UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2001
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____ to _______
Commission File Number: 001-23407
SURREY, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2138564
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13110 Trails End Road
Leander, Texas 78641
(Address of principal executive offices)
(512) 267-7172
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ___ No X
On May 10, 2001, the registrant had issued and outstanding 2,472,727
shares of common stock, no par value.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
--
1
SURREY, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of March 31, 2001 and December 31, 2000 -3-
Statements of Operations for the Three Months Ended March 31, 2001 -5-
Statements of Cash Flows for the Three Months Ended March 31, 2001 -6-
Notes to Financial Statements -8-
Item 2. Management's Discussion and Analysis or Plan of Operation -9-
PART II - OTHER INFORMATION -12-
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SURREY, INC.
BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, 2001 December 31, 2000
-------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 371 $ 14
Accounts receivable 2,046 3,137
Inventories, net 2,845 2,913
Prepaid expenses and other current assets 72 53
Income taxes receivable 32 32
---------- -----------
Total current assets 5,366 6,149
Property and equipment, net 4,156 4,167
---------- -----------
Total assets $ 9,522 $ 10,316
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,203 $ 2,084
Accrued expenses 284 469
Current maturities of long-term debt 6,008 6,136
Current maturities of capital lease obligations 190 192
---------- -----------
Total current liabilities 8,685 8,881
Long-term debt, less current maturities 41 42
Capital lease obligations, less current maturities 42 53
Commitments and contingencies - -
Shareholders' equity:
Common stock; no par value 4,099 4,099
Common stock warrants 64 64
Retained deficit (3,409) (2,823)
---------- -----------
3
Total shareholders' equity 754 1,340
Total liabilities and shareholders' equity $ 9,522 $ 10,316
========== ===========
See Accompanying Notes
4
SURREY, INC.
STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(unaudited)
Three Months Ended
March 31
-----------------------------
2001 2000
---------- -----------
Net sales $ 3,603 $ 3,350
Cost of sales 2,798 2,717
---------- -----------
Gross profit 805 633
Operating expenses:
Sales and marketing 195 215
General and administrative 1,023 773
---------- -----------
Total operating expenses 1,218 988
Loss from operations (413) (355)
Other:
Interest expense (173) (118)
---------- -----------
Loss before income taxes (586) (473)
Income tax benefit 0 (132)
---------- -----------
Net Loss $ (586) $ (341)
========== ===========
Loss per share
Basic and diluted $ (0.24) $ (0.14)
========== ===========
Shares used in computing earnings per share:
Basic and diluted 2,473 2,473
========== ===========
See Accompanying Notes
5
SURREY, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Three Months Ended
March 31
-----------------------------
2001 2000
---------- -----------
OPERATING ACTIVITIES
Net loss $ (586) $ (341)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 106 102
Changes in operating assets and liabilities:
Accounts receivable 1,091 1,895
Inventories 68 181
Prepaid expenses and other current assets (19) (195)
Trade accounts payable 119 (762)
Accrued expenses (185) (124)
Income taxes receivable/payable 0 (132)
---------- -----------
Net cash provided by operating activities 594 624
INVESTING ACTIVITIES
Acquisition of property and equipment 0 (514)
---------- -----------
Net cash used in investing activities 0 (514)
FINANCING ACTIVITIES
Payment of long-term debt (150) (54)
Principal payments on capital lease obligations (87) (50)
---------- -----------
Net cash used in financing activities (237) (104)
Net increase in cash 357 6
Cash and cash equivalents, beginning of period 14 0
---------- -----------
Cash and cash equivalents, end of period $ 371 $ 6
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 173 $ 118
6
Acquisition of property and equipment with
capital leases $ 0 $ 86
See Accompanying Notes
7
SURREY, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
1. ACCOUNTING POLICIES
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001. For further information, refer to
the financial statements and footnotes thereto included in the Surrey, Inc.
annual report on Form 10-KSB for the year ended December 31, 2000.
2. LOSS PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share (in thousands, except per share data):
Three Months Ended
March 31
-----------------------------
2001 2000
---------- -----------
Numerator:
Net loss $ (586) $ (341)
========== ===========
Denominator:
Denominator for basic and diluted loss per share -
weighted - average shares 2,473 2,473
========== ===========
Basic and diluted loss per share $ (0.24) $ (0.14)
========== ===========
Options to purchase 415,000 shares of common stock at $1.53 to $1.68; options to
purchase 317,500 shares of common stock at $4.00 to $4.40 per share; warrants to
purchase 675,000 shares of common stock at $4.80 per share; and a warrant to
purchase 62,500 Units (consisting of two shares of common stock and one
redeemable common stock purchase warrant) at $9.75 per Unit were outstanding
during 2001 and 2000 but were not included in the computation of diluted
earnings per share because the exercise prices were greater than the average
market price of the common shares; therefor, the effect would be antidilutive.
8
3. LONG-TERM DEBT
As of March 31, 2001, the Company was not in compliance with certain financial
covenants specified in their term loan and line of credit agreements. The
Company and the lender have negotiated a forbearance pending the outcome of an
agreement for the sale of substantially all of the Company's assets.
4. SALE OF ASSETS
The Company has entered into an Agreement for the Purchase and Sale of Assets
dated as of April 2, 2001 contract with Jean Charles Incorporated providing for
the sale of substantially all of the Company's assets to Jean Charles
Incorporated. The sale is subject to the approval of the Company's shareholders.
Item 2. Management's Discussion And Analysis or Plan of Operations
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of the
Company's level of operation and financial condition. This discussion should be
read with the financial statements appearing in Part I, Item 1 of this report.
Results of Operations
- ---------------------
Net Sales. Net sales for the Company reflect total sales less cash
discounts and estimated returns. Net sales increased to $3,603,000 for the three
months ended March 31, 2001 from $3,350,000 for the three months ended March 31,
2000, an increase of 7.6%. This increase was primarily due to the new sales
generated by the Company's bulk soap line.
Gross Profit. Gross profit increased for the three months ended March
31, 2001 to $805,000 from $633,000 for the comparable three month period in
2000. Gross profit margin for the three month period increased from 18.9% in
2000 to 22.3% in 2001. Gross profit and gross profit margin in the period
increased primarily because the rate of increase in net sales was greater than
the rate of increase in cost of sales. The rate of increase in cost of sales was
slowed through the use of lower cost full-time seasonal employees instead of
higher cost temporary agency workers.
Operating Expenses. Operating expenses increased for the three months
ended March 31, 2001 by 23.3% over the three months ended March 31, 2000, and
increased as a percentage of net sales; $1,218,000 (or 33.9% of net sales) in
2001, as compared to $988,000 (or 29.5% of net sales) in 2000.
9
New full-time hires, including the addition of several salespersons,
and increased salaries during 2001 have increased general and administrative
expenses during 2001. Also, additional legal and professional fees were incurred
in the 2001 quarter related to the proposed sale of the company. Costs of the
Company's health plan have also increased with the move from temporary agency
workers to full-time seasonal employees. The Company currently expects that all
such operating expenses will remain somewhat constant in 2001 and, based on the
expected increase in sales, will therefore decrease as a percentage of sales
later in 2001.
Sales and marketing expenses decreased for the three months, ended
March 31, 2001 over the comparable period in 2000, and as a percentage of net
sales. Such expenses for the quarter decreased from $215,000 (or 6.4% of net
sales) in 2000 to $195,000 (or 5.4% of net sales) in 2001. The slight decrease
for the quarter was primarily due to lower promotional and advertising expenses.
General and administrative expenses significantly increased for the
three months ended March 31, 2001 as compared to the same period in 2000, and
also increased as a percentage of net sales, from $773,000 (or 23.1% of net
sales) in 2000 to $1,023,000 (or 28.4% of net sales) in 2001. This significant
increase was primarily due to increased salaries for additional full-time staff
and costs associated with the planned sale of the company's operations.
Interest Expense. Interest expense as a percentage of sales increased
as a result of higher bank borrowings and rate increases. Interest expense was
$173,000 in the three months ended March 31, 2001, as compared to $118,000 in
the three months ended March 31, 2000. The increase was primarily due to the
Company's increased borrowings in 2001.
Liquidity and Capital Resources
- -------------------------------
Commencing in the latter part of 2000, the Company was in violation of
the loan covenants for its borrowing from The Chase Manhattan Bank. In January
and March 2001, The Chase Manhattan Bank (the "Lender") accelerated the
Company's bank debt, rendering the Company unable to pay its obligations as they
came due. The Company does not have the liquidity to meet its current
obligations, although the Company believes that its capital resources are
sufficient to satisfy its obligations. Due in large part to this lack of
liquidity, the Company has entered into a contract with Jean Charles
Incorporated for the sale of substantially all of the Company's assets to Jean
Charles Incorporated. The Agreement for the Purchase and Sale of Assets dated as
of April 2, 2001 between Surrey, Inc. and Jean Charles Incorporated was filed as
Exhibit 10.24 to the Company's current report on form 8-K dated April 5, 2001.
The Agreement for the Purchase and Sale of Assets is subject to the approval of
the Company's shareholders and is described in "Item 1. Description of Business
- - Contract for Sale of Substantially All Assets of Surrey, Inc." of the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2000.
10
As a part of the sale agreement, The Chase Manhattan Bank agreed to
forbear taking any action against the Company in connection with the Company's
bank debt until October 2, 2001, subject to the receipt of certain payments from
the Company, which payments were guaranteed by Jean Charles Incorporated. The
Letter Agreement dated April 5, 2001 among Surrey, Inc., Jean Charles
Incorporated and The Chase Manhattan Bank was filed as Exhibit 10.26 to the
Company's current report on form 8-K dated April 5, 2001 and the Guaranty
Agreement dated April 5, 2001 between Jean Charles Incorporated and The Chase
Manhattan Bank was filed as Exhibit 10.25 to the Company's current report on
form 8-K dated April 5, 2001.
The Company leases certain pieces of its manufacturing equipment
pursuant to capital leases. The capital leases currently in effect have maturity
dates ranging from dates during 2001 to 2004. Such leases provide that if no
event of default exists thereunder the Company may purchase the equipment
subject to the lease at the expiration of the lease or may renew the lease.
The Company has a lease line of credit with Key Corporate Capital, Inc.
(due in 2005) which provides for a $1,562,000 leasing line of credit. The
Company drew the entire amount under this line of credit in 1998. The Chief
Executive Officer of the Company has personally guaranteed this lease line of
credit. Payments under this line are approximately $288,400 per year or $24,000
per month.
The Company also has two three year capital lease lines of credit,
originally with Winthrop Resources, Inc., in the aggregate amount of
approximately $777,000. The Company has fully utilized these lines of credit.
Payments under these two lines of credit total approximately $300,000 per year
or approximately $25,000 per month. These leases have been assigned by the
Company to Jean Charles Incorporated pursuant to an Assignment and Assumption
Agreement.
The Company also has a three year capital lease line of credit,
originally entered into in March 1999 with Amembal Capital Corporation, in the
total amount of approximately $416,000. Payments under this line of credit are
approximately $70,900 per year or $5,900 per month.
During second quarter 2000, the Company completed a system-wide
replacement and upgrade of its computer system. The final cost of this
replacement was $325,000, which was financed through a three-year operating
lease with Softech Financial. Payments under this line of credit are
approximately $114,000 per year or $9,500 per month.
During second quarter 2000, the Company added an additional seven-year
$125,000 operating lease line of credit to provide financing for its new candle
production line. Payments under this line of credit are expected to be
approximately $36,000 per year or $3,000 per month.
11
The Company experiences seasonal fluctuations in operating results,
with sales and revenues generally higher during the third and fourth calendar
quarters, reflecting primarily orders for the holiday retail season. Orders
shipped in the third and fourth quarters generally account for approximately 60%
of the Company's total net sales for the year.
Forward Looking Information
- ---------------------------
Statements contained in this report regarding the Company's future
operations, including its growth strategy, future performance and results, its
ability to meet its working capital and capital expenditure needs, increased
sales, anticipated liquidity, and any reduction in expenses as a percentage of
net sales, are forward-looking and therefore are subject to certain risks and
uncertainties.
Any forward-looking information regarding the operations of the Company
will be affected by the continued receipt of large orders from the Company's
significant customers, including Bath & Body Works, the Company's ability to
effectively manage its costs of operation, its ability to continue to increase
its marketing and sales efforts in order to take advantage of its increased
production facilities, and the continued availability of all of the Company's
current and anticipated lines of credit.
Any forward looking information regarding an increase in the Company's
gross profit margin also will be affected by the Company's ability to implement
its strategy of increasing sales and its customer base, focusing on the sales of
higher margin products, and the Company's ability to efficiently utilize its
expanded facilities and effectively manage its labor costs. There can be no
assurance that the Company will be successful in efficiently managing its growth
in order to maximize potential production and contain costs.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is, from time to time, involved in routine litigation that
is incidental to the business of the Company. Other than such litigation,
neither the Company nor its property is a party to or the subject of any pending
legal proceeding. No current proceeding is expected to result in any material
loss to the Company.
Item 2. Changes in Securities and Use of Proceeds
The Company's Loan Agreement with the Chase Manhattan Bank also
restricts the Company from making any dividends or distributions on its capital
stock unless net income equals or exceeds $2,000,000, repurchasing or redeeming
any capital stock (other than pursuant to the terms of the Company's Warrants,
provided no default would occur under the bank loans), paying any bonus or other
non-salary compensation, replacing its President or Chief Financial Officer, or
entering into certain related party transactions without prior written consent
of the Chase Manhattan Bank.
12
Item 3. Defaults upon Senior Securities
In January and March 2001, the Chase Manhattan Bank accelerated the
Company's bank debt, in the amount of approximately $6,000,000, including
principal, interest and late fees, rendering the Company unable to pay its
obligations as they came due. The Company does not have the liquidity to meet
its current obligations, although the Company believes that its capital
resources are sufficient to satisfy its obligations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter has been submitted to a vote of security holders of the
Company during the period covered by this report, through the solicitation of
proxies or otherwise.
Item 5. Other Information
In July 2000, the Company was notified by The Nasdaq that it was not
currently in compliance with the continued listing requirement that its stock
price maintain a bid price of $1.00 or above. Under The Nasdaq rules, the
Company was given 90 days to come into compliance with such requirement. The
Company issued a press release and filed a Form 8-K upon notification that its
shares had been delisted effective October 20, 2000. The Company's stock now
trades on the Nasdaq Over the Counter Market Bulletin Board (SOAP.OB).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Number Description
- ------ -----------
3.1 Articles of Incorporation, as amended to date (incorporated by
reference to the Company's registration statement on Form SB-2 dated
September 16, 1997; Reg. No. 333-35757).
3.2 Amended and Restated By-laws (incorporated by reference to the
Company's registration statement on Form SB-2 dated September 16, 1997;
Reg. No. 333-35757).
4.2 Form of Warrant Agreement and Warrant Certificate (incorporated by
reference to the Company's Amendment No. 1 to the registration
statement on Form SB-2 dated November 12, 1997; Reg. No. 333-35757).
10.1 1997 Long-Term Incentive Plan (incorporated by reference to the
Company's registration statement on Form SB-2 dated September 16, 1997;
Reg. No. 333-35757)
13
10.2(a) 1997 Non-Employee Directors' Stock Option Plan ("Directors' Plan")
(incorporated by reference to the Company's registration statement on
Form SB-2 dated September 16, 1997; Reg. No. 333-35757)
10.2(b) Amendment to Directors' Plan
10.3 Employment Agreement, effective December 1997, between Surrey, Inc. and
John van der Hagen (incorporated by reference to the Company's
registration statement on Form SB-2 dated September 16, 1997; Reg. No.
333-35757)
10.4 Employment Agreement, effective December 1997, between Surrey, Inc. and
Martin van der Hagen (incorporated by reference to the Company's
registration statement on Form SB-2 dated September 16, 1997; Reg. No.
333-35757)
10.5 Form of Consulting Agreement between the Company and Stuart, Coleman &
Co., Inc. (incorporated by reference to the Company's registration
statement on Form SB-2 dated September 16, 1997; Reg. No. 333-35757)
10.6 Loan Agreement, April 8, 1998, between Company and Chase Bank of Texas,
National Association ("Lender") (incorporated by reference to the
Company's quarterly report on Form 10-QSB dated May 15, 1998).
10.7 Construction Loan Agreement, April 8, 1998, between Company and Lender
(incorporated by reference to the Company's quarterly report on Form
10-QSB dated May 15, 1998).
10.8 Security Agreement between Company and Lender securing all obligations
of the Company to Lender under the Loan Agreement (incorporated by
reference to the Company's quarterly report on Form 10-QSB dated May
15, 1998).
10.9 Promissory Note, in the face amount of $2,300,000.00, due to Lender
April 8, 2005 (incorporated by reference to the Company's quarterly
report on Form 10-QSB dated May 15, 1998).
10.10 Master Equipment Lease between the Company and Key Corporate Capital,
Inc. (incorporated by reference to the Company's quarterly report on
Form 10-QSB dated May 15, 1998).
10.11 Second Amended Loan Agreement, January 25, 1999, between Company and
Lender (incorporated by reference to the Company's annual report on
Form 10-KSB for December 31, 1998).
14
10.12 Construction Loan Agreement, January 25, 1999, between Company and
Lender (incorporated by reference to the Company's annual report on
Form 10-KSB for December 31, 1998).
10.13 Promissory Note, in the face amount of $400,000.00, due to Lender
February 8, 2004 (incorporated by reference to the Company's annual
report on Form 10-KSB for December 31, 1998).
10.14 Promissory Note, in the face amount of $2,000,000.00, due to Lender
April 8, 2000 (incorporated by reference to the Company's annual report
on Form 10-KSB for December 31, 1998).
10.15 Third Amendment of Loan Agreement, March 31, 1999, between the Company
and Lender (incorporated by reference to the Company's quarterly report
on Form 10-QSB dated May 14, 1999).
10.16 Fourth Amendment of Loan Agreement, June 17, 1999, between the Company
and Lender (incorporated by reference to the Company's quarterly report
on Form 10-QSB dated August 13, 1999).
10.17 Fifth Amendment of Loan Agreement, effective June 30, 1999, between
Company and Lender (incorporated by reference to the Company's
quarterly report on Form 10-QSB dated November 12,1999).
10.18 2000 Long-Term Incentive Plan (incorporated by reference to the
Company's annual report on Form 10-KSB for December 31, 1999).
10.19 Sixth Amendment of Loan Agreement, effective April 8, 2000, between the
Company and Chase Bank of Texas, National Association, as lender
("Lender") (incorporated by reference to the Company's quarterly report
on Form 10-QSB dated May 12, 2000).
10.20 April 8, 2000 Note ($3,000,000.00) to Lender (incorporated by reference
to the Company's quarterly report on Form 10-QSB dated May 12, 2000).
10.21 April 8, 2000 Note ($1,000,000.00) to Lender (incorporated by reference
to the Company's quarterly report on Form 10-QSB dated May 12, 2000).
10.22 Modification Agreement with Lender ($2,300,000.00 Note) (incorporated
by reference to the Company's quarterly report on Form 10-QSB dated May
12, 2000).
15
10.23 Modification Agreement with Lender ($400,000.00 Note) (incorporated by
reference to the Company's quarterly report on Form 10-QSB dated May
12, 2000).
10.24 Agreement for the Purchase and Sale of Assets dated as of April 2, 2001
between Surrey, Inc. and Jean Charles Incorporated (incorporated by
reference to the Company's current report on form 8-K dated April 5,
2001).
10.25 Guaranty Agreement dated April 5, 2001 between Jean Charles
Incorporated and The Chase Manhattan Bank (incorporated by reference to
the Company's current report on form 8-K dated April 5, 2001).
10.26 Letter Agreement dated April 5, 2001 among Surrey, Inc.; Jean Charles
Incorporated and The Chase Manhattan Bank (incorporated by reference to
the Company's current report on form 8-K dated April 5, 2001).
10.27 Consulting Agreement dated April 2, 2001 between Jean Charles
Incorporated and John van der Hagen (incorporated by reference to the
Company's current report on form 8-K dated April 5, 2001).
10.28 Employment Agreement dated April 2, 2001 between Jean Charles
Incorporated and Marty van der Hagen (incorporated by reference to the
Company's current report on form 8-K dated April 5, 2001).
16 Letter from former certifying accountant (incorporated by reference to
the Company's current report on Form 8-K dated August 4, 1999).
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated March 27, 2001, reporting
the contents of the Company's press release announcing that (i) the Company had
entered into a letter of intent with Jean Charles Incorporated relating to the
sale of substantially all of the Company's operating assets, (ii) The Chase
Manhattan Bank (the "Bank") has accelerated the maturity dates of the
Registrant's promissory notes payable to, and loan agreements with, the Bank,
and (iii) G. Tom MacIntosh II has resigned as a member of the Registrant's Board
of Directors.
The Company filed a Report on Form 8-K dated April 5, 2001, reporting
the agreement between the Company and Jean Charles Incorporated relating to the
sale of substantially all of the Company's operating assets.
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SURREY, INC.
(Registrant)
Date: June 25, 2001 By: /s/ Martin van der Hagen
---------------------------------
Martin van der Hagen, President
Date: June 25, 2001 By: /s/ Mark van der Hagen
---------------------------------
Mark van der Hagen,
Chief Financial Officer
17