendment No. 1 and No. 2
thereto, Registration No. 33-01448 (as amended, the "Form
S-4").
3.1 Articles of Incorporation of Spurlock Industries, Inc.,
incorporated by reference to Exhibit 3.1 to the Form S-4.
3.2 Bylaws of Spurlock Industries, Inc., incorporated by reference
to Exhibit 3.2 to the Form S-4.
10.1 Agreement and Plan of Reorganization, dated April 22, 1992,
between Air Resources Corporation and Spurlock Adhesives, Inc.,
incorporated by reference to Exhibit 10.1 to the Form S-4.
10.2* Employment and Retirement Benefit Agreement dated August 21,
1996 by and between Spurlock Adhesives, Inc. and Harold N.
Spurlock, as amended by First Amendment thereto dated February
24, 1997 by and between such parties.
10.3 Air Resources Corporation 1995 Stock Incentive Plan,
incorporated by reference to Exhibit 10.3 to the Form S-4.
10.4 Incentive Stock Option Agreement, dated February 22, 1995,
between Air Resources Corporation and Irvine R. Spurlock,
incorporated by reference to Exhibit 10.4 to the Form S-4.
10.5 Incentive Stock Option Agreement, dated February 22, 1995,
between Air Resources Corporation and H. Norman Spurlock, Jr.,
incorporated by reference to Exhibit 10.5 to the Form S-4.
10.6 Incentive Stock Option Agreement, dated May 15, 1995, between
Air Resources Corporation and Warren E. Beam, incorporated by
reference to Exhibit 10.6 to the Form S-4.
10.7* Indemnification Agreement, dated January 30, 1997, between
Spurlock Industries, Inc. and Phillip S. Sumpter.
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<PAGE>
10.8 Promissory Note made by H. Norman Spurlock, Jr. in favor of
Spurlock Adhesives, Inc. as of January 10, 1996, incorporated
by reference to Exhibit 10.8 to the Form S-4.
10.9 Letter Agreement dated September 7, 1993, between Air Resources
Corporation and Lloyd B. Putman, incorporated by reference to
Exhibit 10.9 to the Form S-4.
10.10 Collateral Promissory Note made by Harold N. Spurlock in favor
of Spurlock Adhesives, Inc. as of June 30, 1995, incorporated
by reference to Exhibit 10.10 to the Form S-4.
10.11* Indemnification Agreement, dated September 19, 1996, between
Spurlock Industries, Inc. and Glen S. Whitwer.
10.12* Indemnification Agreement, dated January 30, 1997 between
Spurlock Industries, Inc. and Raymond G. Tuttle.
10.13 Loan and Security Agreement, dated July 1, 1996, between
Spurlock Adhesives, Inc. and National Canada Finance
Corporation, incorporated by reference to Exhibit 10 to the
Registrant's Form 10-Q for the quarter ended June 30, 1996,
filed with the Securities and Exchange Commission on August 15,
1996.
10.14 Spurlock Industries, Inc. 1995 Stock Incentive Plan,
incorporated by reference to Exhibit 4.3 of the Registrant's
Registration Statement on Form S-8, File No. 333-09659.
10.15 Form of Spurlock Industries, Inc., Incentive Stock Option
Agreement, incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q for the quarter ended September 30,
1996, filed with the Securities and Exchange Commission on
November 14, 1996.
10.16 Form of Spurlock Industries, Inc. Non-Qualified Stock Option
Agreement, incorporated by reference to Exhibit 10.3 to the
Registrant's Form 10-Q for the quarter ended September 30,
1996, filed with the Securities and Exchange Commission on
November 14, 1996.
10.17** Employment Agreement between the Registrant, Air Resources
Corporation and Spurlock Adhesives Incorporated [sic] and
Phillip S. Sumpter dated March 11, 1996.
21* Subsidiaries of the Registrant.
23.1** Consent of Winter, Scheifley & Associates, P.C.
27** Financial Data Schedule.
* Filed previously.
** Filed herewith.
(b) Reports on Form 8-K.
None.
(c) The exhibits required by Item 601 of Regulation S-K are filed as
exhibits to this Form 10-K.
(d) There are no financial statements of the Registrant required by
Regulation S-X which were excluded from the Annual Report to Shareholders by
Rule 14a-3(b).
-47-
<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 15, 1998 By: /s/ Phillip S. Sumpter
----------------------
Phillip S. Sumpter
Chairman 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/ Phillip S. Sumpter Chairman, Chief Executive Officer and April 15, 1998
------------------------------------- Director
Phillip S. Sumpter (Principal Financial and Executive
Officer)
/s/ Lawrence C. Birkholz Controller April 15, 1998
------------------------------------- (Principal Accounting Officer)
Lawrence C. Birkholz
/s/ Glen S. Whitwer Director April 15, 1998
-------------------------------------
Glen S. Whitwer
/s/ Harold N. Spurlock Director April 15, 1998
-------------------------------------
Harold N. Spurlock
/s/ Raymond G. Tuttle Director April 15, 1998
-------------------------------------
Raymond G. Tuttle
</TABLE>
-48-
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Document
2 Agreement and Plan of Merger dated February 15, 1996, between Air
Resources Corporation and Spurlock Industries, Inc., incorporated
by reference to Exhibit 2 to the Form S-4 of the Registrant filed
with the Securities and Exchange Commission on February 20, 1996,
as amended by Amendment No. 1 and No. 2 thereto, Registration No.
33-01448 (as amended, the "Form S-4").
3.1 Articles of Incorporation of Spurlock Industries, Inc.,
incorporated by reference to Exhibit 3.1 to the Form S-4.
3.2 Bylaws of Spurlock Industries, Inc., incorporated by reference to
Exhibit 3.2 to the Form S-4.
10.1 Agreement and Plan of Reorganization, dated April 22, 1992,
between Air Resources Corporation and Spurlock Adhesives, Inc.,
incorporated by reference to Exhibit 10.1 to the Form S-4.
10.2* Employment and Retirement Benefit Agreement dated August 21, 1996
by and between Spurlock Adhesives, Inc. and Harold N. Spurlock,
as amended by First Amendment thereto dated February 24, 1997 by
and between such parties.
10.3 Air Resources Corporation 1995 Stock Incentive Plan, incorporated
by reference to Exhibit 10.3 to the Form S-4.
10.4 Incentive Stock Option Agreement, dated February 22, 1995,
between Air Resources Corporation and Irvine R. Spurlock,
incorporated by reference to Exhibit 10.4 to the Form S-4.
10.5 Incentive Stock Option Agreement, dated February 22, 1995,
between Air Resources Corporation and H. Norman Spurlock, Jr.,
incorporated by reference to Exhibit 10.5 to the Form S-4.
10.6 Incentive Stock Option Agreement, dated May 15, 1995, between Air
Resources Corporation and Warren E. Beam, incorporated by
reference to Exhibit 10.6 to the Form S-4.
10.7* Indemnification Agreement, dated January 30, 1997 between
Spurlock Industries, Inc. and Phillip S. Sumpter.
10.8 Promissory Note made by H. Norman Spurlock, Jr. in favor of
Spurlock Adhesives, Inc. as of January 10, 1996, incorporated by
reference to Exhibit 10.8 to the Form S-4.
10.9 Letter Agreement dated September 7, 1993, between Air Resources
Corporation and Lloyd B. Putman, incorporated by reference to
Exhibit 10.9 to the Form S-4.
10.10 Collateral Promissory Note made by Harold N. Spurlock in favor of
Spurlock Adhesives, Inc. as of June 30, 1995, incorporated by
reference to Exhibit 10.10 to the Form S-4.
10.11* Indemnification Agreement, dated September 19, 1996, between
Spurlock Industries, Inc. and Glen S. Whitwer.
10.12* Indemnification Agreement, dated January 30, 1997, between
Spurlock Industries, Inc. and Raymond G. Tuttle.
10.13 Loan and Security Agreement, dated July 1, 1996, between Spurlock
Adhesives, Inc. and National Canada Finance Corporation,
incorporated by reference to Exhibit 10 to the Registrant's Form
10-Q for the quarter ended June 30, 1996, filed with the
Securities and Exchange Commission on August 15, 1996.
10.14 Spurlock Industries, Inc. 1995 Stock Incentive Plan, incorporated
by reference to Exhibit 4.3 of the Registrant's Registration
Statement on Form S-8, File No. 333-09659.
10.15 Form of Spurlock Industries, Inc., Incentive Stock Option
Agreement, incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996,
filed with the Securities and Exchange Commission on November 14,
1996.
-49-
<PAGE>
10.16 Form of Spurlock Industries, Inc. Non-Qualified Stock Option
Agreement, incorporated by reference to Exhibit 10.3 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996,
filed with the Securities and Exchange Commission on November 14,
1996.
10.17** Employment Agreement between the Registrant, Air Resources
Corporation and Spurlock Adhesives Incorporated [sic] and Phillip
S. Sumpter dated March 11, 1996.
21* Subsidiaries of the Registrant.
23.1** Consent of Winter, Scheifley & Associates, P.C.
27** Financial Data Schedule.
* Filed previously.
** Filed herewith.
-50-
Exhibit 10.17
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 11th day of March, 1996, between
AIR RESOURCES CORPORATION, a Colorado business corporation, SPURLOCK ADHESIVES
INCORPORATED, a Virginia business corporation, and SPURLOCK INDUSTRIES, INC., a
Virginia business corporation, all with a place of business at P. 0. Box 8,
Route 460 East, Waverly, Virginia 23890 (all jointly hereafter "Employer"), and
PHILLIP S. SUMPTER (hereafter "Employee") currently of 263 Gilson Road, Jaffrey,
New Hampshire 03452.
In consideration of the mutual promises and other valuable
consideration provided hereinafter, Employer and Employee agree and covenant as
follows:
1. Employment Term. Employer employs Employee, commencing as of
the effective date of this Agreement and continuing until the earlier of March
31, 1998 or termination as provided for herein, as Executive Vice President (or
such other officer title upon which Employer and Employee agree).
2. Termination. Employee shall not be a so-called
"employee-at-will." Employee shall serve as Executive Vice President (or such
other officer title upon which Employer and Employee agree) until March 31,
1998; provided however, Employee's employment may be terminated upon the
happening of any of the following:
A. Employee dying;
B. Employee retiring or resigning, by first giving
Employer thirty (30) days advance written notice;
1
<PAGE>
C. Resolution of Employer's Board of Directors
discharging Employee based upon an affirmative
finding, made in good faith, that Employee either has
breached a fiduciary duty owed Employer, or has
committed any fraud or serious dishonest act
detrimentally affecting Employer in Employer's
business relations, or has willfully and knowingly
violated any statute governing either Employer's
business or Employee's conduct as Employer's
employee, or has become either physically or mentally
disabled resulting in Employee's inability to fulfill
the terms of this Agreement; provided however,
Employee shall be entitled to fifteen (15) days
advance written notice before any such proposed Board
resolution may be acted upon and Employee shall
further be entitled to attend any such Board meeting
and to hear and respond to any and all evidence which
the Board considers before adopting any such
resolution.
3. Scope of Employment. Subject to the applicable provisions of
Employer's Articles of Agreement and By-Laws, Employee shall serve as Employer's
Executive Vice President (or such other officer title upon which Employer and
Employee agree) and shall perform all duties which Employer's Board of Directors
might assign to Employee. Employee shall report directly to Employer's President
and Employer's Chairman of the Board of Directors. Employee shall provide
Employee's services to Employer on a full time basis. Employee shall not engage
in any other substantial business endeavors which would detrimentally impact
2
<PAGE>
upon Employee's ability to offer his time, attention and talent to Employer.
4. Base Compensation. Employer shall pay Employee a guaranteed
annual salary of $180,000.00, payable in equal weekly installments, commencing
March 11, 1996.
5. Bonuses. Employer and Employee agree that Employee shall be
eligible for additional compensation in the form of bonuses based upon the value
of the Employee's work contributions to the Employer and the performance of
Employer in the market place - in the event Employer establishes a bonus plan or
program.
6. Stock Options. Employee shall be entitled to participate in
and shall receive the benefit of any existing stock option plans of Employer or
of any stock option plans created during the term of this Agreement which
benefits other executive employees.
7. Company Vehicle. Employer shall provide to Employee, as
additional compensation, a suitable vehicle for Employee's use. Employer shall
solely be responsible for any and all costs associated with maintaining,
insuring and registering said vehicle.
8. Retirement. Employee shall be entitled to participate in and
shall receive the benefit of any existing retirement plans of Employer or of any
retirement plans created during the term of this Agreement which benefits other
executive employees.
9. Fringe Benefits. Employer shall procure comprehensive health
and dental insurance for Employee and Employee's spouse and disability insurance
for Employee under one of more policies of
3
<PAGE>
insurance comparable to the best existing policies by which Employer insures its
other executive employees.
10. Vacation and Holidays. Employee shall be entitled to four (4)
weeks of paid annual vacation. Employee may accrue vacation, in whole or in
part, from year to year. Employee shall also receive such holidays as Employer
provides its other executive employees.
11. Moving and Relocation Expenses. Employer shall reimburse
Employee for the reasonable moving expenses Employee incurs associated with
moving Employee's family and possessions from New Hampshire to Virginia.
Employer also shall pay Employee's reasonable relocation and temporary housing
expenses, in such standard as is appropriate to Employee's position with
Employer, associated with Employee moving to Virginia to be employed by Employer
previous to the sale of Employee's house in New Hampshire.
12. Change of Employer. Upon final approval of a merger plan by
the shareholders of Air Resources Corporation and Spurlock Industries, Inc. and
consummation of such merger, Air Resources Corporation shall no longer be
considered as one of the parties to this Agreement. From that time forward,
Employee shall only have claims against Air Resources Corporation for breaches
of this Agreement which occurred previous to consummation of such merger.
13. Indemnification. Employer shall indemnify and defend and hold
Employee harmless from any and all liability whatsoever, including defense costs
and attorney's fees, arising from Employee's performance on behalf of or as a
result of Employee's
4
<PAGE>
employment by Employer; provided however, Employer shall not have to indemnify
Employee from any claim based upon an action of Employee which is both beyond
Employee's scope of employment and performed by Employee with actual, subjective
bad faith. Employee's rights under this paragraph are in addition to (and not in
substitution for) Employee's rights under an Indemnification Agreement dated
December 21, 1995 and entered into by Air Resources Corporation as Indemnitor
and Employee as Indemnitee. Employer reaffirms said Indemnification Agreement as
if each of the entities which constitute the Employer herein were parties to the
Indemnification as additional indemnitees.
14. Binding Agreement. This Agreement shall be binding upon any
successor of Employer including, but not necessarily limited to, any person,
firm, corporation or other entity which at any time, whether by merger, purchase
or otherwise, acquires all or substantially all of Employer's assets or
business.
15. Partial Invalidity. This Agreement shall be valid and
enforceable to the fullest extent permitted by law. In the event any term of
this Agreement or the application thereof to any person or circumstance shall be
judicially determined to be invalid or unenforceable, the remainder of this
Agreement and the application of such term to persons or circumstances -- other
than those as to which application is judicially held invalid or unenforceable
- -shall not be affected thereby.
16. Governing Law and Jurisdiction. This Agreement and performance
thereunder shall be governed by and construed according
5
<PAGE>
to the laws of the Commonwealth of Virginia. Virginia is an appropriate forum to
litigate any matters involving this Agreement and the courts of the Commonwealth
of Virginia possess jurisdiction over this Agreement, Employer and Employee.
17. Merger Clause. This Agreement, together with any other
agreements explicitly incorporated in this Agreement, constitute the entire
understanding between Employer and Employee and all representations and
covenants are merged into this Agreement. This Agreement can only be amended by
a document executed by Employer and Employee.
18. Costs and Expenses. In the event of any litigation between the
parties involving their respective obligations and performances under this
Agreement, the successful party shall be entitled to recovery of costs and
expenses, including reasonable attorney's fees.
19. Captions. Any and all captions or headings used in this
Agreement are for reference and convenience only and shall not affect its
interpretation.
IN WITNESS WHEREOF, Employer and Employee have hereunto set their hands
and seals as of the date first written above.
AIR RESOURCES CORPORATION,
Employer
/s/ H. Norman Spurlock, Jr. By: /s/ Harold N. Spurlock
- ------------------------------ -----------------------------------
Witness Its Duly Authorized Officer
6
<PAGE>
SPURLOCK ADHESIVES INCORPORATED,
Employer
/s/ H. Norman Spurlock, Jr. By: /s/ Irvine R. Spurlock
- ------------------------------ -----------------------------------
Witness Its Duly Authorized Officer
SPURLOCK INDUSTRIES, INC.,
Employer
/s/ H. Norman Spurlock, Jr. By: /s/ Harold N. Spurlock
- ------------------------------ -----------------------------------
Witness Its Duly Authorized Officer
/s/ H. Norman Spurlock, Jr. /s/ Phillip S. Sumpter
- ------------------------------ ---------------------------------------
Witness PHILLIP S. SUMPTER, Employee
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Report on Form 10-K of Spurlock Industries,
Inc. dated April 15, 1998 of our report dated January 17, 1997, relating to the
financial statements of Spurlock Industries, Inc. as of December 31, 1996.
/s/ Winter, Scheifley & Associates, P.C.
Winter, Scheifley & Associates, P.C.
Certified Public Accountants
April 15, 1998
Englewood, Colorado
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 106072
<SECURITIES> 0
<RECEIVABLES> 1446930
<ALLOWANCES> 0
<INVENTORY> 541632
<CURRENT-ASSETS> 2288914
<PP&E> 9528290
<DEPRECIATION> 4305767
<TOTAL-ASSETS> 12270407
<CURRENT-LIABILITIES> 4388860
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4292783
<TOTAL-LIABILITY-AND-EQUITY> 12270407
<SALES> 28643415
<TOTAL-REVENUES> 28643415
<CGS> 21129265
<TOTAL-COSTS> 25543687
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 667942
<INCOME-PRETAX> 2515162
<INCOME-TAX> 1021487
<INCOME-CONTINUING> 1493675
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1493675
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
