UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
[ ] Transition report pursuant to 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 _X_ No ___
On May 11, 2000, the registrant had 2,472,727 outstanding shares of
common stock, no par value.
Transitional Small Business Disclosure Format (check one);
Yes ___ No _X_
SURREY, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet as of March 31, 2000 and December 31, 1999
Statements of Operations for the Quarter and Three Months Ended
March 31, 2000 and March 31, 1999
Statements of Cash Flows for the Quarter and Three Months
Ended March 31, 2000 and March 31, 1999
Notes to Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II - OTHER INFORMATION
SIGNATURES
EXHIBITS
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PART I: ITEM 1. FINANCIAL STATEMENTS
SURREY, INC
BALANCE SHEET
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6 $ 0
Accounts receivable, net of allowances for doubtful
accounts of $57 and $116 in 2000 and 1999,
respectively 2,196 4,091
Inventories 2,657 2,838
Prepaid expenses and other current assets 218 23
Deferred income taxes 143 143
Income taxes receivable 32 40
-------- --------
Total current assets 5,252 7,135
Property and equipment, net 4,217 4,237
Deferred income taxes 253 113
-------- --------
$ 9,722 $ 11,485
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdrafts $ 0 $ 450
Trade accounts payable 963 1,724
Accrued expenses 202 312
Current maturities of long-term debt 431 418
Current maturities of capital lease obligations 204 204
-------- --------
Total current liabilities 1,800 3,108
Long-term debt, less current maturities 4,651 4,732
Capital lease obligations, less current maturities 163 196
Commitments and contingencies 0 0
Shareholders' equity:
Common stock; no par value: 10,000 shares
authorized, 2,473 shares issued and outstanding 4,099 4,099
Common stock warrants: 737 authorized, 675
issued and outstanding (64) (64)
Accumulated deficit $ (1,055) $ (714)
-------- --------
Total shareholders' equity 3,108 3,449
-------- --------
$ 9,722 $ 11,485
======== ========
SEE ACCOMPANYING NOTES
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SURREY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
Net sales $ 3,350 $ 3,332
Cost of sales 2,717 2,762
------- -------
Gross profit 633 570
Operating expenses:
Sales and marketing 215 284
General and administrative 773 539
------- -------
Total operating expenses 988 823
Loss from operations (355) (253)
Other income (expense):
Interest expense (118) (112)
Other income 0 0
------- -------
Loss before income taxes (473) (365)
Benefit for income taxes (132) (111)
------- -------
Net loss $ (341) $ (254)
======= =======
Loss per share - basic and diluted $ (0.14) $ (0.10)
======= =======
Weighted average shares outstanding:
Basic and diluted 2,473 2,473
======= =======
SEE ACCOMPANYING NOTES.
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SURREY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
OPERATING ACTIVITIES
Net loss $ (341) $ (254)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 102 87
Changes in operating assets and liabilities:
Accounts receivable 1,895 (722)
Inventories 181 (130)
Prepaid expenses and other current assets (195) 86
Trade accounts payable (762) 471
Accrued expenses (124) (50)
Income taxes receivable/payable (132) (112)
------- -------
Net cash provided by (used in) operating
activities 624 (624)
INVESTING ACTIVITIES
Acquisition of property and equipment (514) (487)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable 0 800
Proceeds from issuance of long-term debt 0 311
Payment of long-term debt (54) (34)
Proceeds from capital lease obligations 0 7
Principal payments on capital lease obligations (50) (50)
------- -------
Net cash provided (used in) financing activities $ (104) $ 1,034
------- -------
Net increase (decrease) in cash 6 (77)
Cash and cash equivalents, beginning of period 0 77
------- -------
Cash and cash equivalents, end of period $ 6 $ 0
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 118 $ 112
Income taxes 0 0
Acquisition of property and equipment
under capital leases $ 86 $ 7
SEE ACCOMPANYING NOTES.
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SURREY, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
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 and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- month periods ended March 31,
2000 and 1999 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2000. 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, 1999.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three months ended
March 31,
----------------------
2000 1999
-------- --------
Numerator:
Net income (loss) $ (341) $ (254)
Numerator for basic and diluted earnings (loss) per share -
income (loss) available to common stockholders $ (341) $ (254)
======== ========
Denominator:
Denominator for basic earnings (loss) per share - weighted -
average shares 2,473 2,473
-------- --------
Denominator for diluted earnings (loss) per share - adjusted
weighted - average shares and assumed conversions 2,473 2,473
======== ========
Basic earnings (loss) per share $ (0.14) $ (0.10)
======== ========
Diluted earnings (loss) per share $ (0.14) $ (0.10)
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Options to purchase 415,000 shares of common stock at $1.53 to $1.68 were issued
in April 2000. 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 2000 and 1999 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.
3. CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business. An estimate of the possible loss resulting from these matters cannot
be made; however, the Company believes that the ultimate resolution of these
matters will not have a material adverse effect on its financial position or
results of operations.
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PART I: 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 for first quarter increased slightly
to $3,350,000 for the three months ended March 2000 from $3,332,000 for the
three months ended March 1999, an increase of 0.5%. This result is primarily
attributable to the following factors: the Company had a broader customer base
entering first quarter 2000 as compared with the customer base entering first
quarter 1999 and such customer base has remained fairly unchanged; regular sales
to existing customers remained strong during first quarter 2000; orders from
Bath and Body Works ("BBW") during first quarter 2000 were significantly lower
due to the fact that in first and second quarters of 1999 BBW placed its opening
order shipments (initial shipment of products to stock stores shelves), which
orders are not repeated; and in first and second quarters of 1999 the Company
had two additional special orders (the Minnetonka Brands "Star Wars" soap
project and a special order from Wal-Mart). For second quarter 2000, the Company
currently expects its customer base and its regular order sales to be similar to
second quarter 1999. However, due to the factors mentioned above (particularly
the lack of an opening order from BBW in 2000 and the lack of any special
project orders in 2000), the Company currently expects second quarter sales to
be significantly lower than sales in second quarter 1999.
GROSS PROFIT. Gross profit increased slightly for the three months
ended March 2000 to $633,000 from $570,000 for the comparable three month period
in 1999. Gross profit margin for the same period increased from 17.1% in 1999 to
18.8% in 2000. This increase in gross profit margin is primarily attributed to
significant cost savings in production labor. Specifically, temporary workers
were replaced by full-time production staff. This resulted in a 25% reduction in
production labor costs for the first quarter of 2000 over the comparable period
in 1999.
OPERATING EXPENSES. Operating expenses in the first three months of
2000 increased by 20.0%: $988,000 (or 29.4% of net sales) in 2000 as compared to
$828,000 (or 24.9% of net sales) for the comparable period in 1999.
Sales and marketing expenses decreased from $284,000 (or 8.6% of net
sales) in 1999 to $215,000 (or 6.4% of net sales) in 2000, due mainly to a
decrease in the costs for advertising and promotion.
General and administrative expenses increased from $544,000 (or 16.3%
of net sales) for first quarter 1999 to $773,000 (or 23.0% of net sales) for
first quarter 2000, primarily due to increased salaries and the payment of
approximately $90,000 in bonuses in March 2000.
INTEREST EXPENSE. Interest expense of $118,000 (3.5% of net sales) in
March 2000 remained comparable to $112,000 (3.4% of net sales) in March 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from
operations, bank borrowings, and lease financing.
-8-
Effective April 2000, the Company amended its Loan Agreement with Chase
Bank of Texas, National Association ("Lender"). Under the amended Loan
Agreement, the Company currently has three outstanding term loans and a
revolving line of credit to be used for working capital purposes. The Company
has (a) a construction/term loan in the original principal amount of $2,300,000
("Term Loan") with a final maturity in April 2005, of which approximately $2.1
was outstanding at March 31, 2000; (b) a term loan, in the original principal
amount of $400,000 ("Second Term Loan") with a maturity of February 2004, of
which approximately $355,000 was outstanding at March 31, 2000; and (c) a term
loan, in the original principal amount of $1,000,000, which is being transferred
from amounts previously outstanding at March 31, 2000 under the Company's
Revolving Note ("Third Term Loan"), with a maturity of April 2003. The proceeds
of these terms loans were used to repay outstanding debt, to finance the
Company's 1998 and 1999 expansion of the plant and facilities, and for working
capital.
The Company's current revolving line ("Revolving Note") with the Lender
is based, under the amended Loan Agreement, on eligible accounts and eligible
inventory and has a final maturity of May 8, 2001. Amounts currently available
under the Revolving Note include the lesser of (A) 80% of Eligible Accounts (as
defined), plus on any date between April 1, 2000 and July 31, 2000 or between
January 1, 2001 and May 8, 2001, the lesser of (x), 50% of current inventory
balance and (x) $1.2 million, or (B) $3,000,000. As of April 30, 2000, the
Company had $1,500,000 outstanding under the Revolving Note and $450,000 in
excess borrowing capacity.
Under the current Loan Agreement, (a) interest on each of the Second
and Third Term Loans and the Revolving Note will float at the Lender's Prime
Rate plus 1%, and (b) interest on the Term Loan will be fixed at 8.50%.
The Company and the Lender have amended the financial covenants under
the Loan Agreement on several occasions to provide for reduced financial
covenants. Currently, the Loan Agreement contains (among other requirements) the
following covenants which are tested quarterly. The Company must maintain:
(a) a current ratio of not less than 1.25 to 1.00 as of the end of
each calendar quarter after June 30, 1999;
(b) a debt to tangible net worth ratio not greater than 2.25 to 1.00
as of the end of each calendar quarter after June 30, 1999; and
(c) a debt service coverage ratio, beginning with quarter ending
March 31, 2000, of not less than 1.20 to 1.00, with the numerator
of the debt service coverage ratio being calculated on a rolling
four quarters basis, tested for compliance as of the end of each
calendar quarter.
At March 31, 2000, the Company was in compliance with each of the above
required tests.
Interest on each of the term loans and the Revolving Note is payable
monthly. Under the Loan Agreement, the Company is required to pay down the
Revolving Note and maintain a zero balance for 30 consecutive days once prior to
its maturity in April 2001. Principal and interest on the term loans is payable
in monthly installments, which aggregate approximately $43,700 per month,
increasing to approximately $46,200 per month after April 2001.
The Loan Agreement also limits indebtedness by the Company, restricts
borrowing under certain equipment leases to $2,000,000, restricts the Company
from making or incurring capital expenditures exceeding $2,000,000 in any 12
month period, restricts indebtedness in connection with acquisition of equipment
to $200,000 and limits sales of assets. The Loan Agreement also restricts the
Company from
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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 Lender.
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 2000 to 2003. 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., 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 $25,000 per
month.
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 first quarter 2000, the Company entered into a new three-year
$250,000 operating lease with Softech Financial to provide for the complete
replacement and upgrade of the Company's computer system. As of March 31, 2000,
approximately $200,000 had been drawn under this line. The line is expected to
be fully drawn by third quarter 2000 when the system upgrade is expected to be
completed. Payments under this line of credit are approximately $96,000 per year
or $8,000 per month.
Currently, the Company is negotiating an additional seven-year $200,000
operating lease line of credit to provide financing for the Company's new candle
line. The development of this new line has been financed to date out of
operating funds, which are expected to be replaced by the proceeds of this line
of credit during second quarter 2000. Payments under this line of credit are
expected to be approximately $30,000 per year or $2,500 per month.
The Company believes that cash expected to be provided by future
operations and its current bank loans and financing leases will be sufficient to
meet its working capital and anticipated capital expenditure requirements during
2000. However, the Company may need to seek additional working capital financing
if net sales increase more than currently anticipated.
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
-10-
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 legal proceedings
arising in the normal course of its business. No such current proceeding is
expected to result in any material loss to the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
The Company's Annual Meeting was held May 2, 2000 during second fiscal
quarter. At that meeting the shareholders re-elected the current five
directors, approved an amendment to the 1997 Long-Term Incentive Plan,
adopted the 2000 Long-Term Incentive Plan, and approved Grant Thornton
as auditors.
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.19 - Sixth Amendment of Loan Agreement, effective April
8, 2000, between the Company and Chase Bank of
Texas, National Association, as lender ("Lender").
Exhibit 10.20 - April 8, 2000 Note ($3,000,000.00) to Lender
Exhibit 10.21 - April 8, 2000 Note ($1,000,000.00) to Lender
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Exhibit 10.22 - Modification Agreement with Lender ($2,300,000.00
Note)
Exhibit 10.23 - Modification Agreement with Lender ($400,000.00
Note)
Exhibit 27 - Financial Data Schedule.
(b) The Company filed no Reports on Form 8-K during the reporting
period.
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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: May 12, 2000 By: /s/ Martin van der Hagen
--------------------------------------
Martin van der Hagen
President
By: /s/ Mark van der Hagen
--------------------------------------
Mark van der Hagen
Chief Financial Officer
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