SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: March 31, 1998
Commission file Number: 000-21133
SPURLOCK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Virginia 84-1019856
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
209 W. Main St., Waverly, VA 23890
(Address and zip code of principal executive offices)
(804) 834-8980
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to the filing requirements for
at least the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:
Number of Shares Outstanding
Class as of March 31, 1998
Common Stock, no par value 6,573,639
<PAGE>
SPURLOCK INDUSTRIES, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPURLOCK INDUSTRIES, INC.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 127,716 $ 362,685
Accounts receivable, trade, net 1,922,422 1,222,277
State income tax receivable 40,713 40,713
Federal income tax receivable 151,000 151,000
Accounts and notes receivable - officers
current portion - 101,944
Inventories 528,618 530,183
Deferred tax asset 92,908 92,908
Prepaid expenses 83,012 144,457
---------- ----------
Total current assets 2,946,389 2,646,167
---------- ----------
Property, plant and equipment, net
of accumulated depreciation of
$5,133,699 and $4,890,414 13,228,314 12,043,300
---------- ----------
Other assets:
Cash restricted 2,656,816 3,889,567
Accounts and notes receivable -
officers 41,592 59,122
Cash value of annuity 209,755 171,995
Other 596,025 591,280
---------- ----------
Total other assets 3,504,188 4,711,964
---------- ----------
Total assets $ 19,678,891 $ 19,401,431
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Notes payable, line-of-credit $ 1,740,135 $ 1,341,622
Current portion of long-term debt 1,007,966 1,279,188
Accounts payable, trade 2,232,064 2,378,597
Accrued expenses 305,504 281,629
Accrued taxes 84,080 84,080
---------- ----------
5,368,749 5,365,116
Total current liabilities ---------- ----------
2
<PAGE>
Long-term liabilities
Long-term debt 9,650,334 9,598,315
Deferred tax liability - -
Post retirement benefit liability 209,594 166,956
Other liabilities 967 3,001
---------- ----------
Total long-term liabilities 9,860,995 9,768,272
---------- ----------
Stockholders' equity
Preferred stock, no par value
5,000,000 shares authorized
no shares issued and outstanding - -
Common stock, no par value
500,000,000 shares authorized - -
6,573,639 shares issued and outstanding 4,808,814 4,808,814
Paid in capital (359,667) (540,771)
---------- ----------
Accumulated deficit
4,449,147 4,268,043
---------- ----------
Total liabilities and stockholders'
equity $19,678,891 $19,401,431
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
SPURLOCK INDUSTRIES, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Revenue
Net sales $ 6,053,693 $ 5,961,288
Cost of sales 4,522,032 4,512,915
----------------- -----------------
1,531,661 1,448,573
----------------- -----------------
Selling, general and administrative expenses 1,297,826 1,182,082
----------------- -----------------
Other income and (expense)
Other income 47,686 13,991
Interest expense (100,417) (55,197)
------------------ ------------------
(52,731) (41,206)
------------------ ------------------
Income (loss) before taxes 181,104 225,085
Income tax expense (benefit) - 66,773
----------------- -----------------
Net income $ 181,104 $ 158,312
================= =================
Per share information:
Basic earnings per share $ .028 $ .024
================= =================
Diluted earnings per share $ .028 $ .024
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
SPURLOCK INDUSTRIES, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 181,104 $ 158,312
Adjustment to reconcile net income to net cash:
Depreciation and amortization 243,285 249,000
(Increase) decrease in trade receivables (700,145) (172,231)
(Increase) decrease in inventories 1,565 (151,718)
(Increase) decrease in prepaid expenses 61,445 (60,405)
Increase (decrease) in accounts payable and accrued expenses (122,658) 216,510
Increase (decrease) in other liabilities (2,034) -
Increase (decrease) in post retirement benefits 42,638 32,000
Increase (decrease) in deferred tax liability - 66,773
------------------- -------------------
Total adjustments (475,904) 179,929
------------------- -------------------
Net cash provided by (used in) operating activities (294,800) 338,241
Investing activities:
Purchase fixed assets (1,428,299) (331,059)
(Increase) decrease in cash restricted for capital expenditures 1,232,751 -
------------------- -------------------
Net cash provided by (used in) investing activities (195,548) (331,059)
Financing activities:
(Increase) decrease in other assets (42,505) (96,113)
Proceeds of new borrowings 450,419 -
Repayment of notes and loans (272,009) (5,427)
Repayment of loans to principal holders of equity securities 119,474 -
------------------- -------------------
Net cash provided by (used in) financing activities 255,379 (101,540)
Net increase (decrease) in cash and cash equivalents (234,969) (94,358)
Beginning cash and cash equivalents 362,685 106,072
------------------- -------------------
Ending cash and cash equivalents $ 127,716 $ 11,714
=================== ===================
Supplemental cash flow information:
Cash paid for: Interest expense $ 100,221 $ 55,197
=================== ===================
Income taxes $ - $ 66,773
=================== ===================
</TABLE>
5
<PAGE>
SPURLOCK INDUSTRIES, INC.
Notes to Consolidated Financial Statements
March 31, 1998
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
Income taxes were computed using a statutory rate of 34% net of the effects of
federal surtax exemptions and deductions for state income taxes. There was no
provision for income taxes based upon sufficient net operating loss
carryforwards for the first quarter earnings.
As of March 31, 1998 and December 31, 1997, inventories consisted of the
following:
March 31, 1998 December 31, 1997
-------------- -----------------
Raw materials $382,761 $502,342
Work in process 7,698 9,422
Finished goods 138,159 181,586
-------- --------
$528,618 $693,350
======== ========
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," and SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." There is
no material difference in the financial statements of the Company between
reporting income on a comprehensive basis under SFAS 130, and the current
operating basis. The Company has no separate reporting segment under SFAS 131.
6
<PAGE>
SPURLOCK INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
The following discussion contains certain forward-looking statements,
generally identified by phrases such as "the Registrant expects" or "Management
believes" or words of similar effect. The Registrant 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 Registrant's
actual results and could cause the Registrant's actual results for 1998 and
beyond to differ materially from those expressed in any forward-looking
statements made herein.
Also, certain factors which could cause actual results to differ from
those contained in any such forward-looking statements are contained in the
Registrant's annual report on Form 10-K for the fiscal year ended December 31,
1997 under the heading "Forward-Looking and Cautionary Statements," and are
hereby incorporated herein by reference.
Results of Operations
For the three months ended March 31, 1998, the Company generated net income
after tax of $181,104 as compared to net income of $158,312 for the same period
last year.
The Company's net sales for the quarter ended March 31, 1998 were $6,053,693 as
compared to $5,961,288 for the same period for 1997, an increase of 1.6%. All
the sales were from shipments of resin and formaldehyde by the Registrant's
wholly owned subsidiary, Spurlock Adhesives, Inc.
Cost of sales for the first quarter was $4,522,032 or 74.7% of net sales as
compared to $4,512,915 or 75.7% for the same period in 1997. The improvement in
cost of sales as a percentage of net sales is primarily a result of lower raw
material prices. Accordingly, the gross margin increased to 25.3% from 24.3%
from the prior year period.
Operating expenses (sales, general and administrative expenses) for the first
quarter increased by $115,744 to $1,297,826 or 21.44% of net sales as compared
to $1,182,082 or 19.83% of net sales for the same period in 1997. This increase
on essentially comparable sales primarily reflects increased legal and
accounting expenses relating to the shareholder derivative suit brought against
the Company in Colorado and related matters.
Interest expense for the period was $100,417 or 1.66% of net sales as compared
to $55,197 or .93% of net sales in first quarter 1997. Such additional interest
relates to increased borrowings -- particularly the industrial development bonds
- -- used to finance the new Moreau, New York manufacturing facility.
7
<PAGE>
The Company accrues for income taxes at an effective rate of 34% inclusive of
the deduction for state income tax. There was no tax accrual for the first
quarter of 1998 as compared to $66,773 for the same period last year, owing to
net operating loss carryforwards.
Liquidity and Capital Resources
Working Capital
At March 31, 1998, working capital was ($2,422,360), up $296,589 from December
31, 1997. This improvement was funded by the Company's net earnings of $181,104,
and the aggregate of modest increases in various long-term liabilities,
including post-retirement benefit liability and long-term debt. The most
significant working capital component was an increase of $700,145 or 57.3% in
trade receivables, due to the Company's acquisition of a significant new
customer during the period. This substantial increase in receivables, along with
a reduction in current portion of long-term debt of approximately $271,000 and a
reduction in trade payables of approximately $147,000, was funded by a reduction
in the cash account of approximately $235,000 as well as additional borrowings
under the Company's line of credit of approximately $400,000.
The Company's $3.5 million 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
for the remainder of 1998.
Capital Expenditures
During the quarter ended March 31, 1998, the Company purchased additional fixed
assets in the amount of $1,428,299, relating primarily to construction of a new
formaldehyde manufacturing facility in Moreau, New York. These capital
expenditures were funded primarily by a drawdown of $1,232,751 in restricted
cash, which represents the escrowed proceeds of a $6 million industrial
development bond issue. The total estimated cost of the New York project is $8.3
million, 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 will own one of the two formaldehyde
plants and lease it to the Company under a lease with a 10-year term with
monthly rentals of $46,139 per month. The Company estimates remaining costs to
complete the facility -- which is currently scheduled for completion in July,
1998 -- at approximately $3 million. As of March 31, 1998, the unexpended bond
fund balance was approximately $2,650,000. Management believes that this fund
and internally generated cash from operations will be adequate to fully fund the
project, as well as meet any additional long-term funding needs, in 1998.
8
<PAGE>
SPURLOCK INDUSTRIES, INC.
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is a party to and a borrower under certain credit
arrangements, including the following (collectively, the "Credit Facilities"):
(a) A Loan and Security Agreement dated July 1, 1996 between the
Company and National Canada Finance Corporation whereby (i) such lender provides
the Company with a line of credit of up to $3.5 million based on eligible
accounts receivable and inventory, with outstanding advances totalling
$1,747,135 at March 31, 1998 and (ii) such lender provided the Company with a
term loan in the original principal amount of $3,639,000 to buy out a lease on
the Waverly, Virginia formaldehyde plant and of which $2,678,702 was outstanding
as of March 31, 1998; and
(b) $6,000,000 of Industrial Reveue Bonds through the County of
Saratoga Industrial Development Agency, and a related Letter of Credit
Reimbursement Agreement, $1,500,000 term loan and other related credit
agreements with KeyBank National Association relating to the Company's new
manufacturing facility located in Moreau, N.Y., of which $7,500,000 was
outstanding at March 21, 1998.
The Credit Facilities are secured by substantially all of the Company's
assets, and are subject to substantially similar financial and restrictive
covenants. During the first quarter of 1998 and up to the date of this report,
the Company has been in technical violation of certain of these covenants, as a
result of unauthorized advances to officers, which have been previously
reported, and the Company's failure to meet certain financial covenants relating
primarily to net worth, leverage, net profit and capital expenditures. After
discussion with its lenders, the Company does not believe that such violations
are material and expects to shortly receive waivers from its lenders with
respect thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The Registrant has included the following exhibits pursuant to
Item 601 of Regulation S-K:
Exhibit No. Description
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
9
<PAGE>
(b) Reports on Form 8-K:
In a Form 8-K dated February 17, 1998 and filed with the
Commission on February 24, 1998, the Registrant announced that
it had changed its independent accountant from James E.
Scheifley & Associates, P.C. to Cherry, Bekaert & Holland,
L.L.P. for the 1997 fiscal year.
10
<PAGE>
SPURLOCK INDUSTRIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPURLOCK INDUSTRIES, INC.
(Registrant)
Dated: May 14, 1998 By: /s/ Phillip S. Sumpter
------------ -------------------------------------------
Phillip S. Sumpter
Chairman and Chief Executive Officer
(Principal Executive and Financial Officer)
11
<PAGE>
SPURLOCK INDUSTRIES, INC.
Exhibit Index
Exhibit No. Description
----------- -----------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
12
EXHIBIT 11
SPURLOCK INDUSTRIES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The following table sets forth the reconciliation of the numerators and
denominators of the basic and diluted earnings per share ("EPS") computations:
<TABLE>
<CAPTION>
Three Months ended
March 31,
1998 1997
<S> <C> <C>
Numerator:
(a) Net income available to shareholders $ 181,104 $ 158,312
------------------- --------------------
Denominator:
Weighted average shares outstanding 6,573,639 6,573,639
------------------- --------------------
(b) Basic EPS weighted average shares outstanding 6,573,639 6,573,639
Effect of dilutive securities:
Incremental shares attributable to the
Stock Option Plan 10,509 10,509
------------------- --------------------
(c) Diluted EPS weighted shares outstanding 6,584,148 6,584,148
------------------- --------------------
Basic earnings per share (a/b) $ 0.028 $ 0.024
------------------- --------------------
Diluted earnings per share (a/c) $ 0.028 $ 0.024
------------------- --------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 127,716
<SECURITIES> 0
<RECEIVABLES> 1,935,403
<ALLOWANCES> 12,981
<INVENTORY> 528,618
<CURRENT-ASSETS> 2,946,389
<PP&E> 18,362,013
<DEPRECIATION> 5,133,699
<TOTAL-ASSETS> 19,678,891
<CURRENT-LIABILITIES> 5,368,749
<BONDS> 5,850,000
0
0
<COMMON> 0
<OTHER-SE> 4,449,147
<TOTAL-LIABILITY-AND-EQUITY> 19,678,891
<SALES> 6,053,693
<TOTAL-REVENUES> 6,053,693
<CGS> 4,522,032
<TOTAL-COSTS> 4,522,032
<OTHER-EXPENSES> 1,297,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100,417
<INCOME-PRETAX> 181,104
<INCOME-TAX> 0
<INCOME-CONTINUING> 181,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 181,104
<EPS-PRIMARY> .028
<EPS-DILUTED> .028
</TABLE>
