SPURLOCK INDUSTRIES, INC.
1997 ANNUAL REPORT
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Table of Contents
Page
Spurlock Industries, Inc................................................. 2
Letter to Shareholders................................................... 3
Selected Consolidated Financial Information.............................. 5
Management's Discussion and Analysis of Financial Conditions
and Results of Operations....................................... 6
Reports of Independent Auditors.......................................... 12-13
Financial Statements..................................................... 14
Management............................................................... 36
Market Prices and Dividend Policy........................................ 38
General Information...................................................... 39
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SPURLOCK INDUSTRIES, INC.
Spurlock Industries, Inc. ("Spurlock Industries" or the "Company") is a
Virginia corporation organized in 1996. The Company is the successor to Air
Resources Corporation ("Air Resources"), a Colorado corporation organized in
1986. At a special meeting of the shareholders of Air Resources held on June 11,
1996, the shareholders of Air Resources approved the merger of Air Resources
into Spurlock Industries, in order to, among other things, change the domicile
of Air Resources from Colorado to Virginia. Such merger was consummated on July
26, 1996. References to the "Company" herein shall also include Air Resources as
predecessor to Spurlock Industries.
Through its wholly owned subsidiary, Spurlock Adhesives, Inc.
("Spurlock Adhesives"), the Company develops, manufactures and markets specialty
thermo-setting resins and formaldehyde for the forest products, building
products and furniture industries. The Company also produces, on a limited
basis, fertilizer products for the agricultural and lawn and garden supply
industries. It operates two manufacturing facilities in the southeastern United
States, one in Waverly, Virginia and the other in Malvern, Arkansas. A third
manufacturing facility, located in Moreau, New York, is currently under
construction and is expected to begin operations in mid-1998. The products of
Spurlock Adhesives are sold throughout the east, southeast and midwest regions
of the United States. Spurlock Industries' principal executive offices are
located at 125 Bank Street, Waverly, Virginia 23890, and its telephone number is
(804) 834-8980.
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To Our Shareholders:
1997 and the beginning of 1998 has been a challenging period for
Spurlock Industries, Inc. First, 1997 financial performance was lackluster as
margins tightened throughout the year, due to regional competitive pressures.
Net sales decreased by 13.7% in 1997, when compared to 1996's figures, as the
average selling prices on the Company's resin and formaldehyde products dropped
due to an oversupply of product in its operating regions. As a result, the
Company reported a net loss of $24,740 or $0.00 per share for 1997, compared to
a net profit of $1,493,675 or $0.22 per share for 1996. Included in the 1997
results, however, were one time charges of approximately $533,927 of start-up
and pre-operating costs relating to the new Moreau, New York manufacturing
facility. While the Company could have elected to capitalize these costs for the
New York facility, management chose the more conservative approach -
particularly in view of anticipated accounting guidelines that would require the
expensing of such costs - and included these costs as expenses in 1997.
Second, the resignations of certain executive officers necessitated the
implementation of a management reorganization plan in early 1998. The details
surrounding these resignations has been previously reported in recent filings
with the Securities and Exchange Commission and is detailed in the Proxy
Statement that is accompanied by this Annual Report. As part of this
reorganization, the Executive Committee, which had been formed in mid-1996, was
dissolved, and I was elected to the position of Chairman and Chief Executive
Officer of both Spurlock Industries, Inc. and Spurlock Adhesives, Inc. Also, our
management team was strengthened by the addition in the Company's key areas of
finance and sales and marketing of experienced individuals from outside our
organization, as well as the assumption of the corporate secretary's role by a
talented, long time employee. While the legal and accounting costs associated
with this reorganization, and the related derivative litigation described in the
Proxy Statement, have been significant - not to mention the distraction and
considerable management efforts required - I believe that Spurlock Industries is
now better positioned for success as a publicly traded corporation.
Despite the challenges that have been presented, this period has seen
significant accomplishments by the Company. Paramount amount among these
accomplishments was the progress made on the Company's new manufacturing
facility in Moreau, New York. The facility consists of two formaldehyde plants
and a resin plant. In the fourth quarter of 1997, the Company closed on
favorable financing for the project, including a $6 million industrial
development bond issued by Saratoga County, New York. We have been pleased with
the subsequent progress in the construction of the facility, as it is on
schedule for an anticipated mid-July start date. Management believes that the
region to be served by the New York facility constitutes an attractive market
for the Company's products and that the added production capability from the
facility could represent a substantial increase in future potential revenues.
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In addition to the long term potential of the New York facility, we are
also optimistic about current business prospects for the Company in light of our
favorable first quarter operating results. As previously reported in the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 1998,
Spurlock Industries reported net income of $181,104 or $.028 per share for the
first quarter of 1998, as compared to net income of $158,312 or $.024 for the
first quarter of 1997. Barring unforeseen events, management believes that the
second quarter will yield an operating profit.
Lastly, as the Company reported in a press release dated June 24, 1998,
we have received expressions of interest from several unaffiliated companies
regarding possible acquisitions of our business operations. The Company is
currently engaged in preliminary discussions with such parties. To assist in
exploring these and other potential business opportunities, the Company has
engaged Davenport & Company LLC, a Richmond, Virginia-based investment banking
firm, as its financial advisor. The Board of Directors intends to carefully
evaluate each such strategic opportunity in order to maximize shareholder value.
/s/ Phillip S. Sumpter
Phillip S. Sumpter
Chairman and Chief Executive Officer
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
in this Annual Report.
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, 1997, is derived from the consolidated financial statements of the Company.
The financial statements as of December 31, 1997, and for the year ended
December 31, 1997, have been audited by Cherry, Bekaert & Holland, L.L.P.,
independent auditors. The financial statements for the four years ended December
31, 1996, have been audited by James E. Scheifley & Associates, P.C. (formerly
Winter, Scheifley & Associates, P.C.), independent auditors.
<TABLE>
<CAPTION>
Years Ended December 31,
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1997 1996 1995 (1) 1994 1993
---- ---- ---- ---- ----
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net Sales................................. $24,725,077 $28,643,415 $33,243,677 $30,512,704 $23,475,249
Cost of sales............................. 19,597,991 21,129,265 26,092,053 26,269,016 20,268,532
Gross profit.............................. 5,127,086 7,514,150 7,151,624 4,243,688 3,206,717
Selling, general and administrative
expenses................................ 4,815,638 4,414,422 3,903,371 3,456,356 3,808,775
--------- --------- --------- --------- ---------
Income (Loss) from operations............. 311,448 3,099,728 3,248,253 787,332 (602,058)
Other income and expenses................. - - - - (427,508)
Interest income........................... 139,307 83,376 12,007 2,513 12,849
Interest expense.......................... (627,799) (667,942) (663,662) (828,261) (668,670)
--------- --------- --------- --------- ---------
Income (Loss)from continuing operations... (177,044) 2,515,162 2,596,598 (38,416) (1,685,387)
Provision for income taxes (benefit)...... (152,304) 1,021,487 115,600 - -
--------- --------- ------- --------- -----------
Net Income (Loss)......................... (24,740) 1,493,675 2,480,998 (38,416) (1,685,387)
========= ========= ========= ======== ===========
Net Income (Loss) per common share:
From continuing operations............. $0.00 $0.22 $0.37 ($0.01) ($0.42)
----- ----- ----- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
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1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Current assets............................ $2,726,167 $2,288,914 $3,099,414 $3,715,917 $1,748,663
Current liabilities....................... 5,365,116 4,388,860 5,330,308 8,133,204 5,978,068
Total assets.............................. 19,401,431 12,270,407 9,342,968 9,996,870 8,305,184
Long-term debt............................ 9,598,315 3,402,621 983,652 1,354,556 1,779,592
Stockholders' equity(2)................... 4,268,043 4,292,783 2,919,108 509,110 547,524
Number of common shareholders............. 227 242 249 245 240
Weighted average number of common shares
outstanding............................. 6,573,639 6,711,733 6,717,667 4,266,066 3,999,566
Cash dividends declared .................. 0 0 0 0 0
Book value per share (3).................. $0.66 $0.64 $0.43 $0.08 $0.08
</TABLE>
_________________
(1) 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.
(2) For the three 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.
(3) 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 fiscal years ending
December 31, 1997 were: 6,573,639, 6,711,733, 6,717,667, 6,626,066 and
6,399,566.
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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 the Company's 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.
Forward-Looking Statements
The following discussion contains certain forward-looking statements,
generally identified by phrases such as "the Company expects" or "Management
believes" or words of similar effect. The Company wishes to caution readers that
certain important factors set forth within such discussion, among others, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual results for 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.
General
Overview. The Company's operating results declined substantially in the
fiscal year ended December 31, 1997 primarily due to a significant reduction in
the gross margin, which reduction was caused by price deterioration relating to
oversupplies of the Company's primary products in two of its three regions of
operation. Also, during 1997 the Company elected to expense approximately
$533,927 of startup and pre-operating costs relating to the new Moreau, New York
manufacturing facility, which is scheduled to come on line in mid-1998. As a
result, the Company experienced a loss of ($24,740) in 1997, compared to net
income of $1,493,675 and $2,480,998 in 1996 and 1995, respectively. Management
attributed the record 1995 profits primarily to a refocusing by the Company on
its core resin/adhesives business and the termination of non-profitable gas
generation operations and increased control over raw materials prices and
improved product margins. The lower net profit in 1996 was largely due to the
effect of income taxes, as loss carry/forwards were substantially utilized in
1995.
Dependence on Construction and Related Industries. Demand for Spurlock
Industries' products and the Company's financial performance are closely tied to
the fortunes of construction, forest products and related industries.
Price of Raw Materials. Raw materials costs comprised approximately
60%, 57% and 62% of net sales in 1997, 1996 and 1995, respectively. Raw
materials are by far the largest component of cost of goods sold. Therefore, the
Company's operating performance is sensitive to price 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. This was not possible during 1997, as product prices dropped
in the face of generally stable raw material prices throughout much of the year.
Both methanol and urea prices started to decline in the fourth quarter, which
decline continued into the first quarter of 1998, resulting in even lower
selling prices for the Company's products. Management believes that raw
materials prices may decline further in 1998, then expect them to firm up as
some production facilities for such raw materials are taken off-line.
Freight Costs. A substantial portion of Spurlock Industries' products
are priced on an "as delivered basis." For 1997, 1996, and 1995, freight costs
relating to delivery of the Company's products
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comprised approximately 3.6%, 3.9%, and 4.2%, respectively, of net sales.
Accordingly, the Company's operating performance is sensitive to movements in
freight costs.
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 line of credit in
a like amount 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 a formerly leased formaldehyde plant,
which term loan is secured by all assets.
New York Project. In the fourth quarter of 1996, the Company purchased
property in the Moreau Industrial Park, located in South Glens Falls, New York,
obtained the necessary regulatory approvals and initiated construction of a
manufacturing facility for the production of formaldehyde and resins. The
facility consists of two formaldehyde plants (one purchased and one leased), one
resin plant and ancillary equipment, buildings and tank farms. The total
estimated cost of the project is $8,300,000 for the purchased plants, excluding
soft costs such as interest, environmental permits and legal and administrative
expenses. D.B. Western, Inc. is the general contractor of the project and owns
the leased formaldehyde plant. Payments under the lease are $46,139 per month
over a ten-year term, with a purchase option at the end of three years. The
financing sources for the purchased plants include a term loan for $1,500,000,
amortized for 10 years at an interest rate of LIBOR plus 2.75%, the proceeds
from a tax-exempt bond in the amount of $6,000,000 issued by Saratoga County,
New York, amortized for 10 years at a fixed interest rate of 4.74%, and the
Company's operating cash flow for the remaining $800,000 and the soft costs. As
of December 31, 1997, the unexpended bond fund balance was approximately
$3,890,000. Management believes that construction is proceeding on schedule, and
the Moreau facility is expected to begin operations in mid-1998.
Write Off of Start-up Costs. In 1997, the Company elected to expense
certain start-up and pre-operating costs relating to the New York manufacturing
facility. Such costs aggregated $533,927. The American Institute of Certified
Public Accountants ("AICPA") Accounting Standards Executive Committee (AsSEC) is
anticipated to require the expensing of all start-up and pre-operating costs
effective with years starting after December 15, 1997. While the Company could
elect to capitalize these costs for the New York facility, it seems reasonable
that implementation of the requirement will take place. The Company has elected
the most conservative treatment, under the circumstances.
Purchase of Waverly Formaldehyde Plant. In July 1996, the Company
consummated an agreement with D. B. Western, Inc. whereby the Company purchased
a formaldehyde plant located in Waverly, Virginia formerly leased from D. B.
Western, Inc. Such agreement terminated the lease and settled all operational
performance and rent disputes with respect to the facility for $3,675,000.
Compliance with Environmental Regulations. Environmental costs charged
to operations aggregated $184,259, $202,076 and $277,349 for the years ended
December 31, 1997, 1996 and 1995, respectively. As a percentage of net sales,
such expenditures totaled .75%, .71% and .83%, respectively over such three
years. In such 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, recurring
costs of doing business in its particular industry.
Capacity Utilization. In 1997, the Waverly, Virginia formaldehyde plant
ran at approximately 83% of capacity as compared to 83% in 1996 and 85% in 1995.
The Malvern, Arkansas formaldehyde plant ran at approximately 67% in 1997, as
compared to 84% and 90% in 1996 and 1995, respectively. The decrease was due to
an oversupply of formaldehyde in the regional market served by such plant. In
1997, resin capacity utilization at the Waverly facility was 53% compared to 55%
and 60% in 1996 and
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1995, respectively. With respect to resin capacity utilization, the Malvern
facility produced at a 52% utilization rate for 1997, compared to 65% for both
1996 and 1995. The decline at Malvern was due to regional oversupplies of
product.
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, 1997.
Results of Operations
Fiscal 1997 Compared to 1996. Spurlock Industries' net sales for the
year ended December 31, 1997 were $24,725,077, a decrease of 13.7% compared to
$28,643,415 in 1996. This decrease resulted from lower average selling prices on
Spurlock Adhesives' resin and formaldehyde products due to an oversupply of
product in two of the Company's operating regions. Such oversupply was
particularly acute in the region served by the Company's Malvern, Arkansas
facility. Also, although production volume for formaldehyde remained relatively
stable in 1997 at 71,051,940 pounds as compared to 72,211,660 in 1996, resin
shipments declined 14.4% to 151,742,035 pounds, primarily due to reduced volume
sales from the Malvern plant. All sales in 1997 were generated by Spurlock
Adhesives.
Cost of goods sold for 1997 totaled $19,597,991 or 79.3% of net sales,
compared to $21,129,265 or 73.8% of net sales in fiscal 1996. This translated
into a decrease in the Company's gross margin to 20.7% in 1997 from 26.2% in
1996. Such margin deterioration resulted from the above described downward
pressure on prices exerted by customers purchasing in the competitive,
oversupplied regional markets served by the Company's two existing plants.
Management believes that the extremely competitive pricing environment
experienced in 1997 will continue through 1998, but that formaldehyde and resin
prices will begin to firm up in the Malvern and Waverly markets as current
overcapacity is eliminated. However, management believes that the markets served
by the New York facility to be completed in mid-1998 will be much more
favorable, due to industry under-capacity in that region.
Selling, general and administrative expenses totaled $4,815,638 or
19.5% of net sales in 1997, versus $4,414,422 or 15.4% of net sales in 1996. The
$401,216 increase in these expenses was due primarily to the write off of
start-up and pre-operating costs of the Moreau, New York project aggregating
$533,927. Excluding such start-up and related expenses, in 1997 selling, general
and administrative expenses fell by $132,711. Due to the contraction in net
sales, however, selling, general and administrative expenses increased, as a
percent of net sales, from 15.4% in 1996 to 19.5% in 1997.
Interest expense (which excludes interest on debt obligations related
to the New York Project, which is capitalized) declined 6.0% in 1997. Such
decline resulted primarily from lower average outstandings under the Company's
working capital facility, which resulted in turn from reduced sales and working
capital requirements.
The Company reported a pre-tax loss of ($177,044) in 1997, a
significant decline from $2,515,162 in pre-tax profits reported in the previous
year. The 1997 loss reflects primarily the decline in the gross margin and the
write-off of start-up and pre-operating costs for the Moreau project, as
described above.
The Company utilized tax benefits totaling $152,304 in 1997, consisting
of differences between the accelerated methods of depreciation for income tax
purposes and the deferred tax assets created by the post retirement funding and
the net operating loss carryforward resulting from the operating loss in 1997.
The provision for income tax in 1996 totaled $1,021,487, which consisted of
$149,415 in state income tax and $846,091 in federal income tax.
The Company reported a net loss in 1997 of ($24,740), a significant
decline from net income of $1,493,675 reported in the prior year.
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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.
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 62.4% 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 declined from $2,480,998 in 1995.
Liquidity and Capital Resources
General. For many years, the Company has 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.
Cash Flow. In 1997, Spurlock Industries reported a cash flow from net
income (loss) and depreciation and amortization of $948,837, which represented a
significant reduction from the $2,244,732 reported in 1996. The Company
supplemented such cash flow with a $224,653 reduction in trade receivables,
reflecting lower net sales, and an $805,337 increase in accounts payable and
accrued expenses. Working capital decreased by $619,003 to ($2,718,949) at
December 31, 1997. Net cash provided by operating activities of $1,700,697
effectively permitted the Company to repay notes and loans in the amount of
$1,133,388 and increase other assets (which represent deferred IRB financing
fees aggregating $492,423) by $503,539. New borrowings of $7,500,000 funded
fixed asset additions of $3,488,587 and restricted cash of $3,889,567. Such
restricted cash represents proceeds of the New York industrial development bond
financing which are being held in escrow pending disbursement for project costs.
Overall, cash and cash equivalents at the end of 1997 increased by $256,613 to
$362,685.
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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.
Credit Facility. 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. Outstanding loans under the facility totaled
$1,341,622 and $1,420,801 at December 31, 1997 and 1996, respectively, which
were substantially the total amounts available at such times based on levels of
accounts receivable and inventory on which borrowing availability is based. The
credit facility provides the Company with an important source of liquidity in
addition to its cash account and cash generated from operations. Management
believes that this credit facility and internally generated cash will be
sufficient to fund the Company's working capital needs in 1998.
The credit facility contains 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, as well as the
maintenance of certain financial ratios. During 1997, technical violations of
certain of such covenants resulted, for which the Company has received, or
expects shortly to receive, a waiver from the lender.
Long Term Debt. In addition to its working capital credit facility, the
Company had outstanding at year end 1997 long term debt totaling $9,598,315
(excluding current maturities of $1,279,188), a substantial increase from the
$3,402,621 (excluding current maturities of $1,029,090) outstanding at year end
1996. Such increase relates to borrowings totaling $7,500,000 relating to the
Moreau, New York project, consisting of a term loan in the amount of $1,500,000
and a $6,000,000 industrial revenue bond, described above. In 1996, the Company
entered into a term loan in the amount of $3,639,000 with a bank in order to
purchase a formerly leased formaldehyde plant. Outstandings under such term loan
totaled $2,830,328 at year end 1997. Primarily as a result of the significant
increase in funded debt by the Company in 1997, the ratio of total liabilities
to total net worth, a measure of leverage, increased at year end 1997 to 3.55
from 1.86 at year end 1996.
Moreau Facility. As described above, the total estimated cost of the
New York project is $8,300,000 for the purchased plants, excluding soft costs
such as interest, environmental permits and legal and administrative expenses
estimated at $600,000. D.B. Western, Inc. is the general contractor of the
project and owns the leased formaldehyde plant. Payments under the `lease are
$46,139 per month over a 10-year term, with a purchase option at the end of
three years. The financing sources for the purchased plant include a term loan
for $1,500,000, amortized over 10 years at an interest rate of LIBOR plus 2.75%,
the proceeds from a tax exempt bond in the amount of $6,000,000 issued by
Saratoga County, New York, amortized for 10 years at a fixed interest rate of
4.74%, and the Company's operating cash flow for the remaining $800,000 and the
soft costs. As of December 31, 1997, the unexpended bond fund balance was
approximately $3,890,000. Management believes that the above-described sources
of funds shall be adequate to fully fund the project, as well as meet any
additional long term funding needs, in 1998.
Emerging Issues
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or in the
year 2000. The potential costs and uncertainties to companies in addressing this
issue (the "Year 2000 issue") will depend on a number of factors, including
their software and hardware and the nature of their
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industries. Companies must also coordinate with other entities with which they
electronically interact, both domestically and globally, including suppliers,
customers, creditors, borrowers and financial service organizations.
The Company has closely examined the Year 2000 issue and the potential
costs and consequences to the Company in addressing this issue. As a periodic
improvement to its day-to-day operations, the Company is currently in the
process of upgrading its computer systems, including the software necessary to
maintain inventory controls, all of which are "Year 2000" compliant.
Implementation of these systems is expected to be completed by December 1998.
Management estimates that the Company's investment in hardware and software for
this upgrade will total approximately $20,000 over the next seven months.
The Company is further communicating with third parties with which it
does business to coordinate further action with respect to the Year 2000 issue.
The Company has recognized, in particular, that the Year 2000 issue may affect
machinery and other equipment that use processing chips. The Company has
received preliminary indications from the manufacturers of its equipment that
the equipment at issue is "Year 2000" compliant and will continue to maintain
communications relating to such compliance. As a result, management believes
that, with the implementation of the systems as described above, the Year 2000
issue is not expected to have a material impact on the Company's operations and
that the cost of the Company's addressing the Year 2000 issue is not a material
event or uncertainty that would cause its reported financial information not to
be necessarily indicative of future operating results or financial condition.
Forward-Looking and Cautionary Statements
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 the Company herein. 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 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 in Parts I and II of the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, filed with the Securities and
Exchange Commission, 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 on behalf of the Company.
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and
Shareholders
Spurlock Industries, Inc.
and Subsidiary
Waverly, Virginia
We have audited the accompanying consolidated balance sheet of Spurlock
Industries, Inc. as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. 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 audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spurlock Industries,
Inc. as of December 31, 1997 and the results of its operations, and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
Cherry, Bekaert & Holland, L.L.P.
Richmond, Virginia
March 13, 1998
April 10, 1998 (with respect to Note 2)
12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Spurlock Industries, Inc.
We have audited the accompanying consolidated balance sheets of Spurlock
Industries, Inc. as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two 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. as of
December 31, 1996 and the results of its operations, and its cash flows for each
of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Winter, Schiefley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
January 17, 1997
(Except for Note 2, for which
the date is March 13, 1998.)
13
<PAGE>
FINANCIAL STATEMENTS
Spurlock Industries, Inc.
Consolidated Balance Sheets
As of December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets
1997 1996
<S> <C> <C>
Current Assets:
Cash and cash equivalents $362,685 $106,072
Accounts receivable - trade, net 1,222,277 1,446,930
Other accounts receivable - 8,718
State income tax receivable 40,713 -
Federal income tax receivable 151,000 -
Accounts and notes receivable
- officers current portion 101,944 38,595
Inventories 530,183 541,632
Deferred tax asset 92,908 -
Prepaid income taxes - 72,477
Prepaid expenses 144,457 74,490
----------- -----------
Total current assets 2,646,167 2,288,914
Property, plant and equipment, net of
accumulated depreciation of $4,890,414
and $4,305,767 12,043,300 9,528,290
Other Assets:
Cash, restricted 3,889,567 -
Accounts and notes receivable
- officers 59,122 193,467
Cash value of annuity 171,995 40,000
Other 591,280 219,736
----------- -----------
Total other assets 4,711,964 453,203
----------- -----------
Total assets $19,401,431 $12,270,407
=========== ===========
</TABLE>
14
<PAGE>
Spurlock Industries, Inc.
Consolidated Balance Sheets
As of December 31, 1997 and 1996
(Continued)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
1997 1996
<S> <C> <C>
Current Liabilities:
Notes payable - line of credit $ 1,341,622 $ 1,420,801
Current portion of long-term debt 1,279,188 1,029,090
Accounts payable - trade 2,378,597 1,678,442
Accrued expenses 281,629 260,527
Accrued taxes 84,080 -
------------ ------------
Total current liabilities 5,365,116 4,388,860
Long-term Liabilities:
Long-term debt 9,598,315 3,402,621
Deferred tax liability - 143,476
Post retirement benefit liability 166,956 42,667
Other liabilities 3,001 -
------------ ------------
Total long-term liabilities 9,768,272 3,588,764
------------ ------------
Stockholders' Equity:
Preferred stock, $0 par value - -
5,000,000 shares authorized
no shares issued and outstanding
Common stock, no par value - -
500,000,000 shares authorized
6,573,639 shares issued and outstanding
Paid in capital 4,808,814 4,808,814
Accumulated deficit (540,771) (516,031)
------------ ------------
4,268,043 4,292,783
------------ ------------
Total liabilities and $ 19,401,431 $ 12,270,407
stockholders' equity ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
Spurlock Industries, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenue:
Net sales $24,725,077 $28,643,415 $33,243,677
Cost of sales 19,597,991 21,129,265 26,092,053
----------- ----------- -----------
5,127,086 7,514,150 7,151,624
Selling, general and
administrative expenses 4,815,638 4,414,422 3,903,371
----------- ----------- -----------
Other income and (expense):
Other income 139,307 83,376 12,007
Interest expense (627,799) (667,942) (663,662)
----------- ----------- -----------
(488,492) (584,566) (651,655)
Income (loss) before taxes (177,044) 2,515,162 2,596,598
Income tax expense (benefit) (152,304) 1,021,487 115,600
----------- ----------- -----------
Net income (loss) ($24,740) $ 1,493,675 $ 2,480,998
=========== =========== ===========
Per share information:
Basic earnings per share $0.00 $0.22 $0.37
=========== =========== ===========
Diluted earnings per share $0.00 $0.22 $0.37
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
Spurlock Industries, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Operating activities:
Net income (loss) ($24,740) $1,493,675 $2,480,998
Adjustments to reconcile net income
(loss) to net cash:
Depreciation and amortization 973,577 751,057 700,240
Issuance of common stock for services - - 5,000
Write off of intangible assets - - -
Abandonment of fixed assets - - -
Decrease in trade receivables 224,653 420,306 473,202
(Increase) in other receivables (182,995) - -
(Increase) decrease in trading securities - 200,000 (200,000)
Decrease in inventory 11,449 54,133 566,152
(Increase) decrease in prepaid expenses 2,510 (108,843) 6,001
(Increase) in deferred tax asset (92,908) - -
Increase (decrease) in deferred tax liability (143,476) 131,946 11,600
Increase (decrease) in accounts payable
and accrued expenses 805,337 (380,584) (2,187,581)
Increase in other liabilities 3,001 - -
Increase in post retirement benefit liability 124,289 42,667 -
----------- ----------- -----------
Total adjustments 1,725,437 1,110,682 (625,386)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,700,697 2,604,357 1,855,612
Investing activities:
Purchase of fixed assets (3,488,587) (1,184,369) (352,694)
Increase in cash restricted for capital expenditures (3,889,567) - -
----------- ----------- -----------
Net cash provided by (used in)
investing activities (7,378,154) (1,184,369) (352,694)
</TABLE>
(continued)
17
<PAGE>
Spurlock Industries, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
(continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Financing activities:
(Increase) decrease in other assets (503,539) 2,814 (79,381)
Acquisition of common shares - (120,000) (1,000)
Proceeds of new borrowings 7,500,000 - -
Repayment of loans to principal holders of equity securities 65,816 30,000 -
Loans to principal holders of equity securities (46,176) 125,970) (236,461)
Write-off of advances to a principal holder of equity 51,357 - -
securities
Repayment of notes and loans (1,133,388) (1,351,511) (1,012,309)
Net cash provided by (used in)
financing activities 5,934,070 (1,564,667) (1,329,151)
Net increase in cash and cash equivalents 256,613 (144,679) 173,767
Beginning cash 106,072 250,751 76,984
----------- ----------- -----------
Ending cash $ 362,685 $ 106,072 $ 250,751
=========== =========== ===========
Supplemental cash flow information:
Cash paid for: Interest expense $ 621,149 $ - $ 605,825
Income taxes $ 84,080 $ 658,577 $ 104,000
Non-cash financing and investing activities:
Acquisition of fixed assets with note payable $ - $ 3,305,168 $ 50,818
Conversion of accounts payable to note $ - $ - $ 839,500
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
Spurlock Industries, Inc.
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Paid in Preferred Preferred Accumulated
Shares Capital Shares Stock Deficit
<S> <C> <C> <C> <C> <C>
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 (151,427) (120,000) - - -
shares
Net income for the year - - - - 1,493,675
---------- ----------- ----------- ----------- ------------
Balance December 31, 1996 6,573,639 4,808,814 - - (516,031)
Net loss for the year - - - - (24,740)
---------- ----------- ----------- ----------- ------------
Balance December 31, 1997 6,573,639 $4,808,814 - $ - $ (540,771)
========== =========== =========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
SPURLOCK INDUSTRIES, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Note 1 - Summary of significant accounting policies
Organization and operations
Spurlock Industries, Inc. (the "Company") was originally incorporated on March
17, 1986 in Colorado as Air Resources Corporation. 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.
Principles of consolidation
The consolidated financial statements include the accounts of its wholly owned
subsidiary Spurlock Adhesives, Inc. All significant intercompany transactions
have been eliminated. Substantially all of the Company's revenues have been
derived from the operations of Spurlock Adhesives, Inc.
Restricted cash
Undisbursed funds generated by the Industrial Revenue Bonds are restricted to
the construction of the new formaldehyde manufacturing facility in New York
State. Disbursements are executed by the trustees upon the presentation of
approved construction draws. The Company has no other access to these funds.
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.
1997 1996
- -------------------------------------------------------------------------
Raw materials $ 467,319 $397,511
Work in process 8,028 9,493
Finished goods 54,836 134,628
-------------------------------
$ 530,183 $541,632
===============================
20
<PAGE>
Note 1 - Summary of significant accounting policies (continued)
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.
Useful lives for property and equipment are as follows:
Building 20-30 years
Machinery and equipment 5-25 years
Office equipment 7 years
Vehicles 4-8 years
Start-up and pre-operating costs
Start-up and pre-operating costs include all nonrecurring, non-capital
manufacturing and other costs, such as promotional expenses incurred in
preparing for the operation of a new facility are expensed as incurred.
Deferred financing costs
Costs associated with obtaining Industrial Revenue Bond financing to construct
the new manufacturing facility in New York State, were capitalized. These costs
are to be amortized, utilizing the interest method, over the life of the
Industrial Revenue Bond, as an adjustment to interest expense.
Revenue recognition
The Company recognizes revenue on the sales of its products at the time of
shipment.
Cash and cash equivalents
Cash and cash equivalents, consist of deposits and highly liquid debt
instruments with original maturities of less than 90 days.
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 $184,259,
$202,076 and $277,349 for the years ended December 31, 1997, 1996 and 1995,
respectively.
21
<PAGE>
Note 1 - Summary of significant accounting policies (continued)
Advertising
Advertising costs are charged to expense when incurred. Amounts charged to
expense were $8,291, $28,101 and $27,880 for the years ended December 31, 1997,
1996 and 1995, respectively.
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. At December 31, 1997, the allowance for doubtful accounts receivables
was $12,981. There was no recorded allowance for doubtful allowance at December
31, 1996.
Income taxes
Deferred income taxes arise from temporary differences resulting from income and
expense items (principally net operating losses, postretirement benefits, and
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.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
Earnings per share
Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings per
Share. This statement replaces primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if all stock
options and other stock-based awards, as well as convertible securities, were
exercised and converted into common stock. All net income per share amounts for
all periods have been presented and, where appropriate, restated to conform to
SFAS No. 128 requirements.
22
<PAGE>
Note 1 - Summary of significant accounting policies (concluded)
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 maintain cash
deposits at financial institutions in excess of the $100,000 limit covered by
the Federal Deposit Insurance Corporation. The uninsured cash balance at
December 31, 1997 amounted to $248,640. The Company has several major customers,
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.
Stock-based compensation
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for the stock options granted and employee stock purchases. The
Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting
for Stock-Based Compensation.
Recently issued accounting pronouncements
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) and
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 130 establishes standards for the reporting and displaying of
comprehensive income and its components in financial statements. SFAS 131
supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise,"
and specifies new disclosure requirements for operating segment financial
information. In February 1998, SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (SFAS 132) was issued. SFAS 132
revises and standardizes employers' disclosures about pension and other
postretirement benefit plans. These standards are effective for fiscal years
beginning after December 15, 1997. The Company will adopt the provisions of
these standards during the first quarter of 1998 and does not anticipate their
adoption to have a material effect on the financial statements.
Note 2 - Misappropriation of assets and restatement of financial statements
In January, 1998, the Company discovered that financial information regarding
payments to a note receivable for an executive officer 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 admitted to the payment of personal
expenses by the Company recorded as equipment. An independent investigation
concluded that these acts were apparently conducted through collusion of two
other employees of the Company. Accordingly, records of the Company, and its
predecessor companies, were apparently falsified in 1992.
23
<PAGE>
Note 2 - Misappropriation of assets and restatement of financial statements
(concluded)
In total, the independent investigation revealed approximately $275,000 in
personal expenses paid by the Company and charged to selling, general and
administrative expense. Additional personal expenses of approximately $73,000
were capitalized as equipment.
In February 1998, the Company received full restitution for the $73,000 in
personal expenses capitalized and approximately $8,000 in personal expense
charged to selling, general and administrative expenses. The $73,000 has been
reclassified as a note receivable and interest income has been accrued at the
cost of funds to the Company. Total restitution, including accrued interest,
aggregated $101,944.
On April 10, 1998, settlement was reached regarding the remaining personal
expenses paid by the Company, aggregating approximately $267,000. Restitution
will include interest, at the cost of funds to the Company to settlement date,
as well as partial reimbursement of professional expenses. The aggregate
principal amount of restitution, at April 10, 1998, was $375,000. The principal
amount of restitution will bear interest at 9.00%, payable monthly in advance,
with the entire principal amount due April 8, 2003. Although collateral and
guarantees were obtained, it is management's opinion that sufficient uncertainty
exists to recognize income as received.
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.
After restatement, the pretax effect of the overstatement of selling, 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. The amounts of the restatements were mitigated by the initial
recognition of the personal expense as travel and entertainment expenses and the
full restitution of the amounts capitalized. Since learning of the
misappropriation, the Company has taken actions intended to prevent a recurrence
of this situation.
Note 3 - Investments
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. These were no investments held as trading
securities as of December 31, 1997 and 1996 or for the year ended December 31,
1997.
The Company purchased 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 aggregating $(16,333).
The Company had no sales proceeds from trading securities during the year ended
December 31, 1995. The Company had no unrealized gains (losses) at December 31,
1995.
24
<PAGE>
Note 4 - Property and equipment
<TABLE>
<CAPTION>
Property and equipment consist of the following:
1997 1996
---------------------------------
<S> <C> <C>
Land $ 219,233 $ 219,233
Building 5,440,321 547,041
Machinery and equipment 7,358,963 12,326,041
Construction in progress 2,932 305,913
Vehicles 273,596 285,189
Furniture and fixtures 161,101 150,640
New York project 3,477,568 -
---------------------------------
16,933,714 13,834,057
Less: Accumulated depreciation and amortization 4,890,414 4,305,767
---------------------------------
$ 12,043,300 $ 9,528,290
============== ==============
</TABLE>
Depreciation charged to operations was $973,577, $751,057 and $700,240 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Note 5 - Line of credit
The Company utilizes a line of credit secured by accounts receivable and
inventories to provide working capital. Advances under this line of credit bear
interest at the lesser of prime + 1/2% or LIBOR + 2.75%, and are limited to the
lesser of $3,500,000, or 85% of eligible accounts receivable and 60% of the
inventory value. At December 31, 1997 and 1996, advances outstanding totaled
$1,341,622 and $1,420,801, respectively.
Note 6 - Advances and notes receivable for principal holders of equity
securities
Accounts and notes receivable for principal holders of equity securities
consisted of the following at December 31:
1997 1996
-----------------------------
Notes receivable and advances
with various interest rates $ 161,066 $ 232,062
Less: current portion 101,944 38,595
-----------------------------
$ 59,122 $ 193,467
============ ============
During 1997, the Company wrote off $51,357 in advances and notes receivable for
a principal holder of equity securities. See Note 2.
25
<PAGE>
Note 7 - Long-term debt
<TABLE>
<CAPTION>
Long-term debt consists of the following at December 31:
1997 1996
-----------------------------
<S> <C> <C>
Note payable bank, payable in monthly installments
of $12,500 plus interest at 8.0% through May 2005 $ 1,500,000 $ -
Industrial revenue bonds, payable in quarterly installments
of $150,000 with interest at 4.74% on December 31, 1997 6,000,000 -
Note payable bank, payable in monthly installments of
$50,542 with interest at prime plus .5% or LIBOR plus
2.75% (8.42% at December 31, 1997) secured by
plant and equipment due July, 2002 2,830,328 3,436,832
Note payable bank, payable in monthly installments
of $1,832 at 12% interest, secured by real property due in
August, 2004 99,934 109,295
Note payable vendor, payable in monthly installments
of $23,320 with interest at prime plus 1.5% (10% at
December 31, 1997) due March, 1998 69,940 349,780
Note payable, supplier, payable in monthly installments
of $14,814, with interest at 8.25%, through August 1999 263,185 400,504
Note payable, bank, payable in monthly installments of
$390 including interest of 8.88% through July 1999 6,904 10,786
Note payable, vendor, payable in monthly installments of
$784 including interest of 13.4% through October 1999 15,552 -
Various notes payable, payable in monthly installments
of $4,634 with interest from 8% to 10% due December 1997
to October 2000 secured by personal property 91,660 135,300
-----------------------------
10,877,503 4,431,711
Less current portion 1,279,188 1,029,090
-----------------------------
$ 9,598,315 $ 3,402,621
=========== ===========
</TABLE>
26
<PAGE>
Note 7 - Long-term debt (concluded)
Maturities of long-term debt are as follows:
December 31, 1998 $ 1,279,188
December 31, 1999 1,446,368
December 31, 2000 1,301,145
December 31, 2001 1,296,647
December 31, 2002 1,096,647
Later years 4,456,780
------------
$ 10,877,527
============
At December 31, 1997, the outstanding principal balance of the industrial
revenue bonds was $6,000,000. The issue is at $6,000,000 with quarterly payments
of $150,000 beginning January 31, 1998 at 4.74% interest rate. The bond issue is
collateralized by property, plant, and equipment.
The Company had an outstanding irrevocable letter of credit in the amount of
$6.0 million as of December 31, 1997. This letter of credit, which has a term of
five years, collateralizes the Company's obligations under the Industrial
Revenue Bond financing for the New York State manufacturing facility. The fair
value of this letter of credit approximates the contract value based on the
nature of the fee arrangement with the issuing banks.
Amortization of deferred financing costs aggregated $51,423 in 1997. There were
no deferred financing costs amortized for the years ended December 31, 1996 and
1995.
The Company capitalizes interest on assets constructed for its formaldehyde
production facility in New York State. In 1997, total interest costs incurred
were $683,481, of which $55,682 was capitalized. Interest was not capitalized
for 1996 or 1995.
In 1997, $533,927 of start-up and pre-operating expenses incurred in the
construction and initial production of the new manufacturing facility in New
York State were written off. There were no costs of this nature in 1996 and
1995.
27
<PAGE>
Note 8 - Financial instruments with off-balance-sheet risk
During 1997, the Company entered into an interest rate swap agreement ("swap")
for purposes of fixing the variable rate aggregated the Industrial Revenue Bond
("IRB") borrowing. This swap alters the interest rate characteristics of the IRB
to eliminate the interest rate sensitivity. Swaps involve the periodic exchange
of payments over the life of the agreements. Amounts received or paid on swaps
are used to manage interest rate sensitivity. At December 31, 1997, the Company
had one swap agreement outstanding, the net effect of which is to effectively
covert the $6.0 million variable rate IRB to a fixed rate of 4.74% until
maturity. Payments or receipts under this agreement are due monthly. Changes in
the fair value of the swap is not reflected in the accompanying financial
statements. The estimated fair value of this instrument was $(182,921) as of
December 31, 1997. The Company's credit exposure on this swap is limited to the
value of the swap that has become favorable to the Company in the event of
nonperformance by the counterparties. The Company did not require collateral
from counterparties on its existing agreement. The Company actively monitors the
credit ratings of counterparties and anticipates performance by the counter
parties with whom they transacted the swap.
Note 9 - Related party transactions
During September 1994 a shareholder of the Company entered into an agreement to
purchase 533,333 shares of preferred stock. During January 1996 this shareholder
converted these shares and 666,667 shares of preferred stock into common stock.
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 balance
as of December 31, 1997 was $59,122. 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 an Agreement and Plan
of Reorganization dated April 22, 1992.
In July 1996, the Company entered into an employment contract with its founder
and former chief executive officer to serve as its vice president for product
development through August 31, 1999. The contract provides for an annual salary
of $180,000 during the contract term. The contract also provides for post
retirement benefit payments of $100,000 per year for a five-year period
beginning August 31, 1999. The Company intends to fund the post retirement
payments currently by depositing monthly payments of approximately $12,000 into
an interest bearing account.
The estimated payment assumes an earned interest rate of 5% per year on the
deposit amounts and a discount rate of 8% per year to arrive at the net present
value of the annual retirement benefit due at August 31, 1999. The Company has
recorded $124,284 and $42,667 of expense for post retirement benefits for the
years ended December 31, 1997 and 1996 respectively. The Company estimates that
its net commitment for the period from January 1, 1998 to August 31, 1999
pursuant to this contract will be approximately $864,000 for both salary and
post retirement benefits. The Company has invested in annuities to fund the post
retirement benefit. The cash value of these annuities aggregated $171,995 and
$40,000 as of December 31, 1997 and 1996, respectively.
28
<PAGE>
Note 9 - Related party transactions (concluded)
In 1993, the Company made advances to an Executive Officer aggregating $126,000.
These advances were offset through the purchase of land adjacent to the Waverly,
Virginia production facility. In March 1994, a mortgage of $130,000 was found to
encumber the property, preventing transfer of title. In 1997, these advances
were discovered as unpaid and unrecognized. The advances were recognized and the
remaining amount repaid by the Executive Officer in the amount of $97,633 on
October 15, 1997.
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.
The Company has remaining operating leases for trucking and rail car equipment
which have fixed annual payments as follows: $34,824 in 1998, $33,000 in 1999,
$33,000 in each year thereafter through 2001.
Rent expense was $78,916, $395,627 and $761,997 for the years ended December 31,
1997, 1996 and 1995.
Note 11 - Income taxes
Deferred income taxes arise from temporary differences resulting from income and
expense items reported for financial accounting and tax purposes in different
periods. Deferred taxes are classified as current or non-current, depending on
the classification of assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or non-current depending on the periods in
which the temporary differences are expected to reverse.
Deferred tax assets and liabilities at December 31, 1997 and 1996 resulted from
the following:
1997 1996
---------------------------
Deferred tax assets
Operating loss carry forward $ 69,682 $ -
Post retirement liability 63,925 14,507
Deferred tax liabilities
Accelerated depreciation 40,699 157,983
29
<PAGE>
Note 11 - Income taxes (concluded)
The provision for income taxes expense (benefit) at
December 31, 1997 and 1996 consists of the following:
1997 1996
-----------------------------
Current $ 6,329 $ 987,910
Deferred (158,633) 26,323
-----------------------------
$ (152,304) $ 1,021,487
=========== ===========
A reconciliation of the federal taxes at statutory rates to the tax provision
for the years ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Federal statutory rate $ 69,510 $ 846,091 $ 882,843
State income taxes 14,571 149,415 104,000
Utilization of loss carry forward (69,682) (13,912) (801,532)
Surtax exemption - - (11,750)
Book/tax depreciation difference 13,838 (48,083) (34,000)
Post retirement benefits (63,925) 14,507 -
Other (116,616) 73,469 (23,961)
--------------------------------------
Provision for income taxes expense (benefit) $(152,304) $ 1,021,487 $ 115,600
======================================
</TABLE>
Note 12 - Stockholders' equity
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 $0.50 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 $0.55 for a ten year period. No options were granted for the year
ended December 31, 1997.
30
<PAGE>
Note 12 - Stockholders' equity (concluded)
Following is a summary of the transactions in the plan:
Weighted
Shares Average Price
----------------------------
Balance, beginning of period - $ -
Granted 210,000 0.50
Canceled - -
Exercised - -
-------------------------
Balance, December 31, 1995 10,000 0.50
Granted 75,000 0.55
Canceled - -
Exercised - -
-------------------------
Balance, December 31, 1996 and 1997 285,000 $0.51
=======
Options available at December 31, 1997 215,000
=======
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rate of 6.87%; dividend yields of 0%; volatility factor of 2.05%; and a
weighted-average expected life of the option of 5.2 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is calculated as of the date of grant. The Company's pro forma information
follows:
1997 1996 1995
--------------------------------------------
Pro forma net income (loss) $ (24,740) $ 1,474,969 $ 2,433,940
Pro forma earnings per share
Basic $ 0.00 $ 0.22 $ 0.36
Diluted $ 0.00 $ 0.21 $ 0.36
During January, 1996 the holder of the 1,200,000 shares of preferred stock of
Air Resources Corporation converted these shares into 2,400,000 shares of common
stock of Air Resources Corporation. In connection with the recapitalization, the
Company agreed to reacquire 80,000 shares of the Air Resources Corporation
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.
31
<PAGE>
Note 13 - Earnings per share
The following table sets forth the reconciliation of the numerators and
denominators of the basic and diluted earnings per share ("EPS") computations:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) available to shareholders $ (24,740) $ 1,493,675 $ 2,480,998
============ ============ ============
Denominator:
Weighted average shares outstanding 6,573,639 6,711,733 6,717,666
---------------------------------------------
Basic EPS weighted average shares outstanding 6,573,639 6,711,733 6,717,666
Effect of dilutive securities:
Incremental shares attributable to the
Stock Option Plan 10,509 210,900 52,500
---------------------------------------------
Diluted EPS weighted average shares outstanding 6,584,148 6,922,633 6,770,166
=============================================
Basic earnings per share $ 0.00 $ 0.22 $ 0.37
=============== =============== ===============
Diluted earnings per share $ 0.00 $ 0.22 $ 0.37
=============== =============== ===============
</TABLE>
32
<PAGE>
Note 14 - 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, 1997, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
Receivable
Customer Sales % at 12/31
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
International Paper $ 4,423,800 17% $ 158,681
Union Camp 3,919,989 15 170,026
Schenectady 3,869,340 15 71,964
Willamette 4,715,645 19 113,564
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
</TABLE>
Note 15 - Commitments and contingencies
In connection with the construction of the formaldehyde production facility in
New York State, the Company has entered into a turnkey plant construction
agreement with D.B. 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. The total amount outstanding at
December 31, 1997 was $3,222,100. Construction is currently scheduled for
completion in June 1998.
Should the Company be unable to complete the contract, the deposit would be
forfeited and any additional costs due and payable incurred by D.B. Western in
connection with the project would become due by the Company.
In connection with the new production facility in New York state, the Company
entered into an operating lease agreement with D.B. Western, Inc. on September
30, 1997, for a formaldehyde plant adjacent to the Company's facility. The term
of the lease is for ten (10) years at a monthly rental payment of $46,139.
Rental payments commence ten days after the plant is mechanically operational.
The Company anticipates completion of the facility in mid-1998. Based upon
completion of the facility on July 1, 1998, the Company estimates lease payments
of $276,834 in 1998 and $553,668 for each year from 1999 to 2007. Rental expense
for 2008 is estimated to be $276,834.
33
<PAGE>
Note 15 - Commitments and contingencies (concluded)
The Company purchases substantially all of its three raw material components for
its resin, formaldehyde, and fertilizer operations from four suppliers. The
Company purchased $13,488,767, $15,158,111 and $19,232,831 from these suppliers
during 1997, 1996 and 1995 and had a balance due to them of $1,742,592 and
$1,089,433 at December 31, 1997 and 1996. The Company believes that alternate
sources for its raw materials are readily available.
In April 1997, a shareholders' derivative suit was filed against the Company and
certain current and former officers and directors of the Company in State
District Court in Denver, Colorado. The suit, which has subsequently been
removed to the United States District Court for the District of Colorado,
alleges that the defendants engaged in various activities that breached their
fiduciary duties to the plaintiffs and/or violated provisions of Colorado law
applicable to domestic corporations.
The Special Litigation Committee is currently conducting an investigation into
matters that are likely to cause the supplement of its report, initially issued
in October 1997. The Company expects to defend the lawsuit to the full extent
appropriate, upon resolution of the pending investigation. At this time,
management cannot reliably estimate the potential effect of this suit on the
financial statements of the Company.
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 16 - 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 1997, 1996 and 1995 were $166,282,
$132,476 and $113,114, respectively.
34
<PAGE>
Note 17 - Disclosures about Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
Carrying Est. Fair Carrying Est. Fair
Value Value Value Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash $ 362,685 $ 362,685 $ 106,072 $ 106,072
Accounts receivable 1,222,277 1,222,277 1,446,930 1,446,930
Notes receivable 161,066 161,066 232,062 232,062
Cash value of annuity 171,995 171,995 40,000 40,000
Financial liabilities
Notes Payable 1,341,622 1,341,622 1,420,801 1,420,801
Long term debt 9,598,315 9,598,315 3,402,621 3,402,621
Post retirement benefit liability 166,956 166,956 42,667 42,667
Financial instruments with off-balance sheet risk
Interest rate swap agreement $ - $ (182,921) $ - $ -
</TABLE>
35
<PAGE>
MANAGEMENT
Directors
Name Term Expires in:
Raymond G. Tuttle 2000
Glen S. Whitwer 1998
Harold N. Spurlock 1999
Phillip S. Sumpter 1999
Executive Officers
Phillip S. Sumpter, Chairman of the Board and Chief Executive Officer
of the Company and Spurlock Adhesives.
Irvine R. Spurlock, President of the Company and Spurlock Adhesives.
Harold N. Spurlock, Vice President of Spurlock Adhesives in charge of
product development.
Kirk J. Passopulo, Corporate Secretary and Director of Information
Systems & Environmental Affairs of the Company.
Lawrence C. Birkholz, Controller of the Company and Spurlock Adhesives.
John D. Fitzgerald, Jr., Director of Sales and Marketing for Spurlock
Adhesives.
Business Experience
Summarized below is the business experience for the past five or more
years of each director and executive officer.
Phillip S. Sumpter, 58, has been Chairman of the Board of Directors and
Chief Executive Officer of both the Company and Spurlock Adhesives since
February 11, 1998. Mr. Sumpter has served as a director of the Company since
December 1995 and was its Executive Vice President from March 1996 to February
11, 1998. He was a director of Air Resources from December 1995 to July 1996. In
March 1996, he was appointed Executive Vice President of Spurlock Adhesives, a
subsidiary of the Company and Air Resources. He was in private practice as a
business consultant from June 1993 to March 1996. During such period, he also
served as Director of Marketing of Monadnock Lifetime Products, Inc., a
manufacturer of police protection equipment. Mr. Sumpter was Chairman of the
Board of Wibbies, Inc., a manufacturer of children's clothing, from February
1990 to May 1993. In October 1993, Wibbies, Inc. filed a petition for
liquidation and sale of assets under Maryland law.
Irvine R. Spurlock, 44, has served as President of the Company since
August 1996, and as President of Spurlock Adhesives since 1989. He had
previously served as Chairman of the Board of Directors and Chief Executive
Officer of the Company since August 1996, as a director of the Company since
January 1996, as Chairman of the Board of Directors and Chief Executive Officer
of Spurlock Adhesives since August 1996, and as a Director of Spurlock Adhesives
since 1989. On February 11,
36
<PAGE>
1998, Mr. Spurlock resigned as the Chairman of the Board and Chief Executive
Officer, and as a director, of both the Company and Spurlock Adhesives.
Harold N. Spurlock, 73, has served as a director of the Company since
January 1996. Mr. Spurlock was Chairman of the Board of Directors and Chief
Executive Officer of the Company from January 1996 to August 1996. He served as
Chairman of the Board of Directors and Chief Executive Officer of Air Resources
from August 1992 to July 1996 and as President from July 1994 to July 1996. He
also served as Chairman of the Board of Spurlock Adhesives, which he founded,
from November 1989 until August 1996. In August 1996, Mr. Spurlock became a Vice
President of Spurlock Adhesives in charge of product development.
Raymond G. Tuttle, 71, has served as a director of the Company since
January 1997. Mr. Tuttle has been in private practice as a commission salesman
of structural steel since 1995. Mr. Tuttle has served as Chairman of the Board
of Standard Supplies Inc., a manufacturer of fabricated steel located in
Rockville, Maryland, and as General Manager for approximately the past 13 years.
He also served as a member of the Board of Directors of Devlin Lumber, a lumber
distributor.
Glen S. Whitwer, 53, has served as a director of the Company since
August 1996, and has been a principal of Whitwer & Company, Inc., a management
consulting firm located in Kensington, Maryland, since September 1994. He was
co-owner of Quinn, Whitwer & Co., Inc., a business consultant located in
Bethesda, Maryland, from July 1986 to September 1994.
Kirk J. Passopulo, 44, has served as Corporate Secretary and Director
of Information Systems & Environmental Affairs since February 1998. Mr.
Passopulo previously served as Plant Manager of Spurlock Adhesives from 1993 to
1998.
Lawrence C. Birkholz, 59, has served as Controller of the Company and
Spurlock Adhesives since February 1998. Mr. Birkholz previously served as
Controller-Treasurer of UCB Chemicals from 1985 to 1994, and served in the same
capacity at Paramount Industries, a bedding manufacturer, from 1995 to 1996. He
also served as Chief Financial Officer for Burger Busters, Inc. from 1996 to
1997.
John D. Fitzgerald, Jr., 55, has served as Director of Sales and
Marketing of Spurlock Adhesives since April 1, 1998. Mr. Fitzgerald previously
served as Senior Project Planner with Union Camp Corporation, a paper and wood
products corporation, from November 1995 until March 1998, where he was
responsible for new products and technical transfers. Prior to that, he served
as a Plant Manager at Union Camp from October 1990 until November 1995.
Changes and Disagreements with Accountants
on Accounting and Financial Disclosure
On February 17, 1998, the Board of Directors approved the replacement
of James E. Scheifley & Associates, P.C. (formerly Winter, Scheifley &
Associates, P.C.) as the independent accountant chosen to audit the Company's
financial statements and approved the appointment of Cherry, Bekaert & Holland,
L.L.P. as the Company's independent accountant for the 1997 fiscal year. The
Company has previously disclosed the appointment to the Securities and Exchange
Commission on a Current Report on Form 8-K dated February 17, 1998.
37
<PAGE>
MARKET PRICES AND DIVIDEND POLICY
Market Information. There is no established public trading market for
the Common Stock of Spurlock Industries. The following table shows high and low
bid prices reported in the National Daily Quotation Sheets and the Nasdaq
Bulletin Board (Symbol: "SKII"), which are quotations between dealers without
adjustment for retail markups, markdowns, or commissions, and may not represent
actual transactions.
Bid Price
------------------------
High Low
Fiscal Year Ended December 31, 1996
First Quarter............................ $ 1.0625 $ .3125
Second Quarter........................... 1.4375 .25
Third Quarter............................ 1.125 .50
Fourth Quarter........................... .75 .375
Fiscal Year Ended December 31, 1997
First Quarter............................ $ .625 .375
Second Quarter........................... .4375 .375
Third Quarter............................ .38 .375
Fourth Quarter........................... .45 .38
Approximate Number of Holders of Common Stock. The number of holders of
record of Spurlock Industries' Common Stock, no par value, on December 31, 1997
was approximately 227.
Dividends. Holders of Common Stock are entitled to receive such
dividends as may be declared by Spurlock Industries' Board of Directors. No cash
dividends have been paid with respect to Spurlock Industries' Common Stock and
no dividends are anticipated to be paid in the foreseeable future.
38
<PAGE>
GENERAL INFORMATION
Available Information
Spurlock Industries is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004, and
at the following Regional Offices of the Commission: New York Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048 and Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can also be obtained by mail from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549-1004, at prescribed rates. The Commission maintains an Internet address
(http: //www.sec.gov) that contains reports, proxy statements and other
information regarding registrants, such as the Company, that file electronically
with the Commission.
COPIES OF SPURLOCK INDUSTRIES' ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997 (NOT INCLUDING APPENDICES THERETO) ARE AVAILABLE TO ANY
RECIPIENT OF THIS ANNUAL REPORT, WITHOUT CHARGE, UPON WRITTEN REQUEST DIRECTED
TO: KIRK J. PASSOPULO, CORPORATE SECRETARY, P.O. BOX 8, WAVERLY, VIRGINIA 23890.
Corporation Headquarters
125 Bank Street
Waverly, Virginia 23890
Tel. (804) 834-8980
Annual Meeting
The 1998 Annual Meeting of Shareholders will be held at 10:00 a.m. on
Wednesday, August 12, 1998, in the offices of Williams, Mullen, Christian &
Dobbins, Two James Center, 1021 East Cary Street, 16th Floor, Richmond, Virginia
23219.
Transfer Agent
The Transfer Agent for the Company's Common Stock is American Security
Transfer, Inc., of Denver, Colorado.
Investor Relations
Kirk J. Passopulo, Corporate Secretary, (804) 834-8980.
Independent Auditors
Cherry, Bekaert & Holland, L.L.P., 1700 Bayberry Court, Suite 300,
Richmond, Virginia 23226-3791, (804) 673-4224.
39
<PAGE>
Corporate Counsel
Williams, Mullen, Christian & Dobbins, Two James Center, 1021 East Cary
Street, 16th Floor, Richmond, Virginia 23219.
40
