UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 1998

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        Commission file number 000-21133

                            SPURLOCK INDUSTRIES, INC.
             (Exact Name of Registrant as Specified in its Charter)

                  Virginia                                 84-1018956      
        (State or other jurisdiction                    (I.R.S. Employer   
     of incorporation or organization)                Identification No.)  
                                         
               125 Bank Street                               23890    
              Waverly, Virginia                            (Zip Code) 
   (Address of Principal Executive Offices)                


                                 (804) 834-8980
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None.

           Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, no par value

         Indicate  by check  mark  whether  the  registrant:  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Exchange Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for past 90 days.    Yes  X   No
                                     -----   -----

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item  405 of  Regulation  S-K is not  contained  in this  form,  and will not be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.    X
                                     -----
         The aggregate  market value of the voting stock of the registrant  held
by  non-affiliates  computed by reference to the average bid and asked prices of
such stock, as of March 25, 1999, was $9,193,648.

         The number of shares  outstanding of Common Stock as of March 11, 1999,
was 6,628,639.


<PAGE>

                                TABLE OF CONTENTS

                                     PART I
<TABLE>
<CAPTION>
                                                                                                     Page
<S>                                                                                                 <C>
Item 1.           Business.......................................................................      3

Item 2.           Properties.....................................................................      7

Item 3.           Legal Proceedings..............................................................      8

Item 4.           Submission of Matters to a Vote of Security Holders............................      9


                                     PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder
                  Matters........................................................................      9

Item 6.           Selected Financial Data........................................................     10

Item 7.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operation.......................................................     12

Item 7A.          Quantitative and Qualitative Disclosures About Market Risk.....................     24

Item 8.           Financial Statements and Supplementary Data....................................     25

Item 9.           Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure.........................................     46


                                    PART III

Item 10.          Directors and Executive Officers of the Registrant.............................     46

Item 11.          Executive Compensation.........................................................     47

Item 12.          Security Ownership of Certain Beneficial Owners and
                  Management.....................................................................     52

Item 13.          Certain Relationships and Related Transactions.................................     53


                                     PART IV

Item 14.          Exhibits, Financial Statement Schedules, and Reports on
                  Form 8-K.......................................................................     55

</TABLE>



                                      -2-
<PAGE>


                                     PART I

Item 1.      Business

General

     Spurlock Industries, Inc. (the "Company" or the "Registrant") 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 the
Company,  in order,  among other things, to change the domicile of Air Resources
from  Colorado  to  Virginia.  Such  merger was  consummated  on July 26,  1996.
References herein to the "Company" shall include Air Resources as predecessor to
the Company.

     Through its wholly-owned  subsidiary,  Spurlock Adhesives,  Inc. ("Spurlock
Adhesives")   the  Company   develops,   manufactures   and  markets   specialty
thermosetting 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, in
Waverly,  Virginia and Malvern,  Arkansas, and one in the northeast,  in Moreau,
New York.  Products of Spurlock  Adhesives are sold  throughout  the  northeast,
southeast and midwest regions of the United States.

     The Company's  principal  executive offices are located at 125 Bank Street,
Waverly, Virginia 23890, and its telephone number is (804) 834-8980.

Merger

     As previously  reported,  on December 18, 1998, the Company entered into an
Agreement  and Plan of Merger by and among  Borden  Chemical,  Inc.,  a Delaware
corporation ("Borden Chemical"), SII Acquisition Company, a Virginia corporation
and wholly-owned subsidiary of Borden Chemical ("Acquisition"), and the Company,
dated as of December 18, 1998,  and as  subsequently  amended and restated by an
Amended and  Restated  Agreement  and Plan of Merger by and among such  parties,
dated as of January  25, 1999 (the  "Merger  Agreement").  The Merger  Agreement
provides for the merger of Acquisition with and into the Company (the "Merger").
As a result of the Merger, the Company would become a wholly-owned subsidiary of
Borden Chemical.

     The agreed purchase price is $3.40 per share of the Company's common stock,
no par value  ("Common  Stock"),  subject to  downward  adjustment  for  limited
contingencies.  The  transaction  is subject  to  shareholder  approval,  with a
special  meeting of  shareholders  to consider  the Merger  anticipated  for the
second  quarter  of 1999.  In  conjunction  with the Merger  Agreement,  certain
executive officers and majority shareholders representing 52.4% of the shares of
the Company's Common Stock outstanding as of March 11, 1999, have entered into a
voting agreement with Borden Chemical and Acquisition  (the "Voting  Agreement")
and agreed to vote their shares in favor of the Merger Agreement.

Business and Operational Development

     Development of Gas  Technology  Businesses.  In 1991, Air Resources  formed
Landfill Energy Systems, Inc. and ARC Engineering Fabrications,  Inc. to develop
the equipment and technology  necessary to pursue certain contracts  relating to
landfill gas recovery. The equipment and technology to be developed was intended
to collect raw gases at landfill sites and process them into commercially usable
natural gas for resale.  Air Resources  entered into production  agreements with
two landfill sites in 1991 and conducted feasibility tests in 1992 and 1993. Air
Resources  sustained  substantial  expenses and operating losses associated with
the development of this technology during that time and had discontinued its gas
recovery development operations by March 1994.



                                      -3-
<PAGE>


     Acquisition  of  Spurlock  Adhesives.  On August  5,  1992,  Air  Resources
acquired Spurlock Adhesives as a wholly-owned subsidiary. Spurlock Adhesives was
founded  in 1973 by  Harold  N.  Spurlock,  Sr.,  as  sole  proprietor,  and was
incorporated  in the  Commonwealth  of  Virginia  in 1989.  The  early  years of
operation  consisted  solely  of  the  production  of  urea  resins  and  liquid
fertilizer  products.  The business  evolved  primarily  around the needs of the
growing  composite wood products  industry.  Mr. Spurlock  developed a number of
innovative   products  for  the  particleboard  and  medium  density  fiberboard
industries,  including the first single component resin. This new resin replaced
an expensive  four  component  system that was being used in the medium  density
fiberboard  industry.  Also, Spurlock Adhesives developed one of the first lower
formaldehyde  resins for the  particleboard  industry  in  response  to concerns
expressed by the  environmental  community  in the early 1980s.  The process for
producing this product was one of the first processes patented in this area. See
"-- Patents and Trademarks." The Company has maintained its market leadership in
the   development  of  resins  with  lower  levels  of   formaldehyde   for  the
particleboard and medium density fiberboard industries.

     Over the years,  Spurlock Adhesives has continued to diversify its customer
and  market  base as well as  upgrade  its  manufacturing  facilities.  In 1980,
Spurlock Adhesives serviced less than 10 customers and produced approximately 70
million pounds of resins at its Waverly  plant,  as compared to 30 customers and
375  million  pounds of  resins  and  formaldehyde  in 1998.  In 1987,  Spurlock
Adhesives  built a new resin  production  plant  adjacent to its existing one in
Waverly,  which  increased  its resin  capacity  400%.  In a move to  vertically
integrate the Waverly facility,  Spurlock Adhesives built its first formaldehyde
production  plant in Waverly in 1988. This plant allowed  Spurlock  Adhesives to
internally  supply  approximately  80%  of  its  formaldehyde  needs  for  resin
production,  thus enabling it to become less  dependent on outside supply and to
better control its raw material costs.

     In 1992,  Spurlock Adhesives  acquired a resin and formaldehyde  production
facility  in Malvern,  Arkansas  from BTL  Specialty  Resins  Corp.  of Toronto,
Ontario  (Canada) at the time that it became a  wholly-owned  subsidiary  of Air
Resources.  This merger gave Spurlock Adhesives a larger distribution area, thus
allowing it to compete for business in the midwest  region of the United States.
In 1993, Spurlock Adhesives  completed a state-of-the-art  formaldehyde plant in
Waverly,  which it leased from D.B. Western, Inc. until July 1996, when Spurlock
Adhesives   purchased  the  plant.  This  plant  fulfills  all  of  the  current
formaldehyde needs of the Waverly resin operations and offers Spurlock Adhesives
the  flexibility of being able to produce  additional  marketable  products.  In
1998, the Company opened a commercial  grade  formaldehyde  and resin production
facility,  which was designed and built by D.B.  Western,  Inc., in Moreau,  New
York (the "Moreau  Facility").  The Moreau  Facility  has doubled the  Company's
formaldehyde production capacity and has increased its resin production capacity
by 30%.

     Spurlock Adhesives is presently the sole operating asset of the Company.

Products

     The major products  produced by Spurlock  Adhesives consist of formaldehyde
and two types of thermosetting  resins generally classified as Urea-Formaldehyde
Resins ("Urea  Resins") and Phenol-  Formaldehyde  Resins  ("Phenolic  Resins").
Within these two general resin types are specifically  designed resins developed
for the specific needs of certain industries and individual customers.  Spurlock
Adhesives also produces fertilizer products for a limited number of customers.

     Urea Resins.  These resins are used as the binder system for interior grade
products such as particleboard,  medium density  fiberboard,  plywood and coated
papers.  These  products are then used in furniture,  cabinets,  wall panels and
cabinet  components.  Spurlock Adhesives also produces Urea Resin binder systems
for roof mat that later is processed into asphalt roofing shingles.  Urea Resins
are  thermosetting,  which  means that they cure and adhere with the aid of heat
and sometimes  pressure.  They are characterized as having a Type II bond, which
indicates  that they are  strong  and have a moderate  amount of  resistance  to
moisture and humidity.  The major  materials  involved in the production of Urea
Resins  are  formaldehyde,  urea,  triethanolamine,   sodium  hydroxide,  sodium
chloride  and  other  proprietary  ingredients.   Spurlock  Adhesives  currently
manufactures   and  sells   approximately   36  different  Urea  Resins  to  the
particleboard,  medium density fiberboard,  interior plywood, treated and coated
papers and fiberglass  roof  mat/filter  media segments of the forest  products,
building products and furniture industries. Sales of



                                      -4-
<PAGE>

Urea  Resins  accounted  for  69.5%,  70.7% and 73.6% of net sales for the years
ended December 31, 1998, 1997 and 1996, respectively.

     Phenolic  Resins.  These resins are used as the binder  system for exterior
grade construction materials such as oriented strandboard,  exterior plywood and
hardboard,  as well as the binder for  fiberglass  and mineral wool  insulation.
Further,  these  resins are also used in paper  impregnating  for high  pressure
laminates, such as counter tops. Phenolic Resins are also thermosetting, but are
classified  as  having  a Type I  bond,  indicating  that  they  provide  better
resistance to moisture and humidity than Urea Resins.  Phenolic Resins typically
are slower  curing  and more  expensive.  The major  materials  involved  in the
production of these resins are  formaldehyde,  phenol,  urea,  sodium hydroxide,
potassium hydroxide and sulfuric acid. Spurlock Adhesives presently manufactures
and  sells   approximately   11  different   Phenolic  Resins  to  the  oriented
strandboard,  hardboard,  fiberglass  insulation  and  mineral  wool  insulation
segments of the forest  products,  building  products and furniture  industries.
Sales of Phenolic Resins  accounted for 2.4%, 3.3% and 5.7% of net sales for the
years ended December 31, 1998, 1997 and 1996, respectively.

     Formaldehyde. Spurlock Adhesives produces formaldehyde for its own internal
consumption,  but also selectively  markets this product to industrial  accounts
and other users.  The major material  involved in the production of formaldehyde
is methanol.  Sales of formaldehyde  accounted for 23.2%, 23.4% and 19.2% of net
sales for the years ended December 31, 1998, 1997 and 1996, respectively.

     Fertilizer.   Spurlock  Adhesives  produces  both  liquid  fertilizers  and
intermediate  fertilizer products,  which are purchased and further processed by
customers  engaged in the manufacture  and sale of fertilizers for  agricultural
and lawn and gardening  uses.  Spurlock  Adhesives'  production of fertilizer is
similar to the production of Urea Resins produced by Spurlock  Adhesives.  There
are no  significant  barriers  to entry  into  this  business  for  other  resin
producers.  This production,  however,  serves to diversify Spurlock  Adhesives'
product  mix in a manner  that  may  reduce  financial  exposure  stemming  from
downturns in the business cycle of the forest  products,  building  products and
furniture industries.  Sales of fertilizers accounted for 4.9%, 3.5% and 1.5% of
net sales for the years ended December 31, 1998, 1997 and 1996, respectively.

Sales and Marketing

     Spurlock Adhesives sells its resin products to commercial  manufacturers in
the forest products,  building products and furniture industries.  The customers
of Spurlock Adhesives include small,  medium and large thermosetting resin users
located  principally  in the  northeast,  southeast  and midwest  regions of the
United States.

     Spurlock  Adhesives seeks to attract medium to large users of thermosetting
resins by offering a varied  selection  of high  quality  resins at  competitive
prices,  coupled with the  willingness and ability to tailor its products to the
customer's  individual needs and specifications.  Spurlock Adhesives  emphasizes
customer service and the continual  improvement and development of new resins to
meet the changing needs of the  marketplace,  including resins with lower levels
of  formaldehyde,  phenol and methanol to reduce their  potential  environmental
impact.

     Urea Resins are  marketed to  manufacturers  in the  particleboard,  medium
density  fiberboard  and  interior  plywood  segments  of the  forest  products,
building products and furniture industries.  In addition,  Spurlock Adhesives is
seeking to expand its presence in the fiberglass roof mat and fiberglass  filter
media segments of these  industries.  Phenolic  Resins are marketed to different
industry segments,  including the fiberglass insulation and oriented strandboard
segments with recent emphasis on development of the hardboard segment.

     Spurlock  Adhesives  has a sales  and  marketing  staff  consisting  of two
full-time  Sales  Managers  and a  Director  of Sales and  Marketing.  The Sales
Managers  call  on  existing  and  prospective  customers  in  their  individual
geographic territories.  In circumstances where the company seeks to qualify new
or existing products in a particular industry segment, the Sales Managers submit
samples to  prospective  customers for  evaluation  and testing.  Plant managers
service  accounts  and  assist  in the  development  of new  business.  Spurlock
Adhesives also employs  regional  distributors to service  specific  markets and
accounts.




                                      -5-
<PAGE>

     Spurlock Adhesives also markets itself and its products through advertising
and  participation in industry  associations.  Advertising is usually limited to
the placement of special features in trade  publications and to general listings
of resin  producers  in trade  publications,  annual  buyers  guides  and  other
individual  directories.  Employees of Spurlock Adhesives participate in various
industry trade  associations  and  conferences,  including the Composite  Panels
Association,  the Technical Association of Pulp and Paper Industries, the Forest
Products Research Society, the International  Particleboard/Composite  Materials
Symposium,  the  International  Woodworkers  Fair and the Amino,  Phenolic  Wood
Adhesive Association.

Customers

     The principal  customers of Spurlock Adhesives as of December 31, 1998 were
Willamette   Industries   (Malvern,    Arkansas),    Schenectady   International
(Schenectady, New York), Union Camp (Franklin, Virginia) and International Paper
(Waverly and Stuart, Virginia; Spring Hope and Statesville,  North Carolina; and
Jefferson and Nacogadoches, Texas). Sales to each of these customers represented
at least 10%, but not more than 19%, of Spurlock  Adhesives' total  consolidated
net sales for 1998. The loss of any one of these customers could have a material
adverse  effect on the  financial  condition  and the results of  operations  of
Spurlock Adhesives.

Raw Materials and Suppliers

     The  principal  raw  materials   used  in  the  production  of  resins  and
formaldehyde  are  methanol,  urea and phenol.  These  materials  are  generally
available at present,  and Spurlock Adhesives does not rely on a single producer
for any of its raw materials. Methanol, urea and phenol are commodity chemicals.
In order to assure a continuous  supply of these materials,  Spurlock  Adhesives
enters into multi-year  purchase  contracts with certain producers for a minimum
supply of these commodities.  Purchase orders for commodities are placed several
weeks or months in advance of delivery.  Although  prices for these  commodities
may  fluctuate,  Spurlock  Adhesives  seeks to  minimize  the risk of such price
fluctuations by including  provisions in customer agreements that adjust product
sales prices to reflect changes in Spurlock  Adhesives' raw material costs.  The
amount  of any  change  in raw  material  costs  for  purposes  of  these  price
adjustment  provisions is determined by reference to market indices for specific
commodities.  By matching  increases  and  decreases in raw material  costs with
corresponding  increases  and  decreases in the sales  prices for its  products,
Spurlock Adhesives is better able to maintain profit margins.

Competition

     The business of developing and manufacturing liquid thermosetting resins is
highly competitive. The principal products of Spurlock Adhesives compete against
similar  and  different  products   manufactured  and  sold  by  numerous  other
companies,  some of which are  substantially  larger and have greater  resources
than Spurlock  Adhesives.  The principal  competitors of Spurlock  Adhesives are
three large well-established  manufacturers:  Georgia-Pacific Resins, a division
of  Georgia-Pacific  Corporation;  Borden Chemical;  and Neste Resins, a Finnish
Company.  Spurlock  Adhesives competes on the basis of price,  quality,  product
consistency,  service, method of distribution and the ability to tailor products
to meet customer needs.

Patents and Trademarks

     Spurlock  Adhesives is the owner of a United States patent,  No. 4,381,368,
on a process  for the  production  of Urea  Resins.  The patent was  obtained by
Harold N. Spurlock, Sr. on April 26, 1983, and was formally assigned to Spurlock
Adhesives in January  1996 for no  consideration.  The process  described in the
patent has been used as the foundation  for several other products  developed by
Spurlock Adhesives.

     Management  of  Spurlock  Adhesives  believes  that  it  has a  proprietary
interest  in  certain  processes  for the  production  of  resins  and  that the
competitive  advantage  provided by  maintaining  the  confidentiality  of these
processes  outweighs  any benefits that might be derived from  obtaining  patent
protection for the processes.  Consequently,  Spurlock Adhesives has no plans at
the  present  time to seek  patent  protection  for any such  process.  Spurlock
Adhesives  is not aware of and has not  received any notice or claim that any of
its manufacturing  processes  infringe the proprietary rights of any third party
in any manner that could  materially  affect its business or that would  prevent
Spurlock Adhesives from using its processes.


                                      -6-
<PAGE>


Seasonality and Backlog

     Sales volume in the  thermosetting  resins  business is closely  related to
overall  levels of  activity  in the  forest  products,  building  products  and
furniture  industries.  Historically,  Spurlock  Adhesives'  business  has  been
generally  slower in the winter  months and more vigorous in the spring and fall
months.  In  addition,  the resins  business  is  cyclical  due to the effect of
fluctuations  in the  economy and overall  levels of building  and  construction
activity.  Periods of recession or high interest rates adversely affect building
and construction activity and therefore sales revenues.

     Spurlock  Adhesives  typically  has no  significant  backlog  as  customers
generally place monthly  purchase orders that require delivery as of a specified
date as a condition to placing the order.  Spurlock  Adhesives from time to time
must turn down orders if  necessary  to assure that  existing  orders are timely
delivered.

Employees

     As of December 31, 1998, Spurlock Adhesives had 83 full time employees. The
Company does not employ any  personnel.  Spurlock  Adhesives  believes  that its
relationship  with its employees is good.  Approximately 16 employees located at
the Malvern,  Arkansas plant are covered by a three year  collective  bargaining
agreement  between  Spurlock  Adhesives  and the United Steel Workers of America
that expires June 30, 1999.

Government Regulation

     The Company is subject to various  federal,  state and local  environmental
laws and regulations that limit the discharge, storage, handling and disposal of
a variety of substances.  The Company's operations are also governed by laws and
regulations  relating to work-place  safety and worker health,  principally  the
Occupational  Safety  and  Health  Administration  Act of 1970 and  accompanying
regulations and various state laws and regulations.  Spurlock Adhesives believes
that it presently  complies in all material respects with the foregoing laws and
regulations  and does not  believe  that  future  compliance  with such laws and
regulations  will have a material  adverse effect on its financial  condition or
results of operations.  See Note 1 to the Consolidated  Financial Statements and
Item 7.,  "Management's  Discussion  and Analysis of Financial  Corporation  and
Results of Operations - "Compliance with Environmental Regulations."


Item 2.      Properties

     The  Company  conducts  its  business   operations   primarily  from  three
manufacturing  facilities located in Waverly,  Virginia,  Malvern,  Arkansas and
Moreau,  New York. The Company's  headquarters  and chief executive  offices are
located in leased office space in Waverly,  Virginia.  Management  believes that
the properties  are in good  condition and suitable for the Company's  purposes.
The Company's  three  manufacturing  facilities  are  encumbered  under existing
credit arrangements.

     Executive Offices.  On March 31, 1998, the Company purchased a small office
building in Waverly that contains  approximately 2,700 square feet of space. The
Company began occupying this building on in late July 1998.

     Waverly  Facility.  Spurlock  Adhesives  owns and  operates a facility on a
43-acre  industrial site located about three miles northwest of the intersection
of state highways 40 and 460 near Waverly,  Virginia.  The facility  consists of
two resin plants and two  formaldehyde  plants.  The plants produce Urea Resins,
Phenolic  Resins and  formaldehyde.  In 1998,  the resin plants were operated at
approximately  52% of capacity  and the  formaldehyde  plants  were  operated at
approximately 73% of capacity.

     Malvern  Facility.  Spurlock  Adhesives  owns and operates a facility on 67
acres of land in  Gillford,  Arkansas,  approximately  five miles  northeast  of
Malvern, Arkansas. The facility consists of a resin plant, a formaldehyde plant,
two  administrative  offices and a research  facility.  The plants  produce Urea
Resins, Phenolic Resins and formaldehyde.  In 1998, the resin plant was operated
at approximately 78% of



                                      -7-
<PAGE>


capacity  and the  formaldehyde  plant  was  operated  at  approximately  74% of
capacity.  The Company's major research  activities are conducted at the Malvern
facility.

     Moreau  Facility.  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 cost of
the project is approximately  $8,483,000 for the purchased plants. D.B. Western,
Inc. was the general contractor of the project, which was completed in 1998, 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 variable interest rate which has
been  effectively  fixed at a rate of 4.74% with an interest rate swap,  and the
Company's  operating cash flow for the remaining $800,000 and the soft costs. As
of December 31, 1998 the principal  amounts  currently  outstanding  on the term
loan and the  tax-exempt  bond  were  $1,400,000  and  $5,700,00,  respectively.
Operations  at the  Moreau  facility  began in July 1998,  and the resin  plants
operated  at  approximately  11% of  capacity  and the  formaldehyde  plants  at
approximately 47% of capacity for the approximate five month period of operation
ended December 31, 1998.

     Management believes that the region served by the Moreau facility is a very
favorable market. There has historically been industry  undercapacity for resins
and  formaldehyde  in this  market,  and  purchasers  in this region have had to
procure products from outside the region at higher prices due to freight charges
required.   Accordingly,   the  Company  is   well-positioned  to  replace  such
out-of-region  products  and to  maintain  satisfactory  pricing of the  plants'
output.


Item 3.      Legal Proceedings

     On April 28, 1997,  seven  shareholders  of the Company  filed a Derivative
Suit (the "Derivative  Suit") against the Company and certain current and former
officers and directors of the Company in Colorado  State Court.  The  proceeding
was  subsequently  moved to the United States District Court for the District of
Colorado. The plaintiff  shareholders include Lee Rasmussen,  who as of March 1,
1999 held  approximately  5.3% of the  outstanding  shares of Common Stock.  The
following current directors or officers of the Company were named as defendants:
Harold N. Spurlock, Sr., Phillip S. Sumpter, and Irvine R. Spurlock.  Defendants
also  included H. Norman  Spurlock,  Jr. and Lloyd Putnam,  former  officers and
directors  of the  Company;  and  Warren E. Beam,  Jr., a former  officer of the
Company.

     The Derivative Suit, Rasmussen et al. v. Spurlock Industries,  Inc., et al.
(Civil Action No. 97-D- 2214),  alleged that the  defendants  engaged in various
activities  that breached their fiduciary  duties to the plaintiff  shareholders
and/or violated provisions of Colorado law applicable to domestic  corporations.
The activities so alleged included  wrongful  payment and wrongful  guarantee of
debts of one or more defendants, unlawful loans and distributions to defendants,
unfair dealings with one or more defendants,  overcompensation of defendants and
other   employees,   wrongful   depression   of  the   Company's   stock  price,
misrepresentation as to shareholders, and improper approval of the merger of Air
Resources  into the Company.  The  plaintiff  shareholders  sought a declaratory
judgment with respect to the acts complained of,  repayment of certain monies to
the Company,  an accounting of all  financial  transactions  of the Company from
1992 to the  present,  a  constructive  trust of shares of common  stock held by
certain defendants, injunctive relief and damages.

     A  special  litigation  committee  appointed  by  the  Company's  Board  of
Directors conducted an extensive  investigation of the facts,  circumstances and
transactions  alleged in the Derivative Suit.  Following its investigation,  the
committee  concluded  that  certain  claims  in the suit had merit  and,  having
pursued  such  claims  on  behalf of the  Corporation,  recovered  approximately
$500,000 in cash, a judgment and a secured note.




                                      -8-
<PAGE>

     On December 17, 1998,  the parties to the  Derivative  Suit entered into an
agreement to resolve all claims in  connection  with the suit (the  "Stipulation
and Settlement Agreement").  Under the terms of the settlement,  notice of which
was furnished to all shareholders of record as of December 15, 1998, the Company
was required to pay to the plaintiff shareholders $75,000 in cash,  representing
a  portion  of the  monies  recovered  by the  Company,  and  $22,500  in  cash,
representing  reimbursement  of the plaintiff  shareholders'  legal fees, and to
issue  50,000  shares  of  Common  Stock  to  the  plaintiff  shareholders.  The
Stipulation  and  Settlement  Agreement  was subject to court  approval  and the
running of all appeals periods.

     In addition to the  Stipulation  and  Settlement  Agreement,  the plaintiff
shareholders and the Spurlock Family Limited Partnership, whose limited partners
include Harold N. Spurlock, Sr., Irvine R. Spurlock and H. Norman Spurlock, Jr.,
entered into a separate Settlement  Agreement (the "SFLP Settlement  Agreement")
in order to settle all  outstanding  claims  that may have  existed  between the
parties,  none of which  claims  was a  derivative  claim.  The SFLP  Settlement
Agreement was conditioned  upon court approval of the Stipulation and Settlement
Agreement and the running of all appeals periods relating thereto.  It placed no
obligation on the Company and provided for (i) Lee Rasmussen to receive  225,000
shares of Common Stock from the Spurlock Family Limited Partnership and (ii) the
plaintiff shareholders to have the right to "put" to the Spurlock Family Limited
Partnership certain shares of Common Stock held by them.

     A hearing was held on January 27, 1999 in the United States  District Court
for the  District of  Colorado,  and the Court  determined  that the  settlement
embodied in the  Stipulation and Settlement  Agreement was fair,  reasonable and
adequate,  approved the  settlement  and dismissed all claims  asserted or which
could have been asserted in the Derivative  Suit. The Stipulation and Settlement
Agreement and the SFLP Settlement  Agreement became final and effective on March
11,  1999  upon the  running  of all  appeals  periods  and the  payment  of all
settlement consideration required by such agreements.

     As of March 29, 1999, there were no material  pending legal  proceedings to
which the Company was a party or to which any of its properties was subject.


Item 4.      Submission of Matters to a Vote of Security Holders

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year covered by this report.


                                     PART II

Item 5.      Market  for  Registrant's  Common  Equity and  Related  Stockholder
             Matters

     There is no  established  public trading market for shares of Common Stock.
Shares of Common  Stock are traded in  over-the-counter  markets  and on the OTC
Bulletin Board under the symbol "SKII."

     The following  table shows the high and low closing bid prices per share of
Common Stock as reported in the National Daily  Quotation  Sheets.  These prices
reflect  quotations  between  dealers  without  adjustment  for retail  markups,
markdowns, or commissions, and may not represent actual transactions.

                                                           Closing Bid Price
                                                          High            Low
Fiscal Year Ended December 31, 1997

     First Quarter...............................       $ .625          $ .375
     Second Quarter..............................         .4375           .375
     Third Quarter...............................         .38             .375
     Fourth Quarter..............................         .45             .38




                                      -9-
<PAGE>


Fiscal Year Ended December 31, 1998

     First Quarter (1)...........................       $ .45           $ .25
     Second Quarter (1)..........................        1.50             .26
     Third Quarter (1)...........................        1.75             .82
     Fourth Quarter (1)..........................        3.125           1.53125

____________________
(1)  The  high and low  sales  prices  per  share as  reported  through  the OTC
     Bulletin Board for the fiscal year ended December 31, 1998 were:  $0.55 and
     $0.45, respectively, for the first quarter; $1.75 and $0.312, respectively,
     for the  second  quarter;  $1.875 and  $0.79,  respectively,  for the third
     quarter; and $3.50 and $1.531, respectively, for the fourth quarter.

     The  closing  bid and asked  prices  per share of Common  Stock on March 1,
1999, were $2.96875 and $3.15625, respectively.

     Holders of Common  Stock.  The number of holders of record of the Company's
Common Stock, no par value, as of March 1, 1999 was approximately 200.

     Dividends.  Holders of the  Company's  Common Stock are entitled to receive
such  dividends as may be declared by its Board of Directors.  No cash dividends
have been  declared or paid with  respect to the  Company's  Common Stock and no
dividends are anticipated to be paid in the foreseeable future.

     Sale of Unregistered  Securities.  The Company sold no equity securities of
the Company  which were not  registered  under the  Securities  Act of 1933,  as
amended, during the period covered by this report.

     On December 17, 1998, the Company and certain  current and former  officers
and  directors  entered the  Stipulation  and  Settlement  Agreement  with seven
shareholders of the Company with respect to the Derivative Suit. The Stipulation
and Settlement  Agreement was subject to court  approval.  A hearing was held on
January  27,  1999 in the  United  States  District  Court for the  District  of
Colorado,  at which time the court  approved the  settlement  and  dismissed all
claims  asserted or which could have been asserted in the  Derivative  Suit. The
Stipulation  and  Settlement  Agreement  became final and effective on March 11,
1999,  upon the running of all appeals periods and the payment of all settlement
consideration required by such agreement.

     A portion  of the  settlement  consideration  paid to the  seven  plaintiff
shareholders consisted of 50,000 shares of Common Stock. Such shares were issued
by the Company  pursuant to an exemption from the  registration  requirements of
Section 5 of the  Securities  Act of 1933,  as amended  (the  "Securities  Act")
contained in Section 4(2) of the Securities Act via a private  placement of such
shares. The Common Stock issued to the named plaintiffs was restricted, with the
certificate   evidencing  such  shares  containing  a  restrictive  legend.  The
plaintiffs  were provided with the then most recent  filings of the Company with
the Commission  under the  Securities and Exchange Act of 1934, as amended,  and
certified  to the  Company  that they  were  acquiring  the  50,000  shares  for
investment and not public distribution.


Item 6.      Selected Financial Data

     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,
1998, is derived from the consolidated  financial statements of the Company. The
financial  statements  as of December  31, 1998 and 1997,  and for the two years
ended December 31, 1998, have been audited by Cherry, Bekaert & Holland, L.L.P.,
independent  auditors.  The  financial  statements as of and for the three years
ended  December 31, 1996,  have been audited by James E. Scheifley & Associates,
P.C. (formerly Winter, Scheifley & Associates, P.C.).




                                      -10-
<PAGE>


     The information set forth below should be read in conjunction with Item 7.,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and the Consolidated Financial Statements and Notes thereto.

<TABLE>
<CAPTION>
                                                            Years Ended December 31,                              
                                                    1998           1997           1996           1995 (1)         1994
                                                    ----           ----           ----           ----             ----
<S>                                             <C>             <C>           <C>             <C>             <C>        
Income Statement Data:                              
Net Sales...........................            $27,659,786     $24,725,077   $28,643,415     $33,243,677     $30,512,704
Cost of sales.......................             21,718,458      19,597,991    21,129,265      26,092,053      26,269,016

Gross profit........................              5,941,328       5,127,086     7,514,150       7,151,624       4,243,688
Selling, general and
administrative expenses.............              6,310,326       4,815,638     4,414,422       3,903,371       3,456,356
                                                -----------     -----------   -----------     -----------     -----------
Income (Loss) from operations.......               (368,998)        311,448     3,099,728       3,248,253         787,332

Other income and expenses...........                795,022         139,307        83,376          12,007           2,513
Interest expense....................               (699,109)       (627,799)     (667,942)       (663,662)       (828,261)
                                                -----------     -----------   -----------     -----------     -----------
Income (Loss) before
   income taxes.....................               (273,085)       (177,044)    2,515,162       2,596,598         (38,416)
Provision for income taxes
   (benefit)........................                 23,456        (152,304)    1,021,487         115,600               -
                                                -----------     -----------   -----------     -----------     -----------
Net Income (Loss)...................            $  (296,541)    $   (24,740)   $1,493,675     $ 2,480,998     $   (38,416)
                                                ===========     ===========   ===========     ===========     ===========
Net Income (Loss) per common share:
   Basic and diluted................                 ($0.05)    $      0.00   $      0.22     $      0.37          ($0.01)
                                                ===========     ===========   ===========     ===========     ===========
</TABLE>
<TABLE>
<CAPTION>
                                                            Years Ended December 31,                              
                                                    1998           1997           1996           1995 (1)         1994
                                                    ----           ----           ----           ----             ----
<S>                                            <C>              <C>           <C>              <C>             <C>       
Balance Sheet Data:
Current assets......................           $  3,654,790     $ 2,553,259   $ 2,288,914      $3,099,414      $3,715,917
Current liabilities.................             16,500,693       5,365,116     4,388,860       5,330,308       8,133,204
Total assets........................             21,086,154      19,401,431    12,270,407       9,342,968       9,996,870
Long-term debt......................                274,682       9,598,315     3,402,621         983,652       1,354,556
Stockholders' equity(2).............              3,974,252       4,268,043     4,292,783       2,919,108         509,110

Number of common
   shareholders.....................                    200             227           242             249             245

Weighted average number
   of common shares
   outstanding......................              6,574,899       6,573,639     6,711,733       6,717,667       6,626,066
Cash dividends declared.............                      0               0             0               0               0
Book value per share (3)............                  $0.60           $0.65         $0.64           $0.43           $0.08
</TABLE>
________________________

(1)   Assumes the conversion of 1,200,000  shares of preferred  stock, par value
      $2 per share, into 2,400,000 shares of Common Stock,  which conversion was
      subsequently effected on January 5, 1996. Absent the pro forma addition of
      2,400,000  shares of  Common  Stock,  the  historical  number of  weighted
      average shares outstanding for the fiscal year ended December 31, 1995 was
      4,317,667.

(2)   For the two fiscal years ended  December 31,  1995,  stockholders'  equity
      included 1,200,000 preferred shares, totaling $2,400,000.



                                      -11-
<PAGE>

(3)   Assuming the  conversion  of  1,200,000  preferred  shares into  2,400,000
      shares of Common Stock,  which  conversion  was  subsequently  effected on
      January 5, 1996,  the weighted  average  shares  outstanding  for the five
      fiscal  years  ending  December  31,  1998  were:  6,574,899,   6,573,639,
      6,711,733, 6,717,667 and 6,626,066.

Item 7.      Management's  Discussion  and Analysis of Financial  Condition  and
             Results of Operations

     The following discussion and analysis provides information which management
believes is relevant to  understanding  the Company's  operations  and financial
condition.  It 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 1999 and beyond to
differ  materially from those expressed in any  forward-looking  statements made
herein.  For a discussion of certain  factors that could cause actual results to
differ  from those  contained  in any such  forward-looking  statements,  see "-
Forward-Looking and Cautionary Statements."

General

     Overview.   Despite  the  successful   startup  of  the  Moreau   Facility,
significant gains in revenues and improvement in the gross margin, the Company's
operating  results  declined in the fiscal year ended  December 31,  1998.  This
deterioration  in operating  income was primarily due to  substantial  legal and
accounting  costs  related to the  Derivative  Suit and the sale of the Company,
Derivative  Suit  settlement  costs,  start-up costs  associated with the Moreau
Facility,  and  increased  deferred  tax  liability.  As a result,  the  Company
reported a pretax  loss of  $273,085  and an after tax loss of $296,541 in 1998,
compared to pretax and after tax losses of $177,044 and  $24,740,  respectively,
in the prior year.  Absent the substantial legal and accounting costs related to
the Derivative Suit and the sale of the Company,  and Derivative Suit settlement
costs,  management  estimates  that the Company  would have reported 1998 pretax
profits of approximately $975,000.

     In the fiscal year ended  December 31,  1997,  the  Company's  profits also
declined  substantially  compared  to  1996,  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.  In addition,  during 1997, the Company elected to expense
approximately  $533,927 of start-up and pre-operating  costs relating to the new
Moreau, New York manufacturing facility, which began operations in July 1998. As
a result,  the Company  experienced  a loss of $24,740 in 1997,  compared to net
income of $1,493,675 in 1996.

     Dependence on Construction and Related Industries. Demand for the Company's
products  and  the  Company's  financial  performance  are  closely  tied to the
fortunes of the construction, forest products and related industries.

     Price of Raw Materials.  Raw materials costs comprised  approximately  52%,
60%, and 57% of net sales in 1998, 1997, and 1996,  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. The 1998 reduction in raw material costs reflects  favorable
spot market  purchases in the fourth  quarter and  competitive  pressure in such
commodity markets.




                                      -12-
<PAGE>

     Freight Costs. A substantial  portion of the Company's  products are priced
on an "as delivered basis." For 1998, 1997, and 1996,  freight costs relating to
delivery of the Company's products comprised approximately 8.3%, 3.6%, and 3.9%,
respectively,  of net sales. Accordingly, the Company's operating performance is
sensitive to  movements in freight  costs.  The 1998 freight  increase  reflects
management's  decision to supply  product to customers in the northeast from the
Company's Waverly, Virginia plant prior to the operation of its Moreau, New York
facility in order to lock in such customers.  Such shipments from Waverly ceased
following the start-up of the Moreau Facility in July 1998.  Also, in the fourth
quarter of 1998, management was successful in negotiating more favorable freight
rates generally.

     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 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.  In October 1998 and February 1999, the Company  obtained
"overlines"  to its existing line of credit of $150,000 each to fund  additional
working capital requirements relating to the new Moreau Facility.

     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 Moreau
Facility began  operations in July 1998.  See Item 1.,  "Business - Business and
Operational Development" and Item 2., "Properties."

     The financing sources for the New York plants,  with a total estimated cost
of $8,483,000, included 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 variable  interest rate which has been effectively fixed at a rate of 4.74%
with an interest rate swap (See "- General - Disclosure Concerning Market Risk")
and the  Company's  operating  cash flow for the  remaining  $800,000 and "soft"
costs of approximately  $600,000 consisting of interest,  environmental permits,
legal and  administrative  expenses.  As of December  31,  1998,  the  principal
amounts  currently  outstanding under the term loan and the tax-exempt bond were
$1,400,000 and $5,700,000, respectively.

     One of the two formaldehyde  plants at Moreau is leased from D.B.  Western,
Inc.,  the general  contractor  for the  project.  Payments  under the lease are
$46,139 per month over a ten year term.

     Loan Covenants.  The credit facilities  described under "Credit Facilities"
and "New York Project" above are subject to  substantially  similar  restrictive
financial covenants. At December 31, 1997, March 31, 1998 and June 30, 1998, the
Company was in technical  violation of certain of these covenants as a result of
unauthorized advances to officers,  which have been previously reported, and the
Company's failure to meet certain financial  covenants relating primarily to net
worth, leverage,  net profit and capital expenditures.  As of November 1998, the
Company had received waivers of all such violations. Also, the applicable credit
facilities were amended to liberalize certain financial  covenants  effective as
of September 30, 1998. As a result, based on the Company's financial performance
in the third quarter of 1998,  the Company was in material  compliance  with its
loan covenants as of such date.

     At  December  31, the  Company  was in  violation  of  financial  covenants
relating  to minimum  net worth and  profitability.  These  violations  resulted
primarily from the adverse impact of settlement and  professional  fees relating
to the Derivative  Suit and increased  deferred tax liability due to accelerated
depreciation  relating  to  the  Moreau  Facility.   Because  of  such  covenant
violations, the Company's balance sheet for December 31, 1998 shows all formerly
long term debts  payable to the  Company's  two primary  bank lenders as current
liabilities  under "Current  portion of long term debt" rather than as long term
liabilities  under "Long term debt." The Company is  currently  seeking  waivers
from its two primary lenders with respect to such covenant violations.




                                      -13-
<PAGE>


     The Merger Agreement with Borden Chemical contains covenants which restrict
the  Company's  ability  to  increase  or  otherwise  significantly  modify  the
Company's  credit  facilities.  If the  Merger  is not  consummated,  management
anticipates that it would seek to restructure such credit facilities in order to
better  provide  for the  addition  of the Moreau  Facility  and the  additional
working capital requirements attendant to such new operations.

     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  approximately $533,927 in 1997 and $851,000 in
1998.  The  American  Institute  of  Certified  Public   Accountants   ("AICPA")
Accounting  Standards  Executive  Committee (AsSEC) in its Statement of Position
98-5 "Reporting of the Costs of Start-up  Activities"  required the expensing of
such costs effective for years  commencing  after December 31, 1998. The SEC had
encouraged this practice prior to AsSEC's  consideration  of this SOP. While the
Company could have elected to capitalize  these costs for the New York facility,
the Company elected early adoption,  which was 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  $127,834,  $184,259  and  $202,076  for the years  ended
December 31, 1998,  1997 and 1996,  respectively.  As a percentage of net sales,
such expenditures totalled .46%, .75%, and .71%, respectively, over each of such
three years. In such periods,  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.  For 1998, the Waverly,  Virginia formaldehyde plant
ran at  approximately  73% of capacity,  compared to 83% in 1997 and 1996.  Such
decline in 1998  reflected  the  shifting of  production  for  customers  in the
northeast  from Waverly to Moreau in July of that year.  The  Malvern,  Arkansas
formaldehyde  plant ran at approximately  74% for 1998,  compared to 67% and 84%
for 1997 and 1996,  respectively,  reflecting  increased 1998 product sales from
that location.  The Moreau  Facility,  which began production in late July 1998,
operated at  approximately  47% of  formaldehyde  capacity during August through
December of 1998.

     With respect to resin capacity utilization, the Waverly facility reported a
52% utilization rate for 1998, compared to the 53% and 55% reported for 1997 and
1996,  respectively.  The  Malvern  Facility  produced  at  an  approximate  78%
utilization  rate for  resin  for  1998,  a  significant  increase  over the 52%
utilization  rate for 1997 and 65% for 1996. For August  through  December 1998,
the Moreau Facility,  in its startup mode,  utilized  approximately 11% of resin
capacity.

     Inflation.  Although the  Company's  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, 1998.

     Deferred  Taxes.  The  Company  is  required  to  recognize  the  effect of
temporary differences between the bases of assets and liabilities as measured by
tax laws and their bases as reported in the financial  statements.  Deferred tax
expense or benefit is then recognized for the change in deferred tax liabilities
or assets between periods.

     During 1998, the Company  accrued  non-deductible  expenses  related to the
settlement of the Derivative  Suit and recognized  non-deductible  provisions to
the  allowance  for bad debts.  These  constitute  the  principal  increases  in
deferred taxes of approximately $100,000.




                                      -14-
<PAGE>


     Settlement of Derivative  Suit. In December 1998, the Company  entered into
the  Stipulation and Settlement  Agreement with respect to the Derivative  Suit,
which  settlement  was  approved  by the Federal  District  Court in Colorado on
January 27, 1999. The settlement  became effective on March 11, 1999,  following
the  expiration  of all appeal  periods  and the  payment by the  Company of the
settlement  consideration  to the  plaintiffs  pursuant to the  Stipulation  and
Settlement Agreement. See Item 3., "Legal Proceedings." The cash portion of such
consideration  totalled $97,500. The Company also issued 50,000 shares of Common
Stock to the  plaintiffs,  valued at market on  December  31,  1998 at $3.00 per
share, or $150,000 in the aggregate.  Based on such valuation, the total cost of
the settlement to the Company was $247,500.  Pursuant to FASB No. 5, the cost of
the settlement was recognized in 1998. The Company  expects to recover a certain
portion of the cost from the Company's directors and officers insurance carrier.
The preliminary estimate of such recovery is $97,500,  which is reflected in the
1998 financials. See Note 16 to the Consolidated Financial Statements.

     Disclosure  Concerning  Market Risk. The table below  provides  information
about  the  Company's  derivative  financial  instruments  and  other  financial
instruments that are sensitive to changes in interest rates,  including interest
rate swaps and debt obligations.

     For debt obligations,  the table presents  principal cash flows and related
weighted  average  interest rates by expected  maturity dates. For interest rate
swaps,  the table presents  notional amounts and weighted average interest rates
by expected (contractual) maturity dates. Notional amounts are used to calculate
the contractual  payments to be exchanged under the contract.  Weighted  average
variable  rates are based on  implied  forward  rates in the yield  curve at the
reporting date.



                                      -15-
<PAGE>

<TABLE>
<CAPTION>

December 31, 1998
                                                                                                                             Fair
                                             1999        2000       2001       2002       2003     Thereafter    Total      Value
                                        --------------------------------------------------------------------------------------------
<S>                                      <C>          <C>       <C>        <C>        <C>         <C>          <C>        <C>
Notes payable, line-of-credit             2,346,394                                                            2,346,394   2,346,394
       Variable average interest rate         7.51%
Long term debt                            9,571,487                28,110     14,319    184,389                9,846,169   9,846,169
                                                        47,864                                            -
  Fixed Rate                              1,647,380                28,110     14,319    184,389                1,922,062   1,922,062
                                                        47,864                                            -
       Fixed average interest rate            8.18%      8.18%      8.18%      8.18%      8.18%       8.18%
  Variable Rate                           7,924,107                                                            7,924,107   7,924,107
                                                             -          -          -          -           -
       Variable average interest rate         7.70%      7.89%      8.09%      8.29%      8.50%       8.71%

Interest rate swap:
     Variable to fixed                    5,600,000  5,000,000  4,400,000  3,800,000  3,200,000   2,600,000                (127,421)
          Average pay rate                    4.74%      4.74%      4.74%      4.74%      4.74%       4.74%
          Average receive rate                3.74%      3.91%      4.08%      4.27%      4.46%       4.66%

</TABLE>




                                      -16-
<PAGE>



     The  Company  is  exposed  to   interest   rate  risk   through   borrowing
     arrangements. Much of the Company's debt carries variable interest rates.

     As part of the  Company's  interest rate risk  management,  the Company has
     entered into an interest rate swap to effectively  convert a portion of the
     floating  rate debt to a fixed rate.  The notional  amount and terms of the
     swap  coincide  with  those of the bond  obligation  under  the  Industrial
     Revenue Bond for the Moreau, New York facility.

     The remainder of the variable  rate,  long term debt floats with the London
     Interbank  Offered  Rate.  Upward  movement in this  interest  rate impacts
     approximately $3 million in debt.

     Fixed rate  loans are at or below  market  rates for such debt.  Fixed rate
     debt protects the Company from  increased  costs in a rising  interest rate
     environment.  Should interest rates decline,  the Company may incur greater
     interest cost than if such debt were variable rate.




                                      -17-
<PAGE>


Results of Operations

                       Fiscal Year Ended December 31, 1998
                 Compared to Fiscal Year Ended December 31, 1997

     The  Company's  net sales for the year ended  December  31,  1998  totalled
$27,659,786.  All the sales were from shipments of resin and formaldehyde by the
Company's wholly owned subsidiary,  Spurlock Adhesives.  The significant revenue
increase of 11.87% mainly reflects the addition of the Company's new facility at
Moreau, New York which began production in July 1998.

     Cost of sales in 1998 increased  10.82%, to $21,718,458 from $19,597,991 in
1997. The gross margin  improved to 21.48% from 20.74% in 1997.  Gross profit of
$5,941,328  represents a 15.88%  increase  over the  $5,127,086  reported in the
prior year.  From February 1998 until the startup of the Moreau Facility in July
1998, the Company  supplied  product from Waverly,  Virginia to customers in the
northeast in order to lock in a significant  portion of the future output of the
New York  plant.  A side  effect of this  advanced  planning  was the  Company's
incurring greater than typical freight costs  aggregating an estimated  $400,000
in the second  quarter and early third quarter of 1998.  The negative  impact of
this  arrangement was more than offset by favorable spot market purchases of raw
materials during the fourth quarter.

     Operating expenses (selling, general and administrative expenses) increased
by 31.04% in 1998, to $6,310,326 or 22.81% of sales from $4,815,638 or 19.48% of
sales for the prior year. This significant rise in operating  expenses  resulted
from increased  legal and  accounting  expenses of  approximately  $1.1 million,
relating  primarily to the Derivative Suit, and Derivative Suit settlement costs
totalling  approximately  $250,000,  as well  as  customary  operating  expenses
relating to the Moreau Facility following its mid-year startup.

     Other income in 1998 increased almost six fold to $795,002 from $139,307 in
the prior year. This  substantial  increase was due in large part to the Company
taking into income the $375,000 SFLP Note (as defined  under Item 13.,  "Certain
Relationships  and  Related  Transactions")  from the  Spurlock  Family  Limited
Partnership which is secured by Common Stock. Upon the Company entering into the
Merger Agreement,  management  determined that collectability of recovery of the
SFLP Note was assured by the Merger  Agreement's  requirement  that the Spurlock
Family Limited  Partnership  repay such note in full at closing from its portion
of the merger consideration. Other income for 1998 also included interest income
from the invested but unadvanced proceeds of the New York industrial development
bond totalling  approximately  $386,000,  an increase of approximately  $150,000
over 1997, as well as interest on certain notes from affiliates.

     Interest expense for the year remained relatively  unchanged at $699,109 or
2.53% of sales,  compared to  $627,799  or 2.54% of sales in 1997.  Prior to the
startup of the New York  Facility in July 1998,  interest  on the  approximately
$7.5 million of project debt was capitalized.  Upon the Moreau Facility entering
service in July 1998,  the Company  began to accrue  interest on such debt.  The
impact of interest  accrued on the project debt was mitigated by somewhat  lower
interest  rates,  as average  debt  outstanding  remained  relatively  unchanged
between 1998 and 1997.

     Despite  the  increases  in gross  profits  and other  income in 1998,  the
Company's loss before taxes expanded in 1998 to $273,085 from a loss of $177,044
in 1997 due to the substantial increase in operating expenses discussed above.

     The Company  accrues for income taxes at an effective rate of 34% exclusive
of the deduction  for state income tax. The  effective  rate was impacted by the
increase  in the  deferred  tax  liability  due to the  non-deductible  expenses
associated  with the settlement of the Derivative Suit and the provision for the
allowance  for bad debt  (36%),  as well as the  netting  effect  of  state  tax
benefits (4%).




                                      -18-
<PAGE>


     For 1998,  the  Company  reported  a net loss of  $296,541,  a  substantial
increase over the net loss of $24,740 reported in 1997.

                       Fiscal Year Ended December 31, 1997
                 Compared to Fiscal Year Ended December 31, 1996

     The  Company's  net  sales  for the  year  ended  December  31,  1997  were
$24,725,077, a decrease of 13.68% 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  totalled  $19,597,991  or 79.26% of net sales,
compared to $21,129,265 or 73.77% of net sales in fiscal 1996.  This  translated
into a decrease in the  Company's  gross margin to 20.74% in 1997 from 26.23% 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 then existing plants.

     Selling,  general and administrative expenses totalled $4,815,638 or 19.48%
of net sales in 1997,  versus  $4,414,422  or  15.41% 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,  total selling,  general and administrative  expenses (including
the Moreau related expenses)  increased,  as a percent of net sales, from 15.41%
in 1996 to 19.48% in 1997.

     Interest expense (excluding interest on debt obligations related to the New
York  Project,  which  was  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 reflected  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 recognized non-taxable recoveries in 1997, aggregating $81,486.
These  recoveries  increased  the taxable  benefit to $152,304 for the year then
ended. The provision for income tax in 1996 totalled $1,021,487, which consisted
of $149,415 in state income tax and $855,155 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.

Liquidity and Capital Resources

     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 it takes  advantage of supplier
payment terms which exceed those granted to the Company's customers.

     Working  Capital.  At December  31,  1998,  the Company  reported a working
capital  deficit of  $12,845,903,  a decrease of  $10,034,046  from December 31,
1997. This  substantially  expanded  deficit  reflects the Company's  previously
long-term bank financings being moved under current portion of long-



                                      -19-
<PAGE>

term  debt due to the  Company's  violation  of  certain  loan  covenants  as of
December 31, 1998, as described in "General <-1- 45> Credit  Facilities"  above.
Absent the inclusion of such bank financings as current liabilities, the Company
would have  reported a working  capital  deficit of  $5,265,890,  a decrease  of
$2,454,033  from  December  31,  1997.  Such  decrease  reflects  primarily  the
Company's  use  of  approximately  $1,000,000  in  additional  short  term  bank
borrowings  and an  approximately  $1,800,000  increase in accounts  payable and
accrued   expenses  to  fund  fixed  asset   expenditures  and  working  capital
requirements  relating  to the  Moreau  Facility.  Trade  receivables  increased
significantly,  by  approximately  $1,000,000  to  $2,257,742,  and  inventories
increased  only  marginally  by  approximately  $87,000 to  $617,610,  both such
increases related primarily to shipments from the Moreau Facility.

     Cash Flow.  For the fiscal year ended  December 31, 1998,  cash provided by
net income, depreciation and amortization totalling $949,182 remained relatively
unchanged compared to the $948,837 reported in the prior year. Further, net cash
provided by operations  of  approximately  $1,785,000  compared to $1,752,000 in
1997.  In 1998,  an  increase  in  accounts  payable  and  accrued  expenses  of
approximately   $1,800,000   offset  an  approximate   $1,365,000   increase  in
receivables,  a modest  increase in inventory of  approximately  $87,000 and the
reinstatement of the SFLP Note of $375,000.  The Company invested  approximately
$5,650,000 in additional  fixed assets  relating to the Moreau  Facility,  which
investment was funded predominantly by the draw down of approximately $3,900,000
in  restricted  cash  relating to the  proceeds  from the  Company's  $6,000,000
industrial  revenue bond  financing.  New borrowings  aggregating  approximately
$1,500,000  supplemented  the Company's  operating cash flow and such restricted
cash in funding the fixed asset purchases and loan  repayments of  approximately
$1,500,000. Net cash declined by approximately $260,000.

     In 1997,  the  Company  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 $711,911 to ($2,811,857) at December 31, 1997. Net
cash provided by operating  activities of $1,752,054  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 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.

     Long Term Debt. In addition to its working  capital  credit  facility,  the
Company  had  outstanding  at  year  end  1998  funded  debt  of   approximately
$9,850,000,  a decrease of  approximately  $1,000,000  from 1997.  As  discussed
above,  due to loan  covenant  violations  at December 31,  1998,  approximately
$7,580,000  of  funded  debt  which  was  previously  included  under  long-term
liabilities  was  required to be included  under  current  maturities.  Of total
funded debt,  approximately  $7,500,000 relates to the Moreau, New York project,
consisting of a term loan in the amount  $1,500,000 and a $6,000,000  Industrial
Revenue Bond, both described  above.  The remaining  non-credit line funded debt
consists  of a term loan in the  original  amount of  $3,639,000  with a bank in
order to purchase a former leased formaldehyde plant.
Outstandings under such term loan totalled $2,224,107 at year end 1998.

     Total liabilities increased by 13.58% in 1998 to approximately $17,200,000,
from  approximately  $15,100,000 in 1997. As a result of this increase,  and the
1998 net loss,  the  ratio of total  liabilities  to net  worth,  a  measure  of
financial leverage, increased to 4.41 in 1998 from 3.55 in the prior year.

     In  addition  to its  working  capital  credit  facility,  the  Company had
outstanding  at year end 1997  long term debt  totalling  $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  related to  borrowings  totalling  $7,500,000  relating  to the Moreau
Facility,  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 totalled  $2,830,328 at
year end



                                      -20-
<PAGE>


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.

     Liquidity. As previously reported, the Company has a $3.5 million revolving
credit  facility  with two  lenders,  which  facility  matures in July 1999.  In
December  1998 and  February  1999,  the Company was  granted  overlines  on the
facility totalling $300,000.  On December 31, 1998,  outstanding loans under the
facility totalled $2,346,394,  which amount represented substantially all of the
total amount  available at such time based on levels of accounts  receivable and
inventory on which borrowing availability is based. The credit facility provides
the Company with an important  source of liquidity in addition to cash generated
from operations.

     Plant  start-up  costs,  expenditures  for fixed  assets,  working  capital
requirements related to the Moreau Facility and professional fees and settlement
costs relating to the Derivative Suit placed additional burdens on the Company's
liquidity   position  in  1998.  These  additional   requirements  were  met  by
significantly  increased  use of trade  credit and a credit  facility  overline,
which  supplemented  drawdowns of restricted  cash and cash  generated  from net
income  and  depreciation  and  amortization.   The  increased  working  capital
requirements  associated with Moreau,  as well as increased legal and accounting
expenses  associated  with the  Derivative  Suit  and the  sale of the  Company,
continued  to strain  the  liquidity  position  of the  Company  into the fourth
quarter of 1998,  and  management  believes  they will  continue to do so in the
first half of 1999.  However,  management  believes that the Company's  existing
credit  facilities  and core  cash  flow  from  earnings  and  depreciation  and
amortization  will be adequate to fund the  Company's  short term  liquidity and
working  capital  needs.  If the Merger is not  consummated,  management  of the
Company expects to renegotiate and restructure its credit facilities in order to
better provide for the additional  working  capital  requirements  of the Moreau
Facility.  Under the Merger Agreement,  the Company's ability to restructure its
credit facilities at this time is restricted.

Year 2000

     There has been significant  public awareness and attention paid to the Year
2000 (or "Y2K") problem,  which stems from the inability of certain computerized
devices (hardware,  software and equipment) to process year-dates properly after
1999 (in addition to related  problems  processing  leap years and other dates).
Affected devices may fail or malfunction  unless repaired or replaced.  Although
the actual magnitude and effect of the issue cannot be reasonably  determined in
advance, the Company has given it priority.  In February 1998, the Company began
an analysis of the possible implications to the Company of the Year 2000 problem
and the  development of a plan to prevent the problem from  adversely  affecting
its operations.

     The Company's plan can be divided into two principal areas:

     (1)      Resolution of the internal aspects of the Year 2000 problem.  This
              area  includes  the  effects  of  the  Year  2000  problem  on the
              Company's  technology,  including  computer  hardware and software
              systems, as well as computerized equipment containing programmable
              logic controllers or other embedded chips ("PLCs" or "chips"). The
              Company's internal technology Year 2000 plan includes:

              (i)     Locating, listing and prioritizing the specific technology
                      that is  potentially  subject  to the  Year  2000  problem
                      (referred to as the "inventory" phase),

              (ii)    Assessing  the actual  exposure of such  technology to the
                      Year 2000 problem by inquiry,  research, testing and other
                      means (the "assessment" phase),

              (iii)   Selecting  the method  necessary  to resolve the Year 2000
                      problems  that  were  identified,  including  replacement,
                      upgrade,  repair  or  abandonment,  and  implementing  the
                      selected resolution method (the "remediation" phase), and




                                      -21-
<PAGE>

              (iv)    Testing  the   remediated   or  converted   technology  to
                      determine the efficacy of the  resolutions  (the "testing"
                      phase).

     (2)      Determination and control of the external aspects of the Year 2000
              problem. This area includes:

              (i)     Assessing the risk posed by possible business interruption
                      or production  difficulties  affecting important customers
                      and suppliers of goods,  services and essential  utilities
                      due to Year 2000 problems  affecting  their  technology or
                      business, and

              (ii)    Developing   contingency  plans  to  address  failures  by
                      external parties to remediate fully any Year 2000 problems
                      that are material to the Company.  Assessment  of external
                      parties is accomplished by written and verbal inquiry, and
                      by  research to the extent that  reliable  information  is
                      available.

     To date, the Company has made progress on the internal aspects of the plan.
The majority of the Company's  business  operations have completed the inventory
and assessment  phases.  Also,  management  believes that  approximately  80% of
required  remediation  has been achieved,  primarily  through the replacement of
certain  equipment and systems.  Remediation is expected to be completed by July
1, 1999,  with testing of remediated or converted  internal  systems to continue
through  calendar  year  1999.  The  sequence  and  extent  of  testing  will be
prioritized  by the  importance  of the  technology,  with initial  focus on two
areas:

     (i)      the Company's information technology,  including critical computer
              hardware and software systems, and

     (ii)     the Company's non-information technology,  including PLCs embedded
              in key machinery and equipment.

     The Company has assessed its internal  operational  exposure to the failure
of PLCs.  Information  provided  by the  manufacturers  of the PLCs  within  the
Company's  machinery and equipment  indicates that there do not appear to be any
PLCs that will cause  material  Year 2000  problems.  The  Company is  currently
seeking  technical   assistance  in  order  to  test  certain  PLCs  to  confirm
manufacturers'  representations  regarding  the  absence of  material  Year 2000
problems.  Testing  of PLCs  is not a  routine  practice,  and  there  can be no
assurances  that the Company  will be able to conduct  such test on PLCs or that
the tests  will  lead to  reliable  conclusions.  In  addition,  there can be no
assurances that the Company will be able to conduct tests on all of its internal
technology, or that the tests will be fully successful in detecting Y2K problems
within the internal technology.

     The  Company's  operations  are dependent on its  relationships  with third
parties,  including suppliers of raw materials and the Company's customers.  See
Item 1.,  "Business --  Customers"  and "-- Raw Materials  and  Suppliers."  The
Company  has  begun  communicating  with  such  third  parties  in an  effort to
determine  their Year 2000  readiness.  Based on preliminary  discussions,  such
parties  have  indicated  that they are, or will be,  Year 2000 ready.  A formal
evaluation  of external  parties  will be  initiated  in March,  1999,  and will
continue  throughout  1999.  Determining  the Year 2000  readiness  of  external
parties  requires  collection  and  appraisal  of voluntary  statements  made or
provided by those  parties,  if  available,  together with  independent  factual
research.  Although  the  Company  has  cooperated  in the  Y2K  efforts  of its
customers and suppliers,  and will take reasonable efforts to gather information
to determine the readiness of external  parties,  often such  information is not
provided voluntarily, is not otherwise available, or is not reliable.

     In assessing the risks to the Company's business arising from the Year 2000
problem,  the Company also  recognizes  that it is subject to operational  risks
relating  to the  readiness  of  public  utilities,



                                      -22-
<PAGE>
transportation facilities,  financial services providers and government operated
services.  The  loss  of  services  from  one or more of  these  entities  could
interrupt or disrupt  business  unit  operations.  Furthermore,  with respect to
certain fundamental services such as electricity and telecommunications,  it may
be  impractical  to  develop   contingency  plans  (such  as  alternative  power
generation  or  telecommunication  methods) to mitigate  the  potential  adverse
effects.  The Year 2000  readiness of these  external  parties is  substantially
beyond the Company's knowledge and control,  and there can be no assurances that
the Company will not be adversely  effected by the failure of an external  party
to adequately address the Year 2000 problem.

     At this time,  the Company  believes  the most likely  worst case year 2000
scenario  would  not  have  a  material  effect  on  the  Company's  results  of
operations,  liquidity and financial  condition for the year ending December 31,
2000.  The Company  does not foresee a material  loss of revenue due to the Year
2000 issue. However,  this estimate is based on management's  assessments of the
likelihood  of occurrence of possible  scenarios;  the Company  believes that no
entity can address the virtually  unlimited  possible  circumstances  related to
Year 2000 issues,  including risks outside of the Company's  market area.  While
unlikely,  it is  acknowledged  that  failure  by the  Company  to  successfully
implement  its  Year  2000  plan,  its  modifications  and  conversions,  or  to
adequately  access the  likelihood of various  events  relating to the Year 2000
issue, could have a material impact on the Company's operations. Therefore, this
could  potentially  result in a material adverse effect on the Company's results
of operations and financial conditions.

     Prior to June 30, 1999, the Company expects to develop initial  contingency
plans to address situations wherein the readiness of the internal  technology or
external  parties  is  not  sufficiently   assured,  and  practical  alternative
products,  services  or  methods  are  available.  Thereafter,  as the Year 2000
approaches,  the Company will monitor and update such  contingency  plans as are
appropriate to address any changes in the Company's year 2000 risks. The Company
currently  estimates  the total  cost for  addressing  the Y2K  problem  will be
approximately  $80,000.  These costs do not include the Company's internal costs
incurred for the Y2K project,  such costs being  principally  payroll  costs for
personnel  assigned to such  project,  as the  Company  does not have a tracking
system to capture these items.  However,  management  does not believe that such
internal  costs are or will be  material.  Also,  the  estimated  amounts do not
include  estimated costs associated with the  implementation  of any contingency
plans that may be developed by the Company  during  fiscal year 1999.  The costs
associated  with  preparing  for the Y2K problem  have been and are  expected to
continue  to be  expensed  as  incurred  and are  being  funded  with  cash from
operations.  As of  December  31,  1998,  the  Company  had spent  approximately
$60,000.  The  Company  does not  expect the total  cost of  addressing  the Y2K
problem  with  respect  to  its  internal  technology  to  be  material  to  its
consolidated financial condition or results of operations.

     The above  projections  of total costs to implement the Company's Year 2000
plan and  estimated  timetable for  completion  are based on  management's  best
estimates,  which are necessarily  based in part on assumptions of future events
including the continued  availability  of adequate  resources and  completion of
third party  modification  plans. There can be no guarantee that these estimates
will be  achieved;  actual  results  could  differ  from the  Company's  current
estimates.  Specific risk factors that might cause material differences include,
but are not limited to, the  availability  and cost of personnel  with  adequate
programming skills, the availability of replacement equipment and components and
the ability to locate and correct all relevant  computer codes. The inability to
control the actions and plans of vendors and  suppliers,  customers,  government
entities and other third parties with respect to Year 2000 issues are associated
risks.

                    FORWARD-LOOKING AND CAUTIONARY STATEMENTS

     The Company and its  representatives  may from time to time make written or
oral forward-looking statements, including statements contained in the Company's
filings with the SEC and in its reports to  shareholders.  Such  forward-looking
statements  are generally  identified by phrases such as "the Company  expects,"
"the  Company  believes"  or  words of  similar  import.  These  forward-looking
statements  involve certain risks and  uncertainties  and other factors that may
cause the actual results, performance or achievements to be materially different
from any future  results,  performance or  achievements  expressed or implied by
such forward-looking 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 or

                                      -23-
<PAGE>

on behalf of the  Company.  Any such  statement is qualified by reference to the
following cautionary statements.

     The  Company's  formaldehyde  and resin  business  is  closely  tied to the
construction and forest products industries, and is influenced by housing starts
and construction  activity  generally.  The Company's  operating  performance is
sensitive to price movements in its basic raw materials,  particularly  methanol
and urea. The Company's operating  performance is also sensitive to movements in
freight costs. The Company's raw materials, products and manufacturing processes
are  subject to  environmental  laws and  regulations  and the costs  associated
therewith. The availability of credit from institutional asset based lenders and
suppliers is very important to the Company.  Developments in any of these areas,
which are more fully described elsewhere in this Proxy Statement,  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.  Except as required by law, the Company does not  undertake to update
any forward-looking statement that may be made from time to time by or on behalf
of the Company.


Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

     See "Item 7.,  Management's  Discussion and Analysis of Financial Condition
and Results of Operations - General - Disclosure Concerning Market Risk."





                                      -24-
<PAGE>

Item 8.      Financial Statements and Supplementary Data


                          Independent Auditors' Report



Board of Directors and
   Shareholders
Spurlock Industries, Inc.
Waverly, Virginia


We have  audited  the  accompanying  consolidated  balance  sheets  of  Spurlock
Industries,  Inc. and  Subsidiary  (the  "Company")  as of December 31, 1998 and
1997,  and the related  consolidated  statements  of  operations,  stockholders'
equity, and cash flows for the years 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 audits.

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  made 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 consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Spurlock  Industries,  Inc. and subsidiary as of December 31, 1998 and 1997, and
the results of their operations,  and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.



/s/ Cherry, Bekaert & Holland, L.L.P.


Richmond, Virginia
February 12, 1999




                                      -25-
<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 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 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 the
year then ended, in conformity with generally accepted accounting principles.



                                        /s/ Winter, Scheifley & Associates, P.C.

                                            Winter, Scheifley & Associates, P.C.
                                                    Certified Public Accountants


Englewood, Colorado
January 17, 1997



                                      -26-
<PAGE>
SPURLOCK INDUSTRIES, INC.

Consolidated Balance Sheets
December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                1998                      1997   
                                                                           -------------             -------------
<S>                                                                        <C>                       <C>
         Assets
         Current assets
                  Cash and cash equivalents                                $     105,460             $     362,685
                  Accounts receivable, trade, net                              2,257,742                 1,222,277
                  State income tax recoverable                                    10,624                    40,713
                  Federal income tax recoverable                                 227,552                   151,000
                  Accounts and notes receivable
                     Officers current portion                                    403,136                   101,944
                  Inventories                                                    617,610                   530,183
                  Prepaid expenses                                                32,666                   144,457
                                                                           -------------             -------------
                           Total current assets                                3,654,790                 2,552,259
                                                                           -------------             -------------
         Property, plant and equipment,
         Net of accumulated depreciation
         of  $6,076,617 and $4,890,414                                        16,438,662                12,043,300
                                                                           -------------             -------------
         Other assets
                  Cash restricted                                                      -                 3,889,567
                  Accounts and notes receivable - officers                         6,675                    59,122
                  Cash value of annuity                                          316,401                   171,995
                  Deferred tax asset                                                   -                    92,908
                  Other                                                          487,188                   591,280
                  Miscellaneous accounts receivable                              258,990                   _     -
                                                                           -------------             -------------
                           Total other assets                                  1,069,254                 4,804,872
                                                                           -------------             -------------
                           Total assets                                    $  21,162,706             $  19,401,431
                                                                           =============             =============
         Liabilities and Stockholders' Equity

         Current liabilities
                  Notes payable, line-of-credit                            $   2,346,394             $   1,341,622
                  Current portion of long-term debt                            9,571,487                 1,279,188
                  Accounts payable, trade                                      3,836,722                 2,378,597
                  Accrued expenses                                               745,550                   365,709
                  Accrued payroll and payroll taxes                                  540                         -
                                                                           -------------             -------------
                           Total current liabilities                          16,500,693                 5,365,116
                                                                           -------------             -------------
         Long-term liabilities
                  Long-term debt                                                 274,682                 9,598,315
                  Post retirement benefit liability                              399,271                   166,956
                  Deferred tax liability                                           7,100                         -
                  Other liabilities                                                6,708                     3,001
                                                                           -------------             -------------
                           Total long-term liabilities                           687,761                 9,768,272
                                                                           -------------             -------------
         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
              6,578,639 and 6,573,639 shares
              issued and outstanding in 1998
              and 1997,  respectively                                                  -                         -
           Paid in capital                                                     4,811,564                 4,808,814
           Accumulated deficit                                                  (837,312)                 (540,771)
                                                                           -------------             -------------
                                                                               3,974,252                 4,268,043
                                                                           -------------             -------------
                           Total liabilities and stockholders' equity      $  21,162,706             $  19,401,431
                                                                           =============             =============
</TABLE>

                                      -27-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Consolidated Statements of Operation
For the Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                                1998              1997             1996     
                                                            -------------    -------------     -------------
<S>                                                         <C>                <C>               <C>        
Revenue

         Net sales                                          $  27,659,786      $24,725,077       $28,643,415
         Cost of sales                                         21,718,458       19,597,991        21,129,265
                                                            -------------    -------------     -------------

                                                                5,941,328        5,127,086         7,514,150
                                                            -------------    -------------     -------------

Selling, general and administrative expenses                     6,310,326       4,815,638         4,414,422
                                                            --------------   -------------     -------------


Other income and (expense)
         Other income                                             795,022          139,307            83,376
         Interest expense                                        (699,109)        (627,799)         (667,942)
                                                            -------------    -------------     ------------- 

                                                                   95,913         (488,492)         (584,566)
                                                            -------------    -------------     -------------  

                  Income (loss) before taxes                     (273,085)        (177,044)        2,515,162

Income tax expense (benefit)                                       23,456         (152,304)        1,021,487
                                                            -------------    -------------     -------------



                  Net income (loss)                         $    (296,541)   $     (24,740)    $   1,493,675
                                                            =============    =============     =============

Per share information

         Basic earnings (loss) per share                    $       (0.05)   $        0.00     $       0.22
                                                            =============    =============     =============

         Diluted earnings (loss) per share                  $       (0.05)   $        0.00     $       0.22
                                                            =============    =============     =============

</TABLE>



                                      -28-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                             Common          Paid in           Preferred      Preferred        Accumulated
                                             Shares          Capital            Shares          Stock            Deficit  
                                            ---------     -------------       -----------    -------------    -------------
<S>                                         <C>           <C>                  <C>           <C>              <C>          
Balance December 31, 1995                   4,325,066     $   2,528,814        1,200,000     $   2,400,000    $ (2,009,706)

Conversion of preferred shares              2,400,000         2,400,000       (1,200,000)       (2,400,000)               -

Acquisition and cancellation of shares      (151,427)         (120,000)                -                 -                -

Net income for the year                             -                 -                -                 -        1,493,675
                                            ---------     -------------       -----------    -------------    -------------

Balance December 31, 1996                   6,573,639         4,808,814                -                 -        (516,031)

Net loss for the year                               -                 -                -                 -         (24,740)
                                            ---------     -------------       -----------    -------------    -------------

Balance December 31, 1997                   6,573,639         4,808,814                -                 -        (540,771)

Issuance of common shares                       5,000             2,750                -                 -                -

Net loss for the year                               -                 -                -                 -        (296,541)
                                            ---------     -------------       -----------    -------------    -------------

Balance December 31, 1998                   6,578,639     $   4,811,564                 -    $           -    $   (837,312)
                                            =========     =============       ===========    =============    =============

</TABLE>




                                      -29-
<PAGE>
SPURLOCK INDUSTRIES, INC.

Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
                                                                         1998             1997             1996    
                                                                    -------------    --------------    ------------
<S>                                                                 <C>              <C>               <C>         
Operating activities:                                       
Net income (loss)                                                   $    (296,541)   $      (24,740)   $  1,493,675
Adjustments to reconcile net income
     (loss) to net cash:
   Depreciation and amortization                                        1,245,723           973,577         751,057
   Reinstatement of loan to principal holders
   of equity securities                                                  (375,000)                -               -
   Write-off of advances to a principal holder of equity securities             -            51,357               -
   (Increase) decrease in trade receivables                            (1,035,465)          224,653         420,306
   (Increase) in other receivables                                       (329,214)         (182,995)              -
   (Increase) decrease in trading securities                                    -                 -         200,000
   (Increase) decrease in inventory                                       (87,427)           11,449          54,133
   (Increase) decrease in prepaid expenses                                111,791             2,510        (108,843)
   Increase (decrease) in deferred tax provision                          100,008          (236,384)        131,946
   Increase (decrease) in accounts payable
     and accrued expenses                                               1,838,506           805,337        (380,584)
   Increase in other liabilities                                            5,442             3,001               -
   Increase in post retirement benefit                                    232,315           124,289          42,667
                                                                    -------------    --------------    ------------

Total adjustments                                                       1,410,138         1,776,794       1,110,682
                                                                    -------------    --------------    ------------

Net cash provided by
   Operating activities                                                 1,785,138         1,752,054       2,604,357

Investing activities:
Purchase of fixed assets                                               (5,641,085)       (3,488,587)     (1,184,369)
(Increase) decrease in cash restricted for capital expenditures         3,889,567        (3,889,567)              -
Increases in cash value of annuity                                       (144,406)                -               -
                                                                    -------------    --------------    ------------

Net cash (used in)
   Investing activities                                                (1,895,924)       (7,378,154)     (1,184,369)

Financing activities:
(Increase) decrease in other assets                                       104,092          (503,539)          2,814
Acquisition of common shares                                                    -                 -        (120,000)
Issuance of common stock                                                    2,750                 -               -
Proceeds of new borrowings                                              1,517,539         7,500,000               -
Repayment of loans to principal holders of equity securities              150,016            65,816          30,000
Loans to principal holders of equity securities                                 -           (46,176)       (125,970)
Repayment of notes and loans                                           (1,545,836)       (1,133,388)     (1,351,511)
                                                                    -------------    --------------    ------------

Net cash provided by (used in)
   Financing activities                                                   228,561         5,882,713      (1,564,667)

Net increase in cash and cash equivalents                                (257,225)          256,613        (144,679)

Beginning cash                                                            362,685           106,072         250,751
                                                                    -------------    --------------    ------------

Ending cash                                                         $     105,460    $      362,685    $    106,072
                                                                    -------------    --------------    ------------

Supplemental cash flow information
   Cash paid for:
Interest expense                                                    $     699,109    $      621,149    $    667,942
                                                                    =============    ==============    ============

                  Income taxes                                      $     161,000    $       84,080    $    658,577
                                                                    =============    ==============    ============

Non-cash financing and investing activities:
   Acquisition of fixed assets with note payable                    $           -    $            -    $  3,305,168
                                                                    =============    ==============    ============
</TABLE>

                                      -30-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


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  Spurlock
Industries,  Inc.  and 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 were restricted to
the  construction  of the new  formaldehyde  manufacturing  facility in New York
State.  Disbursements  were  executed by the trustees upon the  presentation  of
approved  construction  draws.  This project was completed,  and restricted cash
disbursed, in July 1998.


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.

                                                  1998                 1997    
                                             --------------       --------------

             Raw materials                   $      501,062       $     467,319
             Work in process                          7,698               8,028
             Finished goods                         108,850              54,836
                                             --------------       --------------
                                             $      617,610       $     530,183
                                             ==============       ==============


Start-up and pre-operating costs

Start-up  and  pre-operating  costs  including  all  nonrecurring,   non-capital
manufacturing  and  other  costs,  such  as  promotional  expenses  incurred  in
preparing for the operation of the new facility have been expensed as incurred.

                                   (continued)



                                      -31-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 1 - Summary of significant accounting policies (continued)

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 high liquid debt instruments
with original maturities of less than 90 days.


Accounts Receivable

Accounts  receivable  are shown net of the  allowance  for doubtful  accounts of
$55,315 and $12,981 in 1998 and 1997 respectively.


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 $127,834,
$184,259,  and  $202,076 for the years ended  December 31, 1998,  1997 and 1996,
respectively.


Advertising

Advertising  costs are  charged to expense  when  incurred.  Amounts  charged to
expense were $8,889,  $8,291, and $28,101 for the years ended December 31, 1998,
1997, and 1996, respectively.


                                   (continued)




                                      -32-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 1 - Summary of significant accounting policies (continued)


Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent assets and liabilities as of the date of the financial statements and
the reported  amounts of revenue and expenses during the period.  Actual results
could differ from these estimates making it reasonably possible that a change in
these estimates could occur in the near term.


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 1997 and 1996 amounts  have been  reclassified  to conform with the 1998
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.

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  1998 the Company  did not  maintain  cash
deposits at financial  institutions  in excess of the $100,000  limit covered by
the Federal  Deposit  Insurance  Corporation.  The  Company  has  several  major
customers, the loss of any one of which could have a material negative


                                   (continued)




                                      -33-
<PAGE>
SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 1 - Summary of significant accounting policies (concluded)

Concentration of credit risk (concluded)

impact upon the Company.  Additionally,  the Company  maintains a line of credit
and a significant portion of its long-term debt with two financial institutions.
The  maintenance of a satisfactory  relationship  with these  institutions 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 the 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.


New accounting pronouncements

The  Statement  of  Financial  Accounting  Standards  No. 133 -  Accounting  for
Derivative Instruments and Hedging Activities

This Statement standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that an
entity  recognize  those  items as assets or  liabilities  in the  statement  of
financial  position and measure them at fair value.  The  statement is effective
for all fiscal  quarters of all fiscal years  beginning after June 15, 1999. The
Company is evaluating the potential impact of adopting SFAS No. 133 and does not
expect  the  adoption  of SFAS No.  133 to have a  material  adverse  impact  on
financial condition or results of operation.


Note 2 - Sale of the Company

On December 18, 1998, the Company, signed an "Agreement and Plan of Merger" (the
"Agreement")  with  Borden  Chemical,  Inc.,  a  Delaware  corporation,  and SII
Acquisition  Company,  a Virginia  corporation  and  wholly-owned  subsidiary of
Borden  Chemical.  The  Agreement  provides  for the  merger of SII  Acquisition
Company  with  and  into  the  Company.  As a  result,  the  Company  will  be a
wholly-owned subsidiary of Borden Chemical.

Subject  to  the  terms  and  conditions  of  the  Agreement,  each  issued  and
outstanding  share  of  Common  Stock  of the  Company,  will  automatically  be
cancelled and cease to exist and shall be converted  into the right to receive a
per  share  amount  equal  to  $3.40  in  cash,  subject  to  possible  downward
adjustments for certain contingencies.

Borden  Chemical,  SII Acquisition and certain  executive  officers and majority
shareholders of the Company have also entered into a Voting Agreement,  dated as
of December 18,  1998,  pursuant to which such  executive  officers and majority
shareholders have agreed, among other things, to vote the shares of Common Stock
owned by them in favor of the sale.  The  merger  awaits the  completion  of the
review of the merger proxy  statement by the Securities and Exchange  Commission
and formal approval by the  stockholders.  Currently,  the votes in favor of the
sale  represented  by the Voting  Agreement  constitute  greater than 51% of the
outstanding shares of the Company, a percentage sufficient to approve the sale.



                                      -34-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 3 - Misappropriation of assets and restatement of financial statements

On January 23, 1998, the Company discovered that financial information regarding
payments on a note receivable from an officer/director/principal  shareholder of
the Company and the  payment of travel and related  expenses of this  individual
has  been  falsified  to  intentionally   mislead  management  concerning  their
propriety.  Subsequent  to this  discovery,  another  officer/director/principal
shareholder 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 as early as 1992.

On April 10, 1998,  settlement was reached  regarding the personal expenses paid
by  the  Company,  aggregating  approximately  $267,000.   Restitution  included
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 bears interest at 9.00%, payable monthly in advance, with the entire
principal  amount due April 8, 2003.  Although  collateral and  guarantees  were
obtained,  it was management's  opinion that sufficient  uncertainty existed, at
the time the settlement was reached, to recognize the recovery as received.

Upon the completion of the Agreement (See Note 2),  management  determined  that
collectability  of the recovery was assured by requiring payment from the merger
transaction.


Note 4 - 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.  There were no  investments  held as trading
securities as of December 31, 1998 and 1997 or for the years ended  December 31,
1998 and 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.

Note 5 - Property and equipment

Property and equipment consist of the following:
<TABLE>
<CAPTION>
                                                              Estimated
                                                            useful lives                   1998                      1997      
                                                          -----------------         -----------------         -----------------
<S>                                                           <C>                   <C>                       <C>              
Land                                                              -                 $         543,866         $         219,233
Land Improvement                                                 7-20                        249,415                          -
Building                                                        15-30                       6,379,321                 5,440,321
Machinery and equipment                                          5-15                      14,684,187                 7,358,963
Construction in progress                                         5-15                         168,219                     2,932
Vehicles                                                         5-7                          280,976                   273,596
Furniture and fixtures                                           5-7                          209,295                   161,101
                                                                                    -----------------         -----------------
                                                                                    $      22,515,279         $      16,933,714
Less: Accumulated depreciation and amortization                                             6,076,617                 4,890,414
                                                                                    -----------------         -----------------

                                                                                    $      16,438,662         $      12,043,300
                                                                                    =================         =================
</TABLE>

Depreciation  charged to operations was $1,245,723,  $973,577,  and $751,057 for
the years ended December 31, 1998, 1997 and 1996, respectively.



                                      -35-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 6 - Line of credit

The Company  utilizes a revolving 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 + .5% or LIBOR + 2.75%  (weighted  average
rate of 7.49% in 1998 and  7.41% in  1997),  and are  limited  to the  lesser of
revolving  $3,650,000  or 85% of  eligible  accounts  receivable  and 60% of the
inventory  value.  The line of credit matures in July 1999. At December 31, 1998
and 1997 advances  outstanding totaled $2,346,394 and $1,341,622,  respectively.
This credit facility is also subject to the same covenants as those of long-term
debt (See Note 8).

Note  7 -  Advances  and  notes  receivable  for  principal  holders  of  equity
securities

Accounts  and notes  receivable  from  principal  holders  of equity  securities
consisted of the following at December 31:
                                                1998                 1997      
                                           ---------------      ---------------
Notes receivable and advances
with various interest rates                $       409,811      $       161,066
Less: current portion                              403,136              101,944
                                           ---------------      ---------------

                                           $         6,675      $        59,122
                                           ===============      ===============

During 1997, the Company wrote off $51,357 in advances and notes  receivable for
a principal holder of equity securities.

During 1998, a note receivable to a former officer and director for $375,000 was
reinstated.  This note had not been  recognized as  collectable  at December 31,
1997 due to uncertainty of resources to repay.  The  reinstatement  of this note
receivable is based upon the  impending  completion of the sale of the Company's
stock as  described  in Note 2.  This  note was  originated  by the  restitution
settlement dated April 10, 1998 (See Note 3).




                                      -36-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 8 - Long-term debt

Bank Borrowing Arrangements

At  December  31,  1998,  the Company  had  agreements  with two banks that have
extended credit,  through lines of credit,  loans and standby letters of credit,
comprising the majority of borrowings of the Company. Under these agreements, as
amended  (the "Bank  Loan  Agreements"),  borrowings  under the  various  credit
facilities are subject to certain  provisions and covenants  which,  among other
things,  require  specific levels of net worth and  profitability  and limit the
amount of future capital expenditures. The violation of covenants related to the
Bank Loan Agreements  creates  defaults under certain credit support  facilities
related to the Industrial Revenue Bond for the Moreau, New York facility.

As of the above  date,  the  Company  violated  the net worth and  profitability
covenants of the Bank Loan Agreements. The impact of the Company's violations is
the  acceleration  of the  long-term  portion of the  affected  loans to current
liabilities.  Management has requested  forbearance from the lenders  concerning
these violations, in anticipation of the sale of the Company.

Should the sale of the Company not occur,  management anticipates  restructuring
long-term  debt,  seeking  outside  capital  or  obtaining  waivers  of the loan
violations.
<TABLE>
<CAPTION>
                                                                                 1998                       1997
                                                                                 ----                       ----
<S>                                                                        <C>                         <C>
Note payable bank,  payable in monthly  installments  
   of $6,250 plus interest at 8.0% through May 2003
   secured by plant and equipment                                             $1,400,000                 $1,500,000

Industrial revenue bonds, payable in quarterly installments of 
   $150,000 through April 1, 2008 with a variable interest rate  
   remarked  weekly, interest at 4.20% on December 31, 1998
   collateralized by the Plant in Moreau, New York                             5,700,000                  6,000,000

Note payable bank payable in monthly installments of
   $50,542 with interest at prime plus .5% or LIBOR plus  
   2.75% (7.85% at December 31, 1998) collateralized by
   plant and equipment due July, 2002                                          2,224,107                  2,830,328

Note payable bank, payable in monthly installments 
   of $1,832 at 12% interest, collateralized by real property
   due in August, 2004                                                                 -                     99,934

Note payable, supplier, payable in monthly installments
   of $14,814, with interest at 8.25%, through August 1999                       137,083                    263,185

Note payable, bank, payable in monthly installments of
   $1,334 including interest of 8.25% through August 2003                        135,134                          -

Note payable, vendor, payable in monthly installments of
   $1,778 including interest of 9.25% through October 2003                        91,218                          -

Various notes payable, payable in monthly installments 
   of $5,808 with interest from 8% to 10% due December 1999
   to October 2000 collateralized by personal property                           158,628                    114,116
                                                                              ----------                 ----------
                                                                               9,846,169                 10,877,503
Less current portion                                                           9,571,487                  1,279,188
                                                                              ----------                 ----------
                                                                              $  274,682                 $9,598,315
                                                                              ==========                 ==========
</TABLE>

                                   (continued)



                                      -37-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 8 - Long-term debt (concluded)

Maturities of long-term debt are as follows:

         1999                                         $       9,571,487
         2000                                                    47,864
         2001                                                    28,110
         2002                                                    14,319
         2003                                                   184,389
         Thereafter                                                   -
                                                      -----------------
                                                      $       9,846,169
                                                      =================

In October 1997,  the Company  obtained an  irrevocable  letter of credit in the
amount of $6.0  million.  As of December 31, 1998 this letter of credit had been
reduced  to $3.1  million.  The  letter of credit  has a term of five  years and
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 carrying value based on the nature of the fee
arrangement with the issuing banks.

Deferred  financing costs are amortized over the life of the Industrial  Revenue
Bond  (ten  years,  based on the  interest  method).  Amortization  of  deferred
financing costs aggregated $102,563 and $51,423 for 1998 and 1997, respectively.
There were no deferred financing costs amortized for 1996.

The Company  capitalized  interest on assets  constructed  for its  formaldehyde
production  facility in the State of New York.  In 1998 and 1997 total  interest
costs  incurred were $930,180 and $683,481,  respectively  of which $231,071 and
$55,682, respectively were capitalized. Interest was not capitalized for 1996.


Note 9  - 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  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, 1998 and 1997, the
Company  had one swap  agreement  outstanding,  the net  effect  of which was to
effectively  convert 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 are not  reflected  in the  accompanying
financial  statements.  The notional amount was $5.3 million and $6.0 million at
December 31, 1998 and 1997 respectively. The estimated fair market value of this
instrument  was a liability of $127,421 and $182,921 as of December 31, 1998 and
1997, respectively.

The  Company's  credit  exposure  on  this  swap  is  limited  to  an  event  of
nonperformance  by the counter  parties and to an amount  equal to the  positive
value  (if  any) of the  swap  to the  company.  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
counterparties with whom it transacted the swap.



                                      -38-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 10 - 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 additional preferred shares,  aggregating 1.2
million shares of preferred stock, into 2.4 million shares of common stock.

In July 1996, the Company entered into an employment  agreement 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 $232,319,  $124,284 and $42,667 of expense for post retirement benefits
for the years ended December 31, 1998, 1997 and 1996, respectively.  The Company
estimates  that its net commitment for the period from January 1, 1999 to August
31, 1999  pursuant to this  contract  will be  approximately  $220,729  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
$316,401 and $171,995 as of December 31, 1998 and 1997, respectively.


Note 11  - Description of leasing arrangements

Lease Commitments

The Company leases equipment under  agreements,  which are classified as capital
leases.  These  leases  generally  provide  that  all  expenses  related  to the
properties are to be paid by the lessee. The leases all expire within ten years.
Rents under  these  agreements  amounted to $18,150 in 1998.  There were no such
payments for 1997 or 1996. All of the equipment  leases have purchase options at
the end of the original lease term.  Assets under capital leases are included in
the consolidated balance sheets as follows:

                                                    1998
                                                    ----

Equipment                                         $76,435

Accumulated amortization                           (9,494)

                                                  $66,941

In addition,  the Company rents equipment and a facility under operating leases.
Payments made under these leases aggregated  $259,842 in 1998 and $6,690 in 1997
and 1996.

                                   (continued)



                                      -39-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 11  - Description of leasing arrangements (concluded)

Future minimum payments, by year and in the aggregate,  under the aforementioned
leases and other noncancellable operating leases with initial or remaining terms
in excess of one year as of December 31, 1998, are as follows:

                                            Capital             Operating
Years Ending                                Leases               Leases

1999                                    $      30,039        $     553,668
2000                                           22,988              553,668
2001                                           14,240              553,668
2002                                                0              553,668
2003                                                0              553,668
Later years                                         0            2,537,645
                                        -------------        -------------

Total minimum lease payments            $      67,267        $   4,819,929
                                                             =============
Less amount representing interest              (9,471)
                                        -------------
   Present value of net minimum
   Lease payments                              57,796
   Less current portion                        (5,716)
                                        $      52,080
                                        =============

Lease related expenses are as follows:

Years Ended                                       1998               1997    
                                             -------------      -------------

Capital lease amortization                   $       9,494      $         578
Capital lease interest expense                       3,628                354
Operating lease rentals
(excluding month-to-month
rents)                                             235,155              6,690


Note 12 - 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.

                                   (continued)




                                      -40-
<PAGE>
SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997

Note 12 - Income taxes (concluded)

Deferred tax assets and liabilities at December 31, 1998, 1997 and 1996 resulted
from the following:
<TABLE>
<CAPTION>
                                                                                1998            1997             1996    
                                                                           ------------     -------------    ------------
<S>                                                                        <C>              <C>              <C>        
Deferred tax assets
     Operating loss carry forward                                          $     83,138     $      69,682    $          -
     Post retirement liability                                                  151,723            63,925          14,507
Deferred tax liabilities
     Accelerated depreciation                                                   246,973            40,699         157,983
                                                                           ------------     -------------    ------------

     Net deferred tax asset (liability)                                    $    (7,100)     $      92,908    $    143,476
                                                                           ============     =============    ============
</TABLE>
The provision for income taxes expense (benefit) at December 31, 1998, 1997, and
1996 consisted of the following:
<TABLE>
<CAPTION>
                                                                                1998            1997             1996    
                                                                           ------------     -------------    ------------
<S>                                                                        <C>              <C>              <C>         
Current                                                                    $    (76,552)    $       6,329    $    987,910
Deferred                                                                        100,008          (158,633)         26,323
                                                                           ------------     -------------    ------------

                                                                           $     23,456     $    (152,304)   $  1,021,487
                                                                           ============     =============    ============
</TABLE>

A  reconciliation  of the federal taxes at statutory  rates to the tax provision
for the years ended December 31, 1998, 1997, and
1996 is as follows:                                                       
<TABLE>
<CAPTION>
                                                                               1998            1997             1996    
                                                                           ------------    -------------    ------------
<S>                                                                        <C>              <C>             <C>         
Federal statutory rate expense (benefit)                                   $    (92,849)    $    (60,195)   $    855,155
State income taxes                                                              (10,922)         (10,623)        149,415
Nondeductible Expenses                                                           95,000                -               -
Other                                                                            32,227          (81,486)         16,917
                                                                           ------------    -------------    ------------

Provision for income taxes expense (benefit)                               $     23,456    $    (152,304)   $  1,021,487
                                                                           ============    =============    ============
</TABLE>
Note 13 - Stockholders' equity

During 1995 the Company  adopted a stock  option plan for the benefit of certain
employees,  officers and directors.  The number of 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
100,000 in 2000 and 110,000 in 2005.  During  June,  1996,  the Company  granted
additional  options under the plan for 75,000 shares  exercisable at $0.55 for a
ten year period.  All shares were vested when  granted.  No options were granted
for the years ended December 31, 1998 and 1997.

                                   (continued)

                                      -41-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 13 - Stockholders' equity (concluded)

Following is a summary of the transactions in the plan:
<TABLE>
<CAPTION>
                                                                                        Weighted
                                                               Shares                Average Price 
                                                         -----------------         ----------------
<S>                                                                <C>             <C>             
Balance, December 31, 1995                                         210,000         $           0.50
Granted                                                             75,000                     0.55
Canceled                                                                 -                        -
Exercised                                                                -                        -
                                                         -----------------         ----------------

Balance, December 31, 1996 and 1997                                285,000                     0.51
                                                         =================
Granted                                                                  -                        -
Canceled                                                            75,000                     0.50
Exercised                                                            5,000                     0.55
                                                         -----------------         ----------------

Balance, December 31, 1998                                         205,000         $           0.51
                                                         =================

Options available at December 31, 1998                             290,000
                                                         =================
</TABLE>

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 2.06%; and a
weighted-average expected life of the option of 6.00 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:

                                              1998         1997         1996
                                              ----         ----         ----

Pro Forma net income (loss)               $ (296,541)   $  (24,740)  $ 1,474,960
Pro forma earnings per share
     Basic                                $    (0.05)   $     0.00   $      0.22
     Diluted                              $    (0.05)   $     0.00   $      0.21


During January 1996 the holder of the 1,200,000 preferred shares converted these
shares  into  2,400,000   shares  of  common  stock.   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.



                                      -42-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 14 - 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,                     
                                                            ------------------------------------------------------------------
                                                                   1998                    1997                    1996       
                                                            -----------------       -----------------       ------------------
<S>                                                         <C>                     <C>                     <C>              
Numerator:
Net income (loss) available to shareholders                 $       (296,541)       $        (24,740)       $       1,493,675
                                                            =================       =================       =================

Denominator:
Weighted average shares outstanding                                 6,574,899               6,573,639               6,711,733
                                                            -----------------        ----------------       -----------------

Basic EPS weighted average shares outstanding                       6,574,899               6,573,639               6,711,733

Effect of dilutive securities:
     Incremental shares attributable to the
         Stock Option Plan                                            130,582                  10,509                 210,900
                                                            -----------------       -----------------       -----------------

Diluted EPS weighted average shares outstanding                     6,705,481               6,584,148               6,922,633
                                                            =================       =================       =================

Basic earnings per share                                    $          (0.05)       $            0.00       $            0.22
                                                            =================       =================       =================

Diluted earnings per share                                  $          (0.05)       $            0.00       $            0.22
                                                            =================       =================       =================
</TABLE>

Note 15 - 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 years ended
December 31, 1998, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
                                                                                                                Receivable
Customer                                                           Sales                     %                   at 12/31     
--------                                                    ----------------------------------------------------------------
<S>                                                         <C>                           <C>               <C> 
1998
     International Paper                                    $       3,737,167              14%              $      108,029
     Union Camp                                                     2,699,956              10                       37,159
     Schenectady                                                    3,013,006              11                      233,567
     Willamette                                                     4,596,978              17                      534,327

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

</TABLE>



                                      -43-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 16 - Commitments and contingencies

The Company purchases substantially all of its three raw material components for
its resin,  formaldehyde,  and fertilizer  operations from four  suppliers.  The
Company purchased $12,801,148, $13,488,767, and $15,158,111 from these suppliers
during  1998,  1997 and 1996 and had a  balance  due to them of  $1,500,931  and
$1,742,592 at December 31, 1998 and 1997.  The Company  believes that  alternate
sources for its raw materials are readily available.

At the end of April 1997, a shareholder's  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 by seven shareholders.  The suit, which
was  subsequently  moved to the United States District Court for the District of
Colorado,  alleged  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.

In response to the suit, the Board of Directors  appointed a Special  Litigation
Committee,  composed  of two  outside  directors  not  named as  defendants,  to
investigate the allegations and determine whether  maintenance of the derivative
proceeding  was in the best  interests  of the Company.  The Special  Litigation
Committee determined in an initial report delivered to the Court in October 1997
that  maintenance  of the  suit was not in the best  interests  of the  Company.
Subsequently,  in response to the winter 1998 discovery and investigation of the
defalcations  by two of the  Company's  officers,  and after the receipt of full
restitution  from one such officer and partial  restitution  plus a judgment and
secured  repayment  agreement  for the  remainder  on behalf of the  other,  the
Special Litigation Committee filed with the Court on April 13, 1998 a supplement
to its October  report and again  concluded  that  maintenance of the derivative
suit was not in the best interests of the Company.

On July 2,  1998,  at a hearing on a Motion for  Summary  Judgment  filed by the
Company,  the Court  declined to dismiss the  derivative  suit and  referred the
matter to a federal  magistrate  for a settlement  conference.  Pursuant to such
initiative,  the named parties  reached a proposed  Stipulation  and  Settlement
Agreement  (the  "Settlement  Agreement")  involving the dismissal of all of the
derivative  claims.  After hearing  evidence and the  arguments of counsel,  the
Court approved the Settlement Agreement and entered, as of January 27, 1999, the
Final Order and Judgment of Dismissal with Prejudice requested by the parties.

The Settlement Agreement provides,  among other things, for delivery or payment,
as the case may be, by the  Company to the  plaintiffs  of (i) 50,000  shares of
newly  issued  Company  common  stock and  $75,000  cash in  recognition  of the
benefits  conferred upon the Company as a result of the investigation  commenced
as a  result  of  the  derivative  suit,  and  (ii)  $22,500  cash  representing
reimbursement  of the  plaintiff's  legal fees incurred in  connection  with the
suit. At December 31, 1998, accrued settlement expenses aggregating $247,500 had
been recognized as a result of these actions.

The  Company,  as a result of the  above  litigation,  has  claims  against  its
insurance carrier for Directors and Officers insurance aggregating approximately
$374,000.  Although  formal  agreements  have not been reached with the carrier,
management's  estimate of probable  recovery  against  these claims  aggregating
$97,500 has been accrued.

The Company enters into  multi-year  purchase  contracts for a minimum supply of
methanol  and  urea.  These  minimums  must be met  annually  and are  generally
exceeded each year.




                                      -44-
<PAGE>

SPURLOCK INDUSTRIES, INC.

Notes to Consolidated Financial Statements
December 31, 1998 and 1997


Note 17 - Employee Benefit Plan

The Company maintains a defined contribution employee benefit plan under section
401(k) of the  Internal  Revenue Code for  eligible  employees.  In order for an
employee to be  considered  eligible they must have been employed by the company
for three months.  An employee will be considered fully vested after seven years
of  employment.  The  contributions  are  determined  as a  percentage  of  each
participating  employee's  compensation.  The  Company  contributes  3%  of  the
employee's  salary.  In addition,  the Company will match employee  contribution
$0.50 on the $1.00 up to 3% of the employee's  salary.  Contributions  for 1998,
1997, and 1996 were $139,312, $166,282, and $132,476, respectively.


Note 18 - Disclosures about Fair Value of Financial Instruments

The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
                                                                1998                                    1997               
                                                ------------------------------------    -----------------------------------
                                                     Carrying           Est. Fair           Carrying            Est. Fair
                                                       Value              Value               Value               Value    
<S>                                             <C>                <C>                  <C>               <C>
Financial Assets
   Cash                                         $      105,460     $       105,460      $      362,685    $      362,685
   Accounts receivable                               2,516,733           2,516,733           1,222,277          1,222,277
   Notes receivable                                    409,811             409,811             161,066           161,066
   Cash value of annuity                               316,401             316,401             171,995           171,995

Financial liabilities
   Notes Payable                                     2,346,394           2,346,394           1,341,622           1,341,622
   Long term debt                                    9,846,169           9,846,169           9,598,315           9,598,315
   Post retirement benefit liability                   399,271             399,271             166,956             166,956

Financial instruments with off-balance sheet risk
     Interest rate swap agreement                            -            (127,421)                  -            (182,921)

</TABLE>




                                      -45-
<PAGE>


Item 9.      Changes in 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 1998 and 1997 fiscal
years. The Company has previously disclosed the appointment to the Commission on
a Current Report on Form 8-K dated February 17, 1998.


                                    PART III

Item 10.     Directors and Executive Officers of the Registrant

         Directors.  The business experience of the directors of the Company for
the past five years is summarized below.

         PHILLIP S. SUMPTER, 59, 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. He has also served as Director
of Marketing of Monadnock  Lifetime  Products,  Inc., a  manufacturer  of police
protection equipment, since January 1995.

         HAROLD N.  SPURLOCK,  74, 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,  72, 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,  54, 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 a director of the Company  since
October 1998. He has served as Corporate  Secretary and Director of  Information
Systems & Environmental Affairs of both the Company and Spurlock Adhesives since
February  1998.  From 1993 to 1998,  Mr.  Passopulo  served as Plant  Manager of
Spurlock Adhesives.  Previously, Mr. Passopulo served the Company in a number of
positions subsequent to joining it in 1976.

         LANCE K.  HOBOY,  45,  has served as a director  of the  Company  since
September 1998. He previously held positions as a director and Vice President of
Air Resources from April 1992 until June



                                      -46-
<PAGE>


1993.  From  December  1993  until  October  1994,  he  served  as a Merger  and
Acquisitions Analyst with Schwan's Sales Enterprises, a frozen food manufacturer
and marketing concern. From October 1994 until the present, he has served as the
Managing   Director  of  Schwan's  Food   International,   also  a  frozen  food
manufacturer and marketing concern,  headquartered in Marshall,  Minnesota. From
July 1998 until  December  1998, he served as a director of  Foodsline,  LTD., a
Japanese  food  distributor.  Since  March 1998 he has  served as a director  of
Schwan's Korea, a Korean food distributor.

         Executive Officers.  The business experience of Phillip S. Sumpter, the
Chairman  and  Chief  Executive  Officer  of the  Company,  Kirk  J.  Passopulo,
Corporate  Secretary  and  Director of  Information  Systems  and  Environmental
Affairs,  and Harold N.  Spurlock,  Vice  President  of Spurlock  Adhesives,  is
presented  above.  The  business  experience  for the past  five  years  for the
remaining executive officers is summarized below.

         IRVINE R.  SPURLOCK,  45, 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,  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, 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.

         LAWRENCE C.  BIRKHOLZ,  60, 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.,  56,  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.

         Family  Relationships.  There are no family  relationships  between any
director and executive officer,  except that Irvine R. Spurlock,  President,  is
the son of Harold N. Spurlock, Director.

         Section 16(a) Beneficial Ownership Reporting Compliance.  Section 16(a)
of the  Securities  Exchange Act of 1934,  as amended,  requires  the  Company's
directors and executive  officers and persons who beneficially own more than 10%
of the Company's  Common Stock to file initial  reports of ownership and reports
of  changes  in  ownership  of Common  Stock with the  Securities  and  Exchange
Commission  (the   "Commission").   Such  persons  are  required  by  Commission
regulation  to furnish the Company  with copies of all Section  16(a) forms that
they file.

         To the Company's knowledge, based solely upon a review of the copies of
such reports  furnished to the Company,  the Company  believes  that  applicable
Section 16(a) filing  requirements  were  satisfied for events and  transactions
that occurred in 1998.


Item 11.     Executive Compensation

         The following table summarizes the compensation  paid or accrued to the
Chief Executive  Officer of the Company and its other most highly paid executive
officers  (the  "Named  Executive  Officers")  for the last  fiscal  year in all
capacities in which they served the Company.




                                      -47-
<PAGE>


                           Summary Compensation Table

<TABLE>
<CAPTION>

                                                                                                         Long Term
                                                                                                       Compensation
                                                               Annual Compensation                         Award
                                                               -------------------                         -----

                                                                                                         Securities
             Name and                                                             Other Annual           Underlying
        Principal Position             Year          Salary        Bonus          Compensation            Options
        ------------------             ----          ------        -----          ------------            -------
<S>                                    <C>          <C>           <C>                <C>                <C>     
Phillip S. Sumpter, Chairman and       1998         $187,151         --                (3)                   --
  Chief Executive Officer (1)          1997         $180,000         --                (3)                   --
                                       1996 (2)     $141,942         --                (3)               50,000 (4)

Irvine R. Spurlock, President (5)      1998         $185,701         --                (3)                   --
                                       1997         $186,725         --                (3)                   --
                                       1996         $179,880         --                (3)                   --

Harold N. Spurlock, Sr. Vice           1998         $180,986      $ 50,000             (3)                   --
  President of Spurlock Adhesives      1997         $180,000      $ 50,000             (3)                   --
                                       1996         $170,130      $ 50,000             (3)                   --
</TABLE>


__________________________ 
(1)      Mr.  Sumpter  was  elected  Chairman  of the Board and Chief  Executive
         Officer on February 11, 1998. During the fiscal year ended December 31,
         1997 and until February 11, 1998, he served as Executive Vice President
         and Chief Financial Officer.
(2)      Represents  compensation for Mr. Sumpter's  employment with the Company
         beginning April 1, 1996.
(3)      The value of perquisites and other personal benefits did not exceed the
         lesser of $50,000 or 10% of the total annual  salary and bonus shown in
         the table.
(4)      Represents  shares of Air Resources' common stock. As of July 26, 1996,
         these  options  were  automatically  converted  to options to  purchase
         shares of Common Stock.
(5)      Irvine  Spurlock  served as Chairman of the Board,  President and Chief
         Executive  Officer  during the fiscal year ended  December 31, 1997 and
         until  February 11, 1998. On February 11, 1998, he resigned as Chairman
         of the Board and Chief  Executive  Officer  but  retained  his title as
         President.


         The  executive  officers of the Company  participate  in other  benefit
plans  provided to all full-time  employees of the Company who meet  eligibility
requirements,  including group life insurance, hospitalization and major medical
insurance.

         Option  Grants,  Exercises and Holdings.  The Company did not grant any
options to the Named Executive Officers named in the Summary  Compensation Table
during the fiscal year ended  December  31, 1998.  In addition,  no options were
exercised  by any of the Named  Executive  Officers  of the  Company  during the
fiscal year ended December 31, 1998.

         The following table sets forth  information with respect to unexercised
options held by the Named Executive Officers as of December 31, 1998:




                                      -48-
<PAGE>


                             Fiscal Year End Options
<TABLE>
<CAPTION>
                                              Number of Securities
                                             Underlying Unexercised                   Value of Unexercised
                                                   Options at                         In-the-Money Options
                                                 Fiscal Year End                     at Fiscal Year End (1)
                                                 ---------------                     ----------------------
Name                                     Exercisable       Unexercisable        Exercisable        Unexercisable
----                                     -----------       -------------        -----------        -------------
<S>                                        <C>              <C>                   <C>                <C>  
Phillip S. Sumpter                         50,000                -                $122,500               -

Irvine R. Spurlock                         50,000                -                $125,000               -
</TABLE>
_______________________
                                               
(1)     The value of  unexercised  in-the-money  options at fiscal  year end was
        calculated by determining  the difference  between the fair market value
        of the  Company's  Common Stock  underlying  the options on December 31,
        1998 per share ($3.00,  closing  sales price on the OTC Bulletin  Board)
        and the exercise price of the options ($0.50 for Mr.  Spurlock and $0.55
        for Mr. Sumpter).

         Compensation  of  Directors.  The Company pays each outside  director a
quarterly  retainer of $3,000,  plus $500 per  meeting.  Directors  who are also
employees do not receive any compensation for their service as directors.

         In May  1997,  the  Company  created a  Special  Litigation  Committee,
consisting  of Messrs.  Tuttle  and  Whitwer,  to  investigate  the  allegations
contained  in the  Derivative  Suit filed  against the Company and to  determine
whether  maintenance of the  derivative  proceeding was in the best interests of
the  Company.  Mr.  Tuttle was paid  $2,857.49  for his  service on the  Special
Litigation Committee in 1998. Mr. Whitwer was paid $27,516.07 for his service on
the Special  Litigation  Committee in 1998, and, at Mr. Whitwer's  request,  the
Company paid his compensation directly to Whitwer & Company,  Inc., a management
consulting  firm owned by Mr.  Whitwer.  For further  information on the Special
Litigation  Committee and the Derivative Suit, see Item 3., "Legal  Proceedings"
above.

Employment Agreements

         Phillip S. Sumpter.  The Company,  Spurlock  Adhesives and Mr.  Sumpter
entered into an employment agreement in 1998 that provides for his employment as
Chairman of the Board of Directors  and Chief  Executive  Officer of the Company
and Spurlock Adhesives. The term of the agreement commenced on April 1, 1998 and
will end on March 31,  2001,  when it will  automatically  renew for  successive
terms of one year each  unless it is  terminated  or not  renewed  by any party.
Under the agreement, Mr. Sumpter is entitled to receive annual base compensation
of $190,000,  subject to annual adjustments by the Company.  If the agreement is
terminated by the Company and Spurlock  Adhesives  without cause (as provided in
the  agreement),  Mr.  Sumpter  will  continue to receive his base  compensation
through the earlier of the last date of the remaining term of the agreement, the
date of his death or the date that is 18 months after such  termination.  If the
agreement  is  terminated  by Mr.  Sumpter  with good reason (as provided in the
agreement),  Mr. Sumpter will continue to receive his base compensation  through
the earlier of the last date of the remaining term of the agreement, the date of
his death or the date that is 12 months after such termination.  In the event of
a change of control of the Company and  Spurlock  Adhesives  (as provided in the
agreement),  Mr.  Sumpter will have the option to terminate his  employment  and
will be entitled  to receive a lump sum payment  equal to one and one half times
his total compensation under the agreement.

         The agreement  requires Mr. Sumpter to keep in confidence certain trade
secrets and  confidential  information  of the Company  and  Spurlock  Adhesives
during the term of his employment and for a period of



                                      -49-
<PAGE>


five years  thereafter.  Mr.  Sumpter has further agreed not to remove or retain
any  documents  of  Spurlock  Adhesives.  Also,  for so long as Mr.  Sumpter  is
employed by the Company and  Spurlock  Adhesives  and as long as he is receiving
any  compensation  under the  agreement,  he has agreed not to compete  with the
Company and Spurlock Adhesives.  In connection  therewith,  Mr. Sumpter has also
agreed in the  agreement  not to solicit  employees  of the Company and Spurlock
Adhesives for a period of 12 months following  termination of his employment for
any reason.

         Harold N. Spurlock. Pursuant to an Agreement and Plan of Reorganization
dated April 22, 1992 (the "Spurlock Adhesives Agreement"),  Air Resources, among
other  things,  acquired  all of the capital  stock of Spurlock  Adhesives  from
Harold  Spurlock.  The Spurlock  Adhesives  Agreement  required Air Resources to
purchase all of Harold  Spurlock's  shares of Air Resources' common stock at his
request upon the  termination of his employment by Air Resources.  The per share
purchase  price set by the Spurlock  Adhesives  Agreement was the highest market
bid price at which such shares have traded in the preceding  twelve months.  The
Spurlock Adhesives  Agreement also provided for Air Resources to purchase all of
Harold  Spurlock's  shares of Air Resources'  common stock upon his death at the
request of his heirs upon  mutually  agreeable  terms.  These  provisions of the
Spurlock Adhesives Agreement relating to Air Resources'  obligations to purchase
Harold Spurlock's shares were terminated by mutual agreement effective April 15,
1996, without compensation to Harold Spurlock.

         On August 21,  1996,  Harold  Spurlock  and the Company  entered into a
certain Employment and Retirement Benefit Agreement (the "Employment Agreement")
which provides, among other things, for Harold Spurlock's employment and certain
retirement benefits.  Pursuant to the Employment Agreement,  Harold Spurlock has
agreed to serve as vice  president for product  development,  and as a member of
the Company's Board of Directors, until August 31, 1999.

         For his services,  Harold  Spurlock  will receive under the  Employment
Agreement  a base  salary of  $180,000  per year,  reimbursement  of expenses in
accordance with the general policies of Spurlock Adhesives,  and such additional
or special  compensation  as the Board of  Directors of Spurlock  Adhesives  may
determine  from time to time.  Harold  Spurlock will not receive any  additional
compensation for service on the Company's Board of Directors.

         The Employment  Agreement  provides that Harold  Spurlock's  employment
with Spurlock  Adhesives  will be terminated by reason of his death or permanent
disability,  by Harold  Spurlock upon 30 days notice in writing,  or by Spurlock
Adhesives with cause.  "Cause" is deemed to exist under the Employment Agreement
if Harold Spurlock (i) willfully  refuses to perform services  thereunder,  (ii)
materially  breaches  the  provisions  thereof  relating to trade  secrets,  and
confidential  information,  retention of documents,  and  noncompetition,  (iii)
engages  in acts of  dishonesty  or  fraud,  or (iv)  engages  in other  serious
misconduct.  If Harold Spurlock's  employment with Spurlock Adhesives terminates
for cause, or due to death, permanent disability or voluntary  termination,  any
portion of his fixed  salary,  which is earned but unpaid as of the date of such
termination shall be paid to him, or his designated  beneficiary in the event of
death.

         The  Employment  Agreement  provides for a retirement  benefit equal to
$100,000 per year to be received by Harold  Spurlock  upon his  retirement  from
employment  at or after August 31, 1999, or permanent  disability  prior to such
date, for a period of five years. In the event of Harold  Spurlock's death prior
to or after such date,  Harold Spurlock's wife would receive such benefit during
such five year period. Any benefit payable to Harold Spurlock's wife would cease
upon her death.  Neither  Harold  Spurlock nor his wife would be entitled to any
retirement or death benefit under the Employment  Agreement in the event that he
voluntarily  terminated his employment  with Spurlock  Adhesives prior to August
31, 1999 without "good reason." Under the Employment Agreement, "good reason" is
deemed to exist if, and only if:

         (a) Spurlock  Adhesives  generally  fails to timely pay the amounts and
benefits provided to Harold Spurlock under the Employment Agreement;




                                      -50-
<PAGE>


         (b) the assignment to Harold Spurlock of duties materially inconsistent
with and inferior to Harold Spurlock's position, duties and responsibilities and
status as a vice president; or

         (c) the transfer of Harold Spurlock's place of employment  further than
30 miles beyond the limits of Petersburg, Virginia without his prior consent.

         The Employment Agreement requires Harold Spurlock to keep in confidence
certain trade secrets and confidential  information of Spurlock Adhesives during
the term of his  employment  and for a period of five years  thereafter.  Harold
Spurlock  has further  agreed not to remove or retain any  documents of Spurlock
Adhesives.  Also,  for so  long as  Harold  Spurlock  is  employed  by  Spurlock
Adhesives and as long as he is receiving retirement benefits,  he has agreed not
to compete with Spurlock Adhesives. In connection therewith, Harold Spurlock has
also agreed in the  Employment  Agreement  not to solicit  employees of Spurlock
Adhesives for a period of 12 months following  termination of his employment for
any reason.

         Bonus.  On June 11, 1996, the Board of Directors of Spurlock  Adhesives
resolved  to pay a bonus to Harold  Spurlock in the amount of $150,000 to reward
his past performance to Spurlock  Adhesives,  including its favorable  operating
performance in 1995 and  year-to-date  1996.  Such bonus was to be paid upon the
effectiveness of a new employment contract (described above), September 1, 1996.
Subsequently,  Spurlock Adhesives and Harold Spurlock agreed, in order to assist
the Company in managing its liquidity position, that such bonus be paid over the
next three  years at $50,000  per year.  The 1996  payment  was made in December
1996. The 1997 and 1998 payments were paid to Harold Spurlock periodically as an
addition to his salary under the Employment Agreement described above.

         Indemnification Agreements. On December 21, 1995, Air Resources entered
into an  Indemnification  Agreement with Phillip S. Sumpter upon his appointment
to the Board of Directors.  The Company  succeeded to and assumed all the rights
and obligations of Air Resources under the Indemnification  Agreement, which was
subsequently superseded by a new Indemnification  Agreement between such parties
dated January 30, 1997.  Similar  Indemnification  Agreements  were entered into
between the  Company and Glen S.  Whitwer,  Raymond G. Tuttle on  September  19,
1996, January 30, 1997, respectively,  and Lance K. Hoboy and Kirk J. Passopulo,
on September 21, 1998. Such agreements  provide for the  indemnification of such
directors against claims, losses, liabilities,  damages, costs and expenses that
each may suffer as a result of his service as a director of the Company,  to the
full  extent  that such  indemnification  is  permitted  and not  prohibited  by
applicable  federal or state law,  including  securities law, or the Articles of
Incorporation of the Company.

         Compensation Committee Interlocks and Insider  Participation.  Prior to
November 20 1997, executive compensation was examined and approved by the entire
Board of  Directors.  On November  20, 1997,  the Board of  Directors  created a
compensation committee,  consisting of the outside directors, Messrs. Tuttle and
Whitwer. Executive compensation is now examined and approved by the Compensation
Committee,  which  then makes  recommendations  to the Board of  Directors.  The
entire Board of Directors must approve  executive  compensation.  For the fiscal
year ended  December 31, 1998,  the Board of  Directors  included the  following
officers  and  employees  of  the  Company  and/or   Spurlock   Adhesives,   who
participated in  deliberations  of the Board of Directors  concerning  executive
officer  compensation:  Harold N.  Spurlock,  Irvine R.  Spurlock and Phillip S.
Sumpter.





                                      -51-
<PAGE>


Item 12.     Security Ownership of Certain Beneficial Owners and Management

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership of Common Stock as of March 11, 1999 by (a) each  director
of the Company,  (b) each of the most highly  compensated  executive officers of
the Company (the "Named  Executive  Officers"),  (c) each person who is known to
the Company to be the beneficial owner of more than 5% of the outstanding shares
of Common Stock,  and (d) all current  directors and  executive  officers,  as a
group.  For the purposes of the following table,  beneficial  ownership has been
determined  in accordance  with the  provisions of Rule 13d-3 under the Exchange
Act, under which, in general,  a person is deemed to be a beneficial  owner of a
security  if he or she has or shares  the power to vote or direct  the voting of
the security or the power to dispose or direct  disposition of the security,  or
if he or she has the  right to  acquire  beneficial  ownership  of the  security
within 60 days. Except as otherwise indicated (i) each shareholder identified in
the table possesses sole voting and investment power with respect to his shares,
and (ii) the mailing  address of each individual is Spurlock  Industries,  Inc.,
125 Bank Street, Waverly, Virginia 23890.
<TABLE>
<CAPTION>
Name and Address of                                        Common Stock
Beneficial Owner                                        Beneficially Owned             Percent of Class*
----------------                                        ------------------             -----------------
<S>                                                           <C>                              <C> 
Phillip S. Sumpter (1)                                           80,000                         1.2
Irvine R. Spurlock (2)(3)(4)                                  3,184,800                        47.7
Harold N. Spurlock, Sr. (2)(5)                                3,420,800                        51.6
Kirk J. Passopulo (6)                                            25,000                         0.4
Lance K. Hoboy (7)                                              120,000                         1.8
Raymond G. Tuttle                                                     0                           0
Glen S. Whitwer                                                       0                           0
Borden Chemical, Inc. Borden Chemical Holdings,               3,470,800                        52.4
Inc., BW Holdings, LLC, SII Acquisition
Company, Whitehall Associates, LP, KKR
Associates (8)
   180 East Broad Street
   Columbus, Ohio  43215
Lee Rasmussen                                                   621,283                         9.4
   14945 E. Radcliffe Drive
   Aurora, CO  80015
Executive officers and                                        3,715,800                        55.0
  directors as a group (eight persons)
</TABLE>
___________________________
*Based on 6,628,639 shares of Common Stock outstanding on March 11, 1999.

(1)     Includes  options to purchase  50,000 shares of Common Stock at $.55 per
        share pursuant to the 1995 Stock  Incentive Plan and 30,000 shares owned
        by Mr. Sumpter's spouse.
(2)     Includes  beneficial  ownership of 3,114,800 shares held by the Spurlock
        Family Limited  Partnership,  which has a mailing  address  identical to
        that of Irvine R. Spurlock.  The general  partner of the Spurlock Family
        Limited Partnership is the Spurlock Family Corporation, control of which
        at is held by Harold N. Spurlock, Sr. and Irvine R. Spurlock.
(3)     Pursuant to an agreement  between Lloyd B. Putman,  H. Norman  Spurlock,
        Jr. and Irvine R.  Spurlock,  dated January 12, 1996,  Irvine and Norman
        Spurlock each purchased  507,400  shares of Air Resources'  common stock
        from Mr.  Putman  in  consideration  of a joint  promissory  note due in
        installments  ending May 2000.  In  accordance  with the stock  purchase
        agreement,  the shares  purchased  have been pledged as security for the
        promissory note, but Messrs.  Spurlock  retained the right to vote their
        respective  shares  until an event of  default  thereunder.  Irvine  and
        Norman  Spurlock  transferred  all such  shares to the  Spurlock  Family
        Limited  Partnership in 1996.  Effective April 8, 1998,  Norman Spurlock
        resigned as an officer and a director of, and  relinquished all interest
        in, the Partnership's general partner, the Spurlock Family Corporation.



                                      -52-
<PAGE>


(4)     Includes  options to purchase  50,000 shares of Common Stock at $.50 per
        share  pursuant to the 1995 Stock  Incentive  Plan and 20,000  shares of
        Common Stock owned as trustee of the Irvine R. Spurlock  Declaration  of
        Living Trust (the "I. Spurlock Trust").

(5)     Includes 306,000 shares of Common Stock held as trustee of the Harold N.
        Spurlock,  Sr.  Declaration of Living Trust dated December 17, 1998 (the
        "H. Spurlock Trust").

(6)     Includes  options to purchase  25,000 shares of Common Stock at $.50 per
        share pursuant to the 1995 Stock Incentive Plan. The options held by Mr.
        Passopulo expire May 15, 2005.

(7)     Includes 120,000 shares of Common Stock owned by Mr. Hoboy's spouse.

(8)     Pursuant to the Voting  Agreement,  the listed  persons have  acquired a
        beneficial  interest  in the  following  voting  securities  of Company:
        3,114,800  shares of Common  Stock held by the Spurlock  Family  Limited
        Partnership,  30,000  shares  of Common  Stock  held by  Phillip  S. and
        Katherine  G.  Sumpter,  20,000  shares of Common  Stock  held by the I.
        Spurlock  Trust  and  306,000  shares  of  Common  Stock  held by the H.
        Spurlock Trust. See Item 1., "Business -- Merger."


         Changes in Control. As previously  reported,  on December 18, 1998, the
Company entered into the Merger  Agreement with Borden Chemical and Acquisition.
Concurrently therewith,  certain executive officers and majority shareholders of
the  Company  representing  52.4% of the shares of the  Company's  Common  Stock
outstanding  as of March 11, 1999  entered  into the Voting  Agreement  whereby,
among  other  things,  they  agreed to vote their  shares in favor of the Merger
Agreement.  Consummation  of the Merger would  result in the Company  becoming a
wholly  owned  subsidiary  of Borden  Chemical,  thereby  effecting  a change in
control of the Company.

Item 13.     Certain Relationships and Related Transactions

Special Litigation Committee

         In May  1997,  the  Company  created a  Special  Litigation  Committee,
consisting  of Messrs.  Tuttle  and  Whitwer,  to  investigate  the  allegations
contained in the  Derivative  Suit and to determine  whether  maintenance of the
derivative  proceeding was in the best interests of the Company.  Mr. Tuttle was
paid $2,857.49 for his service on the Special Litigation  Committee in 1998. Mr.
Whitwer was paid $27,516.07 for his service on the Special Litigation  Committee
in 1998,  and,  at Mr.  Whitwer's  request,  the Company  paid his  compensation
directly to Whitwer & Company, Inc., a management consulting firm owned by Mr.
Whitwer.  See Item 3., "Legal Proceedings."

Indebtedness of Management

         Harold N.  Spurlock,  Sr. On June 30, 1995,  Harold N.  Spurlock,  then
Chairman of the Board,  President  and Chief  Executive  Officer of the Company,
received a loan in the amount of $112,500 from Spurlock Adhesives. Principal and
interest  at 9.0% per  annum  are  payable  in five  equal  annual  installments
commencing  in July  1996,  the first of which was paid as agreed.  The  largest
aggregate amount of such debt outstanding  during 1998 was $60,483.  The balance
as of December  31, 1998 was  $34,811.  The loan  relates to the purchase by Mr.
Spurlock  of  certain  manufacturing  assets  in  Malvern,  Arkansas  that  were
contributed by Mr. Spurlock to Air Resources  pursuant to the Spurlock Adhesives
Agreement.

         Irvine R. Spurlock. As previously reported, in February and March 1998,
Irvine Spurlock, President of the Company, paid the Company in cash $102,944, as
repayment in full of certain unauthorized advances from the Company and interest
thereon.

         H. Norman Spurlock, Jr. As previously reported, in a settlement between
the Company and Norman Spurlock,  a former director and executive officer of the
Company,  dated April 8, 1998,  Mr.  Spurlock  agreed to a  settlement  with the
Company  for  restitution  by him of $385,000  relating to certain  unauthorized
advances.  Of this  amount,  $10,000 was repaid at that time in cash to Spurlock
Adhesives. As a part of the settlement, the Spurlock Family Limited Partnership,
which holds certain shares of the



                                      -53-
<PAGE>


Company's Common Stock held by the Spurlock Family,  delivered a promissory note
for $375,000 (the "SFLP  Note").  Payments on the  promissory  note are interest
only, due monthly,  at 9% per annum,  for three years with a balloon payment for
the full amount at the end of the three years. The promissory note is secured by
2,100,000 unencumbered shares of the Common Stock held by the partnership and is
personally  guaranteed  by Harold  Spurlock,  a director of the Company.  Norman
Spurlock also confessed  judgment for $375,000  docketed in the Circuit Court of
Sussex,  Virginia,  which judgment will not be enforced or domesticated in other
jurisdictions by Spurlock  Adhesives so long as the SFLP Note is paid as agreed.
As of December 31, 1998, all payments had been made as agreed.

Guaranty of Lease by Irvine R. Spurlock

         In order to obtain lease financing from D.B. Western,  Inc., for one of
the Company's two  formaldehyde  plants located in Moreau,  New York,  Irvine R.
Spurlock,  President of the Company,  entered into a Guaranty of Payment,  dated
September 30, 1997 (the "Moreau Guaranty"),  in favor of D.B. Western.  Pursuant
to the Moreau Guaranty, Mr. Spurlock  unconditionally  guarantied the payment of
all obligations of Spurlock Adhesives under the lease agreement between Spurlock
Adhesives  and D.B.  Western,  dated  September  30, 1997,  for the first twelve
months of such lease.  As such lease took effect on August 1, 1998, Mr. Spurlock
is obligated under the Moreau  Guaranty  through July 1999. Mr. Spurlock did not
receive any consideration for his granting of the Moreau Guaranty.





                                      -54-
<PAGE>

                                     PART IV

Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K

      (a)    (1)   Financial Statements:

                   (i)    Independent Auditors' Report
                   (ii)   Consolidated  Balance  Sheets as of December  31, 1998
                          and 1997
                   (iii)  Consolidated  Statements of  Operations  for the years
                          ended December 31, 1998, 1997 and 1996
                   (iv)   Consolidated  Statements of  Stockholders'  Equity for
                          the years ended December 31, 1998, 1997 and 1996
                   (v)    Consolidated  Statements  of Cash  Flows for the years
                          ended December 31, 1998, 1997 and 1996
                   (vi)   Notes to Consolidated Financial Statements

             (2)   Financial Statement Schedules: none.

             (3)   Exhibits


Exhibit No.              Document
-----------              --------

   2.1        Agreement and Plan of Merger dated February 15, 1996,  between Air
              Resources Corporation and Spurlock Industries,  Inc., incorporated
              by reference to Exhibit 2 to the Form S-4 of the Registrant  filed
              with the Securities and Exchange  Commission on February 20, 1996,
              as amended by Amendment No. 1 and No. 2 thereto,  Registration No.
              33-01448 (as amended, the "Form S-4").


   2.2        Amended  and  Restated  Agreement  and Plan of Merger by and among
              Borden  Chemical,   Inc.  ("Borden  Chemical"),   SII  Acquisition
              Company,  a wholly-owned  subsidiary of Borden Chemical  ("SIIA"),
              and   Spurlock   Industries,   Inc.,   dated   January  25,  1999,
              incorporated by reference to Appendix A to the  Preliminary  Proxy
              Statement of the Registrant filed with the Securities and Exchange
              Commission on January 27, 1999.

   3.1        Articles   of   Incorporation   of  Spurlock   Industries,   Inc.,
              incorporated by reference to Exhibit 3.1 to the Form S-4.

   3.2        Bylaws of Spurlock Industries,  Inc., incorporated by reference to
              Exhibit 3.2 to the Form S-4.

   9.1        Voting  Agreement,  dated as of December 18, 1998,  between Borden
              Chemical,  SIIA and  Phillip S.  Sumpter,  Katherine  G.  Sumpter,
              Irvine R.  Spurlock,  Harold N.  Spurlock,  Sr.,  Spurlock  Family
              Corporation,  Spurlock Family Limited Partnership,  Trustees under
              agreement,  dated December 17, 1998, with Harold N. Spurlock, Sr.,
              known as the "Harold N. Spurlock, Sr., Declaration of Living Trust
              dated  December 17,  1998," and Trustees  under  agreement,  dated
              December 17, 1998,  with Irvine R. Spurlock,  known as the "Irvine
              R. Spurlock  Declaration of Living Trust dated December 17, 1998,"
              incorporated by reference to Appendix B to the  Preliminary  Proxy
              Statement of the Registrant filed with the Securities and Exchange
              Commission on January 27, 1999."

   10.1       Agreement  and  Plan of  Reorganization,  dated  April  22,  1992,
              between Air Resources  Corporation and Spurlock  Adhesives,  Inc.,
              incorporated by reference to


                                      -55-
<PAGE>

Exhibit No.              Document
-----------              --------

              Exhibit 10.1 to the Form S-4.

   10.2       Employment and Retirement  Benefit Agreement dated August 21, 1996
              by and between Spurlock Adhesives, Inc. and Harold N. Spurlock, as
              amended by First Amendment  thereto dated February 24, 1997 by and
              between such parties, incorporated by reference to Exhibit 10.2 to
              the  Registrant's  Form 10-K for the year ended December 31, 1996,
              filed with the  Securities  and Exchange  Commission  on March 31,
              1997.

   10.3       Air Resources Corporation 1995 Stock Incentive Plan,  incorporated
              by reference to Exhibit 10.3 to the Form S-4.

   10.4       Incentive Stock Option Agreement, dated February 22, 1995, between
              Air Resources Corporation and Irvine R. Spurlock,  incorporated by
              reference to Exhibit 10.4 to the Form S-4.

   10.5*      Indemnification  Agreement between Spurlock  Industries,  Inc. and
              Kirk J. Passopulo, dated September 21, 1998.

   10.6*      Indemnification  Agreement between Spurlock  Industries,  Inc. and
              Lance K. Hoboy, dated September 21, 1998.

   10.7       Indemnification   Agreement,   dated  January  30,  1997,  between
              Spurlock Industries, Inc. and Phillip S. Sumpter,  incorporated by
              reference  to Exhibit 10.7 to the  Registrant's  Form 10-K for the
              year  ended  December  31,  1996,  filed with the  Securities  and
              Exchange Commission on March 31, 1997.

   10.8*      Stipulation and Settlement Agreement in the United States District
              Court for the  District of Colorado,  Civil Action No.  97-D-2214,
              between Lee  Rasmussen,  Doug  Richmond,  Jeff T.  Coates,  Ernest
              Reeves, Vernon Rasmussen, Sheila Rasmussen, Beverly Dittemore, and
              Christy Olson, Plaintiffs,  and Spurlock Industries,  Inc., Harold
              N. Spurlock,  Irvine R. Spurlock, H. Norman Spurlock, Jr., Phillip
              S. Sumpter,  Warren E. Beam,  Jr., and Lloyd  Putman,  Defendants,
              dated December 2, 1998.

   10.9*      Deed,  dated  November 5, 1998, by and between  Harold N. Spurlock
              and Daphne R. Spurlock and Spurlock Adhesives, Inc.

   10.10      Collateral  Promissory Note made by Harold N. Spurlock in favor of
              Spurlock  Adhesives,  Inc. as of June 30,  1995,  incorporated  by
              reference to Exhibit 10.10 to the Form S-4.

   10.11      Indemnification  Agreement,  dated  September  19,  1996,  between
              Spurlock  Industries,  Inc. and Glen S. Whitwer,  incorporated  by
              reference to Exhibit 10.11 to the  Registrant's  Form 10-K for the
              year  ended  December  31,  1996,  filed with the  Securities  and
              Exchange Commission on March 31, 1997.

   10.12      Indemnification Agreement, dated January 30, 1997 between Spurlock
              Industries,  Inc. and Raymond G. Tuttle, incorporated by reference
              to Exhibit 10.12 to the Registrant's  Form 10-K for the year ended
              December  31,  1996,   filed  with  the  Securities  and  Exchange
              Commission on March 31, 1997.



                                      -56-
<PAGE>

Exhibit No.              Document
-----------              --------

   10.13      Loan and Security Agreement,  dated July 1, 1996, between Spurlock
              Adhesives,   Inc.  and  National   Canada   Finance   Corporation,
              incorporated by reference to Exhibit 10 to the  Registrant's  Form
              10-Q  for  the  quarter  ended  June  30,  1996,  filed  with  the
              Securities and Exchange Commission on August 15, 1996.

   10.14      Spurlock Industries,  Inc. 1995 Stock Incentive Plan, incorporated
              by  reference  to  Exhibit  4.3 of the  Registrant's  Registration
              Statement on Form S-8, File No. 333- 09659.

   10.15      Form  of  Spurlock   Industries,   Inc.,  Incentive  Stock  Option
              Agreement,  incorporated  by  reference  to  Exhibit  10.2  to the
              Registrant's  Form 10-Q for the quarter ended  September 30, 1996,
              filed with the Securities and Exchange  Commission on November 14,
              1996.

   10.16      Form of  Spurlock  Industries,  Inc.  Non-Qualified  Stock  Option
              Agreement,  incorporated  by  reference  to  Exhibit  10.3  to the
              Registrant's  Form 10-Q for the quarter ended  September 30, 1996,
              filed with the Securities and Exchange  Commission on November 14,
              1996.

   10.17      Letter agreement between Spurlock  Adhesives,  Inc. and KeyBank of
              New York  dated  August 4,  1997,  incorporated  by  reference  to
              Exhibit 10.1 to the  Registrant's  Form 10-Q for the quarter ended
              September  30,  1997,  filed  with  the  Securities  and  Exchange
              Commission on November 14, 1997.

   10.18      Promissory  Note dated  August 13, 1997 from  Spurlock  Adhesives,
              Inc. payable to KeyBank of New York,  incorporated by reference to
              Exhibit 10.2 to the  Registrant's  Form 10-Q for the quarter ended
              September  30,  1997,  filed  with  the  Securities  and  Exchange
              Commission on November 14, 1997.

   10.19      HCHO/UFC  Turnkey  Plant "B" Sale  Contract  -  Design,  Engineer,
              Equipment Supply,  Construct, and Install Contract dated September
              30, 1997 between Spurlock Adhesives,  Inc. and D.B. Western, Inc.,
              incorporated by reference to Exhibit 10.3 to the Registrant's Form
              10-Q for the quarter  ended  September  30,  1997,  filed with the
              Securities and Exchange Commission on November 14, 1997.

   10.20      HCHO/UFC  Plant  "A" - Lease  dated  September  30,  1997  between
              Spurlock Adhesives,  Inc. and D.B. Western, Inc.,  incorporated by
              reference  to Exhibit 10.4 to the  Registrant's  Form 10-Q for the
              quarter ended  September 30, 1997,  filed with the  Securities and
              Exchange Commission on November 14, 1997.

   10.21      Guaranty dated September 1, 1997 of Spurlock  Industries,  Inc. in
              favor of D.B. Western, Inc.,  incorporated by reference to Exhibit
              10.5 to the Registrant's Form 10-Q for the quarter ended September
              30, 1997,  filed with the  Securities  and Exchange  Commission on
              November 14, 1997.

   10.22      Guaranty dated September 1, 1997 of Spurlock  Industries,  Inc. in
              favor of D.B. Western, Inc.,  incorporated by reference to Exhibit
              10.6 to the Registrant's Form 10-Q for the quarter ended September
              30, 1997,  filed with the  Securities  and Exchange  Commission on
              November 14, 1997.

   10.23      Guaranty of Payment dated September 30, 1997 of Irvine R. Spurlock
              for the benefit of D.B. Western,  Inc.,  incorporated by reference
              to Exhibit 10.7 to the


                                      -57-
<PAGE>

Exhibit No.              Document
-----------              --------


              Registrant's  Form 10-Q for the quarter ended  September 30, 1997,
              filed with the Securities and Exchange  Commission on November 14,
              1997.

   10.24      Indenture  dated August 13, 1997 between Town of Moreau,  New York
              as grantor and Spurlock Adhesives,  Inc. as grantee,  incorporated
              by reference to Exhibit 10.8 to the Registrant's Form 10-Q for the
              quarter ended  September 30, 1997,  filed with the  Securities and
              Exchange Commission on November 14, 1997.

   10.25      Indenture dated August 13, 1997 between Town of Moreau,  New York,
              as grantor and Spurlock Adhesives,  Inc. as grantee,  incorporated
              by reference to Exhibit 10.9 to the Registrant's Form 10-Q for the
              quarter ended  September 30, 1997,  filed with the  Securities and
              Exchange Commission on November 14, 1997.

   10.26*     Business Loan Agreement,  dated October 23, 1998, between Spurlock
              Adhesives, Incorporated and James River Bank.

   10.27      Employment  Agreement by and between  Spurlock  Industries,  Inc.,
              Spurlock Adhesives, Inc. and Phillip S. Sumpter, dated as of April
              1,  1998,  incorporated  by  reference  to  Exhibit  10.27  to the
              Registrant's Form 10-K for the year ended December 31, 1997, filed
              with the Securities and Exchange Commission on April 17, 1998.

   10.28      Deed, dated October 9, 1997, between Spurlock Adhesives,  Inc., as
              Grantor, and the County of Saratoga Industrial Development Agency,
              as Grantee,  incorporated  by  reference  to Exhibit  10.28 to the
              Registrant's Form 10-K for the year ended December 31, 1997, filed
              with the Securities and Exchange Commission on April 17, 1998.

   10.29      Bill of Sale,  dated  October 1, 1997,  from  Spurlock  Adhesives,
              Inc.,  to the County of Saratoga  Industrial  Development  Agency,
              incorporated  by  reference to Exhibit  10.29 to the  Registrant's
              Form 10-K for the year ended  December  31,  1997,  filed with the
              Securities and Exchange Commission on April 17, 1998.

   10.30      Trust  Indenture,  dated  October 1, 1997,  between  the County of
              Saratoga  Industrial  Development  Agency  and  Star  Bank,  N.A.,
              incorporated  by  reference to Exhibit  10.30 to the  Registrant's
              Form 10-K for the year ended  December  31,  1997,  filed with the
              Securities and Exchange Commission on April 17, 1998.

   10.31      Installment  Sale  Agreement,  dated October 1, 1997,  between the
              County of  Saratoga  Industrial  Development  Agency and  Spurlock
              Adhesives, Inc., incorporated by reference to Exhibit 10.31 to the
              Registrant's Form 10-K for the year ended December 31, 1997, filed
              with the Securities and Exchange Commission on April 17, 1998.

   10.32      Irrevocable  Transferable  Direct  Pay  Letter of Credit  No.  NSL
              792132,  dated October 10, 1997, from KeyBank National Association
              in favor of Star Bank, N.A.,  incorporated by reference to Exhibit
              10.32 to the  Registrant's  Form 10-K for the year ended  December
              31, 1997,  filed with the  Securities  and Exchange  Commission on
              April 17, 1998.

   10.33      Letter of Credit Reimbursement  Agreement,  dated October 1, 1997,
              between Spurlock Adhesives, Inc. and KeyBank National Association,
              incorporated by



                                      -58-
<PAGE>

Exhibit No.              Document
-----------              --------

              reference to Exhibit 10.33 to the  Registrant's  Form 10-K for the
              year  ended  December  31,  1997,  filed with the  Securities  and
              Exchange Commission on April 17, 1998.

   10.34      Pledge and  Assignment,  dated October 1, 1997, from the County of
              Saratoga  Industrial   Development  Agency  to  Star  Bank,  N.A.,
              incorporated  by  reference to Exhibit  10.34 to the  Registrant's
              Form 10-K for the year ended  December  31,  1997,  filed with the
              Securities and Exchange Commission on April 17, 1998.

   10.35      Mortgage and Security  Agreement,  dated October 1, 1997, from the
              County of  Saratoga  Industrial  Development  Agency and  Spurlock
              Adhesives,  Inc. to KeyBank National Association,  incorporated by
              reference to Exhibit 10.35 to the  Registrant's  Form 10-K for the
              year  ended  December  31,  1997,  filed with the  Securities  and
              Exchange Commission on April 17, 1998.

   10.36      Security  Agreement,  dated  October  1,  1997,  between  Spurlock
              Adhesives,  Inc., as Debtor, and KeyBank National Association,  as
              Secured Party,  incorporated  by reference to Exhibit 10.36 to the
              Registrant's Form 10-K for the year ended December 31, 1997, filed
              with the Securities and Exchange Commission on April 17, 1998.

   10.37      Guaranty of Payment and  Performance,  dated October 1, 1997, from
              Spurlock  Industries,   Inc.,  to  KeyBank  National  Association,
              incorporated  by  reference to Exhibit  10.37 to the  Registrant's
              Form 10-K for the year ended  December  31,  1997,  filed with the
              Securities and Exchange Commission on April 17, 1998.

   10.38      Remarketing  Agreement,  dated  October  1, 1997,  among  Spurlock
              Adhesives,  Inc.,  KeyBank National  Association and the County of
              Saratoga Industrial Development Agency,  incorporated by reference
              to Exhibit 10.38 to the Registrant's  Form 10-K for the year ended
              December  31,  1997,   filed  with  the  Securities  and  Exchange
              Commission on April 17, 1998.

   10.39      Pledge and  Security  Agreement,  dated  October 1, 1997,  between
              Spurlock  Adhesives,   Inc.  and  KeyBank  National   Association,
              incorporated  by  reference to Exhibit  10.39 to the  Registrant's
              Form 10-K for the year ended  December  31,  1997,  filed with the
              Securities and Exchange Commission on April 17, 1998.

   10.40      Payment in Lieu of Tax Agreement,  dated October 1, 1997,  between
              the County of Saratoga Industrial  Development Agency and Spurlock
              Adhesives, Inc., incorporated by reference to Exhibit 10.40 to the
              Registrant's Form 10-K for the year ended December 31, 1997, filed
              with the Securities and Exchange Commission on April 17, 1998.

   10.41      Building  Loan  Agreement,  dated  October 1, 1997,  among KeyBank
              National Association,  Spurlock Adhesives,  Inc. and the County of
              Saratoga Industrial Development Agency,  incorporated by reference
              to Exhibit 10.41 to the Registrant's  Form 10-K for the year ended
              December  31,  1997,   filed  with  the  Securities  and  Exchange
              Commission on April 17, 1998.

   10.42      Tax Regulatory  Agreement,  dated October 10, 1997,  from Spurlock
              Adhesives,  Inc.,  for  the  benefit  of the  County  of  Saratoga
              Industrial Development Agency and Star Bank, N.A., incorporated by
              reference to Exhibit 10.42 to the Registrant's



                                      -59-
<PAGE>

Exhibit No.              Document
-----------              --------

              Form 10-K for the year ended  December  31,  1997,  filed with the
              Securities and Exchange Commission on April 17, 1998.

   10.43      Deed of Trust and Security Agreement,  dated October 1, 1997, from
              Spurlock Adhesives, Inc. to Otto W. Konrad and Bruce H. Matson, as
              collective   Trustee,   for  the   benefit  of  KeyBank   National
              Association,  incorporated  by reference  to Exhibit  10.43 to the
              Registrant's Form 10-K for the year ended December 31, 1997, filed
              with the Securities and Exchange Commission on April 17, 1998.

   10.44      Hazardous Substances  Indemnity Agreement,  dated October 1, 1997,
              by Spurlock Adhesives,  Inc., and Spurlock  Industries,  Inc., for
              the  benefit  of KeyBank  National  Association,  incorporated  by
              reference to Exhibit 10.44 to the  Registrant's  Form 10-K for the
              year  ended  December  31,  1997,  filed with the  Securities  and
              Exchange Commission on April 17, 1998.

   10.45      Guaranty,  dated October 1, 1997, from Spurlock Industries,  Inc.,
              to  the  County  of  Saratoga   Industrial   Development   Agency,
              incorporated  by  reference to Exhibit  10.45 to the  Registrant's
              Form 10-K for the year ended  December  31,  1997,  filed with the
              Securities and Exchange Commission on April 17, 1998.

   10.46      Performance  Bond No.  644927,  dated  October 9, 1997,  issued by
              Nobel Insurance  Company,  as Surety,  on behalf of D.B.  Western,
              Inc., as Principal,  for the benefit of Spurlock Adhesives,  Inc.,
              Key  Bank  and  National   Bank  of  Canada,   as  the   Obligees,
              incorporated  by  reference to Exhibit  10.46 to the  Registrant's
              Form 10- K for the year ended  December 31,  1997,  filed with the
              Securities and Exchange Commission on April 17, 1998.

   10.47      Promissory Note, dated October 10, 1997, from Spurlock  Adhesives,
              Inc.,  payable to KeyBank  National  Association,  incorporated by
              reference to Exhibit 10.47 to the  Registrant's  Form 10-K for the
              year  ended  December  31,  1997,  filed with the  Securities  and
              Exchange Commission on April 17, 1998.

   10.48      Settlement   Agreement,   dated  April  8,  1998,  among  Spurlock
              Industries,   Inc.,  Spurlock  Adhesives,  Inc.,  Spurlock  Family
              Limited  Partnership,  H.  Norman  Spurlock,  Jr.  and  Harold  N.
              Spurlock,  Sr.,  incorporated by reference to Exhibit 10.48 to the
              Registrant's Form 10-K for the year ended December 31, 1997, filed
              with the Securities and Exchange Commission on April 17, 1998.

   10.49      Unconditional  Guaranty,  dated April 8, 1998,  given by Harold N.
              Spurlock,  Sr.,  to  Spurlock  Adhesives,  Inc.,  incorporated  by
              reference to Exhibit 10.49 to the  Registrant's  Form 10-K for the
              year  ended  December  31,  1997,  filed with the  Securities  and
              Exchange Commission on April 17, 1998.

   10.50      Pledge  and  Security  Agreement,  dated  April 8,  1998,  between
              Spurlock Adhesives, Inc., and Spurlock Family Limited Partnership,
              incorporated  by  reference to Exhibit  10.50 to the  Registrant's
              Form 10-K for the year ended  December  31,  1997,  filed with the
              Securities and Exchange Commission on April 17, 1998.

   10.51      Promissory Note, dated April 8, 1998, from Spurlock Family Limited
              Partnership,  payable to Spurlock Adhesives, Inc., incorporated by
              reference to Exhibit 10.51 to the  Registrant's  Form 10-K for the
              year  ended  December  31,  1997,  filed with the  Securities  and
              Exchange Commission on April 17, 1998.


                                      -60-
<PAGE>

Exhibit No.              Document
-----------              --------

   10.52*     Promissory Note, dated October 23, 1998, from Spurlock  Adhesives,
              Incorporated payable to James River Bank.

   10.53*     Deed of Trust,  dated October 23, 1998, among Spurlock  Adhesives,
              Incorporated,   as  Grantor,   James  River  Bank,  as  Lender  or
              Beneficiary,  and O. LeRoy  Stables,  Jr. and/or Andy Condlin,  as
              Grantee or Trustee.

   10.54      Letter dated March 4, 1998 from the Registrant to Larry  Birkholz,
              incorporated by reference to Exhibit 10.1 to the Registrant's Form
              10-Q for the quarter  ended  September  30,  1998,  filed with the
              Securities and Exchange Commission on November 16, 1998.

   10.55      Letter dated March 4, 1998 from the Registrant to Kirk  Passopulo,
              incorporated by reference to Exhibit 10.2 to the Registrant's Form
              10-Q for the quarter  ended  September  30,  1998,  filed with the
              Securities and Exchange Commission on November 16, 1998.

   10.56      Letter dated March 4, 1998 from the Registrant to John Fitzgerald,
              Jr., incorporated by reference to Exhibit 10.3 to the Registrant's
              Form 10-Q for the quarter ended September 30, 1998, filed with the
              Securities and Exchange Commission on November 16, 1998.

   10.57*     Deed, dated April 29, 1998,  between James River Bank and Spurlock
              Adhesives, Inc.

   10.58*     Promissory Note, dated May 1, 1998, from Spurlock Adhesives,  Inc.
              to James River Bank.

   10.59*     Deed of Trust, dated May 1, 1998, among Spurlock Adhesives,  Inc.,
              as Grantor,  James River Bank,  as Lender or  Beneficiary,  and O.
              LeRoy  Stables,  Jr.  and/or C.  Taylor  Everett,  as  Grantee  or
              Trustee.

   10.60*     Business  Loan  Agreement,  dated May 1,  1998,  between  Spurlock
              Adhesives, Inc. and James River Bank.

   21*        Subsidiaries of the Registrant.

   23.1*      Consent of Cherry, Bekaert & Holland, L.L.P.

   23.2*      Consent of James E. Scheifley & Associates, P.C. (formerly Winter,
              Scheifley & Associates, P.C.), independent auditors.

   27*        Financial Data Schedule (filed electronically only).

* Filed herewith.

      (b)    Reports on Form 8-K. The  following  reports on Form 8-K were filed
during the last quarter of 1998:



                                      -61-
<PAGE>

<TABLE>
<CAPTION>
Date of Report              Items Reported
--------------              --------------
<S>                         <C>                                   
October 9, 1998             Spurlock Industries, Inc. Announces New Directors
December 18, 1998           Borden Chemical, Inc. to Acquire Spurlock Industries, Inc.
</TABLE>

      (c)    The exhibits  required by Item 601 of  Regulation  S-K are filed as
exhibits to this Form 10-K.

      (d)    There  are no  financial  statements  of the  Company  required  by
Regulation  S-X which were excluded from the Annual  Report to  Shareholders  by
Rule 14a-3(b).




                                      -62-
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                      SPURLOCK INDUSTRIES, INC.



Date:  March 25, 1999                 By:     /s/ Phillip S. Sumpter            
                                          --------------------------------------
                                          Phillip S. Sumpter
                                          Chairman and Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                Signature                                       Title                                Date
                ---------                                       -----                                ----

<S>                                          <C>                                                <C>
          /s/ Phillip S. Sumpter                      Chairman and Chief Executive              March 25, 1999
-------------------------------------------     Officer and Director (Principal Executive
             Phillip S. Sumpter                          and Financial Officer)          
                                                

         /s/ Lawrence C. Birkholz                              Controller                       March 25, 1999
-------------------------------------------          (Principal Accounting Officer)
            Lawrence C. Birkholz                     


          /s/ Harold N. Spurlock                                Director                        March 25, 1999
-------------------------------------------
             Harold N. Spurlock


           /s/ Raymond G. Tuttle                                Director                        March 26, 1999
-------------------------------------------
              Raymond G. Tuttle


            /s/ Glen S. Whitwer                                 Director                        March 26, 1999
-------------------------------------------
               Glen S. Whitwer


           /s/ Kirk J. Passopulo                                Director                        March 25, 1999
-------------------------------------------
              Kirk J. Passopulo


            /s/ Lance K. Hoboy                                  Director                        March 24, 1999
-------------------------------------------
               Lance K. Hoboy

</TABLE>



                                      -63-
<PAGE>


                                INDEX TO EXHIBITS


    Exhibit No.                Document
    -----------                --------

       2.1          Agreement  and  Plan of  Merger  dated  February  15,  1996,
                    between Air Resources  Corporation and Spurlock  Industries,
                    Inc., incorporated by reference to Exhibit 2 to the Form S-4
                    of the  Registrant  filed with the  Securities  and Exchange
                    Commission on February 20, 1996, as amended by Amendment No.
                    1 and No. 2 thereto,  Registration No. 33-01448 (as amended,
                    the "Form S-4").

       2.2          Amended  and  Restated  Agreement  and Plan of Merger by and
                    among  Borden  Chemical,   Inc.  ("Borden  Chemical"),   SII
                    Acquisition  Company,  a  wholly-owned  subsidiary of Borden
                    Chemical  ("SIIA"),  and Spurlock  Industries,  Inc.,  dated
                    January 25, 1999, incorporated by reference to Appendix A to
                    the Preliminary Proxy Statement of the Registrant filed with
                    the Securities and Exchange Commission on January 27, 1999.

       3.1          Articles  of  Incorporation  of Spurlock  Industries,  Inc.,
                    incorporated by reference to Exhibit 3.1 to the Form S-4.

       3.2          Bylaws  of  Spurlock  Industries,   Inc.,   incorporated  by
                    reference to Exhibit 3.2 to the Form S-4.

       9.1          Voting  Agreement,  dated as of December 18,  1998,  between
                    Borden Chemical,  SIIA and Phillip S. Sumpter,  Katherine G.
                    Sumpter,  Irvine  R.  Spurlock,  Harold  N.  Spurlock,  Sr.,
                    Spurlock   Family   Corporation,   Spurlock  Family  Limited
                    Partnership,  Trustees under  agreement,  dated December 17,
                    1998, with Harold N. Spurlock,  Sr., known as the "Harold N.
                    Spurlock,  Sr.,  Declaration  of Living Trust dated December
                    17, 1998," and Trustees under agreement,  dated December 17,
                    1998,  with  Irvine R.  Spurlock,  known as the  "Irvine  R.
                    Spurlock  Declaration  of Living  Trust dated  December  17,
                    1998,"  incorporated  by  reference  to  Appendix  B to  the
                    Preliminary Proxy Statement of the Registrant filed with the
                    Securities and Exchange Commission on January 27, 1999."

       10.1         Agreement and Plan of Reorganization,  dated April 22, 1992,
                    between Air Resources  Corporation  and Spurlock  Adhesives,
                    Inc.,  incorporated by reference to Exhibit 10.1 to the Form
                    S-4.

       10.2         Employment and Retirement Benefit Agreement dated August 21,
                    1996 by and between Spurlock  Adhesives,  Inc. and Harold N.
                    Spurlock,  as  amended  by  First  Amendment  thereto  dated
                    February 24, 1997 by and between such parties,  incorporated
                    by reference to Exhibit 10.2 to the  Registrant's  Form 10-K
                    for the  year  ended  December  31,  1996,  filed  with  the
                    Securities and Exchange Commission on March 31, 1997.

       10.3         Air  Resources   Corporation   1995  Stock  Incentive  Plan,
                    incorporated by reference to Exhibit 10.3 to the Form S-4.

       10.4         Incentive Stock Option  Agreement,  dated February 22, 1995,
                    between Air Resources  Corporation  and Irvine R.  Spurlock,
                    incorporated by reference to Exhibit 10.4 to the Form S-4.


                                      -64-
<PAGE>

    Exhibit No.                Document
    -----------                --------

       10.5*        Indemnification Agreement between Spurlock Industries,  Inc.
                    and Kirk J. Passopulo, dated September 21, 1998.

       10.6*        Indemnification Agreement between Spurlock Industries,  Inc.
                    and Lance K. Hoboy, dated September 21, 1998.

       10.7         Indemnification  Agreement,  dated January 30, 1997, between
                    Spurlock   Industries,   Inc.   and   Phillip  S.   Sumpter,
                    incorporated   by   reference   to   Exhibit   10.7  to  the
                    Registrant's Form 10-K for the year ended December 31, 1996,
                    filed with the Securities  and Exchange  Commission on March
                    31, 1997.

       10.8*        Stipulation  and  Settlement  Agreement in the United States
                    District  Court for the District of  Colorado,  Civil Action
                    No. 97-D-2214, between Lee Rasmussen, Doug Richmond, Jeff T.
                    Coates, Ernest Reeves,  Vernon Rasmussen,  Sheila Rasmussen,
                    Beverly  Dittemore,  and  Christy  Olson,  Plaintiffs,   and
                    Spurlock  Industries,  Inc.,  Harold N. Spurlock,  Irvine R.
                    Spurlock,  H.  Norman  Spurlock,  Jr.,  Phillip S.  Sumpter,
                    Warren E. Beam,  Jr., and Lloyd  Putman,  Defendants,  dated
                    December 2, 1998.

       10.9*        Deed,  dated  November  5, 1998,  by and  between  Harold N.
                    Spurlock and Daphne R. Spurlock and Spurlock Adhesives, Inc.

       10.10        Collateral  Promissory  Note made by Harold N.  Spurlock  in
                    favor of  Spurlock  Adhesives,  Inc.  as of June  30,  1995,
                    incorporated by reference to Exhibit 10.10 to the Form S-4.

       10.11        Indemnification Agreement, dated September 19, 1996, between
                    Spurlock Industries, Inc. and Glen S. Whitwer,  incorporated
                    by reference to Exhibit 10.11 to the Registrant's  Form 10-K
                    for the  year  ended  December  31,  1996,  filed  with  the
                    Securities and Exchange Commission on March 31, 1997.

       10.12        Indemnification  Agreement,  dated  January 30, 1997 between
                    Spurlock   Industries,   Inc.   and   Raymond   G.   Tuttle,
                    incorporated   by   reference   to  Exhibit   10.12  to  the
                    Registrant's Form 10-K for the year ended December 31, 1996,
                    filed with the Securities  and Exchange  Commission on March
                    31, 1997.

       10.13        Loan and  Security  Agreement,  dated July 1, 1996,  between
                    Spurlock   Adhesives,   Inc.  and  National  Canada  Finance
                    Corporation,  incorporated by reference to Exhibit 10 to the
                    Registrant's  Form 10-Q for the quarter ended June 30, 1996,
                    filed with the Securities and Exchange  Commission on August
                    15, 1996.

       10.14        Spurlock   Industries,   Inc.  1995  Stock  Incentive  Plan,
                    incorporated by reference to Exhibit 4.3 of the Registrant's
                    Registration Statement on Form S-8, File No. 333-09659.

       10.15        Form of Spurlock  Industries,  Inc.,  Incentive Stock Option
                    Agreement,  incorporated by reference to Exhibit 10.2 to the
                    Registrant's  Form 10-Q for the quarter ended  September 30,
                    1996,  filed with the Securities and Exchange  Commission on
                    November 14, 1996.



                                      -65-
<PAGE>

    Exhibit No.                Document
    -----------                --------

       10.16        Form of Spurlock Industries, Inc. Non-Qualified Stock Option
                    Agreement,  incorporated by reference to Exhibit 10.3 to the
                    Registrant's  Form 10-Q for the quarter ended  September 30,
                    1996,  filed with the Securities and Exchange  Commission on
                    November 14, 1996.

       10.17        Letter  agreement  between  Spurlock  Adhesives,   Inc.  and
                    KeyBank of New York dated  August 4, 1997,  incorporated  by
                    reference to Exhibit 10.1 to the Registrant's  Form 10-Q for
                    the  quarter  ended  September  30,  1997,  filed  with  the
                    Securities and Exchange Commission on November 14, 1997.

       10.18        Promissory   Note  dated  August  13,  1997  from   Spurlock
                    Adhesives, Inc. payable to KeyBank of New York, incorporated
                    by reference to Exhibit 10.2 to the  Registrant's  Form 10-Q
                    for the quarter  ended  September  30, 1997,  filed with the
                    Securities and Exchange Commission on November 14, 1997.

       10.19        HCHO/UFC Turnkey Plant "B" Sale Contract - Design, Engineer,
                    Equipment  Supply,  Construct,  and Install  Contract  dated
                    September 30, 1997 between Spurlock Adhesives, Inc. and D.B.
                    Western, Inc.,  incorporated by reference to Exhibit 10.3 to
                    the  Registrant's  Form 10-Q for the quarter ended September
                    30, 1997, filed with the Securities and Exchange  Commission
                    on November 14, 1997.

       10.20        HCHO/UFC Plant "A" - Lease dated  September 30, 1997 between
                    Spurlock   Adhesives,   Inc.   and   D.B.   Western,   Inc.,
                    incorporated   by   reference   to   Exhibit   10.4  to  the
                    Registrant's  Form 10-Q for the quarter ended  September 30,
                    1997,  filed with the Securities and Exchange  Commission on
                    November 14, 1997.

       10.21        Guaranty  dated  September  1, 1997 of Spurlock  Industries,
                    Inc.  in  favor  of  D.B.  Western,  Inc.,  incorporated  by
                    reference to Exhibit 10.5 to the Registrant's  Form 10-Q for
                    the  quarter  ended  September  30,  1997,  filed  with  the
                    Securities and Exchange Commission on November 14, 1997.

       10.22        Guaranty  dated  September  1, 1997 of Spurlock  Industries,
                    Inc.  in  favor  of  D.B.  Western,  Inc.,  incorporated  by
                    reference to Exhibit 10.6 to the Registrant's  Form 10-Q for
                    the  quarter  ended  September  30,  1997,  filed  with  the
                    Securities and Exchange Commission on November 14, 1997.

       10.23        Guaranty of Payment  dated  September  30, 1997 of Irvine R.
                    Spurlock for the benefit of D.B. Western, Inc., incorporated
                    by reference to Exhibit 10.7 to the  Registrant's  Form 10-Q
                    for the quarter  ended  September  30, 1997,  filed with the
                    Securities and Exchange Commission on November 14, 1997.

       10.24        Indenture dated August 13, 1997 between Town of Moreau,  New
                    York as grantor  and  Spurlock  Adhesives,  Inc. as grantee,
                    incorporated   by   reference   to   Exhibit   10.8  to  the
                    Registrant's  Form 10-Q for the quarter ended  September 30,
                    1997,  filed with the Securities and Exchange  Commission on
                    November 14, 1997.

       10.25        Indenture dated August 13, 1997 between Town of Moreau,  New
                    York,  as grantor and Spurlock  Adhesives,  Inc. as grantee,
                    incorporated   by   reference   to   Exhibit   10.9  to  the
                    Registrant's  Form 10-Q for the quarter ended  September 30,
                    1997,  filed with the Securities and Exchange  Commission on
                    November 14, 1997.



                                      -66-
<PAGE>

    Exhibit No.                Document
    -----------                --------

       10.26*       Business Loan  Agreement,  dated  October 23, 1998,  between
                    Spurlock Adhesives, Incorporated and James River Bank.

       10.27        Employment  Agreement  by and between  Spurlock  Industries,
                    Inc., Spurlock Adhesives, Inc. and Phillip S. Sumpter, dated
                    as of April 1, 1998,  incorporated  by  reference to Exhibit
                    10.27 to the  Registrant's  Form  10-K  for the  year  ended
                    December 31, 1997,  filed with the  Securities  and Exchange
                    Commission on April 17, 1998.

       10.28        Deed,  dated October 9, 1997,  between  Spurlock  Adhesives,
                    Inc.,  as  Grantor,  and the County of  Saratoga  Industrial
                    Development Agency, as Grantee, incorporated by reference to
                    Exhibit  10.28 to the  Registrant's  Form  10-K for the year
                    ended  December  31,  1997,  filed with the  Securities  and
                    Exchange Commission on April 17, 1998.

       10.29        Bill  of  Sale,   dated  October  1,  1997,   from  Spurlock
                    Adhesives,  Inc.,  to  the  County  of  Saratoga  Industrial
                    Development  Agency,  incorporated  by  reference to Exhibit
                    10.29 to the  Registrant's  Form  10-K  for the  year  ended
                    December 31, 1997,  filed with the  Securities  and Exchange
                    Commission on April 17, 1998.

       10.30        Trust Indenture,  dated October 1, 1997,  between the County
                    of  Saratoga  Industrial  Development  Agency and Star Bank,
                    N.A.,  incorporated  by  reference  to Exhibit  10.30 to the
                    Registrant's Form 10-K for the year ended December 31, 1997,
                    filed with the Securities  and Exchange  Commission on April
                    17, 1998.

       10.31        Installment Sale Agreement,  dated October 1, 1997,  between
                    the County of  Saratoga  Industrial  Development  Agency and
                    Spurlock  Adhesives,  Inc.,  incorporated  by  reference  to
                    Exhibit  10.31 to the  Registrant's  Form  10-K for the year
                    ended  December  31,  1997,  filed with the  Securities  and
                    Exchange Commission on April 17, 1998.

       10.32        Irrevocable Transferable Direct Pay Letter of Credit No. NSL
                    792132,  dated  October  10,  1997,  from  KeyBank  National
                    Association  in favor of Star Bank,  N.A.,  incorporated  by
                    reference to Exhibit 10.32 to the Registrant's Form 10-K for
                    the year ended December 31, 1997,  filed with the Securities
                    and Exchange Commission on April 17, 1998.

       10.33        Letter of Credit Reimbursement  Agreement,  dated October 1,
                    1997, between Spurlock Adhesives,  Inc. and KeyBank National
                    Association,  incorporated  by reference to Exhibit 10.33 to
                    the  Registrant's  Form 10-K for the year ended December 31,
                    1997,  filed with the Securities and Exchange  Commission on
                    April 17, 1998.

       10.34        Pledge and  Assignment,  dated  October  1,  1997,  from the
                    County of  Saratoga  Industrial  Development  Agency to Star
                    Bank,  N.A.,  incorporated  by reference to Exhibit 10.34 to
                    the  Registrant's  Form 10-K for the year ended December 31,
                    1997,  filed with the Securities and Exchange  Commission on
                    April 17, 1998.



                                      -67-
<PAGE>

    Exhibit No.                Document
    -----------                --------

       10.35        Mortgage and Security Agreement, dated October 1, 1997, from
                    the County of  Saratoga  Industrial  Development  Agency and
                    Spurlock  Adhesives,  Inc. to KeyBank National  Association,
                    incorporated   by   reference   to  Exhibit   10.35  to  the
                    Registrant's Form 10-K for the year ended December 31, 1997,
                    filed with the Securities  and Exchange  Commission on April
                    17, 1998.

       10.36        Security Agreement,  dated October 1, 1997, between Spurlock
                    Adhesives,   Inc.,   as   Debtor,   and   KeyBank   National
                    Association,  as Secured Party, incorporated by reference to
                    Exhibit  10.36 to the  Registrant's  Form  10-K for the year
                    ended  December  31,  1997,  filed with the  Securities  and
                    Exchange Commission on April 17, 1998.

       10.37        Guaranty of Payment and Performance,  dated October 1, 1997,
                    from  Spurlock   Industries,   Inc.,  to  KeyBank   National
                    Association,  incorporated  by reference to Exhibit 10.37 to
                    the  Registrant's  Form 10-K for the year ended December 31,
                    1997,  filed with the Securities and Exchange  Commission on
                    April 17, 1998.

       10.38        Remarketing Agreement, dated October 1, 1997, among Spurlock
                    Adhesives, Inc., KeyBank National Association and the County
                    of Saratoga Industrial  Development Agency,  incorporated by
                    reference to Exhibit 10.38 to the Registrant's Form 10-K for
                    the year ended December 31, 1997,  filed with the Securities
                    and Exchange Commission on April 17, 1998.

       10.39        Pledge  and  Security  Agreement,  dated  October  1,  1997,
                    between  Spurlock  Adhesives,   Inc.  and  KeyBank  National
                    Association,  incorporated  by reference to Exhibit 10.39 to
                    the  Registrant's  Form 10-K for the year ended December 31,
                    1997,  filed with the Securities and Exchange  Commission on
                    April 17, 1998.

       10.40        Payment  in Lieu of Tax  Agreement,  dated  October 1, 1997,
                    between the County of Saratoga Industrial Development Agency
                    and Spurlock Adhesives,  Inc.,  incorporated by reference to
                    Exhibit  10.40 to the  Registrant's  Form  10-K for the year
                    ended  December  31,  1997,  filed with the  Securities  and
                    Exchange Commission on April 17, 1998.

       10.41        Building  Loan  Agreement,  dated  October  1,  1997,  among
                    KeyBank National Association,  Spurlock Adhesives,  Inc. and
                    the  County  of  Saratoga  Industrial   Development  Agency,
                    incorporated   by   reference   to  Exhibit   10.41  to  the
                    Registrant's Form 10-K for the year ended December 31, 1997,
                    filed with the Securities  and Exchange  Commission on April
                    17, 1998.

       10.42        Tax  Regulatory  Agreement,  dated  October 10,  1997,  from
                    Spurlock  Adhesives,  Inc., for the benefit of the County of
                    Saratoga Industrial  Development Agency and Star Bank, N.A.,
                    incorporated   by   reference   to  Exhibit   10.42  to  the
                    Registrant's Form 10-K for the year ended December 31, 1997,
                    filed with the Securities  and Exchange  Commission on April
                    17, 1998.

       10.43        Deed of Trust and Security Agreement, dated October 1, 1997,
                    from Spurlock Adhesives, Inc. to Otto W. Konrad and Bruce H.
                    Matson,  as collective  Trustee,  for the benefit of KeyBank
                    National  Association,  incorporated by reference to Exhibit
                    10.43 to the  Registrant's  Form  10-K  for the  year  ended
                    December 31, 1997,  filed with the  Securities  and Exchange
                    Commission on April 17, 1998.



                                      -68-
<PAGE>

    Exhibit No.                Document
    -----------                --------

       10.44        Hazardous Substances  Indemnity Agreement,  dated October 1,
                    1997, by Spurlock Adhesives,  Inc., and Spurlock Industries,
                    Inc.,  for the  benefit  of  KeyBank  National  Association,
                    incorporated   by   reference   to  Exhibit   10.44  to  the
                    Registrant's Form 10-K for the year ended December 31, 1997,
                    filed with the Securities  and Exchange  Commission on April
                    17, 1998.

       10.45        Guaranty,  dated October 1, 1997, from Spurlock  Industries,
                    Inc.,  to the  County  of  Saratoga  Industrial  Development
                    Agency,  incorporated  by reference to Exhibit  10.45 to the
                    Registrant's Form 10-K for the year ended December 31, 1997,
                    filed with the Securities  and Exchange  Commission on April
                    17, 1998.

       10.46        Performance Bond No. 644927,  dated October 9, 1997,  issued
                    by Nobel  Insurance  Company,  as Surety,  on behalf of D.B.
                    Western,  Inc.,  as  Principal,  for the benefit of Spurlock
                    Adhesives,  Inc.,  Key Bank and National Bank of Canada,  as
                    the Obligees,  incorporated by reference to Exhibit 10.46 to
                    the  Registrant's  Form 10-K for the year ended December 31,
                    1997,  filed with the Securities and Exchange  Commission on
                    April 17, 1998.

       10.47        Promissory  Note,  dated  October 10,  1997,  from  Spurlock
                    Adhesives,  Inc.,  payable to KeyBank National  Association,
                    incorporated   by   reference   to  Exhibit   10.47  to  the
                    Registrant's Form 10-K for the year ended December 31, 1997,
                    filed with the Securities  and Exchange  Commission on April
                    17, 1998.

       10.48        Settlement  Agreement,  dated April 8, 1998,  among Spurlock
                    Industries,  Inc., Spurlock Adhesives, Inc., Spurlock Family
                    Limited Partnership,  H. Norman Spurlock,  Jr. and Harold N.
                    Spurlock, Sr., incorporated by reference to Exhibit 10.48 to
                    the  Registrant's  Form 10-K for the year ended December 31,
                    1997,  filed with the Securities and Exchange  Commission on
                    April 17, 1998.

       10.49        Unconditional Guaranty, dated April 8, 1998, given by Harold
                    N. Spurlock, Sr., to Spurlock Adhesives,  Inc., incorporated
                    by reference to Exhibit 10.49 to the Registrant's  Form 10-K
                    for the  year  ended  December  31,  1997,  filed  with  the
                    Securities and Exchange Commission on April 17, 1998.

       10.50        Pledge and Security Agreement,  dated April 8, 1998, between
                    Spurlock  Adhesives,   Inc.,  and  Spurlock  Family  Limited
                    Partnership,  incorporated  by reference to Exhibit 10.50 to
                    the  Registrant's  Form 10-K for the year ended December 31,
                    1997,  filed with the Securities and Exchange  Commission on
                    April 17, 1998.

       10.51        Promissory  Note,  dated April 8, 1998, from Spurlock Family
                    Limited  Partnership,  payable to Spurlock Adhesives,  Inc.,
                    incorporated   by   reference   to  Exhibit   10.51  to  the
                    Registrant's Form 10-K for the year ended December 31, 1997,
                    filed with the Securities  and Exchange  Commission on April
                    17, 1998.

       10.52*       Promissory  Note,  dated  October 23,  1998,  from  Spurlock
                    Adhesives, Incorporated payable to James River Bank.

       10.53*       Deed of  Trust,  dated  October  23,  1998,  among  Spurlock
                    Adhesives,  Incorporated,  as Grantor,  James River Bank, as
                    Lender or Beneficiary, and O. LeRoy Stables, Jr. and/or Andy
                    Condlin, as Grantee or Trustee.

                                      -69-
<PAGE>

    Exhibit No.                Document
    -----------                --------

       10.54        Letter  dated  March 4,  1998 from the  Registrant  to Larry
                    Birkholz,  incorporated  by reference to Exhibit 10.1 to the
                    Registrant's  Form 10-Q for the quarter ended  September 30,
                    1998,  filed with the Securities and Exchange  Commission on
                    November 16, 1998.

       10.55        Letter  dated  March 4,  1998  from the  Registrant  to Kirk
                    Passopulo,  incorporated by reference to Exhibit 10.2 to the
                    Registrant's  Form 10-Q for the quarter ended  September 30,
                    1998,  filed with the Securities and Exchange  Commission on
                    November 16, 1998.

       10.56        Letter  dated  March 4,  1998  from the  Registrant  to John
                    Fitzgerald,  Jr.,  incorporated by reference to Exhibit 10.3
                    to  the  Registrant's   Form  10-Q  for  the  quarter  ended
                    September 30, 1998,  filed with the  Securities and Exchange
                    Commission on November 16, 1998.

       10.57*       Deed,  dated April 29,  1998,  between  James River Bank and
                    Spurlock Adhesives, Inc.

       10.58*       Promissory Note, dated May 1, 1998, from Spurlock Adhesives,
                    Inc. to James River Bank.

       10.59*       Deed of Trust, dated May 1, 1998, among Spurlock  Adhesives,
                    Inc.,   as  Grantor,   James   River  Bank,   as  Lender  or
                    Beneficiary,  and O. LeRoy  Stables,  Jr.  and/or C.  Taylor
                    Everett, as Grantee or Trustee.

       10.60*       Business Loan Agreement, dated May 1, 1998, between Spurlock
                    Adhesives, Inc. and James River Bank.

       21*          Subsidiaries of the Registrant.

       23.1*        Consent of Cherry, Bekaert & Holland, L.L.P.

       23.2*        Consent of James E. Scheifley & Associates,  P.C.  (formerly
                    Winter, Scheifley & Associates, P.C.), independent auditors.

       27*          Financial Data Schedule (filed electronically only).

* Filed herewith.

      (b)    Reports on Form 8-K. The  following  reports on Form 8-K were filed
during the last quarter of 1998:
<TABLE>
<CAPTION>
Date of Report              Items Reported
--------------              --------------
<S>                         <C>                                                                  
October 9, 1998             Spurlock Industries, Inc. Announces New Directors
December 18, 1998           Borden Chemical, Inc. to Acquire Spurlock Industries, Inc.
</TABLE>

      (c)    The exhibits  required by Item 601 of  Regulation  S-K are filed as
exhibits to this Form 10-K.

      (d)    There  are no  financial  statements  of the  Company  required  by
Regulation  S-X which were excluded from the Annual  Report to  Shareholders  by
Rule 14a-3(b).



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